Corporation Law Case Digests Compilation

Concepcion, Culminas, Gamo, Jaugan, Malcampo, Porcina, Uy, Ybio
Corporation Law, Case Digests

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Cases for Business Organizations II

GOD BLESS US ALL!

1. Philippine First Insurance Co., Inc. v. Maria Carmen Hartigan, et. al., 7 SCRA
252
FACTS:
On June 1, 1953, plaintiff was originally named as 'The Yek Tong Lin Fire and
Marine Insurance Co., Ltd an insurance corp. duly presented with the Security and
Exchange Commissioner and before a Notary Public as provided in their articles of
incorporation. Later amended its articles of incorporation and changed its name on May
26, 1961 as Philippine First Insurance Co., Inc. pursuant to a certificate of the Board of
Directors.
The complaint alleges that: 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, to which a promissory
note was made in favour of China Banking. Said defendant failed to pay in full despite
renewal of such note. 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.
Defendants admitted 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 Philippine Insurance. 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.
In their 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.

ISSUE:
May a Philippine corporation change its name and still retain its original
personality and individuality as such?

RULING:
YES. As can be gleaned under Sections 6 and 18 of the Corporation Law, 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
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designates the person."

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.
A general power to alter or amend the charter of a corporation necessarily
includes the power to alter the name of the corporation. Hence, 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.)
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.
Therefore, 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. 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.

2. Municipality of Malabang, Lanao del Sur, et. al. v. Pangandapun Benito, et. al.,
27 SCRA 533
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FACTS:
Petitioner Amer Macaorao Balindong is the mayor of Malabang, Lanao del Sur,
while the respondent Pangandapun Bonito is the mayor, and the rest of the respondents
are the councilors, of the municipality of Balabagan of the same province. Balabagan was
formerly a part of the municipality of Malabang, having been created on March 15, 1960,
by Executive Order 386 of the then President Carlos P. Garcia, out of barrios and
sitios

of the latter municipality.
The petitioners brought this action for prohibition to nullify Executive Order 386
and to restrain the respondent municipal officials from performing the functions of their
respective office relying on the ruling of this Court in Pelaez v. Auditor
General

and Municipality of San Joaquin v. Siva. Respondents argued that the rule
announced in Pelaez can have no application in this case because unlike the
municipalities involved in Pelaez, the municipality of Balabagan is at least a de
facto corporation, having been organized under color of a statute before this was declared
unconstitutional. It is contended that as a de facto corporation, its existence cannot be
collaterally attacked, although it may be inquired into directly in an action for quo
warranto at the instance of the State and not of an individual like the petitioner
Balindong.

ISSUE: Whether the municipality of Balabagan is a de facto corporation.

RULING:
NO. Executive Order 386 is declared void, and the respondents are hereby
permanently restrained from performing the duties and functions of their respective
offices.
Result of the analysis of cases; the following principles may be deduced which
seem to reconcile the apparently conflicting decisions:
I. The color of authority requisite to the organization of a de facto municipal corporation
may be:
1. A valid law enacted by the legislature.
2. An unconstitutional law, valid on its face, which has either (a) been upheld for
a time by the courts or (b) not yet been declared void; provided that a warrant for its
creation can be found in some other valid law or in the recognition of its potential
existence by the general laws or constitution of the state.
II. There can be no de facto municipal corporation unless either directly or potentially,
such a de jure corporation is authorized by some legislative fiat.
III. There can be no color of authority in an unconstitutional statute alone, the invalidity
of which is apparent on its face.
IV. There can be no de facto corporation created to take the place of an existing de
jure corporation, as such organization would clearly be a usurper.
Hence, in the case at bar, the mere fact that Balabagan was organized at a time
when the statute had not been invalidated cannot conceivably make it a de
facto corporation, as, independently of the Administrative Code provision in question,
there is no other valid statute to give color of authority to its creation. Executive Order
386 "created no office."

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3. Hall, et. all v. Piccio, et. al., 86 Phil. 603
FACTS:
On 28 May 1947, C. Arnold Hall and Bradley P. Hall, and Fred Brown, Emma Brown,
Hipolita D.Chapman and Ceferino S. Abella, signed and acknowledged in Leyte, the
article of incorporation of the Far Eastern Lumber and Commercial Co., Inc., organized
to engage in a general lumber business to carry on as general contractors, operators and
managers, etc. Attached to the article was an affidavit of the treasurer stating that 23,428
shares of stock had been subscribed and fully paid with certain properties transferred
tothe corporation described in a list appended thereto. Immediately after the execution of
said articles of incorporation, the corporation proceeded to do business with the adoption
of by-laws and the election of its officers. On 2 December 1947, the said articles of
incorporation were filed in the office of the Securities and Exchange Commissioner, for
the issuance of the corresponding certificate of incorporation. On 22 March 1948,pending
action on the articles of incorporation by the aforesaid governmental office, Fred Brown,
Emma Brown, Hipolita D. Chapman and Ceferino S. Abella filed before the Court of
First Instance of Leyte the civil case, alleging among other things that the Far Eastern
Lumber and Commercial Co. was an unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the members, mismanagement and fraud by
the managers and heavy financial losses. C. Arnold Hall and Bradley P. Hall, filed a
motion to dismiss, contesting the court's jurisdiction and the sufficiently of the cause of
action. After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution of
the company; and at the request of Brown, et. al., appointed Pedro A. Capuciong as the
receiver of the properties thereof, upon the filing of aP20,000 bond. Hall and Hall offered
to file a counter-bond for the discharge of the receiver, but Judge Piccio refused to accept
the offer and to discharge the receiver. Whereupon, Hall and Hall instituted the
present special civil action with the Supreme Court.

ISSUE:
Whether respondents Brown, et. al. may file an action to cause the dissolution of
the Far Eastern Lumber and Commercial Co., without State intervention.

RULING:
Section 11 of the Corporation Law provides that the personality of a corporation
begins to exist only from the moment such certificate is issued and not prior. Not having
obtained the certificate of incorporation, the Far Eastern Lumber and Commercial Co.
even its stockholders may not probably claim "in good faith" to be a corporation. Under
the statue it is to be noted that it is the issuance of a certificate of incorporation by the
Director of the Bureau of Commerce and Industry which calls a corporation into being. In
the case at bar, the Securities and Exchange Commissioner has not issued the
corresponding certificate of incorporation.
Section 19 does not apply in this case for two reasons: 1) The immunity if collateral
attack is granted to corporations "claiming in good faith to be a corporation under this
act." Such a claim is compatible with the existence of errors and irregularities; but not
with a total or substantial disregard of the law. Unless there has been an evident
attempt to comply with the law the claim to be a corporation "under this act" could not be
made "in good faith." 2) This is not a suit in which the corporation is a party. This is a
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litigation between stockholders of the alleged corporation, for the purpose of obtaining its
dissolution. Even the existence of a de jure corporation may be terminated in a private
suit for its dissolution between stockholders, without the intervention of the state.

4. Asia Banking Corporation v. Standard Products Co., 46 Phil. 145
FACTS:
Standard Products, Co., Inc., was indebted to Asia Banking Corporation for the
amount of P37,757.00. To secure its indebtedness, it executed a promissory note in favor
of plaintiff. Upon demand for the balance due, the respondent failed to pay. Hence an
action was brought by plaintiff to recover the sum of P24,736.47. The court rendered
judgment in favor of the plaintiff for the sum demanded in the complaint, with interest on
Hence, this appeal by the respondent. At the trial of the case the plaintiff failed to prove
affirmatively the corporate existence of the parties and the appellant insists that under
these circumstances the court erred in finding that the parties were corporations with
juridical personality and assigns same as reversible error.

ISSUE:
Whether or not respondent is estopped from denying the corporate existence of
the plaintiff.

RULING:
The general rule is that in the absence of fraud, a person who has contracted or
otherwise dealt with an association in such a way as to recognize and in effect admit its
legal existence as a corporate body is thereby estopped to den# its corporate existence in
any action leading out of or insisting such contract or dealing, unless its existence is
attacked for cause which has arisen since making the contract or other dealing relied on
as an estoppel and this applies to foreign as well as to domestic corporations. The
defendant having recognized the corporate existence of the plaintiff by making a
promissory note in its favor and making partial payments on the same is therefore
estopped to deny said plaintiffs corporate existence. It is, of course, also estopped from
denying its own corporate existence. Under these circumstances it was unnecessary for
the plaintiff to present other evidence of the corporate existence of either of the parties. It
ma# be noted that there is no evidence showing circumstances taking the case out of the
rules stated.

5. Salvatierra v. Garlitos, et. al., 103 Phil. 757
FACTS:
In 1954, Manuela Vda. De Salvatierra entered into a lease contract with
Philippine Fibers Producers Co., Inc. (PFPC). PFPC was represented by its president
Segundino Refuerzo. It was agreed that Manuela shall lease her land to PFPC in
exchange of rental payments plus shares from the sales of crops. However, PFPC failed
to comply with its obligations and so in 1955, Manuela sued PFPC and she won. An
order was issued by Judge Lorenzo Garlitos of CFI Leyte ordering the execution of the
judgment against Refuerzos property (there being no property under PFPC). Refuerzo
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moved for reconsideration on the ground that he should not be held personally liable
because he merely signed the lease contract in his official capacity as president of PFPC.
Garlitos granted Refuerzos motion. Manuela assailed the decision of the judge on the
ground that she sued PFPC without impleading Refuerzo because she initially believed
that PFPC was a legitimate corporation. However, during trial, she found out that PFPC
was not actually registered with the Securities and Exchange Commission (SEC) hence
Refuerzo should be personally liable.

ISSUE: Whether or not Manuela is correct.

HELD:
Yes. It is true that as a general rule, the corporation has a personality separate and
distinct from its incorporators and as such the incorporators cannot be held personally
liable for the obligations of the corporation. However, this doctrine is not applicable to
unincorporated associations. The reason behind this doctrine is obvious-since an
organization which before the law is non-existent has no personality and would be
incompetent to act and appropriate for itself the powers and attribute of a corporation as
provided by law; it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so without
authority and at their own risk. In this case, Refuerzo was the moving spirit behind PFPC.
As such, his liability cannot be limited or restricted that imposed upon would-be
corporate shareholders. In acting on behalf of a corporation which he knew to be
unregistered, he assumed the risk of reaping the consequential damages or resultant
rights, if any, arising out of such transaction.

6. Albert v. University Publishing Co., Inc., G.R. No. L-19118, Jan. 30, 1965
FACTS:
Mariano Albert entered into a contract with University Publishing Co., Inc.
through Jose M. Aruego, its President, whereby University would pay plaintiff for the
exclusive right to publish his revised Commentaries on the Revised Penal Code. The
contract stipulated that failure to pay one installment would render the rest of the
payments due. When University failed to pay the second installment, Albert sued for
collection and won. However, upon execution, it was found that University was not
registered with the SEC. Albert petitioned for a writ of execution against Jose M. Aruego
as the real defendant. University opposed, on the ground that Aruego was not a party to
the case.

ISSUE: Whether or not Aruego can be held personally liable to the plaintiff.

RULING:
YES. The Supreme Court found that Aruego represented a non-existent entity and
induced not only Albert but the court to believe in such representation. Aruego, acting as
representative of such non-existent principal, was the real party to the contract sued upon,
and thus assumed such privileges and obligations and became personally liable for the
contract entered into or for other acts performed as such agent. One who has induced
another to act upon his wilful misrepresentation that a corporation was duly organized
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and existing under the law, cannot thereafter set up against his victim the principle of
corporation by estoppel The Supreme Court likewise held that the doctrine of corporation
by estoppel cannot be set up against Albert since it was Aruego who had induced him to
act upon his (Aruego's) willful representation that University had been duly organized
and was existing under the law.

7. Fleischer v. Botica Nolasco Co., 47 Phil. 583
FACTS:
Botica Nolasco, Inc. is a corporation duly organized and existing under the laws
of the Philippine Islands. The plaintiff, Henry Fleischer, filed a complaint against the
Botica Nolasco, Inc., alleging that he
became the owner of five shares of stock of said corporation, by purchase from their
original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the
defendant refused to register said shares in his name in the books of the corporation in
spite of repeated demands to that effect made by him upon said corporation, which
refusal caused him damages amounting to P500. Plaintiff prayed for a judgment ordering
the Botica Nolasco, Inc. to register in his name in the books of the corporation the five
shares of stock recorded in said books in the name of Manuel Gonzalez, and to indemnify
him in the sum of P500 as damages, and to pay the costs.

The cause was brought on for trial, and the judge, held that, in his opinion, article 12 of
the bylaws
of the corporation which gives it preferential right to buy its shares from retiring
stockholders, is in conflict with
Act No. 1459 (Corporation Law), especially with section 35 thereof; and rendered a
judgment ordering the
defendant corporation, through its board of directors, to register in the books of said
corporation the said five
shares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder or owner
thereof, instead of the
original owner, Manuel Gonzalez, with costs against the defendant.
The defendant appealed from said judgment.

ISSUE:
Whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict
with the provisions of the Corporation Law (Act No. 1459).

RULING:
Yes. As a general rule, the by-laws of a corporation are valid if they are
reasonable and calculated to carry into effect the objects of the corporation, and are not
contradictory to the general policy of the laws of the land.

Section 13, paragraph 7, of the Corporation Law, empowers a corporation to make by-
laws, not inconsistent with any existing law, for the transferring of its stock. It follows
from said provision, that a by-law adopted by a corporation relating to transfer of stock
should be in harmony with the law on the subject of transfer of stock. The law on this
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subject is found in section 35 of Act No. 1459. Said section specifically provides that the
shares of stock "are personal property and may be transferred by delivery of the
certificate indorsed by the owner, etc." Said section 35 defines the nature, character and
transferability of shares of stock. Said section contemplates no restriction as to whom
they may be transferred or sold. The holder of shares, as owner of personal property, is at
liberty, under said section, to dispose of them in favor of whomsoever he pleases, without
any other limitation in this respect, than the general provisions of law. Therefore, a stock
corporation in adopting a by-law governing transfer of shares of stock should take into
consideration the specific provisions of section 35 of Act No. 1459, and said by-law
should be made to harmonize with said provisions. It should not be inconsistent
therewith.

And moreover, the by-laws now in question cannot have any effect on the appellee. He
had no knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzalez and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser. An
unauthorized by-law forbidding a shareholder to sell his shares without first offering
them to the corporation for a period of thirty days is not binding upon an assignee of the
stock as a personal contract, although his assignor knew of the by-law and took part in its
adoption.

8. Government of the Philippine Islands v. El Hogar Filipino, 50 Phil. 399
FACTS:
The Philippine Commission enacted Act No. 1459, also known as the
Corporation Law on 1906. El Hogar Filipino, organized under the laws of the Phiippines
Islands, was the first corporation organized under Sec. 171-190 of Act No. 1459, devoted
to the subject of building and loan associations. In the said law, the capial of the said
corporation shall not exceed P3M, but Act No. 2092 amended that and, permitting
capitalization in the amount of P10M.
Soon thereafter the association took advantage of this enactment by amending its articles
so as to provide that the capital should be in an amount not exceeding the then lawful
limit. From the time of its first organization the number of shareholders has constantly
increased, with the result that on 1925, the association had 5,826 shareholders holding
125,750 shares, with a total paid-up value of P8,703,602.25.

First cause of action. The first cause of action is based upon the alleged illegal holding
by the respondent of the title to real property for a period in excess of five years after the
property had been bought in by the respondent at one of its own foreclosure sales. The
provision of law relevant to the matter is found in section 75 of Act of Congress of July
1, 1902 (repeated in subsection 5 of section 13 of the Corporation Law.)

it appears that in the year 1920 El Hogar Filipino was the holder of a recorded mortgage
upon a tract of land in the municipality of San Clemente, Province of Tarlac, as security
for a loan of P24,000 to the shareholders of El Hogar Filipino who were the owners of
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said property. The borrowers having defaulted in their payments, El Hogar Filipino
foreclosed the mortgage and purchased the land at the foreclosure sale for the net amount
of the indebtedness, namely, the sum of P23,744.18. the deed conveying the property to
El Hogar Filipino was sent to the register of deeds of the Province of Tarlac, with the
request that the certificate of title then standing in the name of the former owners be
cancelled and that a new certificate of title be issued in the name of El Hogar Filipino.

For months no reply was received by El Hogar Filipino, so it filed a complaint to the
Chief of the General Land Registration Office; and on May 7, 1921, the certificate of title
to the San Clemente land was received by El Hogar Filipino from the register of deeds of
Tarlac.

Thereafter, the San Clemente land was to be sold to a certain Alcantara. Alcantara was
given successive extensions of the time, the last of which expired April 30, 1926, within
which to make the payment agreed upon; and upon his failure to do so El Hogar Filipino
treated the contract with him as rescinded, and efforts were made at once to find another
buyer. Finally the land was sold to Doa Felipa Alberto for P6,000 by a public instrument
executed before a notary public.

ISSUE:
Whether or not ther was illegal holding on the part of the respondent of the title
to the real property.

Ruling 1: The Attorney-General points out that the respondent acquired title on
December 22, 1920, when the deed was executed and delivered, by which the property
was conveyed to it as purchaser at its foreclosure sale, and this title remained in it until
July 30, 1926, when the property was finally sold to Felipa Alberto. The interval between
these two conveyances is thus more than five years; and it is contended that the five year
period did not begin to run against the respondent until May 7, 1921, when the register of
deeds of Tarlac delivered the new certificate of title to the respondent pursuant to the
deed by which the property was acquired. It has been held by this court that a purchaser
of land registered under the Torrens system cannot acquire the status of an innocent
purchaser for value unless his vendor is able to place in his hands an owner's duplicate
showing the title of such land to be in the vendor.

It results that prior to May 7, 1921, El Hogar Filipino was not really in a position to pass
an indefeasible title to any purchaser. The failure of the respondent to receive the
certificate sooner was not due in any wise to its fault, but to unexplained delay on the part
of the register of deeds. For this delay the respondent cannot be held accountable.

Second cause of action. The second cause of action is based upon a charge that the
respondent is owning and holding a business lot, with the structure thereon, in the
financial district of the City of Manila is excess of its reasonable requirements and in
contravention of subsection 5 of section 13 of the corporation Law.

ISSUE:
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Whether or not the respondent is owning and holding a business lot in excess of its
reasonable requirements.

Ruling 2: Under subsection 5 of section 13 of the Corporation Law, every corporation has
the power to purchase, hold and lease such real property as the transaction of the lawful
business of the corporation may reasonably and necessarily require. When this property
was acquired in 1916, the business of El Hogar Filipino had developed to such an extent,
and its prospects for the future were such as to justify its directors in acquiring a lot in the
financial district of the City of Manila and in constructing thereon a suitable building as
the site of its offices; and it cannot be fairly said that the area of the lot 1,413 square
meters was in excess of its reasonable requirements. Inasmuch as the lot referred to
was lawfully acquired by the respondent, it is entitled to the full beneficial use thereof.
No legitimate principle can discovered which would deny to one owner the right to enjoy
his (or its) property to the same extent that is conceded to any other owner; and an
intention to discriminate between owners in this respect is not lightly to be imputed to the
Legislature.

Third cause of action. Under the third cause of action the respondent is charged with
engaging in activities
foreign to the purposes for which the corporation was created and not reasonable
necessary to its legitimate ends. The specifications under this cause of action relate to
three different sorts of activities. The first consist of the administration of the offices in
the El Hogar building not used by the respondent itself and the renting of such offices to
the public.

Ruling 3a: The activities here criticized clearly fall within the legitimate powers of the
respondent. This matter will therefore no longer detain us. If the respondent had the
power to acquire the lot, construct the edifice and hold it beneficially, as there decided,
the beneficial administration by it of such parts of the building as are let to others must
necessarily be lawful.

The second specification has reference to the administration and management of
properties belonging to delinquent shareholders of the association. The association has
been accustomed (pursuant to clause 8 of its standard mortgage) to take over and manage
the mortgaged property for the purpose of applying the income to the obligations of the
debtor party.

Ruling 3b: We see no reason to doubt the validity of the clause giving the association the
right to take over the property which constitutes the security for the delinquent debt and
to manage it with a view to the satisfaction of the obligations due to the debtor than the
immediate enforcement of the entire obligation, and the validity of the clause allowing
this course to be taken appears to us to be not open to doubt. The second specification
under this cause of action is therefore without merit, as was true of the first.

The third specification under this cause of action relates to certain activities which are
described in the following paragraphs contained in the agreed statements of facts:
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El Hogar Filipino has undertaken the management of some parcels of improved real
estate situated in
Manila not under mortgage to it, but owned by shareholders, and has held itself out by
advertisement as
prepared to do so. The number of properties so managed during the years 1921 to 1925,
inclusive, was as follows:
1921 eight properties
1922 six properties
1923 ten properties
1924 fourteen properties
1925 fourteen properties.
This service is limited to shareholders; but some of the persons whose properties are so
managed for them became shareholders only to enable them to take advantage thereof.

Ruling 3c: The administration of property in the manner described is more befitting to the
business of a real estate agent or trust company than to the business of a building and
loan association. The circumstance that the owner of the property may have been required
to subscribe to one or more shares of the association with a view to qualifying him to
receive this service is of no significance. It is a general rule of law that corporations
possess only such express powers. The management and administration of the property of
the shareholders of the corporation is not expressly authorized by law, and we are unable
to see that, upon any fair construction of the law, these activities are necessary to the
exercise of any of the granted powers. The corporation, upon the point now under the
criticism, has clearly extended itself beyond the legitimate range of its powers.

Fourth cause of action. It appears that among the by laws of the association there is an
article (No. 10) which reads as follows:
The board of directors of the association, by the vote of an absolute majority of its
members, is empowered
to cancel shares and to return to the owner thereof the balance resulting from the
liquidation thereof whenever, by reason of their conduct, or for any other motive, the
continuation as members of the owners of such shares is not desirable.

Ruling 4: This by-law is of course a patent nullity, since it is in direct conflict with the
latter part of section 187 of the Corporation Law, which expressly declares that the board
of directors shall not have the power to force the surrender and withdrawal of unmatured
stock except in case of liquidation of the corporation or of forfeiture of the stock for
delinquency. It is supposed, in the fourth cause of action, that the existence of this article
among the by-laws of the association is a misdemeanor on the part of the respondent
which justifies its dissolution.

Fifth cause of action. The failure of the corporation to hold annual meetings and the
filling of vacancies in the directorate in the manner described constitute misdemeanours
on the part of the respondent which justify the resumption of the franchise by the
Government and dissolution of the corporation; and in this connection it is charge that the
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board of directors of the respondent has become a permanent and self perpetuating body
composed of wealthy men instead of wage earners and persons of moderate means.

Ruling 5: We are unable to see the slightest merit in the charge. No fault can be imputed
to the corporation on account of the failure of the shareholders to attend the annual
meetings; and their non-attendance at such meetings is doubtless to be interpreted in part
as expressing their satisfaction of the way in which things have been conducted.
The doctrine above stated finds expressions in article 66 of the by-laws of the respondent
which declares in
so many words that directors shall hold office "for the term of one year on until their
successors shall have been elected and taken possession of their offices."
It result that the practice of the directorate of filling vacancies by the action of the
directors themselves is valid. Nor can any exception be taken to then personality of the
individuals chosen by the directors to fill vacancies in the body. Certainly it is no fair
criticism to say that they have chosen competent businessmen of financial responsibility
instead of electing poor persons to so responsible a position. The possession of means
does not disqualify a man for filling positions of responsibility in corporate affairs.

Sixth cause of action. Under the sixth cause of action it is alleged that the directors of
El Hogar Filipino, instead of serving without pay, or receiving nominal pay or a fixed
salary, as the complaint supposes would be proper, have been receiving large
compensation, varying in amount from time to time, out of the profits of the respondent.

Ruling 6: The power to fixed the compensation they shall receive, if any, is left to the
corporation, to be determined in its by-laws(Act No. 1459, sec. 21). Pursuant to this
authority the compensation for the directors of El Hogar Filipino has been fixed in
section 92 of its by-laws, as already stated.
If a mistake has been made, or the rule adopted in the by-laws meeting to change the rule,
the remedy, if any, seems to lie rather in publicity and competition, rather than in a court
proceeding. The sixth cause of action is in our opinion without merit.

Seventh cause of action. It appears that the promoter and organizer of El Hogar
Filipino was Mr. Antonio Melian, and in the early stages of the organization of the
association the board of directors authorized the association to make a contract with him
with regard to the services him therefor. As a seventh cause of action it is alleged in the
complaint that this royalty of the founder is "unconscionable, excessive and out of all
proportion to the services rendered, besides being contrary to and incompatible with the
spirit and purpose of building and loan associations."

Ruling 7: It is our opinion that this contention is entirely without merit. The mere fact
that the compensation paid under this contract is in excess of what, in the full light of
history, may be considered appropriate is not a proper consideration for this court, and
supplies no ground for interfering with its performance. In the case of El Hogar Filipino
vs. Rafferty (37 Phil., 995), which was before this court nearly ten years ago, this court
held that the El Hogar Filipino is contract with Mr. Melian did not affect the
association's legal character. The inference is that the contract under consideration was
13

then considered binding, and it occurred to no one that it was invalid. It would be a
radical step indeed for a court to attempt to substitute its judgment for the judgment of the
contracting parties and to hold, as we are invited to hold under this cause of action, that
the making of such a contract as this removes the respondent association from the pale of
the law. The majority of the court is of the opinion that our traditional respect for the
sanctity of the contract obligation should prevail over the radical and innovating
tendencies which find acceptance with some and which, if given full rein, would go far to
sink legitimate enterprise in the Islands into the pit of populism and bolshevism. The
seventh count is not sustainable.

Eight cause of action. Under the fourth cause of action we had case where the alleged
ground for the revocation of the respondent's charter was based upon the presence in the
by-laws of article 10 that was found to be inconsistent with the express provisions of law.
Article 70 of the by-laws in effect requires that persons elected to the board of directors
must be holders of shares of the paid up value of P5,000 which shall be held as security
may be put up in the behalf of any director by some other holder of shares in the amount
stated. Article 76 of the by-laws declares that the directors waive their right as
shareholders to receive loans from the association.

Ruling 8: Article 70 is objectionable in that, under the requirement for security, a poor
member, or wage-earner, cannot serve as director. Article 76 is criticized on the ground
that the provision requiring directors to renounce their right to loans unreasonably limits
their rights and privileges as members. There is nothing of value in either of these
suggestions. Section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors; and the
requirement of security from them for the proper discharge of the duties of their office,
Article 76, prohibiting directors from making loans to themselves, is
of course designed to prevent the possibility of the looting of the corporation by
unscrupulous directors. A more discreet provision to insert in the by-laws of a building
and loan association would be hard to imagine. Clearly, the eighth cause of action cannot
be sustained.

Ninth cause of action. The specification under this head is in effect that the respondent
has abused its franchise in issuing "special" shares. The issuance of these shares is
alleged to be illegal and inconsistent with the plan and purposes of building and loan
associations.

Ruling 9: Tt will be seen that there is express authority, even in the very letter of the law,
for the emission of advance-payment or "special" shares, and the argument that these
shares are invalid is seen to be baseless. In addition to this it is satisfactorily
demonstrated in Severino vs. El Hogar Filipino, supra, that even assuming that the statute
has not expressly authorized such shares, yet the association has implied authority to
issue them. The complaint consequently fails also as regards the stated in the ninth cause
of action.

14

Tenth cause of action. Under this head of the complaint it is alleged that the defendant
is pursuing a policy of depreciating, at the rate of 10 per centum per annum, the value of
the real properties acquired by it at its sales; and it is alleged that this rate is excessive.

Ruling 10: There is no positive provision of law prohibiting the association from writing
off a reasonable amount for depreciation on its assets for the purpose of determining its
real profits; and article 74 of its by-laws expressly authorizes the board of directors to
determine each year the amount to be written down upon the expenses of installation and
the property of the corporation. There can be no question that the power to adopt such a
by-law is embraced within the power to make by-laws for the administration of the
corporate affairs of the association and for the management of its business, as well as the
care, control and disposition of its property (Act No. 1459, sec. 13 [7]). Certainly this
court cannot undertake to control the discretion of the board of directors of the
association about an administrative matter as to which they have legitimate power of
action. The tenth cause of action is therefore not well founded.

Eleventh and twelfth causes of action. The same comment is appropriate with respect
to the eleventh and twelfth causes of action, which are treated together in the briefs, and
will be here combined. The specification in the eleventh cause of action is that the
respondent maintains excessive reserve funds, and in the twelfth cause of action that the
board of directors has settled upon the unlawful policy of paying a straight annual
dividend of 10 per centum, regardless of losses suffered and profits made by the
corporation and in contravention of the requirements of section 188 of the Corporation
Law.

Ruling 11 and 12: We find no reason to doubt the right of the respondent to maintain
these reserves. It is true that the corporation law does not expressly grant this power, but
we think it is to be implied. It is a fact of common observation that all commercial
enterprises encounter periods when earnings fall below the average, and the prudent
manager makes provision for such contingencies. To regard all surplus as profit is to
neglect one of the primary canons of good business practice. Building and loan
associations, though among the most solid of financial institutions, are nevertheless
subject to vicissitudes. Fluctuations in the dividend rate are highly detrimental to any
fiscal institutions, while uniformity in the payments of dividends, continued over long
periods, supplies the surest foundations of public confidence.
Our conclusion is that the respondent has the power to maintain the reserves criticized in
the eleventh and twelfth counts of the complaint; and at any rate, if it be supposed that the
reserves referred to have become excessive, the remedy is in the hands of the Legislature.

Thirteenth and fourteenth causes of action. The specification under this head is, in
effect, that the respondent association has made loans which, to the knowledge of the
associations officers were intended to be used by the borrowers for other purposes than
the building of homes. The specification under this head is that the loans made by the
defendant for purposes other than building or acquiring homes have been extended in
extremely large amounts and to wealthy persons and large companies.

15

Ruling 13 and 14: The law states no limit with respect to the size of the loans to be made
by the association. That matter is confided to the discretion of the board of directors; and
this court cannot arrogate to itself a control over the discretion of the chosen officials of
the company. If it should be thought wise in the future to put a limit upon the amount of
loans to be made to a single person or entity, resort should be had to the Legislature; it is
not a matter amenable to judicial control. The fourteenth cause of action is therefore
obviously without merit.

Fifteenth cause of action. The criticism here comes back to the supposed misdemeanor
of the respondent in maintaining its reserve funds, a matter already discussed under
the eleventh and twelfth causes of action.
Under the fifteenth cause of action it is claimed that upon the expiration of the franchise
of the association through the effluxion of time, or earlier liquidation of its business, the
accumulated reserves and other properties will accrue to the founder, or his heirs, and the
then directors of the corporation and to those persons who may at that time to be holders
of the ordinary and special shares of the corporation.

Ruling 15: There is nothing of the by-laws which is, in our opinion, subject to criticism.
The real point of criticism is that upon the final liquidation of the corporation years hence
there may be in existence a reserve fund out of all proportion to the requirements that
may then fall upon it in the liquidation of the company. It seems to us that this is matter
that may be left to the prevision of the directors or to legislative action if it should be
deemed expedient to require the gradual suppression of the reserve funds as the time for
dissolution approaches.

Sixteenth cause of action. This part of the complaint assigns as cause of action that
various loans now outstanding have been made by the respondent to corporations and
partnerships, and that these entities have in some instances subscribed to shares in the
respondent for the sole purpose of obtaining such loans. It is also admitted that some of
these juridical entities became shareholders merely for the purpose of qualifying
themselves to take loans from the association, and the same is said with respect to many
natural persons who have taken shares in the association.

Ruling 16: The word "person" appears to be here used in its general sense, and there is
nothing in the context to indicate that the expression is used in the restricted sense of both
natural and artificial persons, as indicated in section 2 of the Administrative Code. At any
rate the question whether these loans and the attendant subscriptions were properly made
involves a consideration of the power of the subscribing corporations and partnerships to
own the stock and take the loans; and it is not alleged in the complaint that they were
without power in the premises. Of course the mere motive with which subscriptions are
made, whether to qualify the stockholders to take a loan or for some other reason, is of no
moment in determining whether the subscribers were competent to make the contracts.
The result is that we find nothing in the allegations of the sixteenth cause of action, or in
the facts developed in connection therewith, that would justify us in granting the relief.

16

Seventeenth cause of action. Under the seventeenth cause of action, it is charged that
in disposing of real
estates purchased by it in the collection of its loans, the defendant has no various
occasions sold some of the said real estate on credit, transferring the title thereto to the
purchaser; that the properties sold are then mortgaged to the defendant to secure the
payment of the purchase price, said amount being considered as a loan, and carried as
such in the books of the defendant, and that several such obligations are still outstanding.

Ruling 17: It seems to be supposed that, when the respondent sells property acquired at
its own foreclosure sales and takes a mortgage to secure the deferred payments, the
obligation of the purchaser is a true loan, and hence prohibited. But in requiring the
respondent to sell real estate which it acquires in connection with the collection of its
loans within five years after receiving title to the same, the law does not prescribe that the
property must be sold for cash or that the purchaser shall be a shareholder in the
corporation.

9. Stockholders of F. Guanzon & Sons, Inc. v. Register of Deeds of Manila, 6
SCRA 373
FACTS:
On September 19, 1960, the five stockholders of the F. Guanzon and Sons, Inc.
executed a certificate of liquidation of the assets of the corporation reciting, among other
things, that by virtue of a resolution of the stockholders adopted on September 17, 1960,
dissolving the corporation, they have distributed among themselves in proportion to their
shareholdings, as liquidating dividends, the assets of said corporation, including real
properties located in Manila.

The certificate of liquidation, when presented to the Register of Deeds of Manila, was
denied registration on seven grounds, of which the following were disputed by the
stockholders:
3. The number of parcels not certified to in the acknowledgment;
5. P430.50 Reg. fees need be paid;
6. P940.45 documentary stamps need be attached to the document;
7. The judgment of the Court approving the dissolution and directing the disposition of
the assets of the corporation need be presented (Rules of Court, Rule 104, Sec. 3).

Deciding the consulta elevated by the stockholders, the Commissioner of Land
Registration overruled ground No. 7 and sustained requirements Nos. 3, 5 and 6. The
stockholders interposed the present appeal.

ISSUE:
Whether or noDt the certificate of registration merely involves a distribution of
the corporation's assets or should be considered a transfer or conveyance.

RULING:
A corporation is a juridical person distinct from the members composing it.
Properties registered in the name of the corporation are owned by it as an entity separate
17

and distinct from its members. While shares of stock constitute personal property they do
not represent property of the corporation. The corporation has property of its own which
consists chiefly of real estate. A share of stock only typifies an aliquot part of the
corporation's property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of
the corporation. Nor is he entitled to the possession of any definite portion of its property
or assets. The stockholder is not a co-owner or tenant in common of the corporate
property.

On the basis of the foregoing authorities, it is clear that the act of liquidation made by the
stockholders of the F.
Guanzon and Sons, Inc. of the latter's assets is not and cannot be considered a partition of
community property, but rather a transfer or conveyance of the title of its assets to the
individual stockholders. Indeed, since the purpose of the liquidation, as well as the
distribution of the assets of the corporation, is to transfer their title from the corporation
to the stockholders in proportion to their shareholdings, and this is in effect the
purpose which they seek to obtain from the Register of Deeds of Manila, that transfer
cannot be effected without the corresponding deed of conveyance from the corporation to
the stockholders. It is, therefore, fair and logical to consider the certificate of liquidation
as one in the nature of a transfer or conveyance.

10. Caram, et. al, v. Court of Appeals, et. al., 151 SCRA 373
FACTS:
Herein petitioners question the ruling of the lower court in declaring them
solidarily liable with their co-defendants in the lower court in the dispositive portion of
the decision:
1. Defendants are hereby ordered to jointly and severally pay the plaintiff the
amount of P50,000.00 for the preparation of the project study and his technical services
that led to the organization of the defendant corporation, plus P10,000.00 attorneys
fees.
Petitioners claim that the order of the lower court had no support in fact and in
law because they had no contract with the private respondent regarding the above-
mentioned services. Petitioners claim that as mere subsequent investors in the corporation
that was later created, they should not be held solidarily liable with the Filipinas Orient
Airways, a separate juridical entity, and with Barreto and Garcia, their co-defendants in
the lower court, who were the ones who requested the said services from the private
respondent.

ISSUE:
Whether or not petitioners are also and personally liable for the expenses?

RULING:
No. Petitioners are not liable at all, jointly or jointly and severally.
18

Petitioners, stockholders, were not really involved in the initial steps that finally
led to the incorporation of the Filipinas Orient Airways. Barreto was the moving spirit
and the main promoter during the initial stages of the organization of the airline. The
petitioners were merely among the financiers whose interest was to be invited and who
were in fact persuaded, on the strength of the project study, to invest in the proposed
airline.
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality, to justify making
the petitioners, as principal stockholders thereof, responsible for its obligations. As a
bona fide corporation, the Filipinas Orient Airways should alone be responsible for its
corporate acts as duly authorized by its officers and directors.
The petitioners cannot be held personally liable for the compensation claimed by
the private respondent for the services performed by him in the organization of the
corporation. The petitioners did not contract such services. It was only the results of such
services that Barreto and Garcia presented to them and which persuaded them to invest in
the proposed airline. The most that can be said is that they benefitted from such services,
but that surely is no justification to hold them personally liable therefor. Otherwise, all
the other stockholders of the corporation, including those who came in later, and
regardless of the amount of their share holdings, would be equally and personally liable
also with the petitioners for the claims of the private respondent.

11. Palay, Inc. v. Clave, 124 SCRA 640
FACTS:
On March 28, 1965, petitioner Palay, Inc., through its President, Albert Onstott,
executed in favor of private respondent, Nazario Dumpit, a contract to sell a parcel of
land of the Crestview Heights Subdivision in Antipolo, Rizal, owned by said corporation.
The sale price was P23,000 with 9% interest per annum, payable with a downpayment of
P4,660 and monthly installments of P246.42 until fully paid. Par. 6 of the contract
provided for automatic extrajudicial rescission upon default in payment of any monthly
installment after the lapse of 90 days from the expiration of the grace period of one
month, without need of notice and with forfeiture of all installments paid.
Respondent Dumpit paid the downpayment and several installments amounting to
P13,722.50. The last payment was made on Dec. 5, 1967 for installments up to Sep.
1967.
On May 10, 1973, almost 6 years later, private respondent wrote petitioner
offering to update all his overdue accounts with interest, and seeking its written consent
to the assignment of his rights to a certain Lourdes Dizon. He followed this up with
another letter dated June 20, 1973 reiterating the same request. Replying petitioners
informed respondent that his Contract to Sell had long been rescinded pursuant to
paragraph 6 of the contract, and that the lot had already been resold.
Respondent questioned the validity of the rescission and filed a letter complaint
with the National Housing Authority (NHA) for reconveyance with the alternative prayer
for refund. NHA found the rescission void in the absence of either judicial or notarial
demand and ordered Palay, Inc. and Alberto Onstott, in his capacity as President of the
19

corporation, jointly and severally, to refund immediately to Nazario Dumpit P13,722.50
with 12% interest from the filing of the complaint.

ISSUE:
Whether the doctrine of piercing the veil of corporate fiction has application to
the case at bar. And whether petitioner Onstott was properly made jointly and severally
liable with petitioner corporation for refund to private respondent of the total amount the
latter had paid to petitioner company.

RULING:
No, the piercing of the veil of corporate fiction has no application to the case at
bar. And Petitioner Onstott, the president of the corporation, cannot be made personally
liable.
It is basic that a corporation is invested by law with a personality separate and
distinct from those of the persons composing it as well as from that of any other legal
entity to which it may be related. As a general rule, a corporation may not be made to
answer for acts or liabilities of its stockholders or those of the legal entities to which it
may be connected and vice versa. However, the veil of corporate fiction may be pierced
when it is used as a shield to further an end subversive of justice; or for purposes that
could not have been intended by the law that created it; or to defeat public convenience,
justify wrong, protect fraud, or defend crime; or to perpetuate fraud or confuse legitimate
issues; or to circumvent the law or perpetuate deception; or as an alter ego, adjunct or
business conduit for the sole benefit of the stockholders.
We find no badges of fraud on petitioner`s part. They had literally relied, albeit
mistakenly, on par. 6 of its contract with private respondent when it rescinded the
contract to sell extrajudicially and had sold it to a third person.
In this case, petitioner Onstott was made liable because he was then the President
of the corporation and he a to (sic) be the controlling stockholder. No sufficient proof
exists on record that said petitioner used the corporation to defraud private respondent.
He cannot, therefore, be made personally liable just because he "appears to be the
controlling stockholder". Mere ownership by a single stockholder or by another
corporation is not of itself sufficient ground for disregarding the separate corporate
personality.

(The Court ruled that the extrajudicial rescission was ineffective and inoperative
against private respondent for lack of notice of resolution. Notice of cancellation to the
buyer is indispensable. Extrajudicial rescission has legal effect where the other party does
not oppose it. Where it is objected to, a judicial determination of the issue is still
necessary. In other words, resolution of reciprocal contracts may be made extrajudicially
unless successfully impugned in Court. If the debtor impugns the declaration, it shall be
subject to judicial determination. Thus, the corporation should refund.)

12. Laguna Transportation Company, Inc. v. Social Security System, 107 Phil. 833
FACTS:
20

Sometime in 1949, the Bian Transportation Co., a corporation duly registered
with the SEC, sold part of the lines and equipment it operates to Gonzalo Mercado,
Artemio Mercado, Florentino Mata and Dominador Vera Cruz. The said vendees formed
an unregistered partnership under the name of Laguna Transportation Company, which
continued to operate the lines and equipment bought from the Bian Transportation Co.,
in addition to new lines which it was able to secure from the Public Service Commission.
The original partners and two new members organized a corporation known as the
Laguna Transportation Company, Inc., registered under the SEC on June 20, 1956. The
corporation continued the same transportation business of the unregistered partnership.
Prior to November 11, 1957, plaintiff requested for exemption from coverage by
the System on the ground that it started operation only on June 20, 1956, when it was
registered with the SEC but on November 11, 1957, the Social Security System notified
plaintiff that it was covered.
The lower court ruled that petitioner was an employer engaged in business as
common carrier which had been in operation for at least two years prior to the enactment
of RA 1161, as amended by RA 1792 and by virtue thereof, it was subject to compulsory
coverage under said law.

ISSUE:
Whether or not petitioner, an employer which had been engaged in business as a
common carrier for at least 2 years prior to the enactment of the Social Security Act, is
subject to compulsory coverage thereunder?

RULING:
Yes. The Petitioner corporation is subject to compulsory coverage under the SSS.
Sec. 9 of the Social Security Act provides,
Sec. 9. Compulsory Coverage Coverage in the System shall be
compulsory upon all employees between the ages of sixteen and sixty years, inclusive, if
they have been for at least six months in the service of an employer who is a member of
the System. Provided, That the Commission may not compel any employer to become a
member of the System unless he shall have been in operation for at least two years....
It is not disputed that the Laguna Transportation Company, an unregistered
partnership composed of Gonzalo Mercado, Artemio Mercado, Florentina Mata, and
Dominador Vera Cruz, commenced the operation of its business as a common carrier on
April 1, 1949. These 4 original partners, with 2 others (Maura Mendoza and Sabina
Borja) later converted the partnership into a corporate entity, by registering its articles of
incorporation with the Securities and Exchange Commission on June 20, 1956. The firm
name "Laguna Transportation Company" was not altered, except with the addition of the
word "Inc." to indicate that petitioner was duly incorporated under existing laws. The
corporation continued the same transportation business of the unregistered partnership,
using the same lines and equipment. There was, in effect, only a change in the form of the
organization of the entity engaged in the business of transportation of passengers. Hence,
said entity as an employer engaged in business, was already in operation for at least 3
years prior to the enactment of the Social Security Act on June 18, 1954 and for at least
two years prior to the passage of the amendatory act on June 21, 1957.

21

Petitioner argues that, since it was registered as a corporation with the Securities
and Exchange Commission only on June 20, 1956, it must be considered to have been in
operation only on said date. While it is true that a corporation once formed is conferred a
juridical personality separate and district from the persons composing it, it is but a legal
fiction introduced for purposes of convenience and to subserve the ends of justice. The
concept cannot be extended to a point beyond its reasons and policy, and when invoked
in support of an end subversive of this policy, will be disregarded by the courts.
If any general rule can be laid down, in the present state of authority, it is that a
corporation will be looked upon as a legal entity as a general rule, and until sufficient
reason to the contrary appears; but, when the motion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons.
To adopt petitioner's argument would defeat, rather than promote, the ends for
which the Social Security Act was enacted. An employer could easily circumvent the
statute by simply changing his form of organization every other year, and then claim
exemption from contribution to the System as required, on the theory that, as a new
entity, it has not been in operation for a period of at least 2 years. The door to fraudulent
circumvention of the statute would, thereby, be opened. Moreover, petitioner admitted
that as an employer engaged in the business of a common carrier, its operation
commenced on April 1, 1949 while it was a partnership and continued by the corporation
upon its formation on June 20, 1956. Unlike in the conveyance made by the Bian
Transportation Company to the partners Gonzalo Mercado, Artemio Mercado, Florentino
Mata, and Dominador Vera Cruz, no mention whatsoever is made either in the pleadings
or in the stipulation of facts that the lines and equipment of the unregistered partnership
had been sold and transferred to the corporation, petitioner herein. This omission, to our
mind, clearly indicates that there was, in fact, no transfer of interest, but a mere change in
the form of the organization of the employer engaged in the transportation business, i.e.,
from an unregistered partnership to that of a corporation. As a rule, courts will look to the
substance and not to the form.
Finally, the weight of authority supports the view that where a corporation was
formed by, and consisted of members of a partnership whose business and property was
conveyed and transferred to the corporation for the purpose of continuing its business, in
payment for which corporate capital stock was issued, such corporation is presumed to
have assumed partnership debts, and is prima facie liable therefor.
The reason for the rule is that the members of the partnership may be said to have
simply put on a new coat, or taken on a corporate cloak, and the corporation is a mere
continuation of the partnership.

13. Marvel Building Corporation, et. al. v. David, 94 Phil. 376
FACTS:
Marvel Building Corporation was incorporated in February 12, 1947 wherein its
articles of incorporation contained a capital stock of P 2,000,000.00 of which majority of
its stockholders are Maria B. Castro(President), Amado A. Yatco, Segundo Esguerra and
Maximo Cristobal(Secretary-Treasurer) from the total of eleven(11) stockholders.
During the existence of the corporation, it acquired assets including buildings, namely,
Aguinaldo Building, Wise Building and Dewey Boulevard-Padre Faura Mansion.
22

Towards the end of year 1948, internal revenue examiners discovered that from the 11
stock certificates, all of it were endorsed in the bank by the subscribers, except the one
subscribed by Maria B. Castro. They also discovered that there were no business meeting
held by the board of directors, no by-laws and that the corporation never had any reports
of their transactions or affairs. As a result, Secretary of Finance recommended the
collection of war profit taxes assessed against Maria B. Castro in the amount of
P3,593,950.78 and seize the three(3) buildings named above.
Plaintiff(Marvel Building Corporation) filed a complaint for the release of the
seized property contending that said property are owned by the corporation and not solely
by Maria Castro. The trial court ruled in favor of plantiff and enjoin Collector of Internal
Revenue from selling the same. Collector of Internal Revenue appealed, and CA ruled
that trial court failed to show that Maria B. Castro is not the true owner of all the stock
certificates of the corporation, therefore confiscation of the property against the
corporation is justified. Hence this petition arise.

ISSUE:
Whether or not Maria B. Castro is the sole owner of all the stocks of Marvel
Corporation and the other stockholders are mere dummies?

RULING:
Yes. Maria B. Castro is the sole and exclusive owner of all the shares of stock of
the Marvel Building Corporation and that the other partners are her dummies. Section 89,
Rule 123 of the Rules of Court and section 42 of the Provisional law for the application
of the Penal Code, applies in this case pursuant to circumstantial evidence as the basis of
judgment.
In general the evidence offered by the plaintiffs is testimonial and direct evidence,
easy of fabrication; that offered by defendant, documentary and circumstantial, not only
difficult of fabrication but in most cases found in the possession of plaintiffs. The
circumstantial evidence is not only convincing; it is conclusive. The existence of
endorsed certificates, discovered by the internal revenue agents between 1948 and 1949
in the possession of the Secretary-Treasurer, the fact that twenty-five certificates were
signed by the president of the corporation, for no justifiable reason, the fact that two sets
of certificates were issued, the undisputed fact that Maria B. Castro had made enormous
profits and, therefore, had a motive to hide them to evade the payment of taxes, the fact
that the other subscribers had no incomes of sufficient magnitude to justify their big
subscriptions, the fact that the subscriptions were not receipted for and deposited by the
treasurer in the name of the corporation but were kept by Maria B. Castro herself, the fact
that the stockholders or the directors never appeared to have ever met to discuss the
business of the corporation, the fact that Maria B. Castro advanced big sums of money to
the corporation without any previous arrangement or accounting, and the fact that the
books of accounts were kept as if they belonged to Maria B. Castro alone these facts
are of patent and potent significance. This implied that Maria B. Castro would not have
asked them to endorse their stock certificates, or be keeping these in her possession, if
they were really the owners. They never would have consented that Maria B. Castro keep
the funds without receipts or accounting, nor that she manages the business without their
knowledge or concurrence, were they owners of the stocks in their own rights. Each and
23

every one of the facts all set forth above, in the same manner, is inconsistent with the
claim that the stockholders, other than Maria B. Castro, own their shares in their own
right.
On the other hand, each and every one of them, and all of them, can point to no
other conclusion than that Maria B. Castro was the sole and exclusive owner of the shares
and that they were only her dummies.

14. Palacio, et. al, v. Fely Transportation Company, 5 SCRA 1011
FACTS:
On December 24, 1952, at about 11:30 a.m., while the driver Alfonso (Alfredo)
Carillo was driving AC-687 jeepney at Halcon Street, Quezon City, he accidentally run
over a child Mario Palacio of the herein plaintiff Gregorio Palacio. Mario Palacio
suffered injury and fracture thereby hospitalizing him at the Philippine Orthopedic
Hospital from December 24, 1952, up to January 8, 1953, and continued to be treated for
a period of five months thereafter. While Plaintiff's (Gregorio Palacio's) child was in the
hospital and was under treatment for five months, he was forced to abandon his shop
where he derives income of P10.00 a day for the support of his family and was forced to
sell one air compressor (heavy duty) and one heavy duty electric drill, for a sacrifice sale
of P150.00 which could easily sell at P350.00 in order to sustain the daily expenses of his
family. Because of the failure to recover indemnity from the criminal case filed by the
plaintiff against the driver, this prompted plaintiff to file a civil suit in the Court of First
Instance against the defendant Fely Transportation company, for he incurred P300 for
attorneys fees, P500 for actual damages, and P1200 for moral damages.
The Court of First Instance found accused Alfredo Carillo y Damaso(driver) guilty
beyond reasonable doubt of the crime charged, however, on the basis of these facts, the
lower court held that the civil action filed is barred by the judgment in the criminal case
and, that under Article 103 of the Revised Penal Code, the person subsidiarily liable to
pay damages is Isabelo Calingasan, the employer, and not the defendant corporation.

ISSUE:
Whether or not Fely Transportation Company is subsidiarily liable of the crime
committed by its employee(driver).

RULING:
Yes.

The Court ruled that Isabelo Calingasan(the President and General Manager) and
defendant Fely Transportation may be regarded as one and the same person. It is evident
that Isabelo Calingasan's main purpose in forming the corporation was to evade his
subsidiary civil liability resulting from the conviction of his driver, Alfredo Carillo. This
conclusion is borne out by the fact that the incorporators of the Fely Transportation are
Isabelo Calingasan, his wife, his son, Dr. Calingasan, and his two daughters. It is believed
that in a case where the defendant corporation should not be heard to say that it has a
personality separate and distinct from its members when to allow it to do so would be to
sanction the use of the fiction of corporate entity as a shield to further an end subversive
of justice. Furthermore, the failure of the defendant corporation to prove that it has other
24

property than the jeep (AC-687) strengthens the conviction that its formation was for the
purpose above indicated.
Accordingly, defendants Fely Transportation and Isabelo Calingasan should be held
subsidiarily liable for P500.00 which Alfredo Carillo was ordered to pay in the criminal
case and which amount he could not pay on account of insolvency.

15. Tan Boon Bee & Co. v. Jarencio, 163 SCRA 205
FACTS:
In 1972, Anchor Supply Co. (ASC), through Tan Boon Bee, entered into a
contract of sale with Graphic Publishing Inc. (GPI) whereby ASC shall deliver paper
products to GPI. GPI paid a down payment but defaulted in paying the rest despite
demand from ASC. ASC sued GPI and ASC won. To satisfy the indebtedness, the trial
court, presided by Judge Hilarion Jarencio, ordered that one of the printing machines of
GPI be auctioned. But before the auction can be had, Philippine American Drug
Company (PADCO) notified the sheriff that PADCO is the actual owner of said printing
machine. Notwithstanding, the sheriff still went on with the auction sale where Tan Boon
Bee was the highest bidder.
Later, PADCO filed with the same court a motion to nullify the sale on execution. The
trial court ruled in favor of PADCO and it nullified said auction sale. Tan Boon Bee
assailed the order of the trial court. Tan Boon Bee averred that PADCO holds 50% of
GPI; that the board of directors of PADCO and GPI is the same; that the veil of corporate
fiction should be pierced based on the premises. PADCO on the other hand asserts
ownership over the said printing machine; that it is merely leasing it to GPI.

ISSUE: Whether or not the veil of corporate fiction should be pierced.

HELD:
Yes. PADCO, as its name suggests, is a drug company not engaged in the printing
business. So it is dubious that it really owns the said printing machine regardless of
PADCOs title over it. Further, the printing machine, as shown by evidence, has been in
GPIs premises even before the date when PADCO alleged that it acquired ownership
thereof. Premises considered, the veil of corporate fiction should be pierced; PADCO and
GPI should be considered as one. When a corporation is merely an adjunct, business
conduit or alter ego of another corporation the fiction of separate and distinct corporation
entities should be disregarded.

16. McConnel, et. al. v. Court of Appeals, 1 SCRA 721
FACTS:
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
25

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. The lot owners filed a complaint for
forcible entry in the Municipal Court of Manila which rendered judgment 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 CFI 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 CFI denied recovery; but on appeal, the
CA 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. Hence, this resort via certiorari.

ISSUE:
Whether or not the individual stockholders can held liable for obligations
contracted by the Corporation

RULING:
The Court has 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. The facts thus found cannot be varied by the Court, 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 cannot be invoked or
used for purposes that could not have been intended by the law that created that separate
personality.

17. National Marketing Corporation v. Associated Financing Company, et. al., 19
SCRA 962
FACTS:
On March 25, 1958, ASSOCIATED, a domestic corporation, through its
President, appellee Francisco Sycip, entered into an agreement to exchange sugar with
NAMARCO, represented by its then General Manager, Benjamin Estrella, whereby the
former would deliver to the latter 22,516 bags of "Victorias" and/or "National" refined
26

sugar in exchange for 7,732.71 bags of "Busilak" and 17,285.08 piculs of "Pasumil" raw
sugar belonging to NAMARCO, both agreeing to pay liquidated damages equivalent to
20% of the contractual value of the sugar should either party fail to comply with the
terms and conditions stipulated. Pursuant thereto, on May 19,1958, NAMARCO
delivered the exact quantity of the products as agreed . As ASSOCIATED failed to
comply with its obligation to NAMARCO, the latter demanded in writing either the (a)
immediate delivery thereof before January 20, or (b) payment of its equivalent cash value
amounting to P372,639.80. On January 19, 1959, ASSOCIATED, through Sycip, offered
to pay NAMARCO the value of 22,516 bags of refined sugar at the rate of P15.30 per
bag, but the latter rejected the offer. Instead, NAMARCO demanded payment of the
7,732.71 bags of "Busilak" raw sugar amounting to P118,310.40. and of the 17,285.08
piculs of "Pasumil" raw sugar amounting to P285.203.82. As ASSOCIATED refused to
deliver the raw sugar or pay for the refined sugar delivered to it, inspite of repeated
demands, NAMARCO instituted the present action in the lower court to recover the
payment of the raw sugar plus damages, attorney's fees, expenses of litigation and with
legal interest thereon from the filing of the complaint until fully paid. The trial court
rendered a judgment ordering ASSOCIATED to pay the NAMARCO the sum of
P403,514.28, with legal interest thereon from the date of filing of the action until fully
paid plus damages and attorneys fees but dismissing the complaint insofar as defendant
Francisco Sycip was concerned, as well as the latter's counterclaim.

ISSUE:
Whether or not Francisco Sycip may be held liable, jointly and severally with his
co-defendant, for
the sums of money adjudged in favor of NAMARCO

RULING:
Yes. The Court made a conclusion that Sycip was guilty of fraud because
through false representations he succeeded in inducing NAMARCO to enter into the
aforesaid exchange agreement, with full knowledge, on his part, on the fact that
ASSOCIATED whom he represented and over whose business and affairs he had
absolute control, was in no position to comply with the obligation it had assumed.
Consequently, he cannot now seek refuge behind the general principle that a corporation
has a personality distinct and separate from that of its stockholders and that the latter are
not personally liable for the corporate obligations. To the contrary, upon the proven facts,
the Court is justified in "piercing the veil of corporate fiction" and in holding Sycip
personally liable, jointly and severally with his co-defendant, for the sums of money
adjudged in favor of appellant. It is settled in law in this and other jurisdictions that when
the corporation is the mere alter ego of a person, the corporate fiction may be
disregarded; the same being true when the corporation is controlled, and its affairs are so
conducted as to make it merely an instrumentality, agency or conduit of another.

18. Claparols, et. al. v. Court of Industrial Relations, et. al., 65 SCRA 613
FACTS:
27

A complaint for unfair labor practice was filed by herein private respondent
Allied Workers' Association, respondent Demetrio Garlitos and ten (10) respondent
workers against herein petitioners on account of the dismissal of respondent workers
from petitioner Claparols Steel and Nail Plant. On September 16, 1963, respondent Court
rendered its decision finding "Mr. Claparols guilty of union busting and" of having
"dismissed said complainants because of their union activities," and ordering respondents
"(1) To cease and desist from committing unfair labor practices against their employees
and laborers; (2) To reinstate said complainants to their former or equivalent jobs, as
soon as possible, with back wages from the date of their dismissal up to their actual
reinstatement". Counsel for herein respondent workers filed a motion for execution which
was granted. On January 23, 1965, petitioners filed an opposition alleging that under the
circumstances presently engulfing the company, petitioner Claparols could not personally
reinstate respondent workers; that assuming the workers are entitled to back wages, the
same should only be limited to three months pursuant to the court ruling in the case of
Sta. Cecilia Sawmills vs. CIR; and that since Claparols Steel Corporation ceased to
operate on December 7, 1962, re-employment of respondent workers cannot go beyond
December 7, 1962. On the other had respondent workers, contended that Claparols Steel
and Nail Plant and Claparols Steel and Nail Corporation are one and the same corporation
controlled by petitioner Claparols, with the latter corporation succeeding the former.

ISSUE:
Whether or not the amount of back wages recoverable by respondent workers
from petitioners should be the amount accruing up to December 7, 1962 when the
Claparols Steel Corporation ceased operations.

RULING:
Yes. It is not disputed that Claparols Steel and Nail Plant, which ceased operation of
June 30, 1957, was succeeded by the Claparols Steel Corporation effective the next day,
July 1, 1957 up to December 7, 1962. It is very clear that the latter corporation was a
continuation and successor of the first entity, and its emergence was skillfully timed to
avoid the financial liability that already attached to its predecessor, the Claparols Steel
and Nail Plant. Both predecessors and successor were owned and controlled by the
petitioner Eduardo Claparols and there was no break in the succession and continuity of
the same business. This "avoiding-the-liability" scheme is very patent, considering that
90% of the subscribed shares of stocks of the Claparols Steel Corporation (the second
corporation) was owned by respondent (herein petitioner) Claparols himself, and all the
assets of the dissolved Claparols Steel and Nail Plant were turned over to the emerging
Claparols Steel Corporation. It is very obvious that the second corporation seeks the
protective shield of a corporate fiction whose veil in the present case could, and should,
be pierced as it was deliberately and maliciously designed to evade its financial
obligation to its employees. Furthermore, the Court cited Yutivo & Sons Hardware
Company vs. Court of Tax Appeals where it held that when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law
will regard the corporation as an association or persons, or, in the case of two
corporations, will merge them into one.

28

19. Villa Rey Transit, inc. v. Eusebio E. Ferrer, et. al., 25 SCRA 849
FACTS:

Jose M. Villarama was an operator of Villa Rey Transit, pursuant to certificates of public
convenience granted him by the Public Service Commission. He sold the 2 certificates to
the Pangasinan Transportation Company, Inc. with the condition, among others, that the
Villarama "shall not for a period of 10 years from the date of this sale, apply for any TPU
service identical or competing with the buyer."

Three months after, a corporation called Villa Rey Transit, Inc. was organized which
bought 5 certificates of public convenience, 49 buses, tools and equipment from Valentin
Fernando. Before the PSC could take final action on said application for approval of sale,
the Sheriff of Manila levied on 2 of the 5 certificates of public convenience, pursuant to a
writ of execution in favor of Eusebio Ferrer, judgment creditor, against Valentin
Fernando, judgment debtor, and were sold to Ferrer in a public sale. Ferrer sold
the 2 certificates Pantranco.

Villa Rey Transit, Inc. filed a complaint for the annulment of the sheriff's sale of the
aforesaid 2 certificates and the subsequent sale thereof to Pantranco, praying that all the
orders of the PSC relative to the parties' dispute over the said certificates be annulled.

ISSUES:

1) Whether or not Villa Rey Transit, Inc. is an alter ego of Villarama, warranting the
application of the doctrine of piercing the veil of corporate fiction.

2) Does the stipulation between Villarama and Pantranco, as contained in the deed of
sale, that the former "shall not for a period of 10 years from the date of this sale,
apply for any tpu service identical or competing with the buyer," bind the
Corporation?

RULING:

1) Villarama supplied the organization expenses and the assets of Villa Rey Transit,
Inc.; there was no actual payment by the original subscribers as appearing in the
books; he made use of the money of the Corporation and deposited them to his
private accounts; and the Corporation paid his personal accounts. He mingled the
corporate funds with his own money. Gasoline purchases of the Corporation were
made in his name. Such circumstances are strong persuasive evidence showing
that Villarama has been too much involved in the affairs of the Corporation to
altogether negative the claim that he was only a part-time general manager. They
show beyond doubt that the Corporation is his alter ego.

29

The interference of Villarama in the complex affairs of the corporation, and
particularly its finances, are much too inconsistent with the ends and purposes of
the Corporation law, which, precisely, seeks to separate personal responsibilities
from corporate undertakings. It is the very essence of incorporation that the acts
and conduct of the corporation be carried out in its own corporate name because it
has its own personality.

The doctrine that a corporation is a legal entity distinct and separate from the
members and stockholders who compose it is recognized and respected in all
cases which are within reason and the law. When the fiction is urged as a means
of perpetrating a fraud or an illegal act or as a vehicle for the evasion of an
existing obligation, the circumvention of statutes, the achievement or perfection
of a 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.

2) The preponderance of evidence have shown that the Villa Rey Transit, Inc. is
an alter ego of Jose M. Villarama, and that the restrictive clause in the contract
entered into with Pantranco is also enforceable and binding against the said
Corporation. For the rule is that a seller or promisor may not make use of a
corporate entity as a means of evading the obligation of his covenant. Where the
Corporation is substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee.

20. National Federation of Labor Unions v. Ople, 143 SCRA 125
FACTS:
The National Federation of Labor Union (NAFLU) filed a request for conciliation
before the Bureau of Labor Relations requesting for the intervention in its dispute with
Lawmans management involving certain money claims, refusal to conclude a collective
agreement after such has been negotiated and run-away shop undertaken by management
in order to bust the union. Several conferences were conducted by the Bureau to settle the
dispute amicably but to no avail.
Management unilaterally declared a temporary shutdown alleging that it had suffered
losses and that it had no more plant and building because they were allegedly repossessed
by another corporation for failure to pay rentals. However, it appears that at night,
machines were dismantled, hauled out and then installed at No. 43 Engineering Road,
Araneta University compound, Malabon, Metro Manila and the name of Lawman was
changed to LIBRA GARMENTS. Under that name, new applicants for employment were
called even as the company continued to manufacture the same products but under the
name of LIBRA GARMENTS. When this was discovered by the workers, LIBRA
GARMENTS was changed to DOLPHIN GARMENTS.
30

ISSUE:
Whether or not the company used the shield of corporate fiction to achieve an
illegal purpose, thus making the doctrine of piercing the veil of corporate fiction
applicable
RULING:
It is clear from the records of this case that the company bargained in bad faith
with the union when pending the negotiation of their collective agreement, the company
declared a temporary cessation of its operations which in reality was an illegal lockout. It
also maintained run-away shop when it started transferring its machine first to Libra and
then to Dolphin Garments. Failure on the part of the company to comply with the
requirements of notice and due process to the employees and the Labor Ministry one
month before the intended 'closure' of the firm is clearly against the law.
The evident bad faith, fraud and deceit committed by the company to the prejudice of
both the union and the employees who have existing wage claims, leads (us) to affirm the
union's position that the veil of corporate fiction should be pierced in order to safeguard
the right to self-organization and certain vested rights which had accrued in favor of the
union.
It is very obvious from the above findings that the second corporation seeks the
protective shield of a corporate fiction to achieve an illegal purpose. It is an established
principle that when the veil of corporate fiction is made as a shield to perpetrate a fraud
or to confuse legitimate issues (here, the relation of employer-employee), the same
should be pierced.

21. Cease, et. al. v. Court of Appeals, 93 SCRA 483
FACTS:
Forrest L. Cease together with 5 other Americans organized the Tiaong Milling and
Plantation Company but eventually, all the other original incorporators were bought out
by Cease together with his children. The charter of the company lapsed and the records
were silent on whether there was liquidation. When Cease died, 2 of his children wanted
an actual division while the 3 wanted reincorporation. The 3 children and another
stockholder proceeded to incorporate themselves into the F.L. Cease Plantation Company
and registered it with the SEC. The 2 children initiated a Special Proceeding for the
settlement of the estate of Cease and filed a Civil Case against the 3 asking that the
Tiaong Milling and Plantation Corporation be declared Identical to F.L. Cease and that its
properties be divided among his children as his intestate heirs.
31

On the eve of the expiry of the 3 period provided by the law for the liquidation of
corporations, the board of liquidators of Tiaong Milling executed an assignment and
conveyance of properties and trust agreement in favor of F.L. Cease Plantation Co. Inc.
as trustee of the Tiaong Milling and Plantation Co
ISSUE:
1) Whether or not Tiaong Milling can still maintain adverse title and ownership of
the corporate assets, as a trustee, during liquidation

2) Whether or not the veil of corporate fiction be pierced when it is used to deny
successional rights of heirs

RULING:

1) It is clear in Section 77 of Act No. 1459 (Corporation Law) that upon the
expiration of the charter period, the corporation ceases to exist and is dissolved
ipso facto except for purposes connected with the winding up and liquidation. The
provision allows a three year, period from expiration of the charter within which
the entity gradually settles and closes its affairs, disposes and convey its property
and to divide its capital stock, but not for the purpose of continuing the business
for which it was established. At this terminal stage of its existence, Tiaong
Milling may no longer persist to maintain adverse title and ownership of the
corporate assets as against the prospective distributees when at this time it merely
holds the property in trust, its assertion of ownership is not only a legal
contradiction, but more so, to allow it to maintain adverse interest would certainly
thwart the very purpose of liquidation and the final distribute loll of the assets to
the proper parties.

2) Generally, a corporation is invested by law with a personality separate and
distinct from that of the persons composing it as well as from that of any other
legal entity to which it may be related. By virtue of this attribute, a corporation
may not, generally, be made to answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be connected, and vice versa. This
separate and distinct personality is, however, merely a fiction created by law for
convenience and to promote the ends of justice. For this reason, it may not be
used or invoked for ends subversive of the policy and purpose behind its creation
or which could not have been intended by law to which it owes its being. This is
particularly true where the fiction is used to defeat public convenience, justify
wrong, protect fraud, defend crime, perpetrate deception or otherwise circumvent
the law. This is likewise true where the corporate entity is being used as an alter
ego, adjunct, or business conduit for the sole benefit of the stockholders or of
another corporate entity.
In any of these cases, the notion of corporate entity will be pierced or disregarded,
and the corporation will be treated merely as an association of persons or, where
32

there are two corporations, they will be merged as one, the one being merely
regarded as part or the instrumentality of the other.
An indubitable deduction from the findings of the trial court cannot but lead to the
conclusion that the business of the corporation is largely, if not wholly, the
personal venture of Forrest L. Cease. There is not even a shadow of a showing
that his children were subscribers or purchasers of the stocks they own. Their
participation as nominal shareholders emanated solely from Forrest L. Cease's
gratuitous dole out of his own shares to the benefit of his children and ultimately
his family.
For Tiaong Milling and Plantation Company shall have been able to extend its
corporate existence beyond the period of its charter under the guise and cover of
F. L, Cease Plantation Company, Inc. as Trustee which would be against the law,
and as Trustee shall have been able to use the assets and properties for the benefit
of the petitioners, to the great prejudice and defraudation of private respondents.
Hence, it becomes necessary and imperative to pierce that corporate veil.

22. Delpher Trades Corp. v. IAC, 157 SCRA 349
FACTS:
Delfin Pacheco and his sister, Pelagia Pacheco, were the owners of 27,169 square
meters of real estate which is the subject controversy in this case. As co-owners, they
leased to Construction Components International Inc. the same property and providing
that during the existence or after the term of this lease the lessor should he decide to sell
the property leased shall first offer the same to the lessee and the letter has the priority to
buy under similar conditions. However, lessee Construction Components International,
Inc. assigned its rights and obligations under the contract of lease in favor of Hydro Pipes
Philippines, Inc. with the signed conformity and consent of lessors. Subsquently, a deed
of exchange was executed between lessors and Delpher Trades Corporation whereby the
former conveyed to the latter the leased property together with another parcel of land for
2,500 shares of stock of defendant corporation with a total value of P1,500,000.00.
On the ground that it was not given the first option to buy the leased property
pursuant to the proviso in the lease agreement, respondent Hydro Pipes Philippines, Inc.,
filed an amended complaint for reconveyance of the parcel of land in its favor under
conditions similar to those whereby Delpher acquired the property from lessors.
Petitioner Delpher contend that there was actually no transfer of ownership of the
subject parcel of land since the Pachecos remained in control of the property, and that
there was no transfer of actual ownership interests over the land when the same was
transferred to petitioner corporation in exchange for the latter's shares of stock. The
transfer of ownership, if anything, was merely in form but not in substance. In reality,
Delpher is a mere alter ego or conduit of the Pacheco co-owners; hence the corporation
and the co-owners should be deemed to be the same, there being in substance and in
effect an Identity of interest.
33

Respondent Hydro argues that Delpher is a corporate entity separate and distinct
from the Pachecos. It maintains that there was actual transfer of ownership interests over
the leased property when the same was transferred to Delpher Trades Corporation in
exchange for the latter's shares of stock.
Court of First Instance ruled in favour of plaintiff, in turn decision was affirmed
by IAC.

ISSUE:
Whether or not, Delpher Trades Corp. is an alter ego or it is a corporate entity
separate and distinct from the Pacheco co owners.

RULING:
Delpher is an alter ego or business conduit. There was no attempt to state the true
or current market value of the real estate. Land valued at P300.00 a square meter was
turned over to the family's corporation for only P14.00 a square meter. It is to be stressed
that by their ownership of the 2,500 no par shares of stock, the Pachecos have control of
the corporation. Their equity capital is 55% as against 45% of the other stockholders,
who also belong to the same family group.
In effect, the Delpher Trades Corporation is a business conduit of the Pachecos.
What they really did was to invest their properties and change the nature of their
ownership from unincorporated to incorporated form by organizing Delpher Trades
Corporation to take control of their properties and at the same time save on inheritance
taxes.
The records do not point to anything wrong or objectionable about this "estate
planning" scheme resorted to by the Pachecos. "The legal right of a taxpayer to decrease
the amount of what otherwise could be his taxes or altogether avoid them, by means
which the law permits, cannot be doubted." The "Deed of Exchange" of property between
the Pachecos and Delpher Trades Corporation cannot be considered a contract of sale.
There was no transfer of actual ownership interests by the Pachecos to a third party. The
Pacheco family merely changed their ownership from one form to another. The
ownership remained in the same hands. Hence, the private respondent has no basis for its
claim of a light of first refusal under the lease contract.

NOTA BENE: hahaha!
After incorporation, one becomes a stockholder of a corporation by subscription
or by purchasing stock directly from the corporation or from individual owners thereof.
In the case at bar, in exchange for their properties, the Pachecos acquired 2,500 original
unissued no par value shares of stocks of the Delpher Trades Corporation. Consequently,
the Pachecos became stockholders of the corporation by subscription "The essence of the
stock subscription is an agreement to take and pay for original unissued shares of a
corporation, formed or to be formed."
It is significant that the Pachecos took no par value shares in exchange for their
properties. A no-par value share does not purport to represent any stated proportionate
interest in the capital stock measured by value, but only an aliquot part of the whole
number of such shares of the issuing corporation. The holder of no-par shares may see
from the certificate itself that he is only an aliquot sharer in the assets of the corporation.
34

But this character of proportionate interest is not hidden beneath a false appearance of a
given sum in money, as in the case of par value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth by a stated amount of money, but instead
is expressed to be divided into a stated number of shares, such as, 1,000 shares. This
indicates that a shareholder of 100 such shares is an aliquot sharer in the assets of the
corporation, no matter what value they may have, to the extent of 100/1,000 or 1/10.
Thus, by removing the par value of shares, the attention of persons interested in the
financial condition of a corporation is focused upon the value of assets and the amount of
its debts.

23. Koppel Phils. Inc. v. Yatco, 77 Phil. 496
FACTS:
Plaintiff is a corporation duly organized and existing under and by virtue of the
laws of the Philippines, with principal office in Manila, the capital stock of which is
divided into 1,000 shares of P100 each. The Koppel Industrial Car and Equipment
company, a corporation organized and existing under the laws of the State of
Pennsylvania, United States of America, and not licensed to do business in the
Philippines, owned nine hundred and 995 shares out of the total capital stock of the
plaintiff. The remaining 5 shares only were and are owned one each by officers of the
plaintiff corporation. That plaintiff, at all times material to this case, was and now is duly
licensed to engage in business as a merchant and commercial broker in the Philippines;
and was and is the holder of the corresponding merchant's and commercial broker's
privilege tax receipts.
Exhibited H of the evidence: It is clearly understood that the intent of this contract
is that the broker shall perform only the functions of a broker as set forth above, and shall
not take possession of any of the materials or equipment applying to said orders or
perform any acts or duties outside the scope of a broker; and in no sense shall this
contract be construed as granting to the broker the power to represent the principal as its
agent or to make commitments on its behalf. The Court of First Instance held for the
defendant and dismissed plaintiff's complaint with costs to it.

ISSUE:
Whether or not Koppel Philippines is a domestic corporation distinct and separate
from, and not a mere branch of Koppel Industrial Car and Equipment Co

RULING:
Koppel Philippines is a mere branch, subsidiary or agency of the latter. A
corporation will be looked upon as a legal entity as a general rule, and until sufficient
reason to the contrary appears; but, when the notion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime, the law will regard the
corporation as an association of persons. The corporate entity is disregarded where it is so
organized and controlled, and its affairs are so conducted, as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.
SC reasoned that, in so far as the sales involved herein are concerned, Koppel
Philippines, Inc., and Koppel Industrial Car and Equipment company are to all intents
35

and purposes one and the same; or, to use another mode of expression, that, as regards
those transactions, the former corporation is a mere branch, subsidiary or agency of the
latter. This is conclusively borne out by the fact, among others, that the amount of the so-
called "share in the profits" of Koppel (Philippines), Inc., was ultimately left to the sole,
unbridled control of Koppel Industrial Car and Equipment Company. No group of
businessmen could be expected to organize a mercantile corporation the ultimate end
of which could only be profit if the amount of that profit were to be subjected to such
a unilateral control of another corporation, unless indeed the former has previously been
designed by the incorporators to serve as a mere subsidiary, branch or agency of the
latter. Evidently, Koppel Industrial Car and Equipment Company made us of its
ownership of the overwhelming majority 99.5% of the capital stock of the local
corporation to control the operations of the latter to such an extent that it had the final say
even as to how much should be allotted to said local entity in the so-called sharing in the
profits. SC further ruled that, it cannot overlook the fact that in the practical working of
corporate organizations of the class to which these two entities belong, the holder or
holders of the controlling part of the capital stock of the corporation, particularly where
the control is determined by the virtual ownership of the totality of the shares, dominate
not only the selection of the Board of Directors but, more often than not, also the action
of that Board. Philippine corporation could not possibly contravene with the American
corporation in this case under Exhibit H. This fact necessarily leads to the inference that
the corporation had at least a Vice-President, and presumably also a President, who were
not resident in the Philippines but in America, where the parent corporation is domiciled.
If Koppel (Philippines), Inc., had been intended to operate as a regular domestic
corporation in the Philippines, where it was formed, the record and the evidence do not
disclose any reason why all its officers should not reside and perform their functions in
the Philippines.

24. Liddell & Co., Inc. v. Collector of Internal Revenue, 2 SCRA 632
FACTS:
Liddell & Co. is a domestic corporation establish in the Philippines with an
authorized capital of P100,000 divided into 1000 share at P100 each. Of this ACS, 196
shares valued at P19,600 were subscribed and paid by Frank Liddell while the other four
shares were in the name of C.Kurz, E.J. Darras, A. Manzano and J. Serrano at one shares
each. Its purpose was to engage in the business of importing and retailing Oldsmobile and
Chevrolet passenger cars and GMC and Chevrolet trucks.
Later on, Liddell Motors, Inc. was organized and registered with SEC with an
authorized capital stock of P100,000 of which P20,000 was subscribed and paid for as
follows: Irene Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P.
Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 share each.
Upon review of the transactions between Liddell & Co. and Liddell Motors, Inc.
the Collector of Internal Revenue determined that the latter was but an alter ego of
Liddell & Co. Wherefore, he concluded, that for sales tax purposes, those sales made by
Liddell Motors, Inc. to the public were considered as the original sales of Liddell & Co.
Accordingly, the Collector of Internal Revenue assessed against Liddell & Co. a sales tax
deficiency, including surcharges, in the amount of P1,317,629.61. In the computation, the
gross selling price of Liddell Motors, Inc. to the general public from January 1, 1949 to
36

September 15, 1950, was made the basis without deducting from the selling price, the
taxes already paid by Liddell & Co. in its sales to the Liddell Motors Inc. The Court of
Tax Appeals upheld the position taken by the Collector of Internal Revenue.

ISSUE: Whether or not Liddell & Co. Inc., and the Liddell Motors, Inc. are identical
corporations, the latter being merely the alter ego of the former.

RULING:
The two corporations are identical and the same. Liddell & Co. is wholly owned
by Frank Liddell. As of the time of its organization, 98% of the capital stock belonged to
Frank Liddell. The 20% paid-up subscription with which the company began its business
was paid by him. The subsequent subscriptions to the capital stock were made by him and
paid with his own money. As to Liddell Motors, Inc. SC found that that Frank Liddell
also owned it. He supplied the original capital funds. Accordingly, the mere fact that
Liddell & Co. and Liddell Motors, Inc. are corporations owned and controlled by Frank
Liddell directly or indirectly is not by itself sufficient to justify the disregard of the
separate corporate identity of one from the other. There is, however, in this instant case, a
peculiar consequence of the organization and activities of Liddell Motors, Inc. The law in
force at the time of incorporation on the sales tax on original sales of cars was
progressive under the NIRC. This progressive rate would tempt the taxpayer to employ a
way of reducing the price of the first sale. And Liddell Motors, Inc. was the medium
created by Liddell & Co. to reduce the price and the tax liability.

NOTA BENE: In the case of Gregory v. Helvering, "the legal right of a taxpayer to
decrease the amount of what otherwise would be his taxes, or altogether avoid them by
means which the law permits, cannot be doubted." But, as held in another case, "where a
corporation is a dummy, is unreal or a sham and serves no business purpose and is
intended only as a blind, the corporate form may be ignored for the law cannot
countenance a form that is bald and a mischievous fiction."

25. YUTIVO v. Court of Tax Appeals, 1 SCRA 160
FACTS:
YUTIVO, a domestic corporation incorporated in 1916 under Philippine laws,
was engaged in the importation and sale of hardware supplies and equipment. After the
first world war, it resumed its business and bought a number of cars and trucks from
General Motors(GM), an American Corporation licensed to do business in the
Philippines. On June 13, 1946, the Southern Motors Inc,(SM) was organized to engage in
the business of selling cars, trucks and spare parts. One of the subscribers of stocks
during its incorporation was Yu Khe Thai, Yu Khe Siong and Hu Kho Jin, who are sons
of Yu Tiong Yee, one of Yutivos founders. After SMs incorporation and until the
withdrawal of GM from the Philippines, the cars and trucks purchased by Yutivo from
GM were sold by Yutivo to SM which the latter sold to the public. Yutivo was appointed
importer for Visayas and Mindanao by the US manufacturer of cars and trucks sold by
37

GM. Yutivo paid the sales tax prescribed on the basis of selling price to SM. SM paid no
sales tax on its sales to the public.

An assessment was made upon Yutivo for deficiency sales tax. The Collector of Internal
Revenue, contends that the taxable sales were the retail sales by SM to the public and not
the sales at wholesale made by Yutivo to the latter inasmuch as SM and Yutivo were one
and the same corporation, the former being a subsidiary of the latter. The assessment was
disputed by petitioner. After reinvestigation, a second assessment was made, sustaining
the validity of the first assessment. Yutivo contested the second assessment, alleging that
there is no valid ground to disregard the corporate personality of SM and to hold that it is
an adjunct of petitioner.

ISSUE: Whether or not the corporate personality of SM could be disregarded.

RULING:
Yes. A corporation is an entity separate and distinct from its stockholders and
from other corporations to which it may be connected. However, when the notion of legal
entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime,
the law will regard the corporation as an association of persons, or, in the case of two
corporations, merge them into one. When the corporation is a mere alter ego or business
conduit of a person, it may be disregarded.

SC ruled that CTA was not justified in finding that SM was organized to defraud the
Government. SM was organized in June 1946, from that date until June 30, 1947, GM
was the importer of the cars and trucks sold to Yutivo, which in turn was sold to SM.
GM, as importer was the one solely liable for sales taxes. Neither Yutivo nor SM was
subject to the sales taxes. Yutivos liability arose only until July 1, 1947 when it became
the importer. Hence, there was no tax to evade.

However, SC agreed with the respondent court that SM was actually owned and
controlled by petitioner. Consideration of various circumstances indicate that Yutivo
treated SM merely as its department or adjunct:

a. The founders of the corporation are closely related to each other by blood and affinity.
b. The object and purpose of the business is the same; both are engaged in sale of
vehicles, spare parts, hardware supplies and equipment.
c. The accounting system maintained by Yutivo shows that it maintained high degree of
control over SM accounts.
d. Several correspondences have reference to Yutivo as the head office of SM. SM may
even freely use forms or stationery of Yutivo.
e. All cash collections of SMs branches are remitted directly to Yutivo.
f. The controlling majority of the Board of Directors of Yutivo is also the controlling
majority of SM.
g. The principal officers of both corporations are identical. Both corporations have a
common comptroller in the person of Simeon Sy, who is a brother-in-law of Yutivos
president, Yu Khe Thai.
38

h. Yutivo, financed principally the business of SM and actually extended all the credit to
the latter not only in the form of starting capital but also in the form of credits extended
for the cars and vehicles allegedly sold by Yutivo to SM.

26. La Campana Coffee Factory, Inc. v. Kaisahan ng mga Manggagawa sa La
Campana, 93 Phil. 160
FACTS:
Tan Tong, one of the herein petitioners, has since 1932 been engaged in the
business of buying and selling gaugau under the trade name La Campana Gaugau
Packing with an establishment in Binondo, Manila, which was later transferred to Espaa
Extension, Quezon City. But on July 6, 1950, Tan Tong, with himself and members of his
family corporation known as La Campana Factory Co., Inc., with its principal office
located in the same place as that of La Campana Gaugau Packing.

The Kaisahan ng Manggagawa sa La Campana is a labor union formed by Tan Tongs
employees which applied for registration under the Department of Labor as an
independent entity. Pending its application, the Department gave the new organization
legal standing by issuing it a permit as an affiliate to the Kalipunan Ng Mga
Manggagawa.

On July 19, 1951, the respondent Kaisahan, which, as of that date, counted with 66
members workers all of them of both La Campana Gaugau Packing and La Campana
Coffee Factory Co., Inc. presented a demand for higher wages and more privileges,
the demand being addressed to La Campana Starch and Coffee Factory, by which name
they sought to designate, so it appears, the La Campana Gaugau Packing and the La
Campana Coffee Factory Co., Inc. As the demand was not granted and an attempt at
settlement through the mediation of the Conciliation Service of the Department of Labor
had given no result, the said Department certified the dispute to the Court of Industrial
Relations. With the case already pending in the industrial court, the Secretary of Labor
revoked the Kalipunan Ng Mga Kaisahang Manggagawa's permit as a labor union on the
strength of information received that it was dominated by subversive elements, and, in
consequence, on the 20th of the same month, also suspended the permit of its affiliate, the
respondent Kaisahan.

Petitioner was allowed to intervene in the ongoing proceedings, being a party having an
interest in the dispute. Petitioner contends that the industrial court has no jurisdiction to
try the case as against La Campana Coffee Factory, Inc. because the latter has allegedly
only 14 laborers and only of these are the members of respondent Kaisahan.

ISSUE:
Whether the action be dismissed for being directed against two different entities
with distinct personalities, La Campana Starch Factory and La Campana Coffee Factory,
Inc.

RULING:
39

This contention loses force when it is noted that, as found by the industrial court
and this finding is conclusive upon La Campana Gaugau Packing and La Campana
Coffee Factory Co. Inc., are operating under one single management, that is, as one
business though with two trade names. True, the coffee factory is a corporation and, by
legal fiction, an entity existing separate and apart from the persons composing it, that is,
Tan Tong and his family. But it is settled that this fiction of law, which has been
introduced as a matter of convenience and to subserve the ends of justice cannot be
invoked to further an end subversive of that purpose.

Disregarding Corporate Entity- The doctrine that a corporation is a legal entity existing
separate and apart from the person composing it is a legal theory introduced for purposes
of convenience and to subserve the ends of justice. The concept cannot, therefore, be
extended to a point beyond its reason and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. Thus, in an appropriate case
and in furtherance of the ends of justice, a corporation and the individual or individuals
owning all its stocks and assets will be treated as identical, the corporate entity being
disregarded where used as a cloak or cover for fraud or illegality.
In the present case, Tan Tong appears to be the owner of the gaugau factory. And the
coffee factory, though an incorporated business, is in reality owned exclusively by Tan
Tong and his family. As found by the Court of industrial Relations, the two factories have
but one office, one management and one payroll, except after July 17, the day the case
was certified to the Court of Industrial Relations, when the person who was discharging
the office of cashier for both branches of the business began preparing separate payrolls
for the two. And above all, it should not be overlooked that, as also found by the
industrial court, the laborers of the gaugau factory and the coffee factory were
interchangeable, that is, the laborers from the gaugau factory were sometimes transferred
to the coffee factory and vice-versa. In view of all these, the attempt to make the two
factories appears as two separate businesses, when in reality they are but one, is but a
device to defeat the ends of the law (the Act governing capital and labor relations) and
should not be permitted to prevail.

27. Cagayan Fishing Development Co., Inc. v. Teodoro Sandiko, 65 Phil. 223
FACTS:
Manuel Tabora is the registered owner of four parcels of land. To guarantee the
payment of two loans, Manuel Tabora, executed in favor of PNB two mortgages over the
four parcels of land between August, 1929, and April 1930. Later, a third mortgage on
the same lands was executed also on April, 1930 in favor of Severina Buzon to whom
Tabora was indebted.

On May, 1930, Tabora executed a public document entitled "Escritura de Transpaso de
Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels of land owned by
him was sold to the plaintiff company, said to under process of incorporation. The
plaintiff company filed its article incorporation with the Bureau of Commerce and
Industry only on October, 1930 (Exhibit 2).

40

A year later, the board of directors of said company adopted a resolution authorizing its
president to sell the four parcels of lands in question to Teodoro Sandiko. Exhibits B, C
and D were thereafter made and executed. Exhibit B is a deed of sale where the plaintiff
sold ceded and transferred to the defendant all its right, titles, and interest in and to the
four parcels of land. Exhibit C is a promissory note drawn by the defendant in favor of
the plaintiff, payable after one year from the date thereof. Exhibit D is a deed of mortgage
executed where the four parcels of land were given a security for the payment of the
promissory note, Exhibit C.

The defendant having failed to pay the sum stated in the promissory note, plaintiff,
brought this action in the Court of First Instance of Manila praying that judgment be
rendered against the defendant for the sum stated in the promissory note. After trial, the
court rendered judgment absolving the defendant. Plaintiff presented a motion for new
trial, which motion was denied by the trial court. After due exception and notice, plaintiff
has appealed to this court and makes an assignment of various errors.

ISSUE:
Whether Exhibit B, the deed of sale executed in favor of Teodoro Sandiko, was
valid.

RULING:
No, it was not. The transfer made by Tabora to the Cagayan fishing Development
Co., Inc., plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual
incorporation of said company was affected later on October 22, 1930 (Exhibit 2). In
other words, the transfer was made almost five months before the incorporation of the
company. Unquestionably, a duly organized corporation has the power to purchase and
hold such real property as the purposes for which such corporation was formed may
permit and for this purpose may enter into such contracts as may be necessary. But before
a corporation may be said to be lawfully organized, many things have to be done. Among
other things, the law requires the filing of articles of incorporation.

In the case before us it cannot be denied that the plaintiff was not yet incorporated when
it entered into a contract of sale, Exhibit A. Not being in legal existence then, it did not
possess juridical capacity to enter into the contract.

Boiled down to its naked reality, the contract here (Exhibit A) was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel Tabora
as owner of the four parcels of lands on the one hand and the same Manuel Tabora, his
wife and others, as mere promoters of a corporations on the other hand. For reasons that
are self-evident, these promoters could not have acted as agent for a projected corporation
since that which no legal existence could have no agent. A corporation, until organized,
has no life and therefore no faculties. This is not saying that under no circumstances may
the acts of promoters of a corporation be ratified by the corporation if and when
subsequently organized.

41

There are, of course, exceptions, but under the peculiar facts and circumstances of the
present case we decline to extend the doctrine of ratification which would result in the
commission of injustice or fraud to the candid and unwary.

28. Rizal Light & ice Co., Inc. v. Public Service Commission, et. al., 25 SCRA 285
FACTS:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business
address at Morong, Rizal. It was granted by the Commission a certificate of public
convenience and necessity for the installation, operation and maintenance of an electric
light, heat and power service in the municipality of Morong, Rizal. On September 10,
1962, Morong Electric, filed an application to be granted with a municipal franchise by
respondent municipality to install, operate and maintain an electric heat, light and power
service in said municipality.
Petitioner opposed in writing, alleging among other things, that it is a holder of a
certificate of public convenience to operate an electric light, heat and power service in the
same municipality of Morong, Rizal, and that the approval of said application would not
promote public convenience, but would only cause ruinous and wasteful competition.
The petitioner filed a motion, dated January 4, 1963, asking for the dismissal of the
application upon the ground that applicant Morong Electric had no legal personality when
it filed its application on because its certificate of incorporation was issued by the
Securities and Exchange Commission only later. This motion to dismiss was denied by
the Commission in a formal order issued on the premise that applicant Morong Electric
was a de facto corporation. The Commission approved the application of Morong Electric
and ordered the issuance in its favor of the corresponding certificate of public
convenience and necessity.

ISSUE:
Whether not the municipal franchise granted to Morong Electric is null and void.

RULING:
The municipal franchise is valid.
Petitioner's contention that Morong Electric did not yet have a legal personality when a
municipal franchise was granted to it is correct. The juridical personality and legal
existence of Morong Electric began only on October 17, 1962 when its certificate of
incorporation was issued by the SEC. Before that date, or pending the issuance of said
certificate of incorporation, the incorporators cannot be considered as de
facto corporation. But the fact that Morong Electric had no corporate existence on the day
the franchise was granted in its name does not render the franchise invalid, because later
Morong Electric obtained its certificate of incorporation and then accepted the franchise
in accordance with the terms and conditions thereof. This view is sustained by eminent
American authorities.
Morong Electric was a de facto corporation at the time the franchise was granted and,
as such, it was not incapacitated to enter into any contract or to apply for and accept a
franchise. Not having been incapacitated, Morong Electric maintains that the franchise
granted to it is valid and the approval or disapproval thereof can be properly determined
by the Commission.
42

The incorporation of Morong Electric and its acceptance of the franchise as shown by
its action in prosecuting the application filed with the Commission for the approval of
said franchise, not only perfected a contract between the respondent municipality and
Morong Electric but also cured the deficiency pointed out by the petitioner in the
application of Morong EIectric. Thus, the Commission did not err in denying petitioner's
motion to dismiss said application and in proceeding to hear the same.

29. Republic of the Philippines v. Acoje Mining Co., Inc., 7 SCRA 361
FACTS:
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts
requesting the opening of a post, telegraph and money order offices at its mining camp at
Sta. Cruz, Zambales, to service its employees and their families that were living in said
camp. Acting on the request, the Director of Posts wrote in reply stating that if aside from
free quarters the company would provide for all essential equipment and assign a
responsible employee to perform the duties of a postmaster without compensation from
his office until such time as funds therefor may be available, he would agree to put up the
offices requested.

On April 11, 1949, the Director of Posts again wrote a letter to the company stating
among other things that "In cases where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts,
thereby suggesting that a resolution be adopted by the board of directors of the company
expressing conformity to the above condition relative to the responsibility to be assumed
by it in the event a post office branch is opened as requested.

The post office branch was opened at the camp on October 13, 1949 with one postmaster.
However, he suddenly disappeared. The company found out that the account of the
postmaster had a shortage of P13 867. The several demands made upon the company for
the payment of the shortage in line with the liability it has
assumed having failed, the government commenced the present action on September 10,
1954 before the Court of First Instance of Manila. The company in its answer denied
liability for said amount contending that the resolution of the board of directors is ultra
vires.

ISSUE:
Whether or not the resolution adopted was an ultra vires act.

RULING:
No. It should be noted that the opening of a post office branch at the mining
camp of appellant corporation was undertaken because of a request submitted by it to
promote the convenience and benefit of its employees. The idea did not come from the
government, and the Director of Posts was prevailed upon to agree to the request only
after studying the necessity for its establishment and after imposing upon the company
certain requirements. Thus, after the company had signified its willingness to comply
with the requirement of the government that it furnish free quarters and all the essential
43

equipment that may be necessary for the operation of the office including the assignment
of an employee who will perform the duties of a postmaster, the Director of Posts agreed
to the opening of the post office stating that the company assume direct responsibility for
whatever pecuniary loss may be suffered by the Bureau of Posts by reason of any act of
dishonesty, carelessness or negligence on the part of the employee of the company who is
assigned to take charge of the post office,"

On the basis of the foregoing facts, it is evident that the company cannot now be heard to
complain that it is not liable for the irregularity committed by its employee upon the
technical plea that the resolution approved by its board of directors is ultra vires. The
least that can be said is that it cannot now go back on its plighted word on the ground of
estoppel.

The claim that the resolution adopted by the board of directors of appellant company is
an ultra vires act cannot also be entertained it appearing that the same covers a subject
which concerns the benefit, convenience and welfare of its employees and their families.
While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond the
powers conferred upon it by law, there are however certain corporate acts that may be
performed outside of the scope of the powers expressly conferred if they are necessary to
promote the interest or welfare of the corporation. Thus, it has been held that "although
not expressly authorized to do so a corporation may become a surety where the particular
transaction is reasonably necessary or proper to the conduct of its business," and here it is
undisputed that the establishment of the local post office is a reasonable and proper
adjunct to the conduct of the business of appellant company. Indeed, such post office is a
vital improvement in the living condition of its employees and laborers who came to
settle in its mining camp which is far removed from the postal facilities or means of
communication accorded to people living in a city or municipality.

30. Carlos v. Mindoro Sugar Co., 57 Phil. 343
FACTS:
The Mindoro Sugar Company is a corporation constituted in accordance with the
laws of the country and registered on July 30, 1917. The Philippine Trust Company is
another domestic corporation, registered on October 21, 1917. In its articles of
incorporation, some of its purposes are expressed thus: "To acquire by purchase,
subscription, or otherwise, and to invest in, hold, sell, or otherwise dispose of stocks,
bonds, mortgages, and other securities, or any interest in either, or any obligations or
evidences of indebtedness, of any other corporation or corporations, domestic or foreign.

On November 17, 1917, the board of directors of the Philippine Trust Company, adopted
a resolution authorizing its president, among other things, to purchase at par bonds in the
value of P3,000,000 that the Mindoro Sugar Company was about to issue, and to resell
them, with or without the guarantee of said trust corporation, at a price not less than par,
and to guarantee to the Philippine National Bank the payment of the indebtedness to said
bank by the Mindoro Sugar Company up to P2,000,000.

44

In pursuance of this resolution, on December 21, 1917, the Mindoro Sugar Company
executed in favor of the Philippine Trust Company the deed of trust transferring all of its
property to it in consideration of the bonds it had issued to the value of P3,000,000. In
consequence of this transaction, the bonds, with their coupons were placed on the market
and sold by the Philippine Trust Company. The Philippine Trust Company paid the
appellant, upon presentation of the coupons, the stipulated interest from the date of their
maturity until the 1st of July, 1928, when it stopped payments; and thenceforth it alleged
that it did not deem itself bound to pay such interest or to redeem the obligation because
the guarantee given for the bonds was illegal and void.

ISSUE:
Whether the Philippine Trust Company acquired the four bonds in question, and
whether as such it bound itself legally and acted within its corporate powers in
guaranteeing them.

RULING:
This question was answered in the affirmative. It is not ultra vires for a
corporation to enter into contracts of guaranty or suretyship where it does so in the
legitimate furtherance of its purposes and business. And it is well settled that where a
corporation acquires commercial paper or bonds in the legitimate transaction of its
business it may sell them, and in furtherance of such a sale it may, in order to make them
the more readily marketable, indorse or guarantee their payment.

"Whenever a corporation has the power to take and dispose of the securities of another
corporation, of whatsoever kind, it may, for the purpose of giving them a marketable
quality, guarantee their payment, even though the amount involved in the guaranty may
subject the corporation to liabilities in excess of the limit of indebtedness which it is
authorized to incur. A corporation which has power by its charter to issue its own bonds
has power to guarantee the bonds of another corporation, which has been taken in
payment of a debt due to it, and which it sells or transfers in payment of its own debt, the
guaranty being given to enable it to dispose of the bond to better advantage. And so
guaranties of payment of bonds taken by a loan and trust company in the ordinary course
of its business, made in connection with their sale, are not ultra vires, and are binding."

When a contract is not on its face necessarily beyond the scope of the power of the
corporation by which it was made, it will, in the absence of proof to the contrary, be
presumed to be valid. Corporations are presumed to contract within their powers. The
doctrine of ultra vires, when invoked for or against a corporation, should not be allowed
to prevail where it would defeat the ends of justice or work a legal wrong. It has been
intimated according to section 121 of the Corporation Law, the Philippine Trust
Company, as a banking institution, could not guarantee the bonds to the value of
P3,000,000 because this amount far exceeds its capital of P1,000,000 of which only one-
half has been subscribed and paid.

This difficulty is easily obviated by bearing in mind that the banking operations are not
45

the primary aim of said corporation, which is engaged essentially in the trust business,
and that the prohibition of the law is not applicable to the Philippine Trust Company, for
the evidence shows that Mindoro Sugar Company transferred all its real property, with
the improvements, to it, and the value of both, which surely could not be less than the
value of the obligation guaranteed, became a part of its capital and assets; in other words,
with the value of the real property transferred to it, the Philippine Trust Company had
enough capital and assets to meet the amount of the bonds guaranteed with interest
thereon.

31. Pirovano, et. al. v. de la Rama Steamship Co., 96 Phil. 335
FACTS:
Plaintiffs herein are the minor children of the late Enrico Pirovano represented by
their mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain
resolutions adopted by the Board of Directors and stockholders of the defendant company
giving to said minor children of the proceeds of the insurance policies taken on the life of
their deceased father Enrico Pirovano with the company as beneficiary. Defendant is a
corporation duly organized in accordance with law with an authorized capital of
P500,000, divided into 5,000 shares, with a par value of P100 each share. Enrico
Pirovano became the president of the defendant company and under his management the
company grew and progressed until it became a multi-million corporation by the time
Pirovano was executed by the Japanese during the occupation.

In the meantime, Don Esteban de la Rama, who practically owned and controlled the
stock of the defendant corporation, distributed his shareholding among his five daughters.
One of the daughters was married to Enrico Pirovano. Meanwhile, a grant was made in
favour of the Pirovano children which constitutes the proceeds of the insurance policies
taken on his life by the defendant company. Out of the proceeds of these policies the sum
of P400,000 be set aside for the minor children of the deceased, said sum of money to be
convertible into 4,000 shares of the stock of the Company, at par, or 1,000 shares for each
child. However, members of the family and Don Esteban did not realize that they would
be actually giving to the Pirovano children more than what they intended to give. If the
Pirovano children would be given shares of stock in lieu of the amount to be donated, the
voting strength of the five daughters of Don Esteban in the company would be adversely
affected in the sense that Mrs. Pirovano would have a voting power twice as much as that
of her sisters.

The Board of Directors of the De la Rama company, as a consequence of the change of
attitude of Don Esteban, adopted a resolution changing the form of the donation to the
Pirovano children from a donation of 4,000 shares of stock as originally planned into a
renunciation in favor of the children of all the company's "right, title, and interest as
beneficiary in and to the proceeds of the abovementioned life insurance policies", subject
to the express condition that said proceeds should be retained by the company as a loan.

On March 8, 1951, at a stockholders' meeting convened and majority of the stockholders'
voted to revoke the resolution approving the donation to the Pirovano children.

46

ISSUES:
1. Whether or the donation has been perfected such that the corporation can no
longer rescind it even if it wanted to.
2. Can defendant corporation give by way of donation the proceeds of said
insurance policies to the minor children of the late Enrico Pirovano under the law or its
articles of corporation, or is that donation an ultra vires act?

RULING:
1. Yes. The donation was a corporate act carried out by the corporation not only
with the sanction of its Board of Directors but also of its stockholders. It is evident that
the donation has reached the stage of perfection which is valid and binding upon the
corporation and as such cannot be rescinded unless there is exists legal grounds for doing
so. In this case, we see none. The two reasons given for the rescission of said donation in
the resolution of the corporation adopted on March 8, 1951, to wit: that the corporation
failed to comply with the conditions and that in the opinion of the Securities and
Exchange Commission said donation is ultra vires, are not, in our opinion, valid and legal
as to justify the rescission of a perfected donation. These reasons cannot be invoked by
the corporation to rescind or set at naught the donation, and the only way by which this
can be done is to show that the donee has been in default, or that the donation has not
been validly executed, or is illegal or ultra vires, and such is not the case as we will see
hereafter. We therefore declare that the resolution approved by the stockholders of the
defendant corporation on March 8, 1951 did not and cannot have the effect of nullifying
the donation in question.

2. We find that the corporation was given broad and almost unlimited powers to
carry out the purposes for which it was organized among them, (1) "To invest and deal
with the moneys of the company not immediately required, in such manner as from time
to time may be determined" and, (2) "to aid in any other manner any person, association,
or corporation of which any obligation or in which any interest is held by this corporation
or in the affairs or prosperity of which this corporation has a lawful interest."

The world deal is broad enough to include any manner of disposition, and refers to
moneys not immediately required by the corporation, and such disposition may be made
in such manner as from time to time may be determined by the corporations. Under the
second broad power, that is, to aid in any other manner any person in the affairs and
prosperity of whom the corporation has a lawful interest, the record of this case is replete
with instances which clearly show that the corporation knew well its scope and meaning
so much so that, with the exception of the instant case, no one has lifted a finger to
dispute their validity.

It may perhaps be argued that the donation given to the children of the late Enrico
Pirovano is so large and disproportionate that it can hardly be considered a pension of
gratuity that can be placed on a par with the instances above mentioned, but this
argument overlooks one consideration: the gratuity here given was not merely motivated
by pure liberality or act of generosity, but by a deep sense of recognition of the valuable
services rendered by the late Enrico Pirovano which had immensely contributed to the
47

growth of the corporation to the extent that from its humble capitalization it blossomed
into a multi-million corporation that it is today. Said donation was given not only because
the company was so indebted to him that it saw fit and proper to make provisions for his
children, but it did so out of a sense of gratitude. Another is that Enrico Pirovano was not
only a high official of the company but was at the same time a member of the De la Rama
family, and the recipients of the donation are the grandchildren of Don Esteban de la
Rama. This we, may say, is the motivating root cause behind the grant of this bounty.

We do not see much difference between this definition of gratuity and a remunerative
donation contemplated in the Civil Code. In essence they are the same. A distinction
should be made between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which is contrary to law,
morals, or public policy or public duty, and are, like similar transactions between the
individuals void. On the other hand, an ultra vires act is one outside the scope of the
power conferred by the legislature, and although the term has been used indiscriminately,
it is properly distinguishable from acts which are illegal, in excess or abuse of power, or
executed in an unauthorized manner, or acts within corporate powers but outside the
authority of particular officers or agents.

Since it is not contended that the donation under consideration is illegal we cannot but
logically conclude, that said donation, even if ultra vires in the supposition we have
adverted to, is not void, and if voidable its infirmity has been cured by ratification and
subsequent acts of the defendant corporation. The defendant corporation, therefore, is
now prevented or estopped from contesting the validity of the donation. To allow the
corporation to undo what it has done would only be most unfair but would contravene the
well-settled doctrine that the defense of ultra vires cannot be set up or availed of in
completed transactions.

32. Harden, et. al. v. Benguet Consolidated Mining Co., 58 Phil. 141
FACTS:
The Benguet Consolidated Mining Co. was organized in June 1903 as a sociedad
anonima, in conformity with Spanish law. While the Balatoc Mining Co. was organized
in December 1925, as a corporation, in conformity with the provisions of the Corporation
law (Act 1459). Both entities were organized for the purpose of engaging in the mining of
gold in the Philippine Islands, and their respective properties are located only a few miles
apart in the subprovince of Benguet. The capital stock of the Balatoc Mining consists of
1M shares with the par value of P1.00 each.
When the Balatoc Mining was first organized, the properties acquired by it were
largely undeveloped, and the original stockholders were unable to supply the means
needed to profitable operation. Thus, the Board of directors ordered a suspension of all
work, effective July 31, 1926. That same year, there was a general meeting of the
companys stockholders which appointed a committee for the purpose of interesting
outside capital in the mine.
The committee approached A.W. Beam, then president and general manager of
Benguet Company, to secure the capital necessary to the development of the Balatoc
property. A contract which was formally authorized by the management of both
48

companies, was executed on March 9, 1927. Under the contract: the Benguet Company
was to proceed with the development and construct a milling plant for the Balatoc mine
(100 tons of ore/1 day, extraction of at least 85% of the gold content); the Benguet
Companies agreed to erect an appropriate power plant, with the aerial tramlines and other
buildings needed to operate the mine. In return, it was agreed that the Benguet company
should receive from Balatocs treasurer shares of a par value of P600,000, in payment for
the first P600,000 advanced by Benguet company.
By May 31, 1929, the Benguet Company had spent upon the development the
sum of P1,417,952.15. In compensation, a certificate of 600,000 shares of stock of the
Balatoc was issued to Benguet Company, in cash. Meanwhile, dividends of the Balatoc
company have been enriching its stockholders and the value of the shares had increased
in the market from a nominal valuation to more than P11/share.
While Benguet company was pouring its million and a half into the Balatoc
property, the arrangements made between the two companies appear to have been viewed
by plaintiff, Harden, with complancecy, he being the owner of many thousands of the
shares of the Balatoc company. But as soon as the success of the development had
become apparent, he began this litigation to annul the certificate covering 600,000 shares
of stock of Balatoc which had been issued to Benguet Mining, to secure to the Balatoc
the restoration of a large sum of money alleged to have been unlawfully collected by
Benguet, and for the annulment of the contract, in which he has been joined by 2 others
of the 80 shareholders of the Balatoc company.

ISSUE:
(1) Whether the plaintiffs can maintain an action based upon the violation of law
supposedly committed by Benguet Company.
(2) Whether, assuming the first question to be answered in the affirmative, the
Benguet company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by Congress of US, and
later by the Philippine legislature, prohibiting a mining corporation from
becoming interested in another mining corporation.
RULING:

History of the Laws enacted, affecting the issues:
- Section 75, Philippine Bill: it shall be unlawful for any member of a
corporation engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise interested in
any other corporation engaged in agriculture or in mining.
o Amended by Section 7, Act No. 3518:
The inhibition contained in Section 75 against members of
a corporation engaged in agriculture or mining from being
interested in other corporations engaged in
agriculture/mining was so modified as merely to prohibit
any such member from holding more than 15% of the
outstanding capital stock of another such corporation.
The explicit prohibition against the holding by any
corporation (except for irrigation) of an interest in any
49

other corporation engaged in agriculture/mining was so
modified as to limit the restriction to corporations
organized for the purpose engaging in agriculture or in
mining.
- Corporation Law or Act No. 1459 was the general law enacted authorizing
the creation of corporations in the Philippines. The purpose of this law
was to introduce the American corporation into the Philippines as the
standard commercial entity and to make the sociedad anonima of the
Spanish law obsolete.
In making certain adjustments, there resulted a continued co-existence,
for a time, of the two forms of commercial entities: American
corporation and the Spanish sociedad anonima.
- Section 75, Corporation law (Act 1459): the sociedad anonima is subject
to the provisions of the Corporation law so far as such provisions may be
applicable and giving to the sociedad anonimas previously created the
option to continue business as such or to perform and organize under the
provisions of the Corporation law.
- Corporation Law (Act 1459): did not contain any appropriate clause
directly penalizing the act of a corporation, member of a corporation, in
acquiring an interest contrary to Section 13(5) of the law.
- Section 1990(A), Corporation law inserted as a new section; which
reads:
o Penalties The violation of any of the provisions of this Act and
its amendments not otherwise penalized therein, shall be punished
by a fine of not more than 5K and by imprisonment for not more
than 5 years, in the discretion of the court. If the violation is
committed by a corporation, the same shall, upon such violation
being proved, be dissolved by quo warranto proceedings
instituted by the Atty-General or by any provincial fiscal by
order of said Atty-Gen.

HELD:
(1) No, plaintiffs have no right of action against the Benguet Company for the
infraction of law supposed to have been committed. Section 1990(A) of the
Corporation law or Act No. 1459 expressly states that the Atty-General, not the
plaintiffs, has the power to initiate proceedings to dissolve a corporation which
violated the prohibition against acquiring any interest in other agri/mining
corporations.
The situation involved is not unlike that which has frequently arisen in the
US under provisions of the National Bank Act prohibiting banks organized
under that law from holding real property. It has been uniformly held that
a trust deed or mortgaged conveying property of this kind to a bank, by
way of security, is valid until the transaction is assailed in a direct
proceeding instituted by the Government against the bank, and the
illegality of such tenure supplies no basis for an action by the former
private owner, or his creditor, to annul the conveyance.
50

The case of Compania Azucarera de Carolina vs. Registrar (the register of
deeds refused to register 2 deeds in favour of Compania on the ground that
the land thereby conveyed was in excess of the area permitted by law to
the company), which arose under a provision of the Foraker Act, a law
which is analogous to our Philippine Bill, states in reversing the ruling of
the registrar:
Thus, it may be seen that a corporation limited by the law or by
its charter has, until the State acts every power and capacity that any other
individual capable of acquiring lands, possesses. The corporation may
exercise every act of ownership over such lands; it may sue in ejectment
or unlawful detainer and it may demand specific performance. It has an
absolute title against all the world except the State after a proper
proceeding is begun in a court of lawThe Attorney General is the
exclusive officer in whom is confided the right to initiate proceedings for
escheat or attack the right of a corporation to hold land.

(2) Having shown that the plaintiffs have no right of actin, the discussion on the
second issue is saved by the court. That important question should, in the opinion
of the court, be left until it is raised in an action brought by the Government.

33. Ramirez v. Orientalist Co. & Fernandez, 38 Phil. 634
FACTS:
The Orientalist Company is a corporation, duly organized under Philippine Laws,
and in 1913 and 1914, was engaged in the business of maintaining and conducting a
theatre in Manila for the exhibition of cinematographic films. Under the articles of
incorporation, the company is authorized to manufacture, buy, or otherwise obtain all
accessories necessary for conducting such a business.
Plaintiff, J.F. Ramirez was, at the same time, a resident of Paris, France, and was
engaged in the business of marketing films for a manufacturer/manufacturers, there
engaged in the production/distribution of cinematographic material. He was represented
in Manila by son, Jose Ramirez.
In July 1913, certain directors of the Orientalist Company in Manila became
apprised of the fact that plaintiff in Paris had control of the agencies for 2 different marks
of films: clair Films and Milano Films; Jose Ramirez, agent of plaintiff, begun
negotiations with said officials of the Orientalist Company for the purpose of placing the
exclusive agency of these films in the hands of the Orientalist Co. Defendant, Ramon
Fernandez, a director of the Orientalist Co and its treasurer, was chiefly active in this
matter, being moved by the suggestions and representations of Vicente Ocampo, manager
of Oriental Theater, to the effect that the securing of said films was necessary to the
success of the corporation.
Near the end of July, Jose Ramirez, as rep of his father, placed in Ramon
Fernandez an offer dated July 4, 1913, stating in detail the terms upon which the plaintiff
would undertake to supply from Paris the aforesaid films. The offer was declared to be
good until the end of July. Accordingly on July 30, Ramon Fernandez had an informal
conference with all the members of the companys board of directors, except one, and
51

with the approval of those whom he had communicated, addressed a letter to Jose
Ramirez in Manila, accepting the offer, contained in the memorandum of July 4
th
for the
exclusive agency of the clair films. On August 5, he addressed another letter likewise
accepting the offer of the exclusive agency for the Milano films. These letters were
signed in the form in which there was a separate signature of R.J. Fernandez, as an
individual, placed below to the left of the signature of the Orientalist Company, as signed
by R.J. Fernandez, in the capacity of treasurer.

The Orientalist Company,
By R.J. Fernandez,
Treasurer,
R.J. Fernandez

ISSUE:
(1) Whether or not the Orientalist Corporation is liable upon the contracts
contained in the two letters.
(2) Whether R.J. Fernandez, in affixing his personal signature to the contract, is
liable jointly with the Orientalists Company as a principal obligor, or whether
his liability is that of a guarantor merely.

RULING:
(1) Yes, respondent Corporation is liable. The parties to an action are required to
submit their respective contentions to the court in their complaint and answer.
These documents supply the materials which the court must use in order to
discover the points of contention between the parties; and where the statute
says that the execution of a document which supplies the foundation of an
action is to be taken as admitted unless denied under oath, the failure of the
defendant to make such denial must be taken to operate as a conclusive
admission, so long as the pleadings remain that form.

Section 103, Code of Civil Procedure, reads:
When an action is brought upon a written instrument and the complaint
contains or has annexed a copy of such instrument, the genuineness and due
execution of the instrument shall be deemed admitted, unless specifically denied
under oath in the answer.
Therefore, it was incumbent upon the corporation, if it desired to
question the authority of Fernandez to bind it, to deny the due
execution of said contracts under oath.
No sworn answer denying the genuineness and due execution of the
contracts or questioning the authority of Fernandez to bind the
Orientalist Company was filed in this case;
But, evidence (extracts from the minutes of the proceedings of the
companys stockholders, showing that the authority to make the
contracts had been withheld by the stockholders) was admitted without
objection from plaintiff, tending to show that Fernandez had no such
authority.
52

Reason for the rule:
- The public at large is bound to rely to a large extent upon outward
appearances in dealing with corporations.
- If a man is found acting for a corporation with the external indicia of
authority, any person, not having notice of want of authority, may usually
rely upon those appearances; and if it be found that the directors had
permitted the agent to exercise that authority and thereby held him out as a
person competent to bind the corporation, or had acquiesced in a contract
and retained the benefit supposed to have been conferred by it, the
corporation will be bound, notwithstanding the actual authority may never
have been granted.
The failure of defendant corporation to make any issue in its answer with regard
to the authority of Ramon J. Fernandez to bind it, and particularly its failure to
deny specifically under oath the genuineness and due execution of the contracts
sued upon, have the effect of elimination the question of his authority from the
case, considered as a matter of mere pleading.
The statute (section 103) plainly says that if a written instrument, the foundation
of the suit, is not denied upon oath, it shall be deemed to be admitted. It is familiar
doctrine than an admission made in a pleading cannot be controverted by the
party making such admission; and all proof submitted by him contrary
thereto/inconsistent therewith should simply be ignored by the court, whether
objection is interposed by the opposite party or not. We can see no reason why a
constructive admission, created by the express words of the statute, should be
considered to have less effect than any other admission.

* Even, for the sake of argument, that the liability had been put in issue by a specific
answer under oath denying the authority of Fernandez to bind it, the defendant
corporation would still be liable. The reasoning of the court:
> It must be noted that Fernandez, as treasurer, had no independent authority to
bind the company by signing its name to the letters in question. It is declared by signing
its name to the letters in question.
> It is declared in section 28 of the Corporation Law that corporate power shall be
exercised, and all corporate business conducted by the Board of Directors;
(this principle is recognized by the by-laws of the defendant corporation, in declaring
that the power to make contracts shall be vested in the board of directors.)
> It is also true that in the by-laws, the president shall have the power and it shall
be his duty, to sign contracts. But this refers rather to the formality of reducing to proper
form the contract which are authorized by the board and is not intended to confer an
independent power to make contract binding on the corporation.
> The fact that the power to make corporate contract is vested in the board does
not signify that a formal vote of the board must always be taken before contractual
liability can be fixed upon the corporation. The board can create liability, like an
individual, by other means than by a formal expression of its will (i.e. knowledge and
consent of president and board).
> Based on the minutes of the stockholders meeting, the board was cognizant
about the offer being accepted in the name of the Orientalist company; Fernandez
53

informed the board. Four directors were present and the letter accepting the offer was
sent with their knowledge and consent. The actions of the stockholders amounted to a
virtual, though indirect, approval of the contract. And thereafter, the board took steps
necessary to utilize the films, recognizing the existence of the contract. Thus, the
contracts were inferentially approved by the companys board of directors and that the
company is bound.

(2) R.J. Fernandezs liability is that of a guarantor.
The form in which the contract is signed raises a doubt as to what the real
intention of the signature was. In looking to the evidence, the court is
convinced that the real intention of the parties in putting Fernandezs
signature was of guaranteeing of the contracts performance, not its approval.
Article 1281, Civil Code, declares that if the words of a contract should
appear contrary to the evident intention of the parties, the intention shall
prevail. The General principle is that in case of ambiguity, parol evidence is
admissible to show the intention of the contracting parties.

Notes:
The functions of the stockholders of a corporation are of a limited nature. The
theory of a corporation is that the stockholders may have all the profits but shall
turn over the complete management of the enterprise to their representatives and
agents, called directors.
There is little for the stockholders to do beyond electing directors, making by-
laws, and exercising certain other special powers defined by law.
Contract between a corporation and third person must be made by the director and
not by the stockholders. The corporation, in such matters, is represented by the
former and not by the latter.
Section 28, Corporation law: where a meeting of the stockholders is called for the
purpose of passing on the proprietary of making a corporate contract, its
resolutions are at most advisory and not in any wise binding on the board.
It is familiar doctrine that if a corporation knowingly permits one of its officers,
or any other agent, to do acts within the scope of an apparent authority, and thus
hold him out to the public as possessing power to do those acts, the corporation
will, as against any one who has in good faith dealt with the corporation through
such agent, be estopped from denying his authority; and where it is said if the
corporation permits this means the same as if the thing is permitted by the
directing power of the corporation.

34. Salvador P. Lopez v. Hon. Vicente Ericta, 45 SCRA 539
FACTS:
The Board of Regents of the University of the Philippines met on May 26, 1970,
and President Lopez submitted to it the ad interim appointment of Dr. Blanco as the Dean
of the College of Education.
54

The minutes of that meeting disclose that "the Board voted to defer action on the matter
in view of the objections cited by Regent Kalaw (Senator Eva Estrada Kalaw) based on
the petition against the appointment, addressed to the Board, from a majority of the
faculty and from a number of alumni"
The "deferment for further study" having been approved, the matter was referred to the
Committee on Personnel, which was thereupon reconstituted with the following
composition: Regent Ambrosio F. Tangco, chairman; Regent Pio Pedrosa and Regent
Liceria B. Soriano, members. The opinion was then expressed by the Chairman of the
Board that in view of its decision to defer action, Dr. Blanco's appointment had lapsed,
but (on the President's query) that there should be no objection to another ad
interim appointment in favor of Dr. Blanco pending final action by the Board.
Accordingly, on the same day, May 26, 1970, President Lopez extended another ad
interim appointment to her, effective from May 26, 1970 to April 30, 1971, with the same
conditions as the first, namely, "unless sooner terminated, and subject to the approval of
the Board of Regents and to pertinent University regulations."
The next meeting of the Board of Regents was held on July 9, 1970, and the minutes
show that the Chairman having ruled that Dr. Blanco had not obtained the necessary
number of votes(5-affirm; 3-against; and 4-abstain), the Board agreed to expunge the
result of the voting, and, on motion of Regent Agbayani duly seconded, suspended action
on the ad interim appointment of Dr. Blanco. The Chair stated that this decision of the
Board would in effect render the case subject to further thinking and give the Board more
time on the question of the deanship of the College of Education, and, since the Board
had not taken action on the appointment of Dr. Blanco either adversely or favorably,
her ad interim appointment as Dean effective May 26, 1970 terminated as of July 9, 1970.
." On August 18, 1970 Dr. Blanco wrote the President of the University, protesting the
appointment of Oseas A. del Rosario as Officer-in-Charge of the College of Education.
Neither communication having elicited any official reply, Dr. Blanco went to the Court of
First Instance of Quezon City on a petition for certiorari and prohibition with preliminary
injunction.
The Court of First Instance ruled in favor of Dr. Blanco and declared her to be entitled to
occupy the position as appointed by the President. The Court further declared the
appointment of respondent OIC del Rosario as null and void therefore issued a
permanent injunction commanding respondent Oseas A. del Rosario to desist from
further exercising the functions and duties pertaining to the Office of the Dean of the
College of Education. This gave rise to the appeal by certiorari initiated by the herein
petitioners.
ISSUE:
55

Whether or not the ad interim appointment of Dr. Consuelo S. Blanco is valid in
contemplation of Act No. 1870 of the UP Charter and Article 78 of the Revised Code of
the University.
RULING:
Not valid. It should be noted that both under the Charter (See. 10) and under the
Revised Code of the University (Art. 78) the Dean of a college is elected by the Board of
Regents on nomination by the President of the University. In other words the President's
function is only to nominate, not to extend an appointment, even if only ad interim; and
the power of the Board of Regents is not merely to confirm, but to elect or appoint. At
any rate the ad interim appointment extended to Dr. Blanco on May 26, 1970, although
made effective until April 30, 1971, was subject to the following condition: "unless
sooner terminated and subject to the approval of the Board of Regents." The Board, as
has been shown, not only did not elect Dr. Blanco in its meeting of July 9, 1970, but
declared the appointment terminated as of that day.
Additional Notes(Applied Provisions):
The only provisions of the U.P. Charter (Act No. 1870) which may have a bearing on the
question at issue read as follows:
SEC. 7. A quorum of the Board of Regents shall consist a majority of all
the members holding office at the time the meeting of the Board is called.
All processes against the Board of Regents shall be served on the president
or secretary thereof.
SEC. 10. The body of instructors of each college shall constitute its
faculty, and as presiding officer of each faculty, there shall be a
dean elected from the members of such faculty by the Board of Regents on
nomination by the President of the University.
Article 78 of the Revised Code of the University provides:
Art. 78. For each college or school, there shall be a Dean or Director who
shall be elected by the Board of Regents from the members of the faculty
of the University unit concerned, on nomination by the President of the
University.

35. PNB v. CA, 83 SCRA 238
FACTS:
Rita Tapnio, herein respondent, owes PNB an amount of P2,000.00. The amount
is secured by her sugar crops about to be harvested including her export quota allocation
worth 1,000 piculs. The said export quota was later dealt by Tapnio to a certain Jacobo
Tuazon at P2.50 per picul or a total of P2,500. Since the subject of the deal is mortgaged
56

with PNB, the latter has to approve it. The branch manager of PNB recommended that
the price should be at P2.80 per picul which was the prevailing minimum amount
allowable. Tapnio and Tuazon agreed to the said amount. And so the bank manager
recommended the agreement to the vice president of PNB. The vice president in turn
recommended it to the board of directors of PNB.
However, the Board of Directors wanted to raise the price to P3.00 per picul. This
Tuazon does not want hence he backed out from the agreement. This resulted to Tapnio
not being able to realize profit and at the same time rendered her unable to pay her
P2,000.00 crop loan which would have been covered by her agreement with Tuazon.
Eventually, Tapnio was sued by her other creditors, including herein respondent
Philippine American General Insurance Co., Inc., therefore this prompted Tapnio to file a
third party complaint against PNB where she alleged that her failure to pay her debts was
because of PNBs negligence and unreasonableness in refusing to approve the lease
between Tapnio and Tuazon.

ISSUE: Whether or not Tapnio is correct.

RULING:
Yes. In this type of transaction, time is of the essence considering that Tapnios
sugar quota for said year needs to be utilized ASAP otherwise her allotment may be
assigned to someone else, and if she cant use it, she wont be able to export her crops. It
is unreasonable for PNBs board of directors to disallow the agreement between Tapnio
and Tuazon because of the mere difference of 0.20 in the agreed price rate. What makes it
more unreasonable is the fact that the P2.80 was recommended both by the bank manager
and PNBs VP yet it was disapproved by the board. Further, the P2.80 per picul rate is the
minimum allowable rate pursuant to prevailing market trends that time. This
unreasonable stand reflects PNBs lack of the reasonable degree of care and vigilance in
attending to the matter. PNB is therefore negligent.
A corporation is civilly liable in the same manner as natural persons for torts, because
generally speaking, the rules governing the liability of a principal or master for a tort
committed by an agent or servant are the same whether the principal or master be a
natural person or a corporation, and whether the servant or agent be a natural or artificial
person. All of the authorities agree that a principal or master is liable for every tort which
it expressly directs or authorizes, and this is just as true of a corporation as of a natural
person, a corporation is liable, therefore, whenever a tortious act is committed by an
officer or agent under express direction or authority from the stockholders or members
acting as a body, or, generally, from the directors as the governing body.

36. Garcia v. Lim Chu Sing, 59 Phil. 562
FACTS:
The debt which is the subject matter of the complaint was not really an
indebtedness of the defendant but of Lim Cuan Sy, who had an account with the plaintiff
bank in the form of "trust receipts" guaranteed by the defendant as surety and with chattel
mortgage securities, being an owner of shares of stock of the plaintiff Mercantile Bank of
China amounting to P10,000.
57

As a surety, the defendant-appellant Lim Chu Sing executed and delivered to the
Mercantile Bank of China promissory note for the sum of P19,605.17 with interest
thereon at 6 per cent per annum, payable monthly as follows: P1,000 on July 1, 1930;
P500 on August 1, 1930; and P500 on the first of every month thereafter until the amount
of the promissory note together with the interest thereon is fully paid. However, he
defaulted in the payment of several installments by reason of which the unpaid balance of
P9,105.17 on the promissory note has ipso facto become due and demandable.
Because of failure of Lim Cuan Sy to comply with his obligation, plaintiff bank, without
the knowledge and consent of the defendant, foreclosed the chattel mortgage and
privately sold the property covered thereby. Judgment is also rendered sentencing the
defendant to pay the sum of P9,105.17 with interest thereon at the rate of six per cent per
annum from September 1, 1932, until fully paid, plus the sum of P910.51, as attorney's
fees, with the costs of this suit. This prompted defendant to file a motion praying for the
inclusion of the principal debtor Lim Cuan Sy as party defendant so that he could avail
himself of the benefit of the exhaustion of the property of said Lim Cuan Sy. Said motion
was denied in open court by the presiding judge without the defendant-appellant having
excepted to such order of denial. The proceeds of the sale of the mortgaged chattels
together with other payments made were applied to the amount of the promissory note in
question, leaving the balance which the plaintiff now seeks to collect.

ISSUES:
1. whether or not there is justification when the Court of First Instance denied
the motion for inclusion of a party a defendant(Lim Cuan Sy), filed by the defendant-
appellant.
2. Whether or not it is proper to compensate the defendant-appellant's
indebtedness of P9,105.17, which is claimed in the complaint, with the sum of P10,000
representing the value of his shares of stock with the plaintiff entity, the Mercantile Bank
of China.
3. Whether or not it is justified in sentencing the said defendant-appellant to pay
the sum of P910.51 as attorney's fees in addition to interest at 6 per cent per annum on the
amount sought in the complaint.

RULING:

(1) That failure to file an exception to a ruling rendered in open court denying a motion
for the inclusion of a party as defendant deprives the petitioner, upon appeal of the right
to raise the question whether such denial proper or improper; According to the provisions
of section 141 of the Code of Civil Procedure, ". . . Rulings of the court upon minor
matters, such as adjournments, postponements of trials, the extension of time for filing
pleadings or motions, and other matters addressed to the discretion of the court in the
performance of its duty, shall not be subject to exception. But exception may be taken to
any other ruling, order, or judgment of the court made during the pendency of the action
in the Court of First Instance." The herein defendant-appellant, not having excepted to the
order of the Court of First Instance of Manila denying his motion for the inclusion of Lim
Cuan Sy as party defendant, is estopped from raising such question upon appeal
58

(2) that the shares of a banking corporation do not constitute an indebtedness of the
corporation to the stockholder and, therefore, the latter is not a creditor of the former for
such shares; According to the weight of authority, a share of stock or the certificate
thereof is not an indebtedness to the owner nor evidence of indebtedness and, therefore, it
is not a credit. Stockholders, as such, are not creditors of the corporation . It is the
prevailing doctrine of the American courts, repeatedly asserted in the broadest terms, that
the capital stock of a corporation is a trust fund to be used more particularly for the
security of creditors of the corporation, who presumably deal with it on the credit of its
capital stock
(3) that the indebtedness of a shareholder(defendant Lim Chu Sing) to a banking
corporation cannot be compensated with the amount of his shares therein, there being no
relation of creditor and debtor with respect to such shares, therefore , there is no
sufficient ground to justify a compensation
(4) that the percentage stipulated in a contract, for costs and attorney's fees for the
collection of an indebtedness, includes judicial costs, therefore not usurious.

37. Bayla, et. al. v, Silang traffic Co., Inc., 73 Phil. 557
FACTS:
Petitioners in instituted this action against the respondent Silang Traffic Co., Inc.
to recover certain sums of money which they had paid severally to the corporation on
account of shares of stock they agreed to take and pay for under certain specified terms
and conditions. Petitioners' action for the recovery of the sums above mentioned is based
on a resolution by the board of directors of the respondent corporation. The latter,
however, countered that the resolution is not applicable to the petitioners Sofronio T.
Bayla, Josefa Naval, and Paz Toledo because on the date thereof "their subscribed shares
of stock had already automatically reverted to the defendant, and the installments paid by
them had already been forfeited"; and that said resolution was revoked and cancelled by a
subsequent resolution of the board of directors of the defendant corporation. The trial
court absolved the defendant from the complaint and declared forfeited in favor of the
defendant the shares of stock in question. It held that the resolution was null and void,
saying that a corporation has no legal capacity to release an original subscriber to its
capital stock from the obligation to pay for shares; and any agreement to this effect is
invalid."

ISSUES:
a.) Whether or not the contract entered to was a subscription or a sale of stock

b.) Whether or not under the contract between the parties the failure of the purchaser
to pay any of the quarterly instalments on the purchase price automatically gave
rise to the forfeiture of the amounts already paid
RULING:
The contract in question is one of purchase and not subscription. Whether a
particular contract is a subscription or a sale of stock is a matter of construction and
depends upon its terms and the intention of the parties. In the Unson case just cited, this
Court held that a subscription to stock in an existing corporation is, as between the
59

subscriber and the corporation, simply a contract of purchase and sale. It seems clear
from the terms of the contracts in question that they are contracts of sale and not of
subscription. The lower court erred in overlooking the distinction between subscription
and purchase "A subscription, properly speaking, is the mutual agreement of the
subscribers to take and pay for the stock of a corporation, while a purchase is an
independent agreement between the individual and the corporation to buy shares of stock
from it at stipulated price."

The contract provides for interest of the rate of six per centum per annum on deferred
payments. It is also provides that if the purchaser fails to pay any of said instalments
when due, the said shares are to revert to the seller and the payments already made are to
be forfeited in favor of said seller. The provision regarding interest on deferred payments
would not have been inserted if it had been the intention of the parties to provide for
automatic forfeiture and cancelation of the contract. Moreover, the contract did not
expressly provide that the failure of the purchaser to pay any installment would give rise
to forfeiture and cancelation without the necessity of any demand from the seller; and
under article 1100 of the Civil Code persons obliged to deliver or do something are not in
default until the moment the creditor demands of them judicially or extrajudicially the
fulfillment of their obligation, unless (1) the obligation or the law expressly provides that
demand shall not be necessary in order that default may arise, (2) by reason of the nature
and circumstances of the obligation it shall appear that the designation of the time at
which that thing was to be delivered or the service rendered was the principal inducement
to the creation of the obligation.

38. Datu Tagoranao Benito v. SEC, 123 SCRA 722
FACTS:
On February 6, 1959, the Articles of Incorporation of respondent Jamiatul
Philippine-Al Islamia, Inc. were filed with the Securities and Exchange Commission
(SEC) and were subsequently approved. The corporation had an authorized capital stock
of P200,000.00 divided into 20,000 shares at a par value of P10.00 each. Of the
authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and fully paid
for. Herein petitioner Datu Tagoranao Benito subscribed to 460 shares worth P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of increase of its
capital stock from P200,000.00 to P1,000,000.00. It was shown in said certificate that
P191,560.00 worth of shares were represented in the stockholders' meeting held on
November 25, 1975 at which time the increase was approved. Thus, P110,980.00 worth
of shares were subsequently issued by the corporation from the unissued portion of the
authorized capital stock of P200,000.00. Of the increased capital stock of P1,000,000.00,
P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A.
Lucman and Mrs. Moki-in Alonto. Petitioner prayed that the additional issue of shares of
previously authorized capital stock as well as the shares issued from the increase in
capital stock of respondent corporation be cancelled; that the secretary of respondent
corporation be ordered to register the 2,540 shares acquired by him (petitioner) and that
the corporation be ordered to render an accounting of funds to the stockholders. After due
proceedings, the SEC ruled that the issuance by the corporation of its unissued shares was
validly made and was not subject to the pre-emptive rights of stockholders, including the
60

petitioner and that there is no sufficient legal basis to set aside the certificate issued by
this Commission authorizing the increase in capital stock of respondent corporation.

ISSUE:
Whether or not the issuance by the corporation of its unissued shares was validly
made

RULING:
No. The questioned issuance of the unsubscribed portion of the capital stock worth
P110,980.00 is not invalid even if assuming that it was made without notice to the
stockholders as claimed by petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders' meeting is necessary
to consider it because additional issuance of shares of stocks does not need approval of
the stockholders. The by-laws of the corporation itself states that 'the Board of Trustees
shall, in accordance with law, provide for the issue and transfer of shares of stock of the
Institute and shall prescribe the form of the certificate of stock of the Institute. Petitioner
bewails the fact that in view of the lack of notice to him of such subsequent issuance, he
was not able to exercise his right of pre-emption over the unissued shares. However, the
general rule is that pre-emptive right is recognized only with respect to new issue of
shares, and not with respect to additional issues of originally authorized shares. This is on
the theory that when a corporation at its inception offers its first shares, it is presumed to
have offered all of those which it is authorized to issue. An original subscriber is deemed
to have taken his shares knowing that they form a definite proportionate part of the whole
number of authorized shares. When the shares left unsubscribed are later re-offered, he
cannot therefore claim a dilution of interest.

39. Palting v. San Jose Petroleum, Inc., G.R. L-14441, Dec. 17, 1986
FACTS:
On September 7, 1956, SAN JOSE PETROLEUM filed with the Securities and
Exchange Commission (SEC) a sworn registration statement, for the registration and
licensing for sale in the Philippines Voting Trust Certificates representing 2,000,000
shares of its capital stock of a par value of $0.35 a share, at P1.00 per share. It was
alleged that the entire proceeds of the sale of said securities will be devoted or used
exclusively to finance the operations of San Jose Oil Company, Inc., a domestic mining
corporation. It was the express condition of the sale that every purchaser of the securities
shall not receive a stock certificate, but a registered or bearer-voting-trust certificate from
the voting trustees named therein James L. Buckley and Austin G.E. Taylor, the first
residing in Connecticut, U.S.A., and the second in New York City. While this application
for registration was pending consideration by the Securities and Exchange Commission,
SAN JOSE PETROLEUM filed an amended Statement for registration of the sale in the
Philippines of its shares of capital stock, which was increased from 2,000,000 to
5,000,000, at a reduced offering price of from P1.00 to P0.70 per share. At this time the
par value of the shares has also been reduced from $.35 to $.01 per share. Petitioner
Pedro Palting ,allegedly prospective investors in the shares of SAN JOSE PETROLEUM,
filed with the SEC an opposition to registration and licensing of the securities on the
grounds that (1) the tie-up between the issuer, SAN JOSE PETROLEUM, a Panamanian
61

corporation and SAN JOSE OIL, a domestic corporation, violates the Constitution of the
Philippines, the Corporation Law and the Petroleum Act of 1949; (2) the issuer has not
been licensed to transact business in the Philippines; (3) the sale of the shares of the
issuer is fraudulent, and works or tends to work a fraud upon Philippine purchasers; and
(4) the issuer as an enterprise, as well as its business, is based upon unsound business
principles.

ISSUES:

a.) Whether or not petitioner Palting, as a "prospective investor" in respondent's
securities, has
personality to file the present petition for review of the order of the Securities and
Exchange Commission

b.) Whether or not the "tie-up" between the respondent SAN JOSE PETROLEUM, a
foreign corporation, and SAN JOSE OIL COMPANY, INC., a domestic mining
corporation, is violative of the Constitution, the Laurel- Langley Agreement, the
Petroleum Act of 1949, and the Corporation Law

c.) Whether or not the sale of respondent's securities is fraudulent, or would work or
tend to work fraud to purchasers of such securities in the Philippines.

RULING:
As construed by the administrative office entrusted with the enforcement of the
Securities Act, any person (who may not be "aggrieved" or "interested" within the legal
acceptation of the word) is allowed or permitted to file an opposition to the registration of
securities for sale in the Philippines. And this is in consonance with the generally
accepted principle that Blue Sky Laws are enacted to protect investors and prospective
purchasers and to prevent fraud and preclude the sale of securities which are in fact
worthless or worth substantially less than the asking price. It is for this purpose that
herein petitioner duly filed his opposition giving grounds therefor. Respondent SAN
JOSE PETROLEUM was required to reply to the opposition. Subsequently both the
petition and the opposition were set for hearing during which the petitioner was allowed
to actively participate and did so by cross-examining the respondent's witnesses and
filing his memorandum in support of his opposition. He therefore to all intents and
purposes became a party to the proceedings.

No. First, it is not owned or controlled directly by citizens of the United States,
because it is owned and controlled by a corporation, the OIL INVESTMENTS, another
foreign (Panamanian) corporation. Second, Neither can it be said that it is indirectly
owned and controlled by American citizens through the OIL INVESTMENTS, for this
latter corporation is in turn owned and controlled, not by citizens of the United States, but
still by two foreign (Venezuelan) corporations, the PANTEPEC OIL COMPANY and
PANCOASTAL PETROLEUM. Third, although it is claimed that these two last
corporations are owned and controlled respectively by 12,373 and 9,979 stockholders
62

residing in the different American states, there is no showing in the certification furnished
by respondent that the stockholders of PANCOASTAL or those of them holding the
controlling stock, are citizens of the United States. Lastly, granting that these individual
stockholders are American citizens, it is yet necessary to establish that he different states
of which they are citizens, allow Filipino citizens or corporations or associations owned
or controlled by Filipino citizens, to engage in the exploitation, etc. of the natural
resources of these states. Respondent has presented no proof to this effect. All told, the
respondent SAN JOSE PETROLEUM is not a business enterprise that is authorized to
exercise the parity privileges under the Parity Ordinance, the Laurel-Langley Agreement
and the Petroleum Law. Its tie-up with SAN JOSE OIL is, consequently, illegal.

Yes. Admittedly, to assure continuity of the management and stability of SAN
JOSE PETROLEUM, OIL INVESTMENTS, as holder of the only subscribed stock of
the former corporation and acting "on behalf of all future holders of voting trust
certificates," entered into a voting trust agreement with James L. Buckley and Austin E.
Taylor, whereby said Trustees were given authority to vote the shares represented by the
outstanding trust certificates. It was also therein provided that the said Agreement shall
be binding upon the parties thereto, their successors, and upon all holders of voting trust
certificates. And these are the voting trust certificates that are offered to investors as
authorized by Security and Exchange Commissioner. It cannot be doubted that the sale of
respondent's securities would, to say the least, work or tend to work fraud to Philippine
investors.

40. Velasco v. Poizat, 37 Phil. 802
FACTS:
The Philippine Chemical Product Company" (Ltd.) was originally organized with a
capital of P50,000, divided into 500 shares. Defendant subscribed for 20 shares and paid
the par value of 5 shares. Defendant, while serving as the treasurer and manager, called in
and collected all subscriptions to the capital stock except the 15 shares subscribed by
himself and another 15 shares owned by Jose R. Infante.
During the meeting of the board of directors, two resolutions 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. Infante had already paid 25 % of his subscription.
The other proposition was to the effect that 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. Poizat did not pay
63

ISSUES:
1) Whether or not a stockholder is liable for his entire subscription

2) Whether or not the enforcement of stock subscriptions can be judicially demanded

3) Whether or not the failure of the officers of the corporation to make a call
pursuant to the requirements of sections 37 and 38 of the Corporation Law
precluded the corporation to demand payment from the subscriber for his
subscription
RULING:
1) 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 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. 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.

2) The Corporation Law (Act No. 1459) provides 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 of the Corporation Law are applicable and must be
followed. The other remedy is by action in court.

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.
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.
When insolvency supervenes upon a corporation and the court assumes
jurisdiction to wind up, all unpaid stock subscriptions become payable on
64

demand, and are at once recoverable in an action instituted by the assignee or
receiver appointed by the court.
3) 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.

41. Lingayen Gulf Electric Power Co, Inc. v. Baltazar, 93 Phil. 404
FACTS:
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.
Defendant Baltazar subscribed for 600 shares, to which a balance of P18,500 remained
unpaid for.
On July 23, 1946, a majority of the stockholders adopted Resolution No.17 calling the
balance of all unpaid subscribed capital stock payable in two installments, providing for a
12 % interest and a reversion of all unpaid subscribed stocks to the corporation.
Resolution No. 17 was later made on April 17, 1948 setting aside the resolution made on
June 23, 1946 on the ground that such 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. The directors also decided to call the unpaid subscription in 2 installments.
Resolution No. 4 was further adopted on June 10, 1949 revaluing the stocks and assets
of the company so as to attract outside investors to put in money for the rehabilitation of
the company. 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.
The legal counsel of the plaintiff corporation wrote a letter to the defendant, demanding
the payment of the unpaid balance of his subscription, but was ignored by the latter.
ISSUES:
1) Was the call under Resolution No. 17 (April 17, 1948) valid?

65

2) Was the defendant released from the obligation of the unpaid balance of his
subscription by virtue of stockholders' resolution Nos. 17 and 4?
RULING:
1) 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.
Section 40 is mandatory as regards publication, using the word "must". 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.
The case of Velasco vs. Poizat is different in that 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.
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.

2) 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
generally agreed that in order to effect the release, there must be unanimous
consent of the stockholders of the corporation:

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.

The exception is, as stated, 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.

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.
66

The release attempted in Resolution No. 17 of 1946 was not valid for lack of a
unanimous vote. It was found that at least seven stockholders were absent from
the meeting when said resolution was approved.
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.

42. Baltazar v. Lingayen Gulf Electric Power Co, Inc., 14 SCRA 522
FACTS:
Lingayen Gulf Electric Power Co., Inc was doing business in the Philippines with an
authorized capital stock of P300.000.00 divided into 3,000 shares of voting stock at
P100.00 par value.
Plaintiffs Baltazar and Rose were among the incorporators, having subscribed to 600 and
400 shares.
Of the 600 shares subscribed by Baltazar, he had fully paid 535 shares of stock, and the
Corporation issued to him several fully paid up and non-assessable certificates of stock,
corresponding to the 535 shares. After having made transfers to third persons and
acquired new ones, Baltazar had to his credit, on the filing of the complaint 341 shares
fully paid and non-assessable. He had also 65 shares for which no certificate was issued
to him.
Of the 400 shares of stock subscribed by Rose, he had 375 shares of fully paid stock, duly
covered by certificates of stock issued to him.
Respondents Ungson, Estrada, Fernandez and Yuson were small stockholders of the
Corporation, all holding a total number of not more than 100 shares, with a par value of
P10,000.00 fully paid-up shares of stock.
Defendant Acena, was likewise an incorporator and stockholder, holding 600 shares of
stock, for which certificate of stock were issued to him and was the largest individual
stockholder.
In 1955, defendants Ungson, Estrada, Fernandez and Yuzon, constituted the majority of
the holdover 7-member Board of Directors of the Corporation; 2 of said defendants
(Ungson group) were elected as members of the Board largely on the vote of Acena;
while the other 2 (Baltazar group) were elected mainly on the vote of the plaintiffs and
their group of stockholders.
67

The Ungson group passed 3 resolutions:
Resolution No. 2 declared all watered stocks issued to Acena, Baltazar, Rose and
Jubenville, "of no value and cancelled from the books.
Resolution No. 3 resolved that "... all unpaid subscriptions should bear interest
annually, and any or all payments should be credited to pay interest first.
Resolution No. 4 resolved that "any and all shares of stock issued as fully paid-up
to stockholders whose subscription to a number of shares have been declared
delinquent with the accrued interest on the unpaid are hereby incapacitated to
utilize or avail of the voting power.
ISSUES:
1) If a stockholder, in a stock corporation, subscribes to a certain number of
shares of stock, and he pays only partially, for which he is issued certificates
of stock, is he entitled to vote the latter, notwithstanding the fact that he has
not paid the balance of his subscription, which has been called for payment or
declared delinquent?

2) If a stockholder subscribes to a certain number of shares of stock and makes
partial payment only and declared delinquent as to the rest, with interest,
should previous payments on account of the capital, be first applied to interest,
thus diminishing the voting power of the shares of stock already paid? In other
words, if the entire subscribed shares of stock are not paid, will the paid shares
of stock be deprived of the right to vote, until the entire subscribed shares of
stock are fully paid, including interest?

RULING:
1) Section 37 of the Corporation Law, as amended by Act No. 3518, provides No
certificate of stock shall be issued to a subscriber as fully paid up until the full par
value thereof, or the full subscription in the case of no par stock, has been paid by
him to the corporation. Subscribed shares not fully paid up may be voted
provided no subscription is unpaid and delinquent.
As may readily be seen, said Section 37 makes payment of the "par value" as
prerequisite for the issuance of certificates of par value stocks, and makes
payment of the "full subscription" as prerequisite for the issuance of certificates
of no par value stocks.
The present law requires as a condition before a shareholder can vote his shares,
that his full subscription be paid in the case of no par value stock; and in case of
stock corporation with par value, the stockholder can vote the shares fully paid by
him only, irrespective of the unpaid delinquent shares.
68

As well-observed by the trial court, a corporation may now, in the absence of
provisions in their by-laws to the contrary, apply payment made by, subscribers-
stockholders, either as: "(a) full payment for the corresponding number of shares
of stock, the par value of each of which is covered by such payment; or (b) as
payment pro-rata to each and all the entire number of shares subscribed for"
(amended decision).
In the cases at bar, the defendant-corporation had chosen to apply payments by its
stockholders to definite shares of the capital stock of the corporation and had fully
paid capital stock shares certificates for said payments; its call for payment of
unpaid subscription and its declaration of delinquency for non-payment of said
call affecting only the remaining number of shares of its capital stock for which
no fully paid capital stock shares certificates have been issued, "and only these
have been legally shorn of their voting rights by said declaration of delinquency".
2) In the present case, the defendant-corporation had applied the payments made by
the stockholders to the full par value of the shares of stock subscribed by them,
instead of the accepted interest, as shown by the capital stock shares certificate
issued for the payments made, and the stockholders had accepted such certificates
issued for such payments. This being the case, the said application of payments
must be deemed to have been agreed upon by the Corporation and the
stockholders, and the same cannot now be changed without the consent of the
stockholders concerned.
The Corporation Law and the by-laws of the defendant Corporation do not
contain any provision, prohibiting the application of stockholders' payments to the
full par value of a corporation's capital stock, ahead of the payment of accrued
interest for unpaid subscriptions.
It would, therefore, result that a corporation may, upon request of an interested
stockholder, as his option, apply payment by them to the full par value of shares
of capital leaving its collection later of the accrued interest on unpaid
subscriptions, and that once such option has been exercised and the
corresponding stock certificates have been issued, the corporation cannot, by a
unilateral act, legally nullify and cancel the capital stock certificates so issued.

43. De Silva v. Aboitiz & Co., Inc., 44 Phil. 755
FACTS:
Plaintiff subscribed for 650 shares of stock of Aboitiz corporation of the value of
P500 each, of which he has paid only the total value of 200 shares, there remaining 450
shares unpaid, for which he was indebted to the corporation in the sum of P225,000, the
value thereof. He was notified by the secretary of Aboitiz declaring the unpaid
subscriptions to the capital stock have become due and payable at the office thereof
through the treasurer, further stating that all such unpaid shares will accrue interest and
69

will be declared delinquent. It was advertised for sale at public auction, and sold, for the
purpose of paying up the amount of the subscription and accrued interest, with the
expenses of the advertisement and sale, unless said payment was made before.
De Silva prayed for a judgment in his favour, contending that Aboitiz in
prescribed another method of paying the subscription to the capital stock different from
that provided in article 46 of its by-laws, in declaring the aforesaid 450 shares delinquent,
and in directing the sale thereof, as advertised, the corporation had exceeded its executive
authority, and as a consequence thereof he asked that a writ of injunction be issued
against the said defendant, enjoining it from taking any further action of whatever nature
in connection with the acts complained of and that it pay the costs of this suit;
consequently a preliminary injunction having been issued against Aboitiz.
ART. 46. The net profit resulting from the annual liquidation shall be distributed
as follows: Ten per cent (10%) for the Board of Directors and in the manner prescribed
in article twenty-six (26) of these by-laws; ten per cent (10%) for the general manager;
ten per cent (10%) for the reserve fund, and seventy per cent (70%) for the shareholders
in equal parts; Provided, however, That from this seventy per cent dividend the Board of
Directors may deduct such amount as it may deem fit for the payment of the unpaid
subscription to the capital stock and not pay any dividend to the holders of the said
unpaid shares until they are fully paid;Provided, further, That when all the shares have
been paid in full as provided in the preceding paragraph, the Board of Directors may
also deduct such amount as it may deem fit for the creation of an emergency special fund,
or extraordinary reserve fund when in its judgment the same may convenient for the
development of the business of the corporation or for meeting any such contingencies as
may arise from its operation, whenever the distributable dividend is found, after the
foregoing deduction, to be not less than ten per cent (10%) of the paid up capital stock.
No dividend shall be declared or paid, except when there remains a net profit
after the payment of all the expenses incurred, or allowances made, by the corporation to
carry out the operation of its business; so that no such dividend may be declared as may
affect the capital of the corporation.

ISSUE: Whether or not, under the provision of article 46 of the by-laws of the defendant
corporation, De Silva is still liable pursuant to the dividends as payment for
unpaid subscriptions.

RULING:
Yes, he is. In the instant case, the defendant corporation, through its board of
directors, made use of its discretionary power, taking advantage of the first of the two
remedies provided by the Corporation law: delinquency sale or specific performance On
the other hand, the plaintiff has no right whatsoever under the provision of the above
cited article 46 of the said by-laws to prevent the board of directors from following, for
that purpose, any other method than that mentioned in the said article, for the very reason
that the same does not give the stockholders any right in connection with the
determination of the question whether or not there should be deducted from the 70 per
cent of the profit distributable among the stockholders such amount as may be deemed fit
for the payment of subscriptions due and unpaid. Therefore, it is evident that the
defendant corporation has not violated, nor disregarded any right of the plaintiff
70

recognized by the said by-laws, nor exceeded its authority in the discharge of its
executive functions, nor abused its discretion when it performed the acts mentioned in the
complaint as grounds thereof, and, consequently, the facts therein alleged do not
constitute a cause of action.

In the case of Velasco vs. Poizat (37 Phil., 802):
The first and most special remedy given by the statute consists in permitting the
corporation to put the unpaid stock for sale and dispose of it for the account of the
delinquent subscriber. In this case the provisions of sections 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 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."

44. The National Exchange Co., Inc. v. Dexter, 51 Phil. 601
FACTS:
Defendant I. B. Dexter, signed a written subscription to the corporate stock of C.
S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300) shares of the capital stock of C. S.
Salmon and Company, payable from the first dividends declared on any and all shares of
said company owned by me at the time dividends are declared, until the full amount of
this subscription has been paid.
Upon this subscription the sum of P15,000 was paid, from a dividend declared at
about that time by the company, supplemented by money supplied personally by the
subscriber. Beyond this nothing has been paid on the shares and no further dividend has
been declared by the corporation.There is a balance of P15,000 unpaid subscription.
However, the trial court held that the stipulation was invalid.

ISSUE: Whether the stipulation contained in the subscription to the effect that the
subscription is payable from the first dividends declared on the shares has the
effect of relieving the subscriber from personal liability in an action to recover the
value of the shares.

RULING:
NO, it does not. The Court found the subscription contract as void, as it defrauded
creditors who relied heavily on the capital stock of the corporation. The prohibition
against the issuance of shares by corporations except for actual cash to the par value of
the stock to its full equivalent in property is thus enshrined in both the organic and
statutory law of the Philippine. Now, if it is unlawful to issue stock otherwise than as
stated it is self-evident that a stipulation such as that now under consideration, in a stock
subcription, is illegal, for this stipulation obligates the subcriber to pay nothing for the
shares except as dividends may accrue upon the stock. In the contingency that dividends
are not paid, there is no liability at all. This is a discrimination in favor of the particular
subcriber, and hence the stipulation is unlawful.
71

NOTA BENE:
The general doctrine of corporation law is in conformity with this conclusion, as
may be seen from the following proposition taken from the standard encyclopedia
treatise, Corpus Juris:
Nor has a corporation the power to receive a subscription upon such terms as will
operate as a fraud upon the other subscribers or stockholders by subjecting the
particular subcriber to lighter burdens, or by giving him greater rights and privileges, or
as a fraud upon creditors of the corporation by withdrawing or decreasing the capital. It
is well settled therefore, as a general rule, that an agreement between a corporation and
a particular subscriber, by which the subscription is not to be payable, or is to be
payable in part only, whether it is for the purpose of pretending that the stock is really
greater than it is, or for the purpose of preventing the predominance of certain
stockholders, or for any other purpose, is illegal and void as in fraud of other
stockholders or creditors, or both, and cannot be either enforced by the subcriber or
interposed as a defense in an action on the subcription. (14 C. J., p. 570.)
SC added that the law in force in this jurisdiction makes no distinction, in respect
to the liability of the subcriber, between shares subscribed before incorporation is
effected and shares subscribed thereafter. All like are bound to pay full value in cash or
its equivalent, and any attempt to discriminate in favor of one subscriber by relieving him
of this liability wholly or in part is forbidden.

45. Lumanlan v. Cura, 59 Phil. 746
FACTS:
The appellant Dizon & Co. is a corporation duly organized under Philippine laws
with its central office in Manila. The plaintiff-appellee Bonifacio Lumanlan, subscribed
for 300 shares of stock of said corporation at a par value of P50 or a total of P15,000.
Julio Valenzuela, Pedro Santos and Francisco Escoto, creditors of this corporation, filed
suit against it praying that a receiver be appointed, as it appeared that the corporation at
that time had no assets except credits against those who had subscribed for shares of
stock. The court named Tayag as receiver for the purpose of collecting, said
subscriptions. As Bonifacio Lumanlan had only paid P1,500 of the P15,000, par value of
the stock for which he subscribed, the receiver filed a suit against him in for the
collection of P15,109, P13,500 of which was the amount he owed for unpaid stock and
P1,609 for loans and advances by the corporation to Lumanlan. In that case Lumanlan
was ordered to pay the corporation the above-mentioned sum of P15,109 with legal
interest, and costs. Lumanlan appealed from this decision.
Pending appeal, the company (the creditors, some of the directors and the
majority of the stockholders )and petitioner entered into a compromise whereby
subscribers for the capital stock who were in default should pay the creditors, and
Lumanlan was designated to pay the debt of the corporation to one Valenzuela. He
agreed to the obligation in exchange that he will dismiss his appeal since he would be
72

paying less than his unpaid subscription. Lumanlan withdrew his appeal and paid
Valenzuela, thereby was subrogated in the place of the latter.
The petitioning creditors having been paid the amounts owed to them by the
corporation asked that the receiver be dismissed and the court granted this. Disregarding
this agreement and notwithstanding the payment made by Lumanlan to Valenzuela, the
corporation still sued him for the balance because the company still has unpaid creditors.
Lumanlan used the compromise agreement as his defense.

ISSUE: Whether or not Lumanlan is still liable despite the compromise agreement.
RULING:
Yes. In the present case, it was found that there are other creditors of Dizon & Co.
This being the case that corporation has a right to collect all unpaid stock subscriptions
and any other amounts which may be due it, as the agreement cannot prejudice other
creditors.
It is established doctrine that subscriptions to the capital of a corporation
constitute a fund to which the 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. (Philippine Trust
Co. vs. Rivera, 44 Phil., 469, 470.)
The Corporation Law clearly recognizes that a stock subscription is a 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. (Velasco vs. Poizat, 37 Phil., 802, 805.)

46. Fua Cun v. Summers, 44 Phil. 704
FACTS:
Chua Soco subscribed to 500 shares of stock in China Banking Corp. at a par
value of P100 per share. He paid for half of such subscription, in the amount of P25,000.
A receipt for the said payment was issued stating that a new certificate of shares of stock
shall be issued in the name of Chua once the balance of the subscription is paid, and
surrender of the receipt. Chua thereafter executed a promissory note in favor of Fua Cun
for the sum of P25,000, secured by a chattel mortgage on the shares of stock owned by
Chua in the Bank. Chua endorsed the receipt to Fua Cun, which the latter brought to the
Bank. The manager of the Bank was informed of the transaction between Chua and Fua,
but Fua was told to await the action of the Board upon the matter. Thereafter, Chua
incurred a P37,731 debt with the Bank due to dishonored acceptances of commercial
paper. His interest in the 500 shares of stock was levied upon by the sheriff to satisfy
such debt. Fua thus filed an action alleging that by he had a lien on 250 shares of stock
due to the chattel mortgage thereon, which he said was owned by Chua Soco. He sought
to have the receipt delivered to him and that he be awarded damages.

ISSUE:
73

Whether Chua Soco, by paying of the subscription price of the 500 shares of
stock in effect became the owner of 250 shares, and whether Fua has a lien on the said
shares superior to that of the bank.

RULING:
Chua Soco did NOT, by paying of the subscription price of the 500 shares of stock,
in effect became the owner of 250 shares. The attachment on such 500 shares was due to
the non-payment of drafts accepted by Chua and had no direct connection with the shares
of stock in question. But, as against the rights of Fua, the Bank had no lien unless by
virtue of the attachment. But, such attachment was levied AFTER the Bank had received
notice of the assignment of Chua Socos interests to Fua. It follows that as against these
rights the Bank holds no lien whatever. Thus, Chua Soco acquired the right to 250 shares
of stock through the P25,000 payment, upon which Fua holds a lien superior to that of the
Bank. The receipt evidencing the P25,000 payment must be surrendered to Fua.

47. Nava v. Peers Marketing Corp., 74 SCRA 65
FACTS:
Teofilo Po subscribed to 80 shares of Peers Marketing Corp at P100 per share or a
total par value of P800,000. No certificate of stock was issued to him or to any other
subscriber/stockholder. 20 of these shares were sold to Nava, the Petitioner. In the deed
of sale, Po represented himself as the absolute and registered owner of 20 shares of the
Corporation. Nava thus sought from the officers of the corporation to register the sale in
the corporate books, but it was denied as Po had not fully paid the amount of his
subscription. It was found out that Po was delinquent in the payment of the balance due
on the entire subscription, and that the corporation had a claim on the entire subscription,
including the 20 shares sold to Nava. Thus, Nava filed a mandamus case against the
corporation in the CFI of Negros Occidental to compel the officers (the Cusis) to register
the 20 shares in Navas name in the corporations transfer book. The CFI dismissed the
petition. Thus, Nava filed an appeal in the SC.

ISSUE:
Whether the officers of Peers can be compelled by mandamus to enter in its stock
and transfer book the sale made by Po to Nava.

RULING:
No. the Court held that the transfer made by Po to Nava is not the alienation, sale or
transfer of stock: that is supposed to be recorded in the stock and transfer book as
contemplated by the law. As a rule, the shares which may be alienated are those which
are covered by certificates of stock. Shares of stock may be transferred by delivery to the
transferee of the certificate properly indorsed. The usual practice is for the stockholder to
sign the form on the back of the stock certificate. The certificate may thereafter be
transferred from one person to another. If the holder of the certificate desires to assume
the legal rights of a shareholder to enable him to vote at corporate elections and to receive
dividends, he fills up the blanks in the form by inserting his own name as transferee.
Then, the certificate is delivered to the secretary of the corporation so that the transfer
74

may be entered in the corporate books. The certificate is then surrendered and a new one
is issued to the transferee. But, this procedure cannot be followed in this case because the
20 shares are not covered by any certificate of stock in Pos name. And, in addition, the
corporation has a claim on such shares due to Pos delinquency. Without the stock
certificate, which is the evidence of ownership of corporate stock, the assignment is
effective only between the parties to the transaction. The delivery of the stock certificate,
which represents the shares to be alienated, is essential for the protection of both the
corporation and its stockholders. Under the facts of this case, the corporation has no clear
legal duty to register the 20 shares in Navas name. Hence, there is no cause of action for
mandamus. As to Navas contention that a certificate of stock may be issued for the
shares which have already been paid for although the entire subscription has not yet been
fully paid, is not supported by law or jurisprudence.

48. Nielson & Co., Inc. v. Lepanto Consolidated Mining Co., 26 SCRA 540
FACTS:
In its Motion for Reconsideration before the SC, Lepanto contended that the court
erred in ordering Lepanto to issue and deliver to Nielson shares of stock together with
fruits thereof. The court held in the disputed decision that Nielson is entitled to receive
10% of the stock dividends declared by Lepanto, or shares of stocks, worth P300T at the
par value of PO.10 per share. The court ordered Lepanto to issue and deliver to Nielson
those shares of stocks as well as all the fruits or dividends that accrued to said shares.

ISSUE:
Whether the payment of stock dividends to Nielson as compensation for its
services under the management contract is in violation of the provisions under the
Corporation Code?

RULING:
Yes. Under Section 16 of the Corporation Code, stock dividends cannot be issued
to a person who is not a stockholder in payment of services rendered. And so, in the case
at bar Nielson cannot be paid in shares of stock which form part of the stock dividends of
Lepanto for services it rendered under the management contract. The court sustained the
contention of Lepanto that the understanding between Lepanto and Nielson was simply to
make the cash value of the stock dividends declared as the basis for determining the
amount of compensation that should be paid to Nielson, in the proportion of 10% of the
cash value of the stock dividends declared. The court modified a part of the disputed
decision which declares that Nielson is entitled to shares of stock worth P300,000.00
based on the stock dividends declared on November 28, 1949 and on August 20,
1950, together with all the fruits accruing thereto. Instead, the court finally ruled that
Nielson is entitled to payment by Lepanto of P300,000.00 in cash, which is
equivalent to 10% of the money value of the stock dividends worth P3,000,000.00
which w ere declared on November 28, 1949 and on August 20, 1950, with interest
thereon at the rate of 6% from February 6, 1958.

NOTE: The term "dividend" both in the technical sense and its ordinary acceptation, is
that part or portion of the profits of the enterprise which the corporation, by its governing
75

agents, sets apart for ratable division among the holders of the capital stock. It means the
fund actually set aside, and declared by the directors of the corporation as dividends, and
duly ordered by the director.

49. Phil. Trust Co. v. Rivera, 44 Phil. 469
FACTS:
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. not long after the Cooperativa 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.

ISSUE:
Whether the defendant La Cooperativa is still liable to pay the unpaid balance.

RULING:
Yes. It is established doctrine that subscription to the capital of a corporation
constitutes 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.

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.

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.

50. Uson v. Diosomito, 61 Phil. 535
76

FACTS:
Defendant Vicente Diosomito was the original owner of the seventy-five shares
of stock, having a par value of P7,500, and that on February 3, 1931, he sold said shares
to Emeterio Barcelon and delivered to the latter the corresponding certificates. But
Barcelon did not present these certificates to the North Electric Corporation for
registration until the 16th of September, 1932, when they were cancelled and a new
certificate was issued in favor of Barcelon, who transferred the same of the defendant
H.P.L. Jollye.

Meanwhile, Toribia Uson had filed a civil action for debt against Vicente Diosomito and
that an attachment was duly issued and levied upon the property of the defendant
Diosomito, including seventy-five shares of the North Electric Co., Inc., which stood in
his name on the books of the company. Subsequently, Toribia Uson obtained judgment
against the defendant Diosomito for the sum of P2,300 with interest and costs. To satisfy
said judgment, the sheriff sold said shares at public auction. The plaintiff Toribia Uson
was the highest bidder and said shares were adjudicated to her. In the present action,
H.P.L. Jollye claims to be the owner of said 75 shares of the North Electric Co., Inc., and
presents a certificate of stock issued to him by the company.

It will be seen, therefore, that the transfer of said shares by Vicente Diosomito, the
judgment debtor to Barcelon was not registered and noted on the books of the corporation
until some nine months after the attachment had been levied on said shares.

ISSUE:
Whether a bona fide transfer of the shares of a corporation, not registered or
noted on the books of the corporation, is valid as against a subsequent lawful attachment
of said shares, regardless of whether the attaching creditor had actual notice of said
transfer or not.

RULING:
No. The transfer is not valid. The true meaning of the language is, and the
obvious intention of the legislature in using it was, that all transfers of shares should be
entered, as here required, on the books of the corporation. And it is equally clear to us
that all transfers of shares not so entered are invalid as to attaching or execution creditors
of the assignors, as well as to the corporation and to subsequent purchasers in good faith,
and indeed, as to all persons interested, except the parties to such transfers. All transfers
not so entered on the books of the corporation are absolutely void; not because they are
without notice or fraudulent in law or fact, but because they are made so void by statute.

This court still adheres to the principle that its function is jus dicere non jus dare. To us
the language of the legislature is plain to the effect that the right of the owner of the
shares of stock of a Philippine corporation to transfer the same by delivery of the
certificate is limited and restricted by the express provision that "no transfer, however,
shall be valid, except as between the parties, until the transfer is entered and noted upon
the books of the corporation." Therefore, the transfer of the 75 shares in the North
Electric Company, Inc., made by the defendant Diosomito to the defendant Barcelon was
77

not valid as to the plaintiff-appellee, Toribia Uson on the date on which she obtained her
attachment lien on said shares of stock which still stood in the name of Diosomito on the
books of the corporation.

51. Escao v. Filipinas Mining Corp., 74 SCRA 711
FACTS:
On March 8, 1937, the plaintiff-appellee obtained judgment against Silverio
Salvosa whereby the latter was ordered to transfer and deliver to the former 116 active
shares and an undetermined number of shares in escrow of the Filipinas Mining
Corporation and to pay the sum of P500 as damages, with the proviso that the escrow
shares shall be transferred and delivered to the plaintiff only after they shall have been
released by the company. A writ of garnishment was served by the sheriff of Manila upon
the Filipinas Mining Corporation to satisfy the said judgment; and Filipinas Mining
Corporation advised the sheriff of Manila that according to its books the judgment debtor
Silverio Salvosa was the registered owner of 1,000 active shares and about 21,339
unissued shares held in escrow by the said corporation. The sheriff sold the 1,000 active
shares at public auction.

It appears that Silverio Salvosa sold to Jose P. Bengzon all his right, title, and interest in
and to 18,580 shares of stock of the Filipinas Mining Corporation held in escrow which
the said Salvosa was entitled to receive, and which Bengzon in turn subsequently sold
and transferred to Standard Investment of the Philippines. Neither Salvosa's sale to
Bengzon nor Bengzon's sale to the Standard Investment of the Philippines was notified to
and recorded in the books of the Filipinas Mining Corporation more than three years after
the escrow shares in question were attached by garnishment served on the Filipinas
Mining Corporation as hereinbefore set forth.

On January 24, 1941, the defendant Filipinas Mining Corporation issued in favor of the
defendant Standard
Investment of the Philippines certificate of stock for the 18,580 shares formerly held in
escrow by Silverio Salvosa and which had been adversely by the present plaintiff-
appellee on the one hand and the Standard Investment of the Philippines on the other, the
first by virtue of garnishment proceedings and the second by virtue of the sale made to it
by Jose P. Bengzon as aforesaid.

ISSUE:
Whether or not the issuance by the Filipinas Mining Corporation of the said
18,580 shares of its stock to the Standard Investment of the Philippines was valid as
against the attaching judgment creditor of the original owner.

RULING:
No. The transfer of duly issued shares of stock is not valid as against third
parties and the corporation until it is noted upon the books of the corporation. The
reasons for the registration are (1) to enable the corporation to know at all times who its
actual stockholders are, because mutual rights and obligations exist between the
corporation and its stockholders; (2) to afford to the corporation an opportunity to object
78

or refuse its consent to the transfer in case it has any claim against the stock sought to be
transferred, or for any other valid reason; and (3) to avoid fictitious or fraudulent
transfers.

Moreover, it seems illogical and unreasonable to hold that inactive or unissued shares still
held by the corporation in escrow pending receipt of authorization from the Government
to issue them, may be negotiated or transferred unrestrictedly and more freely than active
or issued shares evidenced by certificates of stock.

We are, therefore, of the opinion and so hold that section 35 of the Corporation Law,
which requires the registration of transfers of shares stock upon the books of the
corporation as a condition precedent to their validity against the corporation and third
parties, is also applicable to unissued shares held by the corporation in escrow.

52. Hager v. Bryan, 19 Phil. 139
FACTS:
Petitioner, resident of Manila but temporarily residing in China, commenced a
writ of mandamus against the defendant, resident and domiciled in Ceby, to compel him,
as the secretary of the Visayan Electric Company (domestic corporation), to transfer upon
the books of said company certain shares.
Prior to Feb 5, 1910, petitioner was the sole owner of 100 shares of capital stock
of the said Visayan Electric. On Feb 5, Petitioner entered into an agreement with Martin
Levering wherein the latter would purchase petitioners interest in Visayan Electric. Such
interest includes the 100 shares and 25 shares issued to Bryan-London & Co. and which
were indorsed to petitioner. Bryan-London of which defendant is a member is trying to
control Visayan Electric while Levering and petitioner is trying to prevent it.
The shares of Visayan Electric are transferable only on the books of the company.
Petitioner has repeatedly demanded respondent, as secretary, to transfer on the books of
the company the aforesaid 25 shares to the name of A.R. Hager, petitioner.

ISSUE:
Will the courts of the Philippines issue the writ of Mandamus for the purpose of
compelling the secretary of a private corporation to transfer stock upon the books of the
corporation?

RULING:
No. Mandamus, being an extraordinary remedy will not issue when another
adequate remedy exists under the ordinary procedure.
The writ will not ordinarily issue of the plaintiff has other remedies. If the
corporation improperly refuses to transfer the stock is it clearly liable for the damages in
an action at law (Tobey vs. Hakes).
The applicants have an adequate remedy, by special action on the case, to recover
the value of the stock, if the bank have unduly refused to transfer it. There is no need of
the extraordinary remedy by mandamus in so ordinary a case. It might as well be required
in every case in which an ordinary action would lie (Shipley vs. Mechanics Bank).
79

A party entitled to stock in a private corporation has an action for damages against
the corporation for the refusal of its officers to transfer the stock to him upon the
companys books (Kimball vs. Union Water Company).
Section 35, Act No. 1459 (Corporation Law) states that: No share of stock against
which the corporation holds any unpaid claim, shall be transferable on the books of the
corporation.
To permit the writ of mandamus to issue for the purpose of compelling the
officers of a corporation to transfer stock upon the books of the corporation, might, under
certain circumstances, require such officers to transfer stock against which the
corporation holds unpaid claims. These claims might easily arise between the time of the
issuance of the writ and the service of the same upon such officers. It the court should
issue the writ, it might require an officer to transfer stock under conditions where the law
expressly prohibited such transfer. The writ of mandamus will never issue to compel a
person to violate an express provision of the law. The act required to be performed must
be one which the law specially enjoin as a duty resulting from an office, trust, or station
or unlawfully excludes the plaintiff from the use and enjoyment of a right or office to
which he is entitled and from which he is unlawfully precluded (Sec. 222, Act 190).
No law especially requires the performance of the act of transferring the stock while
there is a law expressly prohibiting its transfer, except under certain conditions (Sec 35,
Act 1459).

53. Rivera v. Florendo, 144 SCRA 647
FACTS:
Petitioner corporation, Fujiyama Hotel & Restaurant, Inc. was organized and
registered under Philippine laws with a capital stock of P1M divided into 10,00 shares of
P100.00 par value by petitioner Rivera and 4 other incorporators. Thereafter, Rivera
increased his subscription from the original 1,250 to a total of 4899 shares.
Subsequently, Isamu Akasako, a Japanese national and co-petitioner who is
allegedly the real owner of the shares of stock in the name of petitioner Aquilino Rivera,
sold 2550 shares of the same to private respondent Milagros Tsuchiya for a consideration
of P440,000.00 with the assurance that Milagros Tsuchiya will be made the President and
Lourdes Jureidini a director after the purchase. Aquilino Rivera who was in Japan also
assured private respondents by overseas call that he will sign the stock certificates
because Isamu Akasako is the real owner.
However, after the sale was consummated and the consideration was paid with a receipt
of payment therefor shown, Aquilino Rivera refused to make the indorsement unless he is
also paid.
It also appears that the other incorporators sold their shares to both respondent
Jureidini and Tsuchiya such that both respondents became the owners of a total of 3300
shares or the majority out of 5,649 outstanding subscribed shares of the corporation, and
there was no dispute as to the legality of the transfer of the stock certificates all of which
bear the signatures of the president and the secretary as required by the Corporation Law
with the proper indorsements of the respective owners appearing thereon.
Private respondents attempted several times to register their stock certificates with
the corporation but the latter refused to register the same. Thus, private respondents filed
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a special civil action for mandamus and damages with preliminary mandatory injunction
and/or receivership naming herein petitioners as respondents. Respondent judge issued a
writ of preliminary mandatory injunction authorizing respondent Jureidini and Tsuchiya
to manage the corporations hotel and restaurant, upon the filing of a P30,000 bond which
was later increased to P120,000. Hence, this petition.

ISSUE:
(1) Whether it is the regular court or the SEC that has jurisdiction over the present
controversy.
(2) Whether or not mandamus will lie.

RULING:
(1) The regular court, not the SEC, has jurisdiction over the present controversy.
Presidential Decree No. 902-A provides:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving
(a) ...
(b) Controversies arising out of intra-corporate or partnership relations and among
stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members, or associates,
respectively and between such corporations, partnership or association and the State
insofar as it concerns their individual franchise or right to exist as such entity.
An intra-corporate controversy has been defined as one which arises between a
stockholder and the corporation. There is no distinction, qualification, nor any exemption
whatsoever.
As the bone of contention in this case, is the refusal of petitioner Rivera to indorse the
shares of stock in question and the refusal of the Corporation to register private
respondents shares in its books, there is merit in the findings of the lower court that the
present controversy is not an intracorporate controversy since private respondents are not
yet stockholders. They are only seeking to be registered as stockholders because of an
alleged sale of shares of stock to them. Therefore, as the petition is filed by outsiders not
yet members of the corporation, jurisdiction properly belongs to the regular courts.
(2) No. Mandamus will not lie where the shares of stock in question are not even
indorsed by the registered owner Rivera who is specifically resisting the
registration thereof in the books of the corporation. Under the above ruling, even
the shares of stock which were purchased by private respondents from the other
incorporators cannot also be the subject of mandamus on the strength of mere
indorsement of the supposed owners of said shares in the absence of express
instructions from them. The rights of the parties will have to be threshed out in an
ordinary action.
A mandatory injunction is granted only on a showing (a) that the invasion
of the right is material and substantial; (b) the right of complainant is clear
and unmistakable; and (c) there is an urgent and permanent necessity for
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the writ to prevent serious damage. (Pelejo v. Court of Appeals, 117
SCRA 668, Oct. 18, 1982).

54. J. Santamaria v. Hongkong Shanghai Banking Corp., 89 Phil. 780
FACTS:
Mrs. Josefa T. Santamaria bought 10,000 shares of the Batangas Minerals, Inc.,
through the offices of Woo, Uy-Tioco & Naftaly, a stock brokerage firm and pay
therefore the sum of P8,041.20. The buyer received Stock Certificate No. 517 issued in
the name of Woo, Uy-Tioco & Naftaly and indorsed in bank by this firm.
On March 9, 1937, Mrs. Santamaria placed an order for the purchase of 10,000
shares of the Crown Mines, Inc. with R.J. Campos & Co., a brokerage firm, and delivered
Certificate No. 517 to the latter as security therefor with the understanding that said
certificate would be returned to her upon payment of the 10,000 Crown Mines, Inc.
shares. According to certificate Exh. E, R. J. Campos & Co., Inc. bought for Mrs. Josefa
Santamaria 10,000 shares of the Crown Mines, Inc. at .225 a share, or the total amount of
P2,250.
At the time of the delivery of a stock Certificate No. 517 to R.J. Campos & Co.,
Inc. this certificate was in the same condition as that when Mrs. Santamaria received
from Woo, Uy-Tioco & Naftaly, with the sole difference that her name was later written
in lead pencil on the upper right hand corner thereof.
Two days later, on March 11, Mrs. Santamaria went to R.J. Campos & Co., Inc. to
pay for her order of 10,000 Crown Mines shares and to get back Certificate No. 517.
Cosculluela then informed her that R.J. Campos & Co., Inc. was no longer allowed to
transact business due to a prohibition order from Securities and Exchange Commission.
She was also informed that her Stock certificate was in the possession of the Hongkong
and Shanghai Banking Corporation.
Certificate No. 517 came into possession of the Hongkong and Shanghai Banking
Corporation because R.J. Campos & Co., Inc. had opened an overdraft account with this
bank and to this effect it had executed on April 16, 1936 a document of hypothecation, by
the term of which R.J. Campos & Co., Inc. pledged to the said bank "all stocks, shares
and securities which I/we may hereafter come into their possession of my/our account
and whether originally deposited for safe custody only or for any other purpose whatever
or which may hereinafter be deposited by me/us in lieu of or in addition to the Stocks
Shares and Securities now deposited or for any other purposes whatsoever."
On March 11, 1937, as shown by Exhibit G. Certificate No. 517, already indorsed
by R.J. Campos Co. Inc. to the Hongkong & Shanghai Banking Corporation, was sent by
the latter to the office of the Batangas Minerals, Inc. with the request that the same be
cancelled and a new certificate be issued in the name of R.W. Taplin as trustee and
nominee of the banking corporation. Robert W. Taplin was an officer of this institution in
charge of the securities belonging to or claimed by the bank. As per this request the
Batangas Minerals, Inc. on March 12, 1937, issued Certificate No. 715 in lieu of
Certificate No. 517, in the name of Robert W. Taplin as trustee and nominee of the
Hongkong & Shanghai Banking Corporation.
In Civil Case No. 51224, R.J. Campos & Co., Inc. was declared insolvent, and the
Hongkong & Shanghai Banking Corporation asked permission in the insolvency court to
sell the R.J. Campos & Co., Inc., securities listed in its motion by virtue of the document
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of hypothecation. In an order dated July 15, 1937, the insolvency court granted this
motion.
On June 3, 1938, to 10,000 shares of Batangas Minerals, Inc. represented by
Certificate No. 715, were sold to the same bank by the Sheriff for P300 at the foreclosure
sale authorized by said order.

ISSUE:
(1) Whether or not plaintiff-appellee was negligent.
RULING:
(1) Yes. Plaintiff failed to take the necessary precautions upon delivering the
certificate of stock to her broker and plaintiff therefore was chargeable with
negligence in the transaction which resulted to her own prejudice, and as such,
she is estopped from asserting title to it as against the defendant Bank.
Certificate of stock No. 517 was made out in the name of Wo, Uy-Tioco &
Naftaly, brokers, and was duly indorsed in bank by said brokers. This
certificate of stock was delivered by plaintiff to R.J. Campos & Co., Inc. to
comply with a requirement that she deposit something on account if she
wanted to buy 10,000 shares of Crown Mines Inc. In making said deposit,
plaintiff did not take any precaution to protect herself against the possible
misuse of the shares represented by the certificate of stock.
Plaintiff could have asked the corporation that had issued said certificate to
cancel it and issue another in lieu thereof in her name to apprise the holder
that she was the owner of said certificate. This she failed to do, and instead
she delivered said certificate, as it was, to R.J. Campos & Co., Inc., thereby
clothing the latter with apparent title to the shares represented by said
certificate including apparent authority to negotiate it by delivering it to said
company while it was indorsed in blank by the person or firm appearing on its
face as the owner thereof.
The defendant Bank had no knowledge of the circumstances under which
the certificate of stock was delivered to R.J. Campos & Co., Inc., and had a
perfect right to assume that R.J. Campos & Co., Inc. was lawfully in
possession of the certificate in view of the fact that it was a street certificate,
and was in such form as would entitle any possessor thereof to a transfer of
the stock on the books of the corporation concerned. There is no question that,
in this case, plaintiff made the negotiation of the certificate of stock to other
parties possible and the confidence she placed in R.J. Campos & Co., Inc.
made the wrong done possible. This was the proximate cause of the damage
suffered by her. She is, therefore, estopped from claiming further title to or
interest therein as against a bona fide pledge or transferee thereof, for it is a
well-known rule that a bona fide pledgee or transferee of a stock from the
apparent owner is not chargeable with knowledge of the limitations placed on
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it by the real owner, or of any secret agreement relating to the use which
might be made of the stock by the holder.
The said certificate was delivered to the Bank in the ordinary course of
business, together with many other securities, and at the time it was delivered,
the Bank had no Knowledge that the shares represented by the certificate
belonged to the plaintiff for, as already said, it was in the form of street
certificate which was transferable by mere delivery. The rule is "where one of
two innocent parties must suffer by reason of a wrongful or unauthorized act,
the loss must fall on the one who first trusted the wrong doer and put in his
hands the means of inflicting such loss".
The Court has noticed that the defendant Bank was willing from the very
beginning to compromise this case by delivering to the plaintiff certificate of
stock No. 715 that was issued to said Bank by the issuer corporation in lieu of
the original as alleged and prayed for in its amended answer to the complaint
dated April 2, 1941. Considering that in the light of the law and precedents
applicable in this case, the most that plaintiff could claim is the return to her
of the said certificate of stock (Howson vs. Mechanics Sav. Bank, 183 Atl., p.
697), the Court, regardless of the conclusions arrived at as above stated, is
inclined to grant the formal tender made by the defendant to the plaintiff of
said certificate.
Therefore, the court ordered defendant bank to deliver to the plaintiff
certificate of stock no. 715.

55. A. de los Santos v. McGrath, 96 Phil. 577
FACTS:
This action involves the title to 1,600,000 shares of stock of the Lepanto
Consolidated Mining Co (Lepanto), a corporation duly organized and existing under the
laws of the Philippines. Originally, one-half of said shares of stock were claimed by
plaintiff, Apolinario de los Santos, and the other half, by his co-plaintiff Isabelo
Astraquillo.
During the pendency of this case, Apolinario has allegedly conveyed and assigned his
interest in and to said half claimed by him to Isabelo. The shares of stock in question are
covered by several stock certificates issued in favor of Vicente Madrigal, who is
registered in the books of the Lepanto as owner of said stock certificates issued in favor
of Vicente Madrigal, who is registered in the books of the Lepanto as owner of said
stocks and whose endorsement in blank appears on the back of said certificates, all of
which, except certificate No. 2279 marked Exhibit 2 covering 55,000 shares, are in
plaintiffs possession. So was said Exhibit 2, up to sometime in 1945 or 1946 when said
possession was lost under the conditions set forth in subsequent pages.

84

ISSUE: Whether the transfer effected by Juan Campos and Carl Hess in their favor is
valid

RULING:
No, the transfer is not valid. Section 35 of the Corporation Law reads:
The capital stock of stock corporations shall be divided into shares
for which certificates signed by the president or the vice-president,
countersigned by the secretary or assistant secretary, and sealed with the
seal of the corporation, shall be issued in accordance with the by-laws.
Shares of stock so issued are personal property and may be transferred by
delivery of the certificates or certificates endorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the parties, until the
transfer is recorded in the books of the corporation showing the names of
the parties to the transaction, the date of the transfer, the number of the
certificate, and the number of shares transferred.
No shares of stock against which the corporation holds any unpaid
claim shall be transferable on the books of the corporation.
Pursuant to this provision, a share of stock may be transferred by endorsement of the
corresponding stock certificate, coupled with its delivery. However, the transfer shall
not be valid, except as between the parties, until it is recorded in the books of the
corporation. No such entry in the name of the plaintiffs herein having been made, it
follows that the transfer allegedly effected by Campos and Hess in their favor is not
valid, except as between themselves. It does not bind either Madrigal or the Mitsuis who
are not parties to said alleged transaction. It is absolutely void and hence, as good as
non-existent insofar as Madrigal and the Mitsuis are concerned.
Certificates of stock are not negotiable instruments; consequently, a transferee
under a forged assignment acquires no title which can be asserted against the true owner,
unless his own negligence has been such as to create an estoppel against him. If the
owner of the certificate has endorsed it in blank, and it is stolen from him, no title is
acquired by an innocent purchaser for value. Neither the absence of blame on the part of
the officers of the company in allowing an unauthorized transfer of stock, nor the good
faith of the purchaser of stolen property, will avail as an answer to the demand of the true
owner. The great principle that no one can be deprived of his property without his assent,
except by processes of the law which requires that the property wrongfully transferred or
stolen should be restored to its rightful owner.
The doctrine that a bona fide purchaser of shares under a forged or unauthorized transfer
acquires no title as against the true owner does not apply where the circumstances are
such as to estop the latter from asserting his title. It is a case for the application of the
maxim that where one of two innocent parties must suffer by reason of a wrongful or
unauthorized act, the loss must fall on the one who first trusted the wrongdoer and put in
his hands the means of inflicting such loss.
Negligence which will work an estoppel of this kind must be:
1. proximate cause of the purchase or advancement of money by the holder of the
property, and must enter into the transaction itself;
2. the negligence must be in or immediately connected with the transfer itself.
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3. it must appear that the true owner had conferred upon the person who has diverted
the security the indicia of ownership, or an apparent title or authority to transfer
the title.
So the owner is not guilty of negligence in merely entrusting another with the possession
of his certificate of stock, if he does not, by assignment or otherwise, clothe him with the
apparent title. Nor is he deprived of his title or his remedy against the corporation
because he entrusts a third person with the key of a box in which the certificate are kept,
where the latter takes them from the box and by forging the owners name to a power of
attorney procures their transfer on the corporate books. Nor is the mere endorsement of
an assignment and power of attorney in blank on a certificate of stock, which is
afterwards lost or stolen, such negligence as will estop the owner from asserting his title
as against a bona fide purchaser from the finder or thief, or from holding the corporation
liable for allowing a transfer on its books, where the loss or theft of the certificate was not
due to any negligence on the part of the owner, although there is some dangerous and
wholly unjustifiable dictum to the contrary. So it has been held that the fact that stock
pledged to a bank is endorsed in blank by the owner does not estop him from asserting
title thereto as against a bona fide purchaser for value who derives his title from one who
stole the certificate from the pledge. And this has also been held to be true though the
thief was an officer of the pledgee, since his act in wrongfully appropriating the
certificate cannot be regarded as a misappropriation by the bank to whose custody the
certificate was entrusted by the owner, even though the bank may be liable to the
pledger A person is not guilty of negligence in leaving a certificate of stock endorsed
in blank in a safe deposit box used by him and another jointly, so as to estop him from
asserting his title after the certificate has been stolen by the other, and sold or pledged to
a bona fide purchaser or pledgee. Nor is he negligent in putting a certificate so endorsed
in a place to which an employee had access, where he has no reason to doubt the latters
honesty.
In the case at bar, neither Madrigal nor the Mitsuis had alienated shares of stock in
question. It is not even claimed that either had, through negligence, given occasion for
an improper or irregular disposition of the corresponding stock certificates.

56. Chua Guan v. Samahang Magsasaka, Inc., 62 Phil. 473
FACTS:
Gonzalo Co Toco was the owner of 5,894 shares of the capital stock of Samahang
Magsasaka Corporation with principal office in Cabanatuan, Nueva Ecija, represented by
nine certificates having a par value of P5 per share; that on said date, Co Toco,
mortgaged said 5,894 shares to Chua Chiu to guarantee the payment of a debt of 20,000.
The said certificates of stock were delivered with the mortgage to the mortgagee, Chua
Chiu. The said mortgage was duly registered in the register of deeds, and in the office of
said corporation.
Chua Chiu subsequently assigned all his right and interest in the said mortgage to
the plaintiff (Chua Guan) and the assignment was registered in the register of deeds, and
in the office of the said corporation. Since Co Toco was already in default, Chua Chiu
foreclosed said mortgage and delivered the certificates of stock and copies of the
86

mortgage and assignment to the sheriff in order to sell the said shares at public auction.
Chua Guan as the highest bidder acquired said shares.
Chua Guan tendered the certificates of stock standing in the name of Co Toco to
the proper officers of the corporation for cancellation and demanded that they issue new
certificates in the name of the plaintiff. The said officers refused and still refuse to issue
said new shares in the name of the plaintiff.

ISSUE:
Whether or not the registration of a chattel mortgage of shares of stock of a
corporation should be registered in the province in which the corporation has its principal
office or place of business

RULING:
The situs of shares of stock is at the domicile of the owner. The situs of shares of
stock may be at the domicile of the owner and for others at the domicile of the
corporation; and even elsewhere. It is a general rule that for purposes of execution,
attachment and garnishment, it is not the domicile of the owner of a certificate but the
domicile of the corporation which is decisive.
The ownership of shares in a corporation as properly distinct from the certificates which
are merely the evidence of such ownership, it seems to us a reasonable construction of
section 4 of Act No. 1508 to hold that the property in the shares may be deemed to be
situated in the province in which the corporation has its principal office or place of
business. If this province is also the province of the owners domicile, a single
registration is sufficient. If not, the chattel mortgage should be registered both at the
owners domicile and in the province where the corporation has its principal office or
place of business. In this sense the property mortgage is not the certificate but the
participation and share of the owner in the assets of the corporation.
The registration of the said chattel mortgage in the office of the corporation was not
necessary and had no legal effect.

57. Financing Corporation of the Phils, v. Teodoro, 93 Phil. 404
FACTS:
Lizares, etc., in their own behalf and in behalf of the other minority stockholders
of the Financing Corporation of the Phils, filed a complaint against the said corporation
and J. Amado Araneta, its president and general manager, claiming among other things
alleged gross mismanagement and fraudulent conduct of the corporate affairs of the
defendant corporation and asking that the corporation be dissolved; that J. Amado
Araneta be declared personally accountable for the amounts of the unauthorized and
fraudulent disbursements and disposition of assets made by him, and that he be required
to account for said assets, and that pending trial and disposition of the case on its merits a
receiver be appointed to take possession of the books, records and assets of the defendant
corporation preparatory to its dissolution and liquidation and distribution of the assets.
The trial court granted the petition for the appointment of a receiver and designated Mr.
Alfredo Yulo as such receiver with a bond of P50,000.

ISSUE: Whether the minority stockholders can maintain an action for dissolution
87

RULING:
It depends. As a general rule, minority stockholders of a corporation cannot sue and
demand its dissolution. However, there are cases that hold that even minority
stockholders may ask for dissolution under the theory that such minority members if
unable to obtain redress and protection of their rights within the corporation must not and
should not be left without redress and remedy. Dissolution should be brought by the
Government through its legal officer in a quo warranto case, however, they might be
exceptional cases wherein the intervention of the State, for one reason or another, cannot
be obtained, as when the State is not interested because the complaint is strictly a matter
between the stockholders and does not involve in any of the acts or omissions warranting
quo warranto proceedings, in which minority stockholders are entitled to have such
dissolution. When such action or private suit is brought by them, the trial court had
jurisdiction and may or may not grant the prayer, depending upon the facts and
circumstances attending it. The trial court's decision is of course subject to review by the
appellate tribunal. Having such jurisdiction, the appointment of a receiver pendente lite is
left to the sound discretion of the trial court.

58. Government v. Phil. Sugar Estate Co., 38 Phil. 15
FACTS:
Defendant Philippine Sugar Estates, a corporation duly organized under the laws
of the Philippine Islands had engaged in the business of buying and selling real estate. On
May 31, 1913 defendant entered into a contract with the Tayabas Land Company for the
purpose of engaging in the business of purchasing lands along the right of way of the
Manila Railroad Company through the Province of Tayabas with a view to reselling the
same to the Manila Railroad Company at a profit. The defendant admitted having entered
into the contract with The Tayabas Land Company and alleged that the latter as an
ordinary partnership and not a corporation. The contract was entered into between the
defendant and The Tayabas Land Company by virtue of which the defendant delivered to
the said The Tayabas Land Company P304,459.42 which the plaintiff contended
amounted to a contribution by the defendant to the capital of The Tayabas Land
Company but which the defendant contended amounted to a loan to said concern. The
money received was devoted to the purchase of the real estate in the Province of Tayabas
along the proposed right of way of the Manila Railroad Company in that province and
that the purpose of these purchases was for resale to the Manila Railroad Company or any
other person offering an acceptable price. The court rendered judgment ordering the
defendant to abstain in the future from engaging in the business of buying and selling
lands and to pay the costs of the action.

ISSUE:
Whether or not the defendant engaged in the business of buying and selling land
or was this transaction merely a loan to a partnership.

RULING:
88

It is difficult to understand how this contract can be considered a loan. There was
no date fixed for the return of the money and there was no fixed return to be made for the
use of the money. The return was dependent solely upon the profits of the business. It is
possible for the defendant to receive a return from the business even after all of the
"capital" has been returned. The "capital" was to be returned as soon as the land was sold
and apparently, from clause "decima," there were to be no profits until this "capital" was
returned. The defendant was not to receive anything for the use of said sum until after the
capital had been fully repaid, which is not consistent with the idea of a loan.

While it is true that the courts are given a wide discretion in ordering the dissolution of
corporations for violations of its franchises, etc., yet nevertheless, when such abuses and
violations constitute or threaten a substantial injury to the public or such as to amount to a
violation of the fundamental conditions of the contract (charter) by which the franchises
were granted and thus defeat the purpose of the grant, then the power of the courts should
be exercised for the protection of the people.

59. Republic of the Phils. v. Security Credit & Acceptance Corp., G.R. No. 20583,
Jan. 23, 1967
FACTS:

Defendant corporation had established 74 branches in principal cities and towns
throughout the Philippines and managed to induce the public to open 59,463 savings
deposit accounts that, in consequence of the foregoing deposits with the corporation, its
original capital stock was increased, in less than one year. On May 18, 1962, the
Municipal Court of Manila issued search warrant and that pursuant thereto, members of
the intelligence division of the Central Bank and of the Manila Police Department
searched the premises of the corporation and seized documents and records thereof
relative to its business operations. Acting Deputy Governor issued a memorandum
finding that the corporation performing banking functions, without requisite certificate of
authority from the Monetary Board of the Central Bank. Upon said memorandum of the
Superintendent of Banks, the Monetary Board also promulgated a resolution declaring
that the corporation is performing banking operations, without having first complied with
the provisions of Sections 2 and 6 of Republic Act No. 337. Accordingly, on December
6, 1962, the Solicitor General commenced this quo warranto proceedings for the
dissolution of the corporation.

ISSUE: Whether or not Defendant Corporation is engaged in banking corporations

RULING:
Yes. Although, admittedly, defendant corporation has not secured the requisite
authority to engage in banking,defendants deny that its transactions partake of the nature
of banking operations. It is conceded, however, that, in consequence of a propaganda
campaign therefor, a total of 59,463 savings account deposits have been made by the
public with the corporation and its 74 branches, with an aggregate deposit of
P1,689,136.74, which has been lent out to such persons as the corporation deemed
suitable therefor. It is clear that these transactions partake of the nature of banking.
89

Moreover, it has been held that an investment company which loans out the money of its
customers, collects the interest and charges a commission to both lender and borrower, is
a bank. Any person engaged in the business carried on by banks of deposit, of discount,
or of circulation is doing a banking business, although but one of these functions is
exercised. Accordingly, defendant corporation has violated the law by engaging in
banking without securing the administrative authority required in Republic Act No. 337.

60. Republic of the Phils. v. Bisaya Land Transportation Co., Inc., 81 SCRA 9
FACTS:
The Bisaya Land Transportation Company is a corporation organized under the
Corporation Law for the principal purpose of engaging in the business of land and water
transportation, having its domicile and principal place of business in Cebu City. On
March 21, 1959, the Republic of the Philippines, through the Solicitor General Edilberto
Barot, filed a petition for quo warranto in the CFI of Manila for the dissolution of the
Bisaya Land Transportation Company. The petition alleges that respondent corporation
had violated and continues to violate the Corporation Law and other statutes of the
Philippines by having committed acts amounting to a forfeiture of the present
corporation's franchise, rights and private The acts allegedly committed by the
corporation are embodied in nine causes of action which among others include the act of
respondent corporation of falsely reconstituted its articles of incorporation in by adding
new cattle ranch, agriculture, and general merchandise. Under date of April 17, 1959,
respondents (except Miguel Cuenco) filed a motion to dismiss the petition for quo
warranto on the grounds of lack of cause of action, prescription, and the failure of the
Solicitor General to the court's permission as required in section 4 of Rule 66 of the Rules
of Court. On October 20, 1966, the Solicitor General filed a motion for dismissal of the
quo warranto proceedings, to which motion respondent Miguel Cuenco riled his
opposition on. The court a quo issued a resolution granting petitioner's motion for the
dismissal of the action for quo warranto, and dismissing respondent Miguel Cuenco's
cross-claim.

ISSUE:
Whether or not the Solicitor General is vested with absolute and unlimited power
to discontinue the State's litigation and, accordingly, to have the quo warranto petition
dismissed

RULING:
As a rule, the attorney-general has power, both under the common law and by statute,
to make any disposition of the state's litigation that the deems for its best interest; for
instance, he may abandon, discontinue, dismiss, or compromise it. But he cannot enter
into any agreement with respect to the conduct of litigation which will bind his successor
in office, nor can he empower any other person to do so. The attorney-general may
dismiss any suit or proceeding, prosecuted solely in the public interest, regardless of the
relator's wishes. Where the attorney-general is empowered, either generally or
specifically, to conduct a criminal prosecution, he may do any act which the prosecuting
attorney might do in the premises; that is, he can do each and every thing essential to
prosecute in accordance with the law of the land, and this includes appearing in
90

proceedings before the grand jury. Applying the above reasoning to our present case, the
Court concludes that the attorney general by his motion to intervene and supersede the
county attorney exercised his powers and duties under the constitution and appropriate
statutes; this was as far as he could go as an executive officer and as an attorney and
officer of this court. Since he is an officer of the judicial branch, under the separation of
powers of the three branches of government, he was limited and restricted in his conduct
before this court by the code of professional ethics to the same extent any other lawyer
would be. If, therefore, the attorney-general considered the action unmeritorious, he not
only had the authority but he also had a duty to move for dismissal.

61. Buenaflor v. Camarines Sur industry Corporation, G.R. Nos. 14991-14994, May
30, 1960
FACTS:
Jaime Buenaflor has appealed the decision of the Public Service Commission
which rejected his application to install and operate a 5-ton ice plant in Sabang,
Camarines Sur even as it permitted Camarines Sur Industry Corporation to build in that
barrio, a factory with the same output.
Camarines Corporation also submitted two applications: one for authority to
construct and manage a 5-ton ice plant, and another for a cold storage and refrigeration
system, both in Sabang too. It likewise opposed to Buenaflors proposed ice business on
the ground that it was the pioneer distributor of the commodity in that particular locality.
Buenaflor presented a motion to dismiss the Camarines Corporation, challenging its
personality, inasmuch as its corporate life had expired in November 1953, in accordance
with its own articles of incorporation. Immediately thereafter, the corporators of
Camarines Corporation executed and registered a new article of incorporation, and at the
same time notarized a deed of conveyance assigning to the new corporation all the assets
of the expired (old) corporation. The Public Service Commission approved the
conveyance.
The Camarines Corporation answered the motion to dismiss by alleging its recent
incorporation plus its acquisition of the assets and certificates of the old Camarines
Corporation with the Commissions approval as above described. (clever kaayo! Haha)

ISSUE: Whether the new Camarines Corporation can be regarded as a continuation of
the old

RULING:
No.
Since 1953, the old Corporation had been illegally plying its business of selling ice in
Sabang because under the Corporation Code, section 122, after November 1953, it could
not lawfully continue the business for which it had been established. After November
1953, it could only continue to exist for three years for the purpose of prosecuting and
defecting suits by or against it, and of enabling it gradually to settle and close its affairs,
to dispose and convey its property and to divide its capital stock. It could not, without
violating the law, continue to sell ice.
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When the old Camarines Corporation docketed its application, it had no juridical
personality, it had ceased to exist as a corporation and could not sue nor apply for
certificate, for it was incapable of receiving a grant. It was not even a corporation de
facto.
At most, it is the transferee of the properties of the old corporation (or more properly, the
assets of the stockholders).
On these grounds, we think it was error to grant preferential treatment to the new
Camarines Corporation over Buenaflor who, besides being qualified, had applied for the
privilege months in advance of the old Camarines Corporation, and of the incorporation
of the new Camarines Corporation.

62. National Abaca & Other Fivers Corp. v. Pore, 2 SCRA 989
FACTS:
National Abaca, already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of money advanced to
defendant for the purchase of hemp in behalf of the corporation. She failed to account for
that money. Pore moved to dismiss, questioned the corporations capacity to sue, it
having been abolished by EO 372. The lower court ordered plaintiff to include as co-
party plaintiff, The Board of Liquidators, to which the corporations liquidation was
entrusted by EO 372. Plaintiff failed to effect inclusion. The lower court dismissed the
suit. Plaintiff moved to reconsider. Ground: excusable negligence, in that its counsel
prepared the amended complaint, as directed, and instructed the boards incoming and
outgoing correspondence clerk, Mrs. De Ocampo, to mail the original thereof to the court
and a copy of the same to defendants counsel. She mailed a copy to the latter but failed
to send the original to the court. This motion was rejected below. Plaintiff came to this
Court on appeal.
National Abaca objected upon the ground that pursuant to said executive order, it
shall nevertheless be continued as a body corporate for a period of three (3) years from
the effective date of said executive order which was November 30, 1950 for the purpose
of prosecuting and defending suits by or against it and of enabling the Board of
Liquidators, and that this case was begun on November 14, 1953, or before the expiration
of the period aforementioned.

ISSUE:
Whether an action, commenced within three (3) years after the abolition of
plaintiff, as a corporation, may be continued by the same after the expiration of said
period

RULING:
No, it cannot be continued after the expiration of the period. It is a well-settled
rule, in the absence of statutory provision to the contrary, pending actions by or against a
corporation are abated upon expiration of the period allowed by law for the liquidation of
its affairs.
Where a statute continues the existence of a corporation for a certain period after its
dissolution for the purpose of prosecuting and defending suits, the corporation becomes
defunct upon the expiration of such period, at least in the absence of a provision to the
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contrary, so that no action can afterwards be brought by or against it, and must be
dismissed. Actions pending by or against the corporation when the period allowed by the
statute expires ordinarily abate.
Our Corporation Law contains no provision authorizing a corporation, after three (3)
years from the expiration of its lifetime to continue in its corporate name. In fact, section
122 of the Corporation Code provides that the corporation shall be continued as a body
corporate for three years after the time when it would have been dissolved for the purpose
of prosecuting and defending suits by or against it, so that, thereafter, it shall no longer
enjoy corporate existence for such purpose.
It further authorizes the corporation at any time during said three years to convey all of its
property to trustees for the benefit of members, stockholders, creditors and other
interested parties, evidently for the purpose of enabling said trustees to prosecute and
defend suits by or against the corporation begun before the expiration of said period
(section 122, Corporation Code).
It is to be noted that the time during which the corporation, through its own officers, may
conduct the liquidation of its assets and sue and be sued as a corporation is limited to
three years from the time the period of dissolution commences; but that there is no time
limited within the trustees must complete a liquidation placed in their hands. It is
provided only that the conveyance to the trustees must be made within the three-year
period. It may be found impossible to complete the work of liquidation within the three-
year period or to reduce disputed claims to judgment. The authorities are to the effect that
suits by or against a corporation abate when it ceased to be an entity capable of suing or
being sued; but trustees to whom the corporate assets have been conveyed pursuant to the
authority of section 122 may be sued as such in all matters connected with the
liquidation. By the terms of the statute the effect of the conveyance is to make the
trustees the legal owners of the property conveyed, subject to the beneficial interest
therein of creditors and stockholders.

63. Board of Liquidators v. Kalaw, 20 SCRA 987
FACTS:
National Coconut Corporation (NACOCO) was chartered as a non-profit
governmental organization by Commonwealth Act 518. NACOCOs charter was
amended to grant that corporation the express power to buy, sell, barter, export, and in
any other manner deal in coconut, copra, and desiccated coconut, as well as their by-
products, and to act as agent broker or commission merchant of the producers, dealers or
merchants.
General Manager and board chairman was Maximo Kalaw; defendants Juan
Bocar and Casimiro Garcia were members of the Board; defendant Leonor Moll became
director only on December 1947.
NACOCO embarked on copra trading activities. Unfortunately, NACOCO failed
to fulfil the contracts due to fortuitous event. Four devastating typhoons visited the
Philippines.
When it became clear that the contracts would be unprofitable, Kalaw submitted
them to the board for approval. Defendant Moll took her oath after the membership was
completed. A meeting was then held, and Kalaw made a full disclosure of the situation,
apprised the board of the impending heavy losses. No action was taken on the contracts.
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Neither did the board vote thereon at the meeting. Then, on January 11, 1948, President
Roxas made a statement that the NACOCO head did his best to avert the losses,
emphasized that government concerns faced the same risks that confronted private
companies, that NACOCO was recouping its losses, and that Kalaw was to remain in his
post. Not long thereafter, the board met again with Kalaw, Garcia, and Moll in
attendance. They unanimously approved the contracts. NACOCO partially performed the
contracts.
Louis Dreyfus & Go (overseas) sued NACOCO. However, there was an out-of-
court amicable settlement between the two when the Kalaw management was already out.
NACOCO put up the defenses that: 1) contracts were void because Dreyfus did not have
license to do business here, and 2) failure to deliver was due to force majeure.
NACOCO seeks to recover the sum of P1, 343, 274. 52 from general manager and board
chairman Kalaw, directors Bocar, Garcia, and Moll.
The defendants posed the defense that suit was commenced in February 1949; that by EO
372, 1950, NACOCO was abolished and the Board of Liquidators was entrusted with the
function of settling and closing its affairs; and that since the three-year period has
elapsed, the Board of Liquidators may not now continue with, and prosecute, the present
case (section 122, Corporation Code).

FIRST ISSUE:
Whether the Board of Liquidators has lost its legal personality to continue with
this suit.

RULING:
Yes, the Board of Liquidators can continue with the suit. The proviso in Section 1
of EO 372, whereby the corporate existence of NACOCO was continued for a period of
three years from the effectivity of the order for the purpose of prosecuting and defending
the suits by or against it and of enabling the Board of Liquidators gradually to settle and
close its affairs, to dispose of and convey its property, is to be read not as an isolated
provision but in conjunction with the whole. So reading it will be readily observed that no
time limit has been tacked to the existence of the Board of Liquidators and its function of
closing the affairs of the various government owned corporations, including NACOCO.
By section 2 of the EO, while the boards of directors of the various corporations were
abolished, their powers and functions and duties under existing laws were to be assumed
and exercised by the Board of Liquidators. Nowhere in the EO was there any mention of
the lifespan of the Board of Liquidators. The Board of Liquidators still exists as an office
with officials and numerous employees continuing the job of liquidation and prosecution
of several court actions.
Further, by EO 372, the government, the sole stockholder, abolished NACOCO,
and placed its assets in the hands of the Board of Liquidators. The Board of Liquidators
thus became the trustee on behalf of the government. It was an express trust. The legal
interest became vested in the trustee the Board of Liquidators. The beneficial interest
remained with the sole stockholder the government. At no time had the government
withdrawn the property, or the authority to continue the present suit, from the Board of
Liquidators. If for this reason alone, we cannot stay the hand of the Board of Liquidators
from prosecuting this case to its final conclusion. The provisions of section 122 of the
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Corportion Code the third method of winding up corporate affairs find application.
The Board of Liquidators has personality to proceed as party-plaintiff in this case.
Three (3) methods by which a corporation may wind up its affairs:
1) section 119 of the Corporation Code: upon voluntary dissolution of a corporation, the
court may direct such disposition of its assets as justice requires, and may appoint a
receiver to collect such assets and pay the debts of the corporation
2) section 122, Corporation Code whereby a corporation whose corporate existence is
terminated, shall nevertheless be continued as a body corporate for three (3) years after
the time when it would have been so dissolved, for the purpose of prosecuting and
defending suits by or against it and of enabling it gradually to settle and close its affairs,
to dispose of and convey its property and to divide its capital stock, but not for the
purpose of continuing the business for which it was established
3) section 122, Corporation Code by virtue of which the corporation, within the three-
year period is authorized and empowered to convey all of its property to trustees for the
benefit of members, stockholders, creditors, and others interested.

SECOND ISSUE:
Whether the case at bar is to be taken out of the general concept of the powers of
a general manager, given the cited provision of the NACOCO by-laws requiring prior
directorate approval of NACOCO contracts (in this instance, no prior directorate
approval).

RULING:
No. Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general manager may
bind the company without formal authorization of the board of directors. Existence of
such authority is established by proof of the course of business, the usage and practices of
the company and by the knowledge which the board of directors has, or must be
presumed to have, of acts and doings of its subordinates in and about the affairs of the
corporation.
Authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised. Thus, when in the
usual course of business of a corporation, an officer has been allowed in his official
capacity to manage its affairs, his authority to represent the corporation may be implied
from the manner in which he has been permitted by the directors to manage its business.
In this case, the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in NACOCOs
behalf without prior board approval. If the by-laws were to be literally followed, the
board should give its stamp of prior approval on all corporate contracts. But that board
itself, by its acts and through acquiescence, practically laid aside the by-law requirement
of prior approval. Thus, the Kalaw contracts are valid corporate acts.

64. China Banking Corp., v. Michelin & Cie., 58 Phil. 261
FACTS:
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George OFarrel & Cie Inc. is a domestic corporation acting as agent and
representative of the Michelin & Cie, a foreign corporation engaged in the sale and
distribution of Michelin tires. Michelin decided to discontinue their business relations,
and it was discovered that OFarrel failed to account for an amount representing the price
of tires sold by the latter. Michelin claims the money was disposed by OFarrel for its
own use and benefit and without the authority or consent of Michelin. Gaston OFarrel
(the person) and Sanchez executed a mortgage on the house of OFarrel and shares
owned by both to guarantee payment of the amount to the Michelin, but left a balance
which the latter seeks to recover. The board of OFarrel filed a petition for its dissolution
and sought the appointment of Gaston as receiver and liquidator, which was granted by
TC. Michelin filed its claim against OFarrel Corp with a prayer that its claim be allowed
as a preferred one against the latter. TC grants motion of Michelin. Nobody except
Michelin and Gaston was notified of the order. China Bank intervened and moved that
Michelins claim be allowed as an ordinary one under the Insolvency Law and sought the
nullification of the TC orders.

ISSUE: Liquidation. (ISSUE NI? Hahahahaha! :P )

RULING:
The appointment of a receiver by the court to wind up the affairs of the
corporation upon petition of voluntary dissolution does not empower the court to hear
and pass on the claims of the creditors of the corporation at first hand. In such cases, the
receiver does not act as a receiver of an insolvent corporation. Since "liquidation" as
applied to the settlement of the affairs of a corporation consists of adjusting the debts and
claims, that is, of collecting all that is due the corporation, the settlement and adjustment
of claims against it and the payment of its just debts, all claims must be presented for
allowance to the receiver or trustees or other proper persons during the winding-up
proceedings within the 3 years provided by the Corporation Law as the term for the
corporate existence of the corporation, and if a claim is disputed so that the receiver
cannot safely allow the same, it should be transferred to the proper court for trial and
allowance, and the amount so allowed then presented to the receiver or trustee for
payment. The rulings of the receiver on the validity of claims submitted are subject to
review by the court appointing such receiver though no appeal is taken to the latter ruling,
and during the winding-up proceedings after dissolution, no creditor will
be permitted by legal process or otherwise to acquire priority, or to enforce his claim
against the property held for distribution as against the rights of other creditors.

NOTE: Under the Corporation Code, it is the SEC which
may appoint the receiver.

65. Sumera v. Valencia, 67 Phil. 721
FACTS:
A corporation was organized under the style, "Devota de Nuestra Seora de la
Correa", for the promotion of the filing industry or business for a period of twenty years
in accordance with Philippine laws in the year 1920. Said corporation was already in
operation when, on petition of various stockholders thereof, an investigation into its
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financial condition was made by the provincial auditor in which it was discovered that
Eugenio Valencia, manager of the corporation, had withdraw the amount of P600 from
the remaining assets of the corporation. A petition was filed for the voluntary dissolution
of the corporation and was granted by CFI. CFI ordered the liquidation of the properties
and appointed D. Nicolas as assignee in charge of the liquidation in the year 1928.
Nicolas demanded Valencia of the payment of P600 belonging to the corporation.
Valencia did not have money and promised to pay on a later date. Upon being asked
again to pay the aforesaid amount, Eugenio Valencia delivered to the assignee Nicolas,
the sum of P200, leaving a balance of P400. Subsequently Nicolas was replaced by
Tiburcio Sumera upon his resignation. Sumera, in his capacity as such assignee of the
corp., filed a complaint against Valencia for the recovery of the sum of P400 with interest
at the rate of 12 per cent per annum, and the sum of P100 as indemnity. Valencia
however denied such obligation and alleged it was already paid in full.
The case having been called for trial on October 12, 1936, defendant, with leave
of court, inserted in his answer a new defense in which he alleged that the action brought
by plaintiff against him has already prescribed.

ISSUE: Whether or not Section 77 of Act No. 1459 is applicable, does it preclude an
action to wind up brought after the three years.

RULING:
No. Section 77 of Act No. 1459 provides that "Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise, or whose corporate
existence for other purposes is terminated in any other manner, shall nevertheless be
continued as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and of
enabling it gradually to settle and close its affairs to dispose of and convey its property
and to divide its capital stock, but not for the purpose of continuing the business for
which it was established." And section 77 of the same Act provides, "At any time during
said three years said corporation is authorized and empowered to convey all of its
property to trustees for the benefit of members, stockholders, creditors, and others
interested. From and after any such conveyance by the corporation of its property in trust
for the benefit of its members, stockholders, creditors, and others in interest, all interest
which the corporation had in the property terminates, the legal interest vests in the
trustees, and the beneficial interest in the members, stockholders, creditors, or other
persons in interest."
If the corporation carries out the liquidation of its assets through its own officers
and continues and defends the actions brought by or against it, its existence shall
terminate at the end of three years from the time of dissolution; but if a receiver or
assignee is appointed, as has been done in the present case, with or without a transfer of
its properties within three years, the legal interest passes to the assignee, the beneficial
interest remaining in the members, stockholders, creditors and other interested persons;
and said assignee may bring an action, prosecute that which has already been commenced
for the benefit of the corporation, or defend the latter against any other action already
instituted or which may be instituted even outside of the period of three years fixed for
the offices of the corporation.
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SC ruled that when a corporation is dissolved and the liquidation of its assets is
placed in the hands of a receiver or assignee, the period of three years prescribed by
section 77 of Act No. 1459 known as the Corporation Law is not applicable, and the
assignee may institute all actions leading to the liquidation of the assets of the corporation
even after the expiration of three years.

66. Republic of the Phils. v. Marsman Development Co., 44 SCRA 418
FACTS:
Defendant corporation was a timber license holder with concessions in Camarines
Norte. Investigations led to the discovery that certain taxes were due on it. BIR assessed
Marsman 3 times for unpaid taxes. Atty. Moya, in behalf of the corporation, received the
first 2 assessments. He requested for reinvestigations. As a result, corporation failed to
pay within the prescribed period. Numerous BIR warnings were given. After 3 years of
futile notifications, BIR sued the corporation.

ISSUE:
Whether or not the present action is barred by prescription, in light of the fact that
the corporation law allows corporations to continue only for 3 years after its dissolution,
for the purpose of presenting or defending suits by or against it, and to settle its affairs.

RULING:
NO. Although Marsman was extra-judicially dissolved, with the 3-year rule,
nothing however bars an action for recovery of corporate debts against the liquidators. In
fact, the 1st assessment was given before dissolution, while the 2nd and 3rd assessments
were given just 6 months after dissolution (within the 3-year rule). Such facts definitely
established that the Government was a creditor of the corporation for whom the liquidator
was supposed to hold assets of the corporation.

NOTE: Code provides for a 3-year period for continuation of the corporate existence for
purposes of liquidation, BUT there is nothing in the provision which bars an action for
recovery of debts of the corporation against the liquidator himself, after the lapse of the
3-year period.

67. Tan Tiong Bio v. Commissioner of Internal Revenue, G.R, No. L-15778, April
23, 1962
FACTS:
Central Syndicate is a corporation which sent a letter to the Collector of Internal
Revenue advising the latter that it purchased from Dee Hong Lue the surplus properties
which the said Dee Hong Lue had bought from the Foreign Liquidation Commission that
it assumed Dee Hong Lue's obligation and would pay a portion of the sales tax on said
surplus goods it was paying P43,750.00 in behalf of Dee Hong Lue as deposit to answer
for the payment of said sales tax. Central Syndicate again wrote the Collector requesting
a refund for the purchase price of goods obtained from Dee Hong Lue was adjusted and
reduced. The CIR investigated the matter and the Collector decided that Central
Syndicate was the importer and original seller of the surplus goods in question and,
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therefore, the one liable to pay the sales tax. The Collector denied the request of the
syndicate for the refund. Central Syndicate elevated the case to the Court of Tax Appeals.
The Collector filed a motion requiring Central Syndicate to file a bond to guarantee the
payment of the tax assessed against it to which motion was denied by the Court of Tax
Appeals on the ground that cannot be legally done it appearing that the syndicate is
already a non-existing entity due to the expiration of its corporate existence. In
view of this development, the Collector filed a motion to dismiss the appeal on
the ground of lack of personality on the part of Central Syndicate, which met an
opposition on the part of the latter, but on January 25, 1955, the Court of Tax Appeals
issued a resolution dismissing the appeal primarily on the ground that the Central
Syndicate has no personality to maintain the action then pending before it. From this
order the syndicate appealed to the Supreme Court w herein it intimated that the appeal
should not be dismissed because it could be substituted by its successors-in-interest
Tan Tiong Bio and others.

ISSUE:
Whether the sales tax in question can be enforced against the corporations
successors-in-interest who are the present petitioners since the Central Syndicate has
already been dissolved because of the expiration of its corporate existence.

RULING:
YES. The creditor of a dissolved corporation may follow its assets once they
passed into the hands of the stockholders. The net profit of the corporation (from the sale
of the surplus goods) was distributed among the stockholders when the corporation
liquidated and distributed its assets immediately after the sale of the said surplus goods.
Petitioners are therefore the beneficiaries of the defunct corporation and as such should
be held liable to pay the taxes in question.

The dissolution of a corporation does not extinguish the debts due or owing to it because
a creditor of a dissolved corporation may follow its assets, as in the nature of a trust fund,
into the hands of its stockholders. With reference to the effect of dissolution upon taxes
due from a corporation, "that the hands of the government cannot, of course, collect taxes
from a defunct corporation, it loses thereby none of its rights to assess taxes which had
been due from the corporation, and to collect them from persons, who by reason of
transactions with the corporation, hold property against which the tax can be enforced
and that the legal death of the corporation no more prevents such action than would the
physical death of an individual prevent the government from assessing taxes against him
and collecting them from his administrator, who holds the property which the decedent
had formerly possessed

68. Reyes v. Blouse, 91 Phil. 305
FACTS:
Minority stockholders of the Laguna Tayabas Bus Co. file an action to enjoin
Blouse et. al. from executing its resolution approved by 99 % of stockholders to
consolidate the properties and franchises of Laguna Tayabas with Batangas Transport.
Blouse believes it is merely an exchange of properties and not a consolidation.
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ISSUE:
Whether the real purpose of the resolution is merger or consolidation, and if so,
whether it can be carried out under the old Corporation Law.

RULING:
The questioned resolution charges the board of Laguna to consolidate properties and
franchises thereof with that of Batangas Transport. Both corporations have passed similar
resolutions to take steps to effect the consolidation. It is apparent that the purpose of the
resolution is not to dissolve but to merely transfer its assets to a new corporation in
exchange for its shares. This comes within the purview of the old corporation law, which
provides that a corporation may sell, exchange, lease or otherwise dispose of all its
property and assets when authorized by affirmative vote of 2/3 of stockholders. The
words "or otherwise disposed of" is very broad and in a sense covers a merger or
consolidation. However, the transaction in this case cannot be considered as a merger or
consolidation because a merger implies the termination or cessation of the merged
corporations and not merely a merger of assets and properties. The two companies will
not lose their corporate existence but will continue to exist even after the consolidation.
What is intended by the resolution is merely a consolidation of properties and assets, to
be managed and operated by a new corporation, and not a merger of the corporations
themselves.

69. The Edward J. Nell Co. v. Pacific Farms, Inc., 15 SCRA 415
FACTS:
Edward Nell Co. secured a judgment representing the unpaid balance of the price
of a pump sold to Insular Farms. Pacific Farms then purchased all or substantially all of
shares of stock as well as real and personal property of Insular, selling the shares to
certain individuals who reorganized Insular. The board reorganized Insular then sold its
assets to be sold to Pacific for P10,000. The writ of execution was returned, stating that
Insular had no property for levy. Nell Co sued Pacific Farms, on the ground as a result of
the purchase of all or substantially all assets of Insular, Pacific became the alter ego of
Insular Farms.

ISSUE:
Whether a corporation who sells or otherwise transfers all of its assets to another
corporation is liable for debts and liabilities of the transferor?

RULING:
NO. Generally where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the transferor,
except: (1) where the purchaser expressly or impliedly agrees to assume such debts; (2)
where the transaction amounts to a consolidation or merger of the corporations; (3) where
the purchasing corporation is merely a continuation of the selling corporation; and
(4)where the transaction is entered into fraudulently in order to escape liability for such
debts. In the case at bar, there is neither proof nor allegation that appellee had made any
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of the above exceptions. Hence, Pacific Farms cannot assume the debts and liabilities of
Insular Farms.

70. Marshall-Wells Co. v. Henry W. Elser Co., 46 Phil. 71
FACTS:
Marshall-Wells Company, an Oregon corporation, sued Henry W. Elser & Co.,
Inc., a domestic corporation, in the Court of First Instance of Manila, for the unpaid
balance of a bill of goods sold by plaintiff to defendant and for which plaintiff holds
accepted drafts. Defendant demurred to the complaint on the statutory ground that the
plaintiff has not legal capacity to sue. In the demurrer, counsel stated that "The said
complaint does not show that the plaintiff has complied with the laws of the Philippine
Islands in that which is required of foreign corporations desiring to do business in the
Philippine Islands, neither does it show that it was authorized to do business in the
Philippine Islands." The demurrer was sustained by the trial judge. Inasmuch as the
plaintiff could not allege compliance with the statute, the order was allowed to become
final and an appeal was perfected.

ISSUE:
Is the obtaining of the license prescribed in section 68, as amended, of the
Corporation Law a condition precedent to the maintaining of any kind of action in the
courts of the Philippine Islands by a foreign corporation?

RULING:
Yes. The object of the statute was to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. The object of the statute was
not to prevent the foreign corporation from performing single acts, but to prevent it from
acquiring a domicile for the purpose of business without taking the steps necessary to
render it amenable to suit in the local courts. The implication of the law is that it was
never the purpose of the Legislature to exclude a foreign corporation which happens to
obtain an isolated order for business from the Philippines, from securing redress in the
Philippine courts, and thus, in effect, to permit persons to avoid their contracts made with
such foreign corporations. The effect of the statute preventing foreign corporations from
doing business and from bringing actions in the local courts, except on compliance with
elaborate requirements, must not be unduly extended or improperly applied. It should not
be construed to extend beyond the plain meaning of its terms, considered in connection
with its object, and in connection with the spirit of the entire law. The noncompliance of
a foreign corporation with the statute may be pleaded as an affirmative defense.
Thereafter, it must appear from the evidence, first, that the plaintiff is a foreign
corporation, second, that it is doing business in the Philippines, and third, that it has not
obtained the proper license as provided by the statute.

The literal terminology of Section 69 of the Corporation Law is as follows:
No foreign corporation or corporation formed, organized, or existing under any laws
other than those of the
Philippine Islands shall be permitted to transact business in the Philippine Islands or
maintain by itself or assignee any suit for the recovery of any debt, claim, or demand
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whatever, unless it shall have the license prescribed in the section immediately preceding.
Any officer, director, or agent of the corporation not having the license prescribed shall
be punished by imprisonment for not less than six months nor more than two
years or by a fine of not less than two hundred pesos nor more than one thousand pesos,
or by both such imprisonment and fine, in the discretion of the court.

71. Atlantic Mutual Insurance Co. v. Cebu Stevedoring Co., Inc., G.R. no. 18961,
August 31, 1966
FACTS:
Appellants Atlantic Mutual Insurance Company and Continental Insurance
Company are both foreign corporations existing under the laws of the United States.
They sued the Cebu Stevedoring Co., Inc., a domestic corporation, for recovery of a sum
of money on the following allegations: that defendant, a common carrier, undertook to
carry a shipment of copra for deliver to Procter & Gamble Company, at Cebu City; that
upon discharge, a portion of the copra was found damaged; that since the copra had been
previously insured with plaintiffs they paid the shipper and/or consignee, upon proper
claim and assessment of the damage; and that as subrogee to the shipper's and/or
consignee's rights, plaintiffs demanded, without success, settlement from defendant by
reason of its failure to comply with its obligation, as carrier, to deliver the copra in good
order.

Defendant moved to dismiss on two grounds: (a) that plaintiffs had "no legal personality
to appear before
Philippine courts and with no capacity to sue;" and (b) that the complaint did not state a
cause of action. Both grounds were based upon failure of the complaint to allege
compliance with section 69 of the Corporation Law.

ISSUE:
Whether or not plaintiffs had "legal personality to appear before Philippine courts
and with capacity to sue.

RULING:
No. The Law simply means that no foreign corporation shall be permitted to
transact business in the Philippines, unless it shall have the license required by law, and,
until it complies with this law, shall not be permitted to maintain any suit in the local
courts. The object of the statute was to object of the statute was not to prevent the foreign
corporation from performing single acts, but to prevent it from acquiring a domicile for
the purpose of business without taking the steps necessary to render it amenable to suit in
the local courts. The implication of the law is that it was never the purpose of the
Legislature to exclude a foreign corporation which happens to obtain an isolated order
for business from the Philippines, from securing redress in the Philippine Courts, and
thus, in effect, to permit persons to avoid their contracts made with such foreign
corporations. The effect of the statute preventing foreign corporations from doing
business and from bringing actions in the local courts, except in compliance with
elaborate requirements, must not be unduly extended or improperly applied. It should not
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be construed to extend beyond the plain meaning of its terms, considered in connection
with its object, and in connection with the spirit of the entire law."

To be sure, under the Rules of Court (Section 11, Rule 15) in force prior to the
promulgation of the Revised Rules on January 1, 1964, it was not necessary to aver the
capacity of a party to sue except to the extent required to show jurisdiction of the court.
In our opinion, however, such rule does not apply in all situations and under all
circumstances. The theory behind a similar rule in the United States is "that capacity ... of
a party for purpose of suit is not in dispute in the great bulk of cases, and that pleading
and proof can be simplified by a rule that an averment of such matter is not necessary,
except to show jurisdiction." But where as in the present case, the law denies to a foreign
corporation the right to maintain suit unless it has previously complied with a certain
requirement, then such compliance, or the fact that the suing corporation is exempt
therefrom, becomes a necessary averment in the complaint. These are matters peculiarly
within the knowledge of appellants alone, and it would be unfair to impose upon appellee
the burden of asserting and proving the contrary. It is enough that foreign corporations
are allowed by law to seek redress in our courts under certain conditions: the
interpretation of the law should not go so far as to include, in effect, an inference that
those conditions have been met from the mere fact that the party suing is a foreign
corporation.

72. General Garments Corp v. Director of Patents, 41 SCRA 50
FACTS:
The General Garments Corporation, organized and existing under the laws of the
Philippines, is the owner of the trademark "Puritan. Puritan Sportswear Corporation,
organized and existing in and under the laws of the state of Pennsylvania, U.S.A., filed a
petition with the Philippine Patent Office for the cancellation of the trademark "Puritan"
registered in the name of General Garments Corporation, alleging ownership and prior
use in the Philippines of the said trademark on the same kinds of goods, which use it had
not abandoned; and alleging further that the registration thereof by General Garments
Corporation had been obtained fraudulently and in violation of Section 17(c) of Republic
Act No. 166, as amended, in relation to Section 4(d) thereof. On March 30, 1964 General
Garments Corporation moved to dismiss the petition.

ISSUE:
Whether or not Puritan Sportswear Corporation, which is a foreign corporation
not licensed to do business and not doing business in the Philippines, has legal capacity to
maintain a suit in the Philippine Patent Office for cancellation of a trademark registered
therein.

RULING:
Yes. Respondent is not suing in our courts "for the recovery of any debt, claim or
demand," for which a license to transact business in the Philippines is required by Section
69 of the Corporation Law, subject only to the exception already noted. The purpose of
such a suit is to protect its reputation, corporate name and goodwill which has been
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established, through the natural development of its trade for a long period of years, in the
doing of which it does not seek to enforce any legal or contract rights arising from, or
growing out of any business which it has transacted in the Philippine Islands.

The right to the use of the corporate or trade name is a property right, a right in rem,
which it may assert and protect in any of the courts of the world even in jurisdictions
where it does not transact business just the same as it may protect its tangible
property, real or personal against trespass or conversion.

A foreign corporation is allowed there under to sue "whether or not it has been licensed
to do business in the Philippines" pursuant to the Corporation Law. In any event,
respondent in the present case is not suing for infringement or unfair competition under
Section 21- A, but for cancellation under Section 17, on one of the grounds enumerated
in Section 4. And while a suit under Section 21-A requires that the mark or tradename
alleged to have been infringed has been "registered or assigned" to the suing foreign
corporation, a suit for cancellation of the registration of a mark or tradename under
Section 17 has no such requirement. For such mark or tradename should not have been
registered in the first place (and consequently may be cancelled if so registered) if it
"consists of or comprises a mark or tradename which so resembles a mark or tradename
... previously used in the Philippines by another and not abandoned, as to be likely, when
applied to or used in connection with goods, business or services of the applicant, to
cause confusion or mistake or to deceive purchasers.

73. Le Chemise Lacoste, S.A. v. Fernandez, 129 SCRA 377
FACTS:
Petitioner La Chemise Lacoste, S.A., a well known European manufacturer of
clothings and sporting apparels sold in the international market and bearing the
trademarks "LACOSTE" "CHEMISE LACOSTE", "CROCODILE DEVICE" and a
composite mark consisting of the word "LACOSTE" and a representation of a
crocodile/alligator. Petitioner is a foreign corporation organized and existing under the
laws of France and not doing business in the Philippines. Its products have been marketed
in the Philippines since 1964.
In 1975, Hemandas & Co., a duly licensed domestic firm applied for and was
issued Reg. No. SR-2225 (SR stands for Supplemental Register) for the trademark
"CHEMISE LACOSTE & CROCODILE DEVICE" by the Philippine Patent Office for
use on T-shirts, sportswear and other garment products of the company. Two years later,
it applied for the registration of the same trademark under the Principal Register. The
Patent Office eventually issued an order dated March 3, 1977 which states that:
Considering that the mark was already registered in the Supplemental Register in favor
of herein applicant, the Office has no other recourse but to allow the application,
however, Reg. No. SR-2225 is now being contested in a Petition for Cancellation
docketed as IPC No. 1046, still registrant is presumed to be the owner of the mark until
after the registration is declared cancelled. Thereafter, Hemandas & Co. assigned to
respondent Gobindram Hemandas all rights, title, and interest in the trademark
"CHEMISE LACOSTE & DEVICE".
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Petitioner filed its application for registration of the trademark Crocodile
Device and Lacoste. The former was approved while the latter was opposed by Games
and Garments. Petitioner filed a petition for cancellation of Reg. No. SR-2225.

ISSUE:
(1) Whether Petitioner is doing business or not.
(2) Whether or not petitioner has capacity to sue.

RULING:
(1) Petitioner is not doing business.
The present case involves a complaint for violation of Article 189 of RPC.
The petitioner is a foreign corporation not doing business in the Philippines.
The marketing of its products in the Philippines is done through an exclusive
distributor, Rustan Commercial Corporation. The petitioner is a foreign
corporation not doing business in the Philippines. The marketing of its
products in the Philippines is done through an exclusive distributor, Rustan
Commercial Corporation. The latter is an independent entity which buys and
then markets not only products of the petitioner but also many other products
bearing equally well-known and established trademarks and tradenames, in
other words, Rustan is not a mere agent or conduit of the petitioner.
Petitioner is not doing business in the Philippines. Rustan is actually a middleman
acting and transacting business in its own name and or its own account and not in the
name or for the account of the petitioner.
Rule I, Sec. 1 (g) of said rules and regulations defines "doing business" as one"
which includes, inter alia:
(1) ... A foreign firm which does business through middlemen acting on their own
names, such as indentors, commercial brokers or commission merchants, shall not
be deemed doing business in the Philippines. But such indentors, commercial
brokers or commission merchants shall be the ones deemed to be doing business
in the Philippines.
(2) Appointing a representative or distributor who is domiciled in the Philippines,
unless said representative or distributor has an independent status, i.e., it transacts
business in its name and for its account, and not in the name or for the account of
a principal Thus, where a foreign firm is represented by a person or local
company which does not act in its name but in the name of the foreign firm the
latter is doing business in the Philippines.

(2) Yes. Petitioner can sue. As early as 1927, this Court is of the view that a
foreign corporation not doing business in the Philippines needs no license to
sue before Philippine courts for infringement of trademark and unfair
competition.
A foreign corporation which has never done any business in the
Philippines and which is unlicensed and unregistered to do business here,
but is widely and favorably known in the Philippines through the use
therein of its products bearing its corporate and tradename, has a legal
right to maintain an action in the Philippines to restrain the residents and
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inhabitants thereof from organizaing a corporation therein bearing the
same name as the foreign corporation, when it appears that they have
personal knowledge of the existence of such a foreign corporation, and it
is apparent that the purpose of the proposed domestic corporation is to
deal and trade in the same goods as those of the foreign corporation.

More important is the nature of the case which led to this petition. What preceded this
petition for certiorari was a letter complaint filed before the NBI charging Hemandas
with a criminal offense, i.e., violation of Article 189 of the Revised Penal Code. If
prosecution follows after the completion of the preliminary investigation being conducted
by the Special Prosecutor the information shall be in the name of the People of the
Philippines and no longer the petitioner which is only an aggrieved party since a criminal
offense is essentially an act against the State. It is the latter which is principally the
injured party although there is a private right violated. Petitioner's capacity to sue would
become, therefore, of not much significance in the main case. We cannot snow a possible
violator of our criminal statutes to escape prosecution upon a far-fetched contention that
the aggrieved party or victim of a crime has no standing to sue.

In upholding the right of the petitioner to maintain the present suit before our courts for
unfair competition or infringement of trademarks of a foreign corporation, we are
moreover recognizing our duties and the rights of foreign states under the Paris
Convention for the Protection of Industrial Property to which the Philippines and France
are parties. We are simply interpreting and enforcing a solemn international commitment
of the Philippines embodied in a multilateral treaty to which we are a party and which we
entered into because it is in our national interest to do so.

NOTE:
The Paris Convention provides in part that:
ARTICLE 1
(1) The countries to which the present Convention applies constitute themselves into a
Union for the protection of industrial property.
(2) The protection of industrial property is concerned with patents, utility models,
industrial designs, trademarks service marks, trade names, and indications of source or
appellations of origin, and the repression of unfair competition.

ARTICLE 2
(2) Nationals of each of the countries of the Union shall as regards the protection of
industrial property, enjoy in all the other countries of the Union the advantages that their
respective laws now grant, or may hereafter grant, to nationals, without prejudice to the
rights specially provided by the present Convention. Consequently, they shall have the
same protection as the latter, and the same legal remedy against any infringement of their
rights, provided they observe the conditions and formalities imposed upon nationals.

ARTICLE 6
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(1) The countries of the Union undertake, either administratively if their legislation so
permits, or at the request of an interested party, to refuse or to cancel the registration and
to prohibit the use of a trademark which constitutes a reproduction, imitation or
translation, liable to create confusion, of a mark considered by the competent authority of
the country of registration or use to be well-known in that country as being already the
mark of a person entitled to the benefits of the present Convention and used for Identical
or similar goods. These provisions shall also apply when the essential part of the mark
constitutes a reproduction of any such well-known mark or an imitation liable to create
confusion therewith.

ARTICLE 8
A trade name shall be protected in all the countries of the Union without the obligation of
filing or registration, whether or not it forms part of a trademark.

ARTICLE 10bis
(1) The countries of the Union are bound to assure to persons entitled to the benefits of
the Union effective protection against unfair competition.

ARTICLE 10ter
(1) The countries of the Union undertake to assure to nationals of the other countries of
the Union appropriate legal remedies to repress effectively all the acts referred to in
Articles 9, 10 and l0bis.
(2) They undertake, further, to provide measures to permit syndicates and associations
which represent the industrialists, producers or traders concerned and the existence of
which is not contrary to the laws of their countries, to take action in the Courts or before
the administrative authorities, with
a view to the repression of the acts referred to in Articles 9, 10 and 10bis, in so far as the
law of the country in which protection is claimed allows such action by the syndicates
and associations of that country.

ARTICLE 17
Every country party to this Convention undertakes to adopt, in accordance with its
constitution, the measures necessary to ensure the application of this Convention.
It is understood that at the time an instrument of ratification or accession is deposited on
behalf of a country; such country will be in a position under its domestic law to give
effect to the provisions of this Convention. (61 O.G. 8010)

74. Converse Rubber Products v. Universal Products, Inc., 147 SCRA 155
FACTS:
Respondent Universal Rubber Products, Inc. filed an application with the
Philippine Patent office for registration of the trademark Universal Converse and
Device used on rubber shoes and rubber slippers. Petitioner Converse Rubber
Corporation filed its opposition to the application for registration on grounds that (a) the
trademark sought to be registered is confusingly similar to the word Converse which is
part of petitioners corporate name Converse Rubber Corporation as to likely deceive
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purchasers of products on which it is to be used to an extent that said products may be
mistaken by the unwary public to be manufactured by the petitioner and (b) the
registration of respondents trademark will cause great and irreparable injury to the
business reputation and goodwill of petitioner in the Philippines and would cause damage
to said petitioner within the meaning of section 8, RA 166, as amended.
The Director of Patents dismissed the opposition of the petitioner and gave due
course to respondents application. Hence, this petition for review.

ISSUE:
(1) Whether or not the respondents partial appropriation of petitioners corporate
name (Converse) is of such character that it is calculated to deceive or
confuse the public to the injury of the petitioner to which the name belongs.
(2) Whether or not petitioner, a foreign corporation not doing business in the
Philippines, has a right to maintain an action.

RULING:

(1) A trade name is any individual name or surname, firm name, device or word
used by manufacturers, industrialists, merchants and others to identify their
businesses, vocations or occupations. As the trade name refers to the business
and its good will, the trademark refers to the goods. The ownership of a
trademark or tradename is a property right which the owner is entitled to
protect since there is damage to him from confusion or reputation or
goodwill in the mind of the public as well as from confusion of goods. The
modern trend is to give emphasis to the unfairness of the acts and to classify
and treat the issue as fraud.
From a cursory appreciation of the petitioner's corporate name "CONVERSE
RUBBER CORPORATION,' it is evident that the word "CONVERSE" is the dominant
word which Identifies petitioner from other corporations engaged in similar business.
Respondent, in the stipulation of facts, admitted petitioner's existence since 1946 as a
duly organized foreign corporation engaged in the manufacture of rubber shoes. This
admission necessarily betrays its knowledge of the reputation and business of petitioner
even before it applied for registration of the trademark in question. Knowing, therefore,
that the word "CONVERSE" belongs to and is being used by petitioner, and is in fact the
dominant word in petitioner's corporate name, respondent has no right to appropriate the
same for use on its products which are similar to those being produced by petitioner.
A corporation is entitled to the cancellation of a mark that is confusingly similar
to its corporate name. Appropriation by another of the dominant part of a corporate name
is an infringement.
Respondents witness had no idea why respondent chose Universal Converse as
trademark and the record discloses no reasonable explanation for respondents use of the
word Converse in its trademark. Such unexplained use by respondent of the dominant
word of petitioners corporate name lends itself open to the suspicion of fraudulent
motive to trade upon petitioners reputation.
The testimony of petitioner's witness, who is a legitimate trader as well as the
invoices evidencing sales of petitioner's products in the Philippines, give credence to
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petitioner's claim that it has earned a business reputation and goodwill in this country.
The sales invoices submitted by petitioner's lone witness show that it is the word
"CONVERSE" that mainly Identifies petitioner's products, i.e. "CONVERSE CHUCK
TAYLOR, "CONVERSE ALL STAR," ALL STAR CONVERSE CHUCK TAYLOR,"
or "CONVERSE SHOES CHUCK and TAYLOR." Thus, contrary to the determination
of the respondent Director of Patents, the word "CONVERSE" has grown to be Identified
with petitioner's products, and in this sense, has acquired a second meaning within the
context of trademark and tradename laws.
It is a corollary logical deduction that while Converse Rubber Corporation is not
licensed to do business in the country and is not actually doing business here, it does not
mean that its goods are not being sold here or that it has not earned a reputation or
goodwill as regards its products.
The similarity y in the general appearance of respondent's trademark and that of
petitioner would evidently create a likelihood of confusion among the purchasing public.
But even assuming, arguendo, that the trademark sought to be registered by respondent is
distinctively dissimilar from those of the petitioner, the likelihood of confusion would
still subsists, not on the purchaser's perception of the goods but on the origins thereof. By
appropriating the word "CONVERSE," respondent's products are likely to be mistaken as
having been produced by petitioner. "The risk of damage is not limited to a possible
confusion of goods but also includes confusion of reputation if the public could
reasonably assume that the goods of the parties originated from the same source.

(2) Yes. The Convention of the Union of Paris for the Protection of Industrial Property to
which the Philippines became a party in 1966 provides that: Article 8: a trade name
or corporate name shall be protected in all the countries of the Union without the
obligation of filing or registration, whether or not it forms part of the trademark.
The object of the Convention is to accord a national of a member nation extensive
protection against infringement and other types of unfair competition.
The mandate of the aforementioned Convention finds implementation in Sec. 37
of RA No. 166, otherwise known as the Trademark Law:
Sec. 37. Rights of Foreign Registrants-Persons who are nationals of, domiciled or
have a bona fide or effective business or commercial establishment in any foreign
country, which is a party to an international convention or treaty relating to marks
or tradenames on the repression of unfair competition to which the Philippines
may be a party, shall be entitled to the benefits and subject to the provisions of
this Act . . . ...
Tradenames of persons described in the first paragraph of this section shall be
protected without the obligation of filing or registration whether or not they form
parts of marks.

75. Home Insurance Co. v. Eastern Shipping Lines, 123 SCRA 424
FACTS:
On or about January 13, 1967, S. Kajita & Co., on behalf of Atlas Consolidated
Mining & Development Corporation, shipped on board the SS "Eastern Jupiter' from
Osaka, Japan, 2,361 coils of "Black Hot Rolled Copper Wire Rods." The said VESSEL is
owned and operated by defendant Eastern Shipping Lines (CARRIER). The shipment
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was covered by Bill of Lading No. O-MA-9, with arrival notice to Phelps Dodge Copper
Products Corporation of the Philippines (CONSIGNEE) at Manila. The shipment was
insured with plaintiff against all risks in the amount of P1,580,105.06 under its Insurance
Policy No. AS-73633.
The coils discharged from the VESSEL numbered 2,361, of which 53 were in bad
order. What the
CONSIGNEE ultimately received at its warehouse was the same number of 2,361 coils
with 73 coils loose and partly cut, and 28 coils entangled, partly cut, and which had to be
considered as scrap. Upon weighing at CONSIGNEE's warehouse, the 2,361 coils were
found to weight 263,940.85 kilos as against its invoiced weight of 264,534.00 kilos or a
net loss/shortage of 593.15 kilos, or 1,209,56 lbs.
For the loss/damage suffered by the cargo, plaintiff paid the consignee under its
insurance policy the amount of P3,260.44, by virtue of which plaintiff became subrogated
to the rights and actions of the CONSIGNEE. Plaintiff made demands for payment
against the CARRIER and the TRANSPORTATION COMPANY for reimbursement of
the aforesaid amount but each refused to pay the same. ...

ISSUE:
(1) Whether or not petitioner foreign corporation can sue.
(2) Whether or not contracts entered into by petitioner foreign corporation at the
time when it had not acquired license to do business, are null and void.
RULING:
(1) Yes. The petitioner foreign corporation introduced documentary evidence that
it had the authority to engage in the insurance business at the time it filed the
complaints. Respondents failed to specifically deny petitioners capacity to
sue.
When the complaints in these two consolidated cases were filed, the petitioner
had already secured the necessary license to conduct its insurance business in the
Philippines. It could already file suits. However, when the insurance contracts which
formed the basis of these cases were executed, the petitioner had not yet secured the
necessary licenses and authority.
The objective of Section 68 and 69 of the Corporation law (Now, Sec. 133 of the
Corporation Code) was to subject the foreign corporation to the jurisdiction of our courts.
The Corporation law must be given a reasonable, not an unduly harsh, interpretation
which does not hamper the development of trade relations and which fosters friendly
commercial intercourse among countries.
(2) No. There is no question that the contracts are enforceable (since the
corporation code did not expressly mention that contracts made by a foreign
corporation without license are void). The requirement of registration affects
only the remedy. The primary purpose of our statute is to compel a foreign
corporation desiring to do business within the state to submit itself to the
jurisdiction of the courts of this state. The statute was not intended to exclude
foreign corporations from the state. It does not, in terms, render invalid
contracts made in this state by non-complying corporations. The contracts are
enforceable upon compliance with the law.
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It is not necessary to declare the contracts null and void even as against the
erring foreign corporation. The penal sanction for the violation and the
denial of access to our courts and administrative bodies are sufficient from
the viewpoint of legislative policy.

76. The Mentholatum Co. Inc. v. Mangaliman, 72 Phil. 525
FACTS:
On October 1, 1935, the Mentholatum Co., Inc., and the Philippine-American
Drug Co., Inc. instituted an action against Mangaliman and company for infringement of
trade mark and unfair competition.
The complaint stated, among other particulars, that the Mentholatum Co., Inc., is a
Kansas corporation which manufactures Mentholatum," a medicament and salve adapted
for the treatment of colds, nasal irritations, and other external ailments of the body; that
the Philippine-American Drug co., Inc., is its exclusive distributing agent in the
Philippines authorized by it to look after and protect its interests; that the Mentholatum
Co., Inc., registered with the Bureau of Commerce and Industry the word,
"Mentholatum," as trade mark for its products; that the Mangaliman brothers prepared a
medicament and salve named "Mentholiman" which they sold to the public packed in a
container of the same size, color and shape as "Mentholatum"; and that, as a consequence
of these acts of the defendants, plaintiffs suffered damages from the dimunition of their
sales and the loss of goodwill and reputation of their product in the market.
Mentholatum Co., Inc., has not sold personally any of its products in the
Philippines; that the Philippine-American Drug Co., Inc., like fifteen or twenty other
local entities, was merely an importer of the products of the Mentholatum Co., Inc., and
that the sales of the Philippine-American Drug Co., Inc., were its own and not for the
account of the Mentholatum Co., Inc. Upon the other hand, the defendants contend that
the Philippine-American Drug Co., Inc., is the exclusive distributing agent in the
Philippines of the Mentholatum Co., Inc., in the sale and distribution of its product
known as "Mentholatum"; that, because of this arrangement, the acts of the latter; and
that the Mentholatum Co., Inc., being thus engaged in business in the Philippines, and not
having acquired the license required by section 68 of the Corporation Law, neither it nor
the Philippine-American Drug co., Inc., could prosecute the present action.

ISSUE:
Whether or not the petitioners could prosecute the instant action without having
secured the license required in section 69 of the (old) Corporation Law

RULING:
The true test, however, seems to be whether the foreign corporation is continuing
the body or substance of the business or enterprise for which it was organized or whether
it has substantially retired from it and turned it over to another. The term implies a
continuity of commercial dealings and arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the functions normally incident
to, and in progressive prosecution of, the purpose and object of its organization.
However, whatever transactions the Philippine-American Drug Co., Inc., had executed in
view of the law, the Mentholatum Co., Inc., did it itself. And, the Mentholatum Co., Inc.,
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being a foreign corporation doing business in the Philippines without the license required
by section 68 of the Corporation Law, it may not prosecute this action for violation of
trade mark and unfair competition. Neither may the Philippine-American Drug Co., Inc.,
maintain the action here for the reason that the distinguishing features of the agent being
his representative character and derivative authority, it cannot now, to the advantage of
its principal, claim an independent standing in court.

77. Far East International Import & Export Corp. v. Nankai Kogyo Co., Ltd., 6 SCRA
725

78. Facilities Management Corporation v. Leonardo de la Osa, 89 SCRA 131
FACTS:
Leonardo dela Rosa sought his reinstatement with full backwages, as well as the
recovery of his overtime compensation, swing shift and graveyard shift differentials.
Petitioner alleged that he was employed by respondents as, painter, houseboy and cashier.
He further averred that from December, 1965 to August, 1966, inclusive, he rendered
overtime services daily and that this entire period was divided into swing and graveyard
shifts to which he was assigned, but he was not paid both overtime and night shift
premiums despite his repeated demands from respondents.

The petitioner, a foreign corporation domiciled outside the Philippines was ordered by
CIR then to pay the unpaid overtime and premium pay. However, on certiorari, the
petitioner contended that because it was domiciled outside and not doing business in
Philippines, it could not be sued in the country.

ISSUE:
Whether or not the Philippine court can acquire jurisdiction over a foreign
company

RULING:
Yes. Considering that petitioner paid the claims of private respondent, the case
had become moot and academic. The fact of such payment amounts to an
acknowledgement on the part of petitioner of the jurisdiction of the court over it.

Moreover, FMC had to appoint an agent, pursuant to Department of Labor Order, with
authority to execute Employment Contracts and receive legal services and be bound by
the processes of the Philippine Courts for as long as he remains an employee of FMC.
According to the Rules of Court, service of summons upon foreign corporations may be
made on its resident agent (Sec14, Rules of Court old)

112

Further, if a foreign corporation, not engaged in business in the Philippines, is not banned
from seeking redress from courts in the Philippines, that same corporation cannot claim
exemption from being sued in Philippine courts for acts done against a person or persons
in the Philippines.

79. Pacific Vegetable Oil Corporation v. Singzon, G.R. No. 7917, April 29, 1955

80. Aetna Casualty & Surety Co. v. Pacific Star Line, 80 SCRA 635
FACTS:
Defendant Pacific Star Line, a common carrier, was operating the vessel SS
Ampal on a commercial run between United States and Philippine Ports including
Manila, The Bradman Co. Inc., was the ship agent in the Philippines for the SS Ampal
and/or Pacific Star Line while Manila Railroad Co. Inc. and Manila Port Service were
the arrastre operators in the port of Manila and were authorized for the delivery of
cargoes discharged into their custody on presentation of release papers from the Bureau
of Customs and the steamship carrier and/or its agents. On December 2, 1961, the SS
Ampal took on board at New York, N.Y., U.S.A., a consignment or cargo including 33
packages of Linen & Cotton Piece Goods for shipment to Manila for which defendant
Pacific Star Line issued Bill of Lading No. 18 in the name of I. Shalom & Co., Inc., as
shipper, consigned to the order of Judy Philippines, Inc., Manila. The SS Ampal arrived
in Manila on February 10, 1962 and in due course, discharged her cargo into the custody
of Manila Port Service and that due to the negligence of the defendants, the shipment
sustained damages valued at US $2,300.00 representing pilferage and seawater damage.
Due to this, on February 11, 1963, Smith Bell & Co. (Philippines), Inc. and Aetna Surety
Casualty & Surety Co. Inc., as subrogee, filed a complaint against The Bradman Co. Inc.,
Manila Port Service and/or Manila Railroad Company, Inc. to recover the amount of US
$2,300.00 representing the value of the stolen and damaged cargo plus litigation expenses
and exemplary damages. In their answer, the defendants allege that the plaintiff, Aetna
casualty & Surety Company, is a foreign corporation not duly licensed to do business in
the Philippines and, therefore. without capacity to sue and be sued.

ISSUE:
Whether or not Aetna Casualty & Surety Company has been doing business in the
Philippines and hence be allowed to file an action

RULING:
Section 68 of the Corporation Law provides that "No foreign corporation or
corporation formed, organized, or existing under any laws other than those of the
Philippines shall be permitted to transact business in the Philippines until after it shall
have obtained a license for that purpose from the Securities and Exchange
Commissioners xxx" And according to Section 69 of said Corporation Law "No foreign
corporation or corporation formed, organized, or existing under any laws other than those
of the Philippines shall be permitted to transact business in the Philippines or maintain by
itself or assignee any suit for the recovery of any debt, claim, or demand whatever, unless
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it shall have the license prescribed in the section immediately preceding xxx." It is settled
that if a foreign corporation is not engaged in business in the Philippines, it may not be
denied the right to file an action in Philippine courts for isolated transactions. Citing
Mentholatum Co., Inc. et al. vs. Mangaliman, et al., the court held that No general rule
or governing principle can be laid down as to what constitutes 'doing' or 'engaging in' or
'transacting' business. Indeed, each case must be judged in the light of its peculiar
environmental circumstances. The true test, however, seems to be whether the foreign
corporation is continuing the body or substance of the business or enterprise. For which it
was organized or whether it has substantially retired from it and turned it over to
another. In the case at bar, Aetna Casualty & Surety Company is transacting business of
insurance in the Philippines for which it must have a license. The contract of insurance
was entered into in New York, U.S.A., and payment was made to the consignee in its
New York branch. All the actions, except two cases filed by Smith, Bell & Co., Inc.
against the Aetna Casualty & Surety Company, are claims against the shipper and the
arrastre operators just like the case at bar. Consequently, since the appellant Aetna
Casualty & Surety Company is not engaged in the business of insurance in the
Philippines but is merely collecting a claim assigned to it by the consignee, it is not
barred from filing the instant case although it has not secured a license to transact
insurance business in the Philippines.

81. Top-Weld Mfg., Inc. v. ECED, S.A., 138 SCRA 120
FACTS:
Petitioner Top-weld Manufacturing, Inc. is a Philippine corporation engaged in
the business of manufacturing and selling welding supplies and equipment. It entered into
separate contracts with two different foreign entities. One contract, entitled a "LICENSE
AND TECHNICAL ASSISTANCE AGREEMENT" was entered into with IRTI, S.A.,
(IRTI), a corporation organized and existing under the laws of Switzerland. By virtue of
this agreement, the petitioner was constituted a licensee of IRTI to manufacture welding
products under certain specifications, with raw materials to be purchased by the former
from suppliers designated by IRTI, for a period of three years. The other contract was a
"DISTRIBUTOR AGREEMENT" entered into with ECED, S.A., (ECED), a company
organized and existing under the laws of Panama. Under this agreement, the petitioner
was designated as ECED's distributor in the Philippines of certain welding products and
equipment. By its terms, the contract was to remain effective until terminated by either
party upon giving six months or 180 days written notice to the other. Upon learning that
the two foreign entities were negotiating with another group to replace the petitioner as
their licensee and distributor, the latter instituted a civil case against herein respondents.
Moreover, the petitioner sought the issuance of a writ of preliminary injunction to restrain
the corporations from negotiating with third persons or from actually carrying out the
transfer of its distributorship and franchising rights. It also asked the court to prohibit the
defendants from terminating their contracts with the petitioner, and if said termination
had already been accomplished, from putting into effect and carrying out the terms and
the consequences of said termination until after good faith negotiations on existing
contracts between them had been carried out and completed.

ISSUE:
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Whether or not respondent corporations can be considered as "doing business" in
the Philippines and, therefore, subject to the provisions of R.A. No. 5455

RULING:
There is no general rule or governing principle laid down as to what constitutes
"doing" or engaging in" or "transacting" business in the Philippines. Each case must be
judged in the light of its peculiar circumstances. The acts of these corporations should be
distinguished from a single or isolated business transaction or occasional, incidental and
casual transactions which do not come within the meaning of the law. The true test,
however, seems to be whether the foreign corporation is continuing the body or substance
of the business or enterprise for which it was organized or whether it has substantially
retired from it and turned it over to another. In the case at bar, when the respondents
entered into the disputed contracts with the petitioner, they were carrying out the
purposes for which they were created, i.e. to manufacture and market welding products
and equipment. The terms and conditions of the contracts as well as the respondents'
conduct indicate that they established within our country a continuous business, and not
merely one of a temporary character. Respondents' acts enabled them to enter into the
mainstream of our economic life in competition with our local business interests. This
necessarily brings them under the provisions of R.A. No. 5455. All told, the Court
upholds the appellate court's finding that "IRTI AND ECED were doing business and
engaging in economic activity in the Philippines, as a prerequisite to which they should
have first secured a written certificate from the Board of Investments."

Notes:

As between the parties themselves, R.A. No. 5455 does not declare as void or invalid the
contracts entered into without first securing a license or certificate to do business in the
Philippines. Neither does it appear to intend to prevent the courts from enforcing
contracts made in contravention of its licensing provisions. There is no denying, though,
that an "illegal situation," as the appellate court has put it, was created when the parties
voluntarily contracted without such license. The very purpose of the law was
circumvented and evaded when the petitioner entered into said agreements despite the
prohibition of R.A. No. 5455. The parties in this case being equally guilty of violating
R.A, No. 5455, they are in pari delicto, in which case it follows as a consequence that
petitioner is not entitled to the relief prayed for in this case.

82. Antam Consolidated v. CA, 143 SCRA 289
FACTS:
Stokely filed a complaint against Banahaw, Tambunting, and Unicom for
collection of sum of money.
1) Stokely is a corporation organized and existing under the laws of the state of Indiana,
U.S.A., and one of its subdivisions "Capital City Product Company" (Capital City) has its
office in Columbus, Ohio, U.S.A.;
(2) that Stokely and Capital City were not engaged in business in the Philippines prior to
the commencement of the suit;
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(3) that Capital City and Coconut Oil Manufacturing (Phil.) Inc. (Comphil) entered into a
contract wherein Comphil undertook to sell and deliver, and Capital City agreed to buy
500 long tons of crude coconut oil
4) but Comphil failed to deliver the coconut oil so that Capital City covered its coconut
oil needs in the open market at a price substantially in excess of the contract and
sustained a loss of US$103,600; that to settle Capital City's loss under the contract, the
parties entered into a subsequent numerous contracts just for the Comphil to settle and
recompense the damages, but to no avail
5) that after repeated demands from Comphil to pay the said amount, the latter still
refuses to pay the same.
6) petitioners filed a motion to dismiss on the ground that Stokely, being a foreign
corporation not licensed to do business in the Philippines has no personality to maintain
the instant suit
7) petitioner averred that the test of whether one is doing business or not is whether
there is continuity of transactions which are in pursuance of the normal business of the
corporation

ISSUE:
What constitutes doing business in the Philippines. Is the petitioner
correct?

RULING:
There is no general rule or governing principle laid down as to what constitutes
'doing' or 'engaging in' or 'transacting business in the Philippines. Each case must be
judged in the Light of its peculiar circumstance. The acts of these corporations should be
distinguished from a single or isolated business transaction or occasional, incidental and
casual transactions which do not come within the meaning of the law. Where a single act
or transaction , however, is not merely incidental or casual but indicates the foreign
corporation's intention to do other business in the Philippines, said single act or
transaction constitutes 'doing' or 'engaging in' or 'transacting' business in the Philippines.
The true test, however, seems to be whether the foreign corporation is continuing the
body or substance of the business or enterprise for which it warning-organized or whether
it has substantially was retired from it and turned it over to another.
The term implies a continuity of commercial dealings and arrangements, and
contemplates, to that extent, the performance of acts or workers or the exercise of some
of the functions normally incident to, and in progressive prosecution of, the purpose and
object of its organization.
In the case at bar, the transactions entered into by the respondent with the
petitioners are not a series of commercial dealings which signify an intent on the part of
the respondent to do business in the Philippines but constitute an isolated one which does
not fall under the category of "doing business." The records show that the only reason
why the respondent entered into the second and third transactions with the petitioners was
because it wanted to recover the loss it sustained from the failure of the petitioners to
deliver the crude coconut oil under the first transaction and in order to give the latter a
chance to make good on their obligation. Instead of making an outright demand on the
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petitioners, the respondent opted to try to push through with the transaction to recover the
amount of US$103,600.00 it lost.
in reality, there was only one agreement between the petitioners and the respondent and
that was the delivery by the former of 500 long tons of crude coconut oil to the latter,
who in turn, must pay the corresponding price for the same. The three seemingly different
transactions were entered into by the parties only in an effort to fulfill the basic
agreement and in no way indicate an intent on the part of the respondent to engage in a
continuity of transactions with petitioners which will categorize it as a foreign
corporation doing business in the Philippines.
Further, Stokely, being a foreign corporation not doing business in the
Philippines, does not need to obtain a license to do business in order to have the capacity
to sue.
As we have held in Eastboard Navigation Ltd. v. Juan Ysmael and Co: While plaintiff is
a foreign corporation without license to transact business in the Philippines, it does not
follow that it has no capacity to bring the present action. Such license is ' not necessary
because it is not engaged in business in the Philippines.

83. Claude Neon Lights Federal, Inc. v. Phil. Advertising Corp., 57 Phil.607
FACTS:
Phil Advertising Corp filed suit against the petitioner claiming P300k as damages
for alleged breach of the agency contract existing between the two. At the same time, Phil
Advertising filed in said court an application for writ of attachment duly verified in which
it is stated that Claude Neon Lights is a foreign corporation having its principal place of
business in Washington.
However, the only statutory ground relied upon for the issuance of the writ of
attachment is par 2 of section 424 of the Code of Civil Procedure which provides that
plaintiff may have the property of the defendant attached in an action against a defendant
not residing in the Phil islands.
Claude Neon Lights is a corporation duly organized under the laws of the District of
Columbia; it had complied with all the requirements of the Philippine laws and was duly
licensed to do business in the Phil Islands on the date said writ of attachment was issued.
It was actively engaged in doing business in the Phil Islands and had considerable
property, which was in the possession and under the control and management of Phil
Advertising Co., as the agent of the petitioner, on the date said attachment was levied.
ISSUE:
Whether Claude Neon Lights, a foreign corporation, shall, in a metaphorical
sense, be deemed as not residing in the Philippine Islands in the sense in which that
expression would apply to a natural person

RULING:
Having regard to the reason for the statute which is the protection of the creditors
of a non-resident, we are of the opinion that there is not the same reason for subjecting a
duly licensed foreign corporation to the attachment of its property by a plaintiff under
section 424 (2), Civil Procedure, as may exist in the case of a natural person not residing
in the Philippines islands. The law does not require a nonresident citizen, as it does the
corporation, to appoint a resident agent for service of process; nor to prove to the
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satisfaction of the Government before the does business here, as the foreign corporation
must prove, that he is solvent and in sound financial condition (section 125,
Corporation Code). He pays no license fee nor is his business subject at any time to
investigation by the Secretary of Finance and the Governor-General; nor is his right to
continue to do business revocable by the Government. His books and papers are not
liable to examination at any time by the Attorney-General, the Insular Auditor, the
Insular Treasurer, or any other officer of the Government on the order of the Governor-
General. He is not, like a foreign corporation bound by all laws, rules and regulations
applicable to domestic corporations which are designed to protect creditors and the
public. He can evade service of summons and other legal process, the foreign corporation
never.
Corporations are less mobile than individuals, especially of foreign corporations that are
carrying on business by proper authority. They possess great capital which is seeking
lucrative and more or less permanent investment in young and developing countries like
our Philippines.

Section 71, however, provides that if the Secretary of Finance or the Secretary of
Commerce and Communications and the Governor-General find a duly licensed foreign
corporation to be insolvent or that is continuance in business will involve probable loss to
its creditors, they may revoke its license and the Attorney-General shall take such
proceedings as may be proper to protect creditors and the public. It contemplates that the
proceedings instituted by the Attorney-General shall effect the protection of all creditors
and the public equally.
Par 2, section 424, old civil procedure, does not apply to a domestic corporation. Our
laws and jurisprudence indicate a purpose to assimilate foreign corporations duly
licensed to do business here to the status of domestic corporations. We think it would
be entirely out of line with this policy should we make a discrimination against a foreign
corporation subject its property to the harsh writ of seizure by attachment when it has
complied not only with every requirement of law made especially of foreign
corporations, but in addition with every requirement of law made of domestic
corporation.

84. Phil. Products Co. v. Primateria Societe Anonyme Pour Le Commerce Exterieur
(Phil), Inc., 15 SCRA 301
FACTS:
Primateria is a foreign juridical entity and had its main office at Zurich,
Switzerland. It was then engaged in transactions in international trade with agricultural
products, particularly in oils, fats and oil-seeds and related products.
Primateria entered into an agreement with plaintiff Phil Products, whereby the latter
undertook to buy copra in the Phils for the account of Primateria Zurich, during a
tentative experimental period of one month from date. The contract was renewed by
mutual agreement of the parties. During such period, the plaintiff caused the shipment of
copra to foreign countries pursuant to instructions from defendant Primateria.
It is Phil Products theory that Primateria is a foreign corporation within the meaning of
Sections 68 and 69 of the Corporation Law and since it transacted business in the Phils
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without the necessary license, its agents are personally liable for contracts made in its
behalf.

ISSUES:
(1) Whether defendant Primateria may be considered a foreign corporation within
the meaning of Sections 68 and 69 of the Corporation Law (amended by BP
68, Corporation CODE)
(2) Whether it may be considered as having transacted business in the Philippines
within the meaning of said sections
(3) Whether its agents may be held personally liable on contracts made in the
name of the entity with third persons in the Philippines
RULING:
No, Primateria was not duly proven to be a foreign corporation; nor that a societe
anonyme (sociedad anomima) is a corporation; and that failing such proof, the societe
cannot be deemed to fall within the prescription of Section 68 of the Corporation Law.
Plainitiff alleges that the agents are liable to it under Art. 1897 of the New Civil Code,
but there is no proof that the agents exceeded the limits of their authority.
Foreign corporations doing business without a license can be sued for contracts made by
him in the name of such corporation. Moreover, liability of the agent is necessarily
premised on the inability to sue the principal or non-liability of such principal.

85. General Corporation of the Phil. v. Union Insurance Society of Canton, Ltd., 87
Phil. 313
FACTS:
General Corporation of the Philippines and the Mayon Investment Co. are
domestic corporations duly organized and existing by virtue of the laws of the
Philippines, with principal offices in Manila. The Union Insurance Society of Canton,
Ltd. is a foreign insurance corporation, duly authorized to do business in the Philippines,
with head office in the City of Hongkong, China, and a branch office in Manila. The
Firemans Fund Insurance Co. is a foreign insurance corporation duly organized and
existing under the laws of the State of California, U. S. A. It has been duly registered
with the Insurance Commissioner of the Bureau of Commerce as such insurance
company since November 7, 1946, and authorized to do business in the Philippines since
that date. The Union Insurance Society of Canton, Ltd. has been acting as settling agent
of and settling insurance claims against the Firemans Fund Insurance Co. even before
the last world war and continued as such at least up to November 7, 1946.
Plaintiffs sued the Union Insurance Society of Canton, Ltd. and the Firemans
Fund Insurance Co. for the payment of 12 marine insurance which were issued by the
Firemans Fund Insurance Co. for merchandise shipped from the United States to the
Philippines in 1945. As regards the issue of jurisdiction, summons corresponding to
Firemans Fund Insurance Co. was served, on the Union Insurance Society of Canton,
Ltd. then acting as appellants settling agent in this country. At that time, the appellant
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Fireman Co. had not yet been registered and authorized to do business in the Philippines.
Said registration and authority came a little less than two months later.
The trial court in its decision held that service of summons for appellant Firemans
Fund Insurance Co. on its settling agent Union Insurance Society of Canton, Ltd., was
legal and gave the court jurisdiction over said appellant, the court ruling that the phrase
"or agents within the Philippines" clearly embraced settling agents like the Union
Insurance Society of Canton, Ltd (Section 14, Rule 7 of the Rules of Court).

ISSUES:
(1) Whether or not Firemans Fund Insurance Co. was doing business in the
Philippines; and
(2) Whether or not that trial court acquired jurisdiction over it.

RULING:
(1) Yes. It is a rule generally accepted that one single or isolated business
transaction does not constitute "doing business" within the meaning of the law,
and that transactions which are occasional, incidental and casual, not of a
character to indicate a purpose to engage in business do not constitute the doing or
engaging in business contemplated by law. In order that a foreign corporation
may be regarded as doing business within a State, there must be continuity of
conduct and intention to establish a continuous business, such as the appointment
of a local agent, and not one of a temporary character. The Firemans Fund
Insurance Co., to judge by the twelve marine insurance policies issued as already
mentioned, policies covering different shipments, made payable in Manila,
indorsed in blank, and in practice, collectible by the consignees in Manila or such
other persons or entities who meet the terms by paying the amounts of the
invoices, rendering it not only convenient but necessary for said Firemans Fund
Insurance Co. to appoint and keep a settling agent in this jurisdiction, was
certainly doing business in the Philippines. And these were not casual or isolated
business transactions. According to the evidence, since before the war, the
Firemans Fund Insurance Co. would appear to have engaged in this kind of
business and had employed its co-defendant Union Insurance Society of Canton,
Ltd. as its settling agent, although sometime in 1946, between July and August of
that year, appellant had its own employee from its head office in America, one
John L. Stewart, acting as its settling agent here. And, to conclusively prove
continuity of the business and the intention of the appellant not only to establish
but to continue such regular business in this jurisdiction, less than two months
after service of summons, it applied for, obtained a license and was authorized to
regularly do business in the Philippines.
(2) SC in its conclusion hold that a foreign corporation actually doing
business in this jurisdiction, with or without license or authority to do so, is
amenable to process and the jurisdiction of local courts. If such foreign
corporation has a license to do business, then summons to it will be served on the
agent designated by it for the purpose, or otherwise in accordance with the
provisions of the Corporation Law. Where such foreign corporation actually
doing business here has not applied for license to do so and has not designated an
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agent to receive summons, then service of summons on it will be made pursuant
to the provisions of the Rules of Court, particularly Rule 7, section 14 thereof. SC
added that where a foreign insurance corporation engages in regular marine
insurance business here by issuing marine insurance policies abroad to cover
foreign shipments to the Philippines, said policies being made payable here, and
said insurance company appoints and keeps an agent here to receive and settle
claims flowing from said policies, then said foreign corporation will be regarded
as doing business here in contemplation of law.

86. Grey v. Insular Lumber Co., 67 Phil. 139
FACTS:
Insular Lumber Company is a corporation organized and existing under the laws
of the State of New York, licensed to engage in business in the Philippines, with offices
in the City of Manila, in Fabrica, Occidental Negros, in New York and in Philadelphia.
M. E Gray is the owner and possessor of 6, shares of the capital stock of the defendant
corporation. The dispute arises when he asked the offices of insular lumber in Manila and
in Fabrica to permit him to examine the books and records of the business of said
defendant, but he was not allowed to do so. According to Insular Lumber, applying the
law of New York, the rights of a stockholder to examine the books and records of a
corporation organized under the laws of that State, have been, during the entire period
material to this action, only those provided in section 77 of the Stock Corporation Law
which substantially provides that only stockholder owning at least three percent of the
capital stock has the right to examine the books and records of the corporation. M.E
Gray, not being a stockholder owning at least three percent of the capital stock has not
right to examine. M.E Gray, contends that under our Corporation code, under which
insular lumber company was registered to do business in the Philippines, he is entitled, as
stockholder, to inspect the record of the transactions of the defendant corporation (sec.
51, Act No. 1459), and this right, which is recognized in the common law, has not been
altered by section 77 of the Stock Corporation Law of New. The lower court denied the
petition for mandamus compelling the company to allow the petitioner to examine the
books and records.

ISSUE:
Whether M.E Gray is entitled, as stockholder of the Insular Lumber Company, to
inspect and examine the books and records of the transactions of said company.

RULING:
No. The decision of the CFI was affirmed denying the mandamus against the
company and absolving it from the complaint. The stipulation of facts is binding upon
both parties and cannot be altered by either of them.On the strength of that principle M.E
Gray is bound to adhere to the agreement made by him with the Insular Lumber Co. in
paragraph four of the stipulation of facts, to the effect that the rights of a stockholder,
under the law of New York, to examine the books and records of a corporation organized
under the laws of said State, and during the entire period material to this action, are only
those provided in section 77 of the Stock Corporation Law of New York. Under this law,
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plaintiff has the right to be furnished by the treasurer or other fiscal officer of the
corporation with a statement of its affairs embracing a particular account of all its assets
and liabilities.

The right under the common law cannot be granted by insular lumber in the present case,
since the same can only be granted at the discretion of the court, under certain conditions,
to wit:
(a) That the stockholder of a corporation in New York has the right to inspect its books
and records if it can be shown that he seeks information for an honest purpose
(b) That said right to examine and inspect the books of the corporation must be exercised
in good faith, for a specific and honest purpose, and not to gratify curiosity, or for
speculative or vexatious purposes.

M.E Gray has made no effort to prove or even allege that the information he desired to
obtain through the examination and inspection of defendants books was necessary to
protect his interests as stockholder of the corporation, or that it was for a specific and
honest purpose, and not to gratify curiosity, nor for speculative or vexatious purposes.

87. Santos v. Bishop of Nueva Caceres, 45 Phil. 895
FACTS:
It appears from the record of this case that the appellant's husband, Engracio
Orense, died, leaving an estate which, according to the inventory filed by the appellant,
was worth the sum of P43,382.27 over and above all debts, expenses of last illness and
the funeral, as well as expenses of administration. The deceased left a will, according to
which six parcels of land were left to the Roman Catholic Church as trustee for various
purposes.

The will was probated, and the appellant was appointed executrix. In the meantime, the
appellant, as special administratrix of the estate, filed a motion reciting that the deceased,
in his lifetime, had obtained a franchise to establish and operate an electric light plant and
had signed a contract with the Pacific Commercial Company whereby the latter agreed to
furnish him the machinery and that the said appellant was bound to continue to pay the
debts in order to completely extinguish the obligation.

The appellant filed a motion in which she stated that she had been seeking buyers for the
properties and that offers had not reached even half of the debts, and she therefore asked
for authority to sell three more parcels of land, all of which pertained to the devise in
favor of the Roman Catholic Church. This motion also contained the indorsement of
Julian Ope, the parish priest of Guinobatan.

Upon argument by counsel for both parties, but without any testimony being offered or
received, the court revoked the license to sell on the ground that the consent to the sale
given by the parish priest at Guinobatan was of no legal effect and that the license,
therefore, was improvidently granted.
122

ISSUE:
Whether the order of sale is void.

RULING:
Yes. At the time of the granting of the licensed, a distribution of the estate of the
deceased had been made, the order of distribution had become final and the title to the
estate in remainder devised to the Roman Catholic Church had become vested. As far as
the title to the property was concerned, the administration proceedings were then
terminated and the court had lost its jurisdiction in respect thereto. There might still be a
lien on the property for the debts of the deceased and legitimate expenses of
administration, but it seems obvious that the court could have no jurisdiction to foreclose
this lien and order the property sold unless some sort of notice was given the holder of
the title. No notice, neither actual nor constructive, was given in the present case. It does
not even appear that the order of sale was recorded in the office of the registry of deeds as
required by subsection 7 of section 722 of the Code of Civil Procedure. The order of sale
was therefore void for want of jurisdiction in the court and could be vacated at anytime
before it had been acted upon and sale made and confirmed.
The court could properly take judicial notice of the fact that the corporation sole, the
Roman Catholic Archbishop of Nueva Caceres is the administrator of the temporalities of
that church in the diocese within which the land in question is situated and that the parish
priest have no control thereover.

88. Gana v. Roman Catholic Archbishop of Manila, 43 O.G. No. 8, 3225 (1947)

89. Roman Catholic Apostolic Administrator of Davao, Inc. v. Land Registration
Com., 102 Phil. 596
FACTS:
Mateo Rodis, a Filipino citizen and resident of Davao City, executed a deed of
sale in favor of Roman Catholic Apostolic Administrator of Davao Inc., a corporation
sole organized and existing in accordance with Philippine laws, with Msgr. Clovis
Thibault, a Canadian citizen, as actual incumbent.
When the deed of sale was presented to Register of Deeds of Davao for registration, it
required the Roman Catholic Inc, a corporation sole, to submit an affidavit declaring that
60% of the members thereof were Filipino citizens.
The Register of Deeds referred the matter to the Land Registration Commissioner
en consulta for resolution. The latter held that in view of the provisions of Section 1 and
5 of Article XIII of the Philippine Constitution, the vendee was not qualified to acquire
private lands in the Philippines in the absence of proof that at least 60% of the capital,
property, or assets of the Roman Catholic Apostolic Administrator of Davao, Inc., was
actually owned or controlled by Filipino citizens, there being no question that the present
incumbent of the corporation sole was a Canadian citizen. Further, that section 159 of the
Corporation Law relied upon by the vendee was rendered operative by the
aforementioned provisions of the Constitution with respect to real estate, unless the
precise condition set therein that at least 60% of its capital is owned by Filipino
citizens.
123

Petitioner consistently maintained that a corporation sole, irrespective of the
citizenship of its incumbent, is not prohibited or disqualified to acquire and hold real
properties. The Corporation Law and Canon Law are explicit in their provisions that a
corporation sole or ordinary is not the owner of the properties that he may acquire but
merely the administrator thereof. The Canon Law also specified that church temporalities
are owned by the Catholic Church as a moral person or by the diocese, the bishop only as
administrator.
Respondents averred that although the petitioner is not the owner of the land
purchased, yet he has control over the same, with full power to administer, take
possession, alienate, and many others which actually entail all rights of ownership over
the properties.

ISSUE:
(1) Who are considered qualified to acquire and hold agricultural lands in the
Philippines?
(2) What is the effect of this constitutional prohibition of the right of a religious
corporation recognized by our Corporation Law and registered as a
corporation sole, to possess, acquire, and register real estates in its name when
the Head, Manager, Administrator, or actual incumbent is an alien?
RULING:
A corporation sole is a special form of corporation usually associated with the
clergy.
Conceived and introduced into the common law by sheer necessity, this legal creation
was designed to facilitate the exercise of the functions of ownership carried on by the
clerics for and on behalf of the church which was regarded as the property owner.
A corporation sole consists of one person only, and his successors (who will always be
one at a time), in some particular station, who are incorporated by law in order to give
them some legal capacities and advantages, particularly that of perpetuity, which in their
natural persons they could not have had. In this sense, the king is sole corporation; so is a
bishop, or dens, distinct from their several chapters.

Section 154 of the Corporation Law on religious corporations govern, which provides:
Sec154. For the administration of the temporalities of any religious
denomination, society or church and the management of the estates and the properties
thereof, it shall be lawful for the bishop, chief priest, or presiding either of any such
religious denomination, society or church to become a corporation sole, unless
inconsistent with the rules, regulations or discipline of his religious denomination, society
or church or forbidden by competent authority thereof.
Section 155 also provides us that: In order to become a corporation sole the bishop,
chief priest, or presiding elder of any religious denomination, society or church must file
with the Securities and Exchange Commission articles of incorporation setting forth the
fact: (3) that as such bishop, chief priest, or presiding elder he is charged with the
administration of the temporalities and the management of the estate and properties of his
religious denomination, society, or church within its territorial jurisdiction, describing it.
124

Section 157 of the Commonwealth Act No. 287 states that: From and after the filing
with the SEC all estates, properties shall be held in trust by him as a corporation
sole, for the use, purpose, behalf, and sole benefit of his religious denomination, society,
or church, including hospitals, schools, colleges, orphan, asylums, parsonages, and
cemeteries thereof.
Hence, the bishops or archbishops as corporations sole are merely administrators
of the church properties that come to their possession, in which they hold in trust for the
church.
Moreover, church properties acquired by the incumbent of a corporation sole pass, by
operation of law, upon his death not his personal heirs but to his successors in office.
Q: Whether the Universal Roman Catholic Apostolic Church in the Philippines, or better
still, the corporation sole named the Roman Catholic Apostolic Administrator of Davao,
Inc., is qualified to acquire private agricultural lands in the Philippines pursuant to the
provisions of Article XII of the Constitution.
A Corporation sole is organized and composed of a single individual, the head of
any religious society or church, for the administration of the temporalities of such society
or church. By temporalities is meant estate and properties not used exclusively for
religious worship. The successor in office of such religious head or chief priest
incorporated as a corporation sole shall become the corporation sole on ascension to
office, and shall be permitted to transact business as such on filing with the SEC.
Section113, B.P.68 of the Corporation Code states that any corporation sole may
purchase and hold real estate and personal property for its church, charitable, benevolent,
or educational purposes, and may receive bequests of gifts. Such corporation may
mortgage or sell real property upon obtaining an order for that purpose from the Court
of First Instance of the province where the property is located proof must be made to
the satisfaction of the Court that notice of the application for leave to mortgage or sell has
been given by publication or otherwise in such manner leave to mortgage or sell must
be made by petition, duly verified by the bishop, chief priest, or presiding elder acting as
corporation sole, and may be opposed by any member Provided in case where the
rules, regulations, and discipline of the religious denomination, society or church
regulate the methods of acquiring holding, selling and mortgaging real estate and
personal property such shall control and the intervention of the Courts shall not be
necessary.
Hence, the power of a corporation sole to purchase real property is not restricted
although the power to sell or mortgage sometimes depends upon the rules and regulations
of the church concerned represented by said corporation sole.
Can they register said real properties? As provided by law, lands held in trust for specific
purposes may be subject of registration, and the capacity of a corporation sole to register
lands belonging to it is acknowledged, and title thereto may be issued in its name. Every
corporation sole then organized and registered had by express provision of law the
necessary power and qualification to purchase in its name private lands located in the
territory in which it exercised its functions or ministry and for which it was created,
independently of the nationality of its incumbent unique and single member and head, the
bishop of the diocese. Note that Roman Catholic Apostolic Church in the Philippines has
no nationality and that the framers of the Constitution did not have in mind the religious
corporations sole when they provided the 60% of the capital be owned by Filipinos.
125

A duly registered corporation sole is an artificial being having the right of
succession and the power, attributes, and properties expressly authorized by law or
incident to its existence (Section 1, Corporation Law).
1. A corporation sole is organized by and composed of a single individual, the head
of any religious society or church operating within the zone, are or jurisdiction covered
by said corporation sole (Article 110, Corporation Code, BP68);
2. That a corporation sole is a non-stock corporation;
3. That the Ordinary (the corporation sole proper) does not own the temporalities
which he merely administers;
4. That under the law the nationality of said Ordinary or of any administrator has
absolutely no bearing on the nationality of the person desiring to acquire real property in
the Philippines by purchase or other lawful means other than by hereditary succession,
who according to the Constitution must be a Filipino
5. That section 113 of the Corporation Code expressly authorized the corporation
sole to purchase and hold real estate for its church, charitable, benevolent or educational
purposes, and to receive bequests or gifts for such purposes;

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