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Business Organization 2 (Corporation Code) Case Digests

Christopher G. Halnin
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(1)

Aurbach vs. Sanitary Wares, 180 SCRA 130 (1989)


Roman Catholic Administrator vs. LRC, 102 Phil. 597 (1957)
Government of the PI vs. Manila Railroad, 103 PHIL 757 (1929)
PMI Colleges vs. NLRC, GR. No. 121466, August 15, 1997
Vda. De Salvatierra vs. Garlitos, 103 PHIL 757 (1958)
Villa Rey Transit vs. Ferrer, 25 SCRA 845 (1968)
NAMARCO vs. Associated Finance Co., Inc. 19 SCRA 962
Datu vs. SEC, 123 SCRA 722 (1983)
PNB vs. CA, 83 SCRA 237 (1978)
De Silva vs. Aboitiz, 44 PHIL 755
Escano vs. Filipinas Mining, 74 PHIL 711
Gokongwei vs. SEC, 89 SCRA 336 (1979)
Philpots vs. Phil. Manufacturing, 40 PHIL 471
Lee vs. Court of Appeals, 205 SCRA 752 (1992)
Pearson and George vs. NLRC, 67 SCAD 698, January 30, 1996
RCBC vs. IAC, GR. No. 74851 (1999)
Avon Insurance PLC vs. CA, GR. No. 97642 (1997)
Western Equipment vs. Reyes, 51 PHIL 115
Joint Venture
Aurbach vs. Sanitary Wares
180 SCRA 130
December 15, 1989
FACTS:
In 1961, Saniwares, a domestic corporation was incorporated for the primary purpose of manufacturing and
marketing sanitary wares. One of the incorporators, Mr. Baldwin Young went abroad to look for foreign partners,
European or American who could help in its expansion plans. On August 15, 1962, ASI, a foreign corporation
domiciled in Delaware, United States entered into an Agreement with Saniwares and some Filipino investors
whereby ASI and the Filipino investors agreed to participate in the ownership of an enterprise which would
engage primarily in the business of manufacturing in the Philippines and selling here and abroad vitreous china
and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall initially be "Sanitary Wares Manufacturing
Corporation." The joint enterprise thus entered into by the Filipino investors and the American corporation
prospered. Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. And during one of their stockholders meeting for the election of directors, a
disagreement between numbers of representative by both parties to board was had. Although it is clear in that
the foreign corporation was entitled to three seats in the board of nine, however it was suspected that their
other two Filipino nominees are beholden to ASI, thus, given ASI, in essence, five seats in the board. The ASI
Group contends being a corporation by their agreement with Saniwares, they are entitled to vote their additional
10% equity during election of Saniwares Board of Directors.
ISSUE:
Whether or not the nature of the business established by the parties was a joint venture and not a corporation?
HELD:
The Court held in the affirmative. Quite often, Filipino entrepreneurs in their desire to develop the industrial and
manufacturing capacities of a local firm are constrained to seek the technology and marketing assistance of huge
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multinational corporations of the developed world. Arrangements are formalized where a foreign group becomes
a minority owner of a firm in exchange for its manufacturing expertise, use of its brand names, and other such
assistance. However, there is always a danger from such arrangements. The foreign group may, from the start,
intend to establish its own sole or monopolistic operations and merely uses the joint venture arrangement to
gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group undermines the local majority ownership
and actively tries to completely or predominantly take over the entire company. This undermining of joint
ventures is not consistent with fair dealing to say the least. To the extent that such subversive actions can be
lawfully prevented, the courts should extend protection especially in industries where constitutional and legal
requirements reserve controlling ownership to Filipino citizens.
The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a
general business with some degree of continuity, while the joint adventure is formed for the execution of a single
transaction, and is thus of a temporary nature. This observation is not entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its
object a specific undertaking. It would seem therefore that under Philippine law, a joint adventure is a form of
partnership and should thus be governed by the law of partnerships. The Supreme Court has however recognized
a distinction between these two business forms, and has held that although a corporation cannot enter into a
partnership contract, it may however engage in a joint adventure with others.

(2)

Corporation Sole
Roman Catholic Administrator vs. LRC
102 Phil. 597
December 20, 1957
FACTS:
October 4, 1954: Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed a deed of sale of a
parcel of land in favor of the 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. The Register of Deeds of Davao for registration, having in mind a previous resolution of the CFI in
Carmelite Nuns of Davao were made to prepare an affidavit to the effect that 60% of the members of their corp.
were Filipino citizens when they sought to register in favor of their congregation of deed of donation of a parcel
of land, required it to submit a similar affidavit declaring the same. The Roman in the letter expressed willingness
to submit an affidavit but not in the same tenor as the Carmelite Nuns because it had five incorporators while as
a corporation sole it has only one and it was ownership through donation and this was purchased. As
the Register of the Land Registration Commissioner has some doubts as to the registerability of the deed of sale,
the matter was referred to the Land Registration Commissioner en consulta for resolution. According to the
respondent, 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 per centum 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. Action for mandamus was instituted by Roman alleging the land is held in true for the benefit
of the Catholic population of the place.
ISSUE:
Whether or not Roman is qualified to acquire private agricultural lands in the Philippines pursuant to the
provisions of Article XIII of the Constitution?
HELD:
The Court held in the affirmative. The Register of Deeds of the City of Davao is ordered to register the deed of
sale. A corporation sole consists of one person only, and his successors who will always be one at a time, in some
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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 a
sole corporation; so is a bishop, or dens, distinct from their several chapters. A corporation sole is composed of
only one persons, usually the head or bishop of the diocese, a unit which is not subject to expansion for the
purpose of determining any percentage whatsoever. Only the administrator and not the owner of the
temporalities located in the territory comprised by said corporation sole and such temporalities are administered
for and on behalf of the faithful residing in the diocese or territory of the corporation sole. It has no nationality
and the citizenship of the incumbent and ordinary has nothing to do with the operation, management or
administration of the corporation sole, nor effects the citizenship of the faithful connected with their respective
dioceses or corporation sole. Constitution demands that in the absence of capital stock, the controlling
membership should be composed of Filipino citizens. (Register of Deeds of Rizal vs. Ung Sui Si Temple).
Undeniably the members of the Roman Catholic Apostolic faith within the territory of Davao are predominantly
Filipino citizens. The fact that the law thus expressly authorizes the corporations sole to receive bequests or gifts
of real properties (which were the main source that the friars had to acquire their big haciendas during the
Spanish regime), is a clear indication that the requisite that bequests or gifts of real estate be for charitable,
benevolent, or educational purposes, was, in the opinion of the legislators, considered sufficient and adequate
protection against the revitalization of religious landholdings. As in respect to the property which they hold for
the corporation, they stand in position of TRUSTEES and the courts may exercise the same supervision as in other
cases of trust.

(3)

General Formalities in Organizing Corporations


Government of the PI vs. Manila Railroad
103 PHIL 757
June 30, 1929
FACTS:
Petitioner filed in the Supreme Court of the extraordinary legal writ of mandamus praying that the writ be issued
to compel the Manila Railroad Company to provide and equip the telegraph poles of said company between the
municipality of Paniqui, Province of Tarlac, and the Municipality of San Fernando, Province of La Union, with
crosspieces for six telegraph wires belonging to the Government, which, it is alleged, are necessary for public
service between said municipalities. Petitioner relies upon the provisions of section 84 of Act No. 1459, the
General Corporation Law, which was adopted by the United States Philippine Commission on March 1, 1906.
Petitioner contends that under said section 84 the defendant company is required to erect and maintain posts for
its telegraph wires, of sufficient length and strength, and equipped with sufficient crosspieces to carry the
number of wires which the Government may consider necessary for the public service, and that six wires are now
necessary for the public service. The respondents answered by a general and special defense. In their special
defense they contend that section 84 of Act No. 1459 has been repealed by section 1, paragraph 8 of Act No.
1510 of the United States Philippine Commission, and that under the provisions of said Act No. 1510 the
Government is entitled to place on the poles of the company four wires only. Act No. 1510 is the charter of the
Manila Railroad Company.
ISSUE:
Whether or not a special charter supersedes a general law?
HELD:
The Court held in the affirmative. As has been said, Act No. 1459 is a general law applicable to corporations
generally, while Act No. 1510 is the charter of the Manila Railroad Company and constitute a contract between it
and the Government. Inasmuch as Act No. 1510 is the charter of Manila Railroad Company and constitute a
contract between it and the Government, it would seem that the company is governed by its contract and not by
the provisions of any general law upon questions covered by said contract. From a reading of the said charter or
contract it would be seen that there is no indication that the Government intended to impose upon said company
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any other conditions as obligations not expressly found in said charter or contract. If that is true, then certainly
the Government cannot impose upon said company any conditions or obligations found in any general law, which
does not expressly modify said contract.
Act No. 1510 is a special charter of the respondent company. It constitutes a contract between the respondent
company and the state; and the state and the grantee of a charter are equally bound by its provisions. For the
state to impose an obligation or a duty upon the respondent company, which is not expressly provided for in the
charter (Act No. 1510), would amount to a violation of said contract between the state and the respondent
company. The provisions of Act No. 1459 relating to the number of wires which the Government may place upon
the poles of the company are different and more enerous than the provisions of the charter upon the same
question. Therefore, to allow the plaintiff to require of the respondent company a compliance with said section
84 of Act No. 1459, would be to require of the respondent company and the performance of an obligation which
is not imposed upon it by its charter. The charter of a corporation is a contract between three parties: (a) it is a
contract between the state and the corporation to which the charter is granted; (b) it is a contact between the
stockholders and the state and (c) it is also a contract between the corporation and its stockholders.

(4)

By-Laws
PMI COLLEGES vs. NLRC
G.R. No. 91478
February 7, 1991
FACTS:
In 1991, PMI Colleges hired the services of Alejandro Galvan for the latter to teach in said institution.
However, for unknown reasons, PMI defaulted from paying the remunerations due to Galvan. Galvan made
demands but were ignored by PMI. Eventually, Galvan filed a labor case against PMI. Galvan got a favorable
judgment from the Labor Arbiter; this was affirmed by the National Labor Relations Commission. On appeal, PMI
reiterated, among others, that the employment of Galvan is void because it did not comply with its bylaws.
Apparently, the by-laws require that an employment contract must be signed by the Chairman of the Board of
PMI. PMI asserts that Galvans employment contract was not signed by the Chairman of the Board.
ISSUE:
Whether or not Galvans employment contract is void?
HELD:
The Court held in the negative. PMI Colleges never even presented a copy of the by-laws to prove the existence
of such provision. But even if it did, the employment contract cannot be rendered invalid just because it does not
bear the signature of the Chairman of the Board of PMI. By-Laws operate merely as internal rules among the
stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have
knowledge of the same. In this case, PMI was not able to prove that Galvan knew of said provision in the by-laws
when he was employed by PMI.

(5)

Corporation by estoppel
Vda. De Salvatierra vs. Garlitos
103 PHIL 757
May 23, 1958
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
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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 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 PFPC was a legitimate corporation?
HELD:
The Court held in the negative. 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)

Fraud Cases
Villa Rey Transit vs. Ferrer
25 SCRA 845
October 29, 1968
FACTS:
Prior to 1959, Jose M. Villarama was an operator of a bus transportation, under the business name of Villa Rey
Transit, pursuant to certificates of public convenience granted him by the Public Service Commission (PSC) in
Cases 44213 and 104651, which authorized him to operate a total of 32 units on various routes or lines from
Pangasinan to Manila, and vice-versa. On 8 January 1959, he sold the two certificates of public convenience to
the Pangasinan Transportation Company, Inc. (Pantranco), for P350,000.00 with the condition, among others,
that the seller (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."
Barely 3 months thereafter, or on 6 March 1959: a corporation called Villa Rey Transit, Inc. (the Corporation) was
organized with a capital stock of P500,000.00 divided into 5,000 shares of the par value of P100.00 each;
P200,000.00 was the subscribed stock; Natividad R. Villarama (wife of Jose M. Villarama) was one of the
incorporators, and she subscribed for P1,000.00; the balance of P199,000.00 was subscribed by the brother and
sister-in-law of Jose M. Villarama; of the subscribed capital stock, P105,000.00 was paid to the treasurer of the
corporation, who was Natividad R. Villarama. In less than a month after its registration with the Securities and
Exchange Commission (10 March 1959), the Corporation, on 7 April 1959, bought 5 certificates of public
convenience, 49 buses, tools and equipment from one Valentin Fernando, for the sum of P249,000.00, of which
P100,000.00 was paid upon the signing of the contract; P50,000.00 was payable upon the final approval of the
sale by the PSC; P49,500.00 one year after the final approval of the sale; and the balance of P50,000.00 "shall be
paid by the BUYER to the different suppliers of the SELLER."
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The very same day that the contract of sale was executed, the parties thereto immediately applied with the PSC
for its approval, with a prayer for the issuance of a provisional authority in favor of the vendee Corporation to
operate the service therein involved. On 19 May 1959, the PSC granted the provisional permit prayed for, upon
the condition that "it may be modified or revoked by the Commission at any time, shall be subject to whatever
action that may be taken on the basic application and shall be valid only during the pendency of said application."
Before the PSC could take final action on said application for approval of sale, however, the Sheriff of Manila, on
7 July 1959, levied on 2 of the five certificates of public convenience involved therein, namely, those issued under
PSC cases 59494 and 63780, pursuant to a writ of execution issued by the Court of First Instance of Pangasinan in
Civil Case 13798, in favor of Eusebio E. Ferrer against Valentin Fernando. The Sheriff made and entered the levy in
the records of the PSC. On 16 July 1959, a public sale was conducted by the Sheriff of the said two certificates of
public convenience. Ferrer was the highest bidder, and a certificate of sale was issued in his name. Thereafter,
Ferrer sold the two certificates of public convenience to Pantranco, and jointly submitted for approval their
corresponding contract of sale to the PSC. Pantranco therein prayed that it be authorized provisionally to operate
the service involved in the said two certificates.
The applications for approval of sale, filed before the PSC, by Fernando and the Corporation, Case 124057, and
that of Ferrer and Pantranco, Case 126278, were scheduled for a joint hearing. In the meantime, to wit, on 22
July 1959, the PSC issued an order disposing that during the pendency of the cases and before a final resolution
on the aforesaid applications, the Pantranco shall be the one to operate provisionally the service under the two
certificates embraced in the contract between Ferrer and Pantranco. The Corporation took issue with this
particular ruling of the PSC and elevated the matter to the Supreme Court, which decreed, after deliberation, that
until the issue on the ownership of the disputed certificates shall have been finally settled by the proper court,
the Corporation should be the one to operate the lines provisionally.
On 4 November 1959, the Corporation filed in the Court of First Instance of Manila, a complaint for the
annulment of the sheriff's sale of the aforesaid two certificates of public convenience (PSC Cases 59494 and
63780) in favor of Ferrer, and the subsequent sale thereof by the latter to Pantranco, against Ferrer, Pantranco
and the PSC. The Corporation prayed therein that all the orders of the PSC relative to the parties' dispute over the
said certificates be annulled. The CFI of Manila declared the sheriff's sale of two certificates of public convenience
in favor of Ferrer and the subsequent sale thereof by the latter to Pantranco null and void; declared the
Corporation to be the lawful owner of the said certificates of public convenience; and ordered Ferrer and
Pantranco, jointly and severally, to pay the Corporation, the sum of P5,000.00 as and for attorney's fees. The case
against the PSC was dismissed. All parties appealed.
ISSUE:
Whether the stipulation, "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" in the contract between Villarama and Pantranco,
binds the Corporation (the Villa Rey Transit, Inc.).
HELD:
Villarama supplied the organization expenses and the assets of the Corporation, such as trucks and equipment;
there was no actual payment by the original subscribers of the amounts of P95,000.00 and P100,000.00 as
appearing in the books; Villarama made use of the money of the Corporation and deposited them to his private
accounts; and the Corporation paid his personal accounts. Villarama himself admitted that he mingled the
corporate funds with his own money. These 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. 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
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(7)

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. Hence, the Villa Rey Transit, Inc. is an alter ego
of Jose M. Villarama, and that the restrictive clause in the contract entered into by the latter and 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.
Due Process
NAMARCO vs. Associated Finance Co., Inc.
19 SCRA 962
April 27, 1967
FACTS:
Sometime in 1958, respondent corporation, 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 enter into an agreement with the petitioner for the delivery of bags of
refined and piculs of raw sugar. However, respondent failed to fulfill its obligation. Petitioner through a written
letter, demanded the delivery of the refined and raw sugar or payment of its equivalent cash value amounting to
P372,639.80. As ASSOCIATED refused to deliver the raw sugar or pay for the refined sugar delivered to it, inspite
of repeated demands therefore, NAMARCO instituted an action in the lower court to recover the sum of
P403,514.28 in payment of the raw sugar received by defendants. In their amended answer defendants, by way
of affirmative defenses, alleged that the correct value of the sugar delivered by NAMARCO to them was
P259,451.09 and not P403,514.38 as claimed by NAMARCO.
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?
HELD:
The Court held in the affirmative. Based on records, respondent Sycip owned shares of stocks of the respondent
corporation, that negotiations that lead to the execution of the exchange agreement in question were conducted
exclusively by Sycip on behalf of respondent corporation, that, as a matter of fact, in the course of his testimony,
Sycip referred to himself as the one who contracted or transacted the business in his personal capacity. The
foregoing facts, fully established by the evidence, can lead to no other conclusion than 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. The Court stressed that it is perfectly 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 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.
Wherefore, the decision appealed from is modified by sentencing defendant-appellee Francisco Sycip to pay,
jointly and severally with the Associated Finance Company, Inc.
7

(8)

Power to deny Pre-emptive Rights


Datu Tagoranao Benito vs. SEC
123 SCRA 722
July 25, 1983
FACTS:
Sometime in February 1959, the Articles of Incorporation of respondent Jamiatul Philippine-Al Islamia, Inc. were
filed with the SEC and were approved on December 14, 1962. 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.
Sometime in October 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.
On November 1976, petitioner filed with respondent Securities and Exchange Commission a petition alleging that
the additional issue (worth P110,980.00) of previously subscribed shares of the corporation was made in violation
of his pre-emptive right to said additional issue and that the increase in the authorized capital stock of the
corporation from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record were not
notified of the meeting wherein the proposed increase was in the agenda. 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 from Domocao Alonto and Moki-in Alonto; and that the corporation be
ordered to render an accounting of funds to the stockholders.
ISSUE:
Whether or not the issuance of new shares of stocks was in violation of the pre-emptive rights of the
stockholder?
HELD:
The Court held in the negative. 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.
Petition was dismissed for lack of merit.

(9)

Liability for Torts or Crimes


Philippine National Bank vs. Court of Appeals
83 SCRA 237
May 18, 1978
FACTS:
Rita Tapnio 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 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 and Tapnio filed a third party complaint against PNB where
she alleged that her failure to pay her debts was because of PNBs negligence and unreasonableness.
ISSUE:
Whether or not a corporation can be held liable for damages?
HELD:
The Court held in the affirmative. 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.

(10)

Delinquency Subscription
De Silva vs. Aboitiz
44 PHIL 755
March 21, 1923
9

FACTS:
The plaintiff subscribed for 650 shares of stock of the defendant corporation, 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. On April
22, 1922, he was notified by the secretary of the corporation of a resolution adopted by the board of directors of
the corporation, declaring the unpaid subscriptions to the capital stock of the corporation to have become due
and payable, the payment to be made to the treasurer, and stating that all such shares as may have not been
paid then, with the accrued interest up to that date, will be declared delinquent, 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. The proper advertisement having
been published, as announced in the aforesaid notice, the plaintiff filed a complaint in the Court of First Instance
of Cebu against said corporation, wherein he prayed for a judgment in his favor, decreeing that, in prescribing
another method of paying the subscription to the capital stock different from that provided in article 46 of its bylaws, 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. The plaintiff alleged that, according
to aforesaid article 46 of the by-law of the corporation, all the shares subscribed to by the incorporation that
were not paid for at the time of the incorporation, shall be paid out of the 70 per cent of the profit obtained, the
same to be distributed among the subscribers, who shall not receive any dividend until said shares were paid in
full.
ISSUE:
Whether or not a subscriber may opt for payment of its delinquent subscriptions according to the corporations
by-laws?
HELD:
The Court held in the negative. Art. 46 specifies the manner in which the net profit from the annual liquidation
should be distributed, fixing a certain per cent for the board of directors; another for the general manager;
another for the reserve fund, and the remaining 70 per cent to be distributed in equal parts among the
shareholders. But it authorizes or empowers the board of directors to collect the value of the shares subscribed
to and not fully paid by deducting from the 70 per cent, distributable in equal parts among the shareholders, such
amount as may be deemed convenient, to be applied on the payment of the said shares, and not to pay the
subscriber until the same are fully paid up. So that it is discretionary on the part of the board of directors to do
whatever is provided in the said article relative to the application of a part of the 70 per cent of the profit
distributable in equal parts on the payment of the shares subscribed to and not fully paid. If the board of
directors does not wish to make, or does not make, use of said authority it has two other remedies for
accomplishing the same purpose. 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."
In the instant case the board of directors of the defendant corporation elected to avail itself of the first of said
two remedies, and, complying strictly with the provisions of sections 37 to 49, inclusive, of the aforesaid
Corporation Law, which is binding upon it and its stockholders.

(11)

Transfer of Shareholding
Escano vs. Filipinas Mining
10

74 PHIL 711
July 28, 1944
FACTS:
Sometime in March 1937, Escano obtained judgment in the Court of First Instance of Manila 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. The 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 to which a
writ of garnishment was issued. However during the pendency of the case Escano vs Salvaso, 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 said Salvosa was entitled to receive, and which Bengzon in turn subsequently sold and
transferred to the present defendant-appellant, 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 until December 7, 1940, that is to say, more than three years after the
escrow shares in question were attached by garnishment served on the Filipinas Mining Corporation. Filipinas
further contends that the issued shares and unissued shares of stock should be treated differently.
ISSUE:
Whether or not the issuance of shares of stock to the Standard Investment of the Philippines was valid as against
the attaching judgment creditor of the original owner?
HELD:
The Court held in the negative. According to the Code of Civil Procedure, the Filipinas Mining Corporation became
liable to the plaintiff for the shares of stock mentioned in its return to the sheriff of July 29, 1937, wherein it
informed the latter in response to the notice of garnishment "that according to its books said Silverio Salvosa was
the registered owner of 1,000 active shares evidence by certificate of stock No. 235 and about 21,338 unissued
shares held in escrow by the defendant Filipinas Mining Corporation."
The reason of the law for requiring the recording upon the books of the corporation of transfers of shares of
stock as a condition precedent to their validity against the corporation, and third parties is (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 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. We see no valid reason for treating unissued
shares held in escrow differently from issued shares insofar as their sale and transfer is concerned. In both cases
the corporation is entitled to know who the actual owners of the shares are, and to object to the transfer upon
any valid ground. Likewise, in both cases the possibility of fictitious or fraudulent transfers exists. The only reason
advanced by the appellant for exempting the transfer of unissued shares from recording is that in case of
unissued shares there is no certificate number to be recorded. But that is a mere detail which does not affect the
reasons behind the rule. The lack of such detail does not make it impossible to record the transfer upon the
books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, and
the number of shares transferred, which are the most essential data.
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
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validity against the corporation and third parties, is also applicable to unissued shares held by the corporation in
escrow.

(12)

Powers of the Board of Trustees


Gokongwei vs. SEC
89 SCRA 336
April 11, 1979
FACTS:
Petitioner, stockholder of San Miguel Corp. filed a petition with the SEC for the declaration of nullity of the bylaws etc. against the majority members of the BOD and San Miguel. It is stated in the by-laws that the
amendment or modification of the by-laws may only be delegated to the BODs upon an affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid uo capital stock of the corporation, which
2/3 could have been computed on the basis of the capitalization at the time of the amendment. Petitioner
contends that the amendment was based on the 1961 authorization, the Board acted without authority and in
usurpation of the power of the stockholders n amending the by-laws in 1976. He also contends that the 1961
authorization was already used in 1962 and 1963. He also contends that the amendment deprived him of his right
to vote and be voted upon as a stockholder (because it disqualified competitors from nomination and election in
the BOD of SMC), thus the amended by-laws were null and void. While this was pending, the corporation called
for a stockholders meeting for the ratification of the amendment to the by-laws. This prompted petitioner to
seek for summary judgment. This was denied by the SEC. In another case filed by petitioner, he alleged that the
corporation had been using corporate funds in other corps and businesses outside the primary purpose clause of
the corporation in violation of the Corporation Code.
ISSUE:
Whether or not the amendments valid?
HELD:
The validity and reasonableness of a by-law is purely a question of law. Whether the by-law is in conflict with the
law of the land, or with the charter of the corporation or is in legal sense unreasonable and therefore unlawful is
a question of law. However, this is limited where the reasonableness of a by-law is a mere matter of judgment,
and one upon which reasonable minds must necessarily differ, a court would not be warranted in substituting its
judgment instead of the judgment of those who are authorized to make by-laws and who have exercised
authority. The Court held that a corporation has authority prescribed by law to prescribe the qualifications of
directors. It has the inherent power to adopt by-laws for its internal government, and to regulate the conduct and
prescribe the rights and duties of its members towards itself and among themselves in reference to the
management of its affairs. A corporation, under the Corporation law, may prescribe in its by-laws the
qualifications, duties and compensation of directors, officers, and employees. Any person who buys stock in a
corporation does so with the knowledge that its affairs are dominated by a majority of the stockholders and he
impliedly contracts that the will of the majority shall govern in all matters within the limits of the acts of
incorporation and lawfully enacted by-laws and not forbidden by law. Any corporation may amend its by-laws by
the owners of the majority of the subscribed stock. It cannot thus be said that petitioners has the vested right, as
a stock holder, to be elected director, in the face of the fact that the law at the time such stockholder's right was
acquired contained the prescription that the corporate charter and the by-laws shall be subject to amendment,
alteration and modification. A Director stands in a fiduciary relation to the corporation and its shareholders,
which is characterized as a trust relationship. An amendment to the corporate by-laws which renders a
stockholder ineligible to be director, if he be also director in a corporation whose business is in competition with
that of the other corporation, has been sustained as valid. This is based upon the principle that where the
director is employed in the service of a rival company, he cannot serve both, but must betray one or the other.
The amendment in this case serves to advance the benefit of the corporation and is good. Corporate officers are
also not permitted to use their position of trust and confidence to further their private needs, and the act done in
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furtherance of private needs is deemed to be for the benefit of the corporation. This is called the doctrine of
corporate opportunity.

(13)

Right to Inspect Specified Records (Remedies)


Philpotts vs. Phil. Manufacturing
40 PHIL 471
November 8, 1919
FACTS:
Petitioner is a stockholder in the Philippine Manufacturing Company who sougth to obtain a writ of mandamus to
compel the respondents to permit the plaintiff, in person or by some authorized agent or attorney, to inspect and
examine the records of the business transacted by said company since January 1, 1918. The petition is filed with
the Court of First Instance in cases, among others, where any corporation or person unlawfully excludes the
plaintiff from the use and enjoyment of some right to which he is entitled. The respondents interposed a
demurrer.
The real controversy which has brought these litigants into court is upon the question argued, whether the right
which the law concedes to a stockholder to inspect the records can be exercised by a proper agent or attorney of
the stockholder as well as by the stockholder in person.
In the argument in support of the demurrer it is conceded by counsel for the respondents that there is a right of
examination in the stockholder granted under section 51 of the Corporation Law, but it is insisted that this right
must be exercised in person.
ISSUE:
Whether or not an authorized agent by the stockholder may be allowed to inspect the records of a corporation?
HELD:
The Court held in the affirmative. The pertinent provision of our law is found in the second paragraph of section
51 of Act No. 1459, which reads as follows: "The record of all business transactions of the corporation and the
minutes of any meeting shall be open to the inspection of any director, member or stockholder of the
corporation at reasonable hours."
This provision is to be read of course in connecting with the related provisions of sections 51 and 52, defining the
duty of the corporation in respect to the keeping of its records.
Now it is our opinion, and we accordingly hold, that the right of inspection given to a stockholder in the provision
above quoted can be exercised either by himself or by any proper representative or attorney in fact, and either
with or without the attendance of the stockholder. This is in conformity with the general rule that what a man
may do in person he may do through another; and we find nothing in the statute that would justify us in
qualifying the right in the manner suggested by the respondents.
The Court further stressed, "the possession of the right in question would be futile if the possessor of it, through
lack of knowledge necessary to exercise it, were debarred the right of procuring in his behalf the services of one
who could exercise it."
However, the rule stated may not be taken in too sweeping a sense. The Court deem it advisable to say that
there are some things which a corporation may undoubtedly keep secret, notwithstanding the right of inspection
given by law to the stockholder; as for instance, where a corporation, engaged in the business of manufacture,
has acquired a formula or process, not generally known, which has proved of utility to it in the manufacture of its
products.
13

(14)

Qualification of Directors and Trustees


Lee vs. Court of Appeals
205 SCRA 752
February 4, 1992
FACTS:
Sometime in March 1986, a third party complaint was filed by the private respondent to ALFA Textile Mills and
petitioners in relation to a complaint for a sum of money against private respondent by International Corporate
Bank, Inc. However, petitioners answered that they were erroneously served with summons considering that the
management of ALFA had been transferred to the DBP, hence, they filed a motion to dismiss. An alias summon
was upon ALFA through DBP. However, in a manifestation dated July 1988, the DBP claimed that it was not
authorized to receive summons on behalf of ALFA since the DBP had not taken over the company which has a
separate and distinct corporate personality and existence. Respondents filed a Motion for the Declaration of
Proper Service of Summons and contends that the voting trust agreement between DBP and ALFA did not divest
the petitioners of their positions as president and executive vice-president of ALFA so that service of summons
upon ALFA through the petitioners as corporate officers was proper.
ISSUE:
Whether or not there was proper service of summon to petitioners in light of the voting trust agreement
between ALFA and DBP?
HELD:
The Court held in the negative. The law simply provides that a voting trust agreement is an agreement in writing
whereby one or more stockholders of a corporation consent to transfer his or their shares to a trustee in order to
vest in the latter voting or other rights pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions specified in the agreement. The five yearperiod may be extended in cases where the voting trust is executed pursuant to a loan agreement whereby the
period is made contingent upon full payment of the loan.
Art. 23 of the Corporation Code provides, Every director must own in his own right at least one share of the
capital stock of the stock corporation of which he is a director, which stock shall stand in his name on the books
of the corporation. A director who ceases to be the owner of at least one share of the capital stock of a stock
corporation of which is a director shall thereby cease to be a director The facts of this case show that the
petitioners, by virtue of the voting trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one
share standing in their names on the books of ALFA as required under Section 23 of the new Corporation Code.
They also ceased to have anything to do with the management of the enterprise. The petitioners ceased to be
directors. Hence, the transfer of the petitioners' shares to the DBP created vacancies in their respective positions
as directors of ALFA.
Sec. 13. Service upon private domestic corporation or partnership, provides, If the defendant is a corporation
organized under the laws of the Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent or any of its directors.
In view of the foregoing, the ultimate issue of whether or not there was proper service of summons on ALFA
through the petitioners is readily answered in the negative.

(15)

Officers
Pearson and George vs. NLRC
67 SCAD 698
January 30, 1996
14

FACTS:
Private respondent Leopoldo Llorente was a member of the Board of Directors of the petitioner. In January 1989,
the Board of Directors elected among themselves the corporate officers. Llorente was elected as Vice-Chairman
of the Board and as Managing Director for a term of one year and until his successor should have been duly
elected pursuant to the petitioner's by-laws. On January 1990, Llorente was preventively suspended, with pay, by
reason of alleged anomalous transactions entered by him, which were prejudicial to the interest of the
petitioner. At the regular stockholders' meeting on March 1990, the stockholders of the petitioner elected a new
set of directors. Llorente was not reelected. On the same day, the new Board of Directors held a meeting wherein
it elected a new set of officers and abolished the position of Managing Director. On March 1990, the petitioner's
counsel informed Llorente of his non-reelection, the abolition of the position of Managing Director, and his
termination for cause. On April 1990, Llorente filed with the Labor Arbiter a complaint for unfair labor practice,
illegal dismissal, and illegal suspension alleging therein that he was dismissed without due process of law. The
petitioner filed a Motion to Dismiss alleging therein that the case falls within the jurisdiction of the SEC and not of
the NLRC. The Labor Arbiter denied the said motion on the ground that Llorente was not merely acting as a
Director but was likewise doing the functions of a manager or line officer of the corporation. The Labor Arbiter
found for Llorente, ruled that he was illegally terminated from employment.
ISSUE:
Whether or not respondent was illegally dismissed?
HELD:
The Court held in the negative. The Court agree with both the petitioner and the Office of the Solicitor General
that the removal of Llorente as Managing Director is purely an intra-corporate dispute which falls within the
exclusive jurisdiction of the SEC and not of the NLRC.
In reality, Llorente was not dismissed. If he lost the position of Managing Director, it was primarily because he
was not reelected as Director during the regular stockholders' meeting. The office of Managing Director
presupposes that its occupant is a Director; hence, one who is not a Director of the petitioner or who has ceased
to be a Director cannot be elected or appointed as a Managing Director. Elsewise stated, the holding of the
position of Director is a prerequisite for the election, appointment, or designation of Managing Director. If a
Managing Director should lose his position because he ceased to be a Director for any reason, such as nonreelection as in the case of Llorente, such loss is not dismissal but failure to qualify or to maintain a prerequisite
for that position. Then too, the position of Managing Director was abolished.
Any question relating or incident to the election of the new Board of Directors, the non-reelection of Llorente as
a Director, his loss of the position of Managing Director, or the abolition of the said office are intra-corporate
matters. Disputes arising therefrom are intra-corporate disputes which, if unresolved within the corporate
structure of the petitioner, may be resolved in an appropriate action only by the SEC pursuant to its authority.

(16)

Rehabilitation
RCBC vs. IAC
GR. No. 74851
December 9, 1999
FACTS:
On September 28, 1984, BF Homes filed a Petition for Rehabilitation and for Declaration of Suspension of
Payments with the SEC.
RCBC, one of the creditors listed in BF Homes inventory of creditors and liabilities, on October 26, 1984,
requested the Provincial Sheriff of Rizal to extra-judicially foreclose its real estate mortgage on some properties
15

of BF Homes. BF Homes opposed the auction sale and the SEC ordered the issuance of a writ
of preliminary injunction upon petitioners filing of a bond. Presumably unaware of the filing of the bond on the
very day of the auction sale, the sheriff proceeded with the public auction sale in which RCBC was the highest
bidder for the properties auctioned. But because of the proceedings in the SEC, the sheriff withheld the delivery
to RCBC of the certificate of sale covering the auctioned properties.
On March 13, 1985, despite the SEC case, RCBC filed with RTC an action for mandamus against the provincial
sheriff of Rizal to compel him to execute in its favor a certificate of sale of the auctioned properties.
On March 18, 1985, the SEC appointed a Management Committee for BF Homes.
Consequently, the trial court granted RCBCs motion for judgment on the pleading ordering respondents to
execute and deliver to petitioner the Certificate of Auction Sale.
On appeal, the SC affirmed CAs decision (setting aside RTCs decision dismissing the mandamus case and
suspending issuance to RCBC ofnew land titles until the resolution of the SEC case) ruling that whenever a
distressed corporation asks the SEC for rehabilitation and suspension of payments, preferred creditors may no
longer assert such preference but stand on equal footing with other creditors. Hence, this Motion for
Reconsideration.
ISSUE:
Whether or not should the suspension of actions for claims against BF Homes take effect?
HELD:
The issue of whether or not preferred creditors of distressed corporations stand on equal footing with all other
creditors gains relevance and materiality only upon the appointment of a management committee, rehabilitation
receiver, board or body.
Upon cursory reading of Section 6, par (c) of PD 902-A, it is adequately clear that suspension of claims against a
corporation under rehabilitation is counted or figured up only upon the appointment of a management
committee or a rehabilitation takes effect as soon as the application or a petition for rehabilitation is filed with
the SEC may to some, be more logical and wise but unfortunately, such is incongruent with the clear language of
the law. To insist on such ruling, no matter how practical and noble would be to encroach upon legislative
prerogative to define the wisdom of the law --- plainly judicial legislation.
Once a management committee, rehabilitation receiver, board or body is appointed pursuant to PD 902-A, all
actions for claims against a distressed corporation pending before any court, tribunal, board or body shall be
suspended accordingly; Suspension shall not prejudice or render ineffective the status of a secured creditor as
compared to a totally unsecured creditor. What it merely provides is that all actions for claims against the
corporation, partnership or association shall be suspended. This should give the receiver a chance to rehabilitate
the corporation if there should still be a possibility for doing so. In the event that rehabilitation is no longer
feasible and claims against the distressed corporation would eventually have to be settled, the secured creditors
shall enjoy preference over the unsecured creditors subject only to the provisions of the Civil Code on
Concurrence and Preferences of Credit.

(17)

Foreign Corporation
Avon Insurance PLC vs. CA
GR. No. 97642
August 29, 1997
FACTS:
16

Sometime in July 1979 and October 1980, Yupangco Cotton Mills engaged to secure with Worldwide Security and
Insurance Co. Inc., several of its properties totaling P200 Million. These contracts were covered by reinsurance
treaties between Worldwide Surety and Insurance, and several foreign reinsurance companies including the
petitioners through CJ Boatrwright, and international broker , acting as agent of Worldwide Suretyand Insurance.
A Fire then razed the properties insured on December 1969 and May 1981, within the respective effectivity
periods of Policies, thereby giving rise to the obligation of the insurer to indemnify the Yupangco Cotton Mills.
Partial payments were made by Worldwide Surety and Insurance and some of the reinsurance companies. A
Deed of Assignment made by Worldwide Surety and Insurance acknowledged a remaining balance of
P19,444,447.75 still due and assigned to Yupangco all reinsurance proceeds still collectible from all the foreign
reinsurance companies. Yupangco then filed a collection suit on the above petitioners. The service of summons
were made through the office of the Insurance Commissioner but since the international reinsurers question the
jurisdiction of the trial court the case has not proceeded to trial on the merits. The reinsurer is questioning also
the service of summons through extraterritorial service under Sect 17 Rule 14 of the Rules of Court nor through
the Insurance Commissioner under Sec 14. Yupangco also contends that since the reinsurers question the
jurisdiction of the court they are deemed to have submitted to the jurisdiction of the court.
In a Petition for Certiorari filed with the Court of Appeals, petitioners submitted that respondent Court has no
jurisdiction over them, being all foreign corporations not doing business in the Philippines with no office, place of
business or agents in the Philippines. The remedy of Certiorari was resorted to by the petitioners on the premise
that if petitioners had filed an answer to the complaint as ordered by the respondent court, they would risk,
abandoning the issue of jurisdiction. Moreover, extra-territorial service of summons on petitioners is null and
void because the complaint for collection is not one affecting plaintiffs status and not relating to property within
the Philippines.
ISSUE:
Whether or not the reinsurers in the above case, all foreign corporations, is doing business in the Philippines,
hence, is within the jurisdiction of the Philippines courts?
HELD:
The Court held in the negative. A foreign corporation, is one which owes its existence to the laws of another
state, and generally, has no legal existence within the state in which it is foreign. It was held that corporations
have no legal status beyond the bounds of the sovereignty by which they are created. Nevertheless, it is widely
accepted that foreign corporations are, by reason of state comity, allowed to transact business in other states
and to sue in the courts of such fora. In the Philippines foreign corporations are allowed such privileges, subject
to certain restrictions, arising from the state's sovereign right of regulation.
The Court stressed that, the term "doing business in the Philippines ordinarily implies a continuity of commercial
dealings and arrangements, and contemplates, to that extent, the performance of acts or works or the exercise of
the functions normally incident to and in progressive prosecution of the purpose and object of its organization as
contemplated in Article 44 of the Omnibus Investments Code of 1987. A single act or transaction made in the
Philippines, however, could qualify a foreign corporation to be doing business in the Philippines, if such singular
act is not merely incidental or casual, but indicates the foreign corporation's intention to do business in the
Philippines. There is no sufficient basis in the records which would merit the institution of this collection suit in
the Philippines. More specifically, there is nothing to substantiate the private respondent's submission that the
petitioners had engaged in business activities in this country. This is not an instance where the erroneous service
of summons upon the defendant can be cured by the issuance and service of alias summons, as in the absence of
showing that petitioners had been doing business in the country, they cannot be summoned to answer for the
charges leveled against them.
It does not appear at all that the petitioners had performed any act which would give the general public the
impression that it had been engaging, or intends to engage in its ordinary and usual business undertakings in the
17

country. The reinsurance treaties between the petitioners and Worldwide Surety and Insurance were made
through an international insurance broker, and not through any entity or means remotely connected with the
Philippines. Moreover, there is authority to the effect that a reinsurance company is not doing business in a
certain state merely because the property or lives which are insured by the original insurer company are located
in that state. The reason for this is that a contract of reinsurance is generally a separate and distinct arrangement
from the original contract of insurance, whose contracted risk is insured in the reinsurance agreement. Hence,
the original insured has generally no interest in the contract of reinsurance.

(18)

Effects of Failure to Obtain License


Western Equipment vs. Reyes
GR No. 27897
December 2, 1927
FACTS:
In 1925, Western Equipment and Supply Co. applied for the issuance of a license to engage in business in the
Philippines. On the other hand, Western Electric Co. has never been licensed to engage in business, nor has it
ever engaged in business in the Philippines. Western Equipment, since the issuance of its license, engaged in the
importation and sale of electrical and telephone apparatus and supplies manufactured by Western Electric. A
local corporation, Electric Supply Co. Inc. has been importing the same products in the Philippines. In 1926,
Electric Supplys president, Henry Herman, along with other persons sought to organize a corporation to be
known as Western Electric Co. Inc. Western Equipment, et al. filed against Herman to prevent them from
organizing said corporation. The trial court ruled in favor of Western Equipment, holding that the purpose of the
incorporation of the proposed corporation is illegal or void.
ISSUE:
Whether the foreign corporation Western Electric Co. Inc. has right of action to prevent an officer of the
government from issuing a certificate of incorporation to Philippine residents who attempt to pirate the
corporate name of the foreign corporation and engage in the same business?
HELD:
The Court held in the affirmative. A trademark acknowledges no territorial boundaries of municipalities, states or
nations, but extends to every market where the traders goods have become known and identified by the use of
the mark. Rights to the use of its corporate name or trade name is a property right, a right in rem, which it may
assert and protect against the whole world, in any of the courts in 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.
The trial court was correct in holding that the purpose of the proposed corporation by Herman, et. al. as
fraudulent and contrary to law, as it attempts to unjustly compete with the real Western Electric Co. Inc. and
deceive Filipinos into thinking that the goods they propose to sell are goods of manufacture of the real Western
Electric Co.

18