PRESIDENTIAL DECREE NO.

902-A
SEC REORGANIZATION ACT
March 11, 1976

REORGANIZATION OF THE SECURITIES AND EXCHANGE COMMISSION WITH

ADDITIONAL POWERS AND PLACING THE SAID AGENCY UNDER THE
ADMINISTRATIVE SUPERVISION OF THE OFFICE OF THE PRESIDENT.

WHEREAS, in line with the government's policy of encouraging investments,

both domestic and foreign, and more active public participation in the affairs of
private corporations and enterprises through which desirable activities may be
pursued for the promotion of economic development; and to promote a wider and
more meaningful equitable distribution of wealth, there is a need for an agency of
the government to be invested with ample powers to protect such investment and
the public;
WHEREAS, to achieve these national objectives, it is necessary to reorganize
and restructure the Securities and Exchange Commission to make it a more
potent, responsive and effective arm of the government to help in the
implementation of these programs and to play a more active role in nationalbuilding;
WHEREAS, it is necessary and desirable to professionalize such agency by
investing it with adequate powers so that it could avail itself of the services of
highly technical and qualified men in the government service;
NOW, THEREFORE, I, FERDINAND E. MARCOS, President of the Republic of the
Philippines, by virtue of the powers vested in me by the Constitution, do hereby
order
and
decree
that:
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Section 1. The administrative supervision of the Securities and Exchange

Commission is hereby transferred from the Department of Trade and shall
hereafter be under the direct general supervision of the President.
Sec. 2. That the Commission shall be a collegial body composed of a Chairman and
two (2) Associate Commissioners who shall be appointed by the President and the
tenure of the office of each member shall be seven (7) years: Provided, however,
That the Chairman and the Members of the Commission first appointed by the
President shall serve for a period of seven (7) years, five (5) years and three (3)
years, as fixed in their respective appointments: Provided, further, That upon the
expiration of his term, a Member shall serve as such until his successor shall have
been appointed and qualified: and Provided, Finally, that no vacancy shall be filled
except for the unexpired portion of the term. The Chairman shall receive an annual
salary of Fifty Thousand (P50,000.00) Pesos and a monthly allowance of Two
Thousand (P2,000.00) Pesos and each Member shall receive an annual salary of

Forty-Two Thousand Five Hundred (P42,500.00) Pesos and a monthly commutable

allowance of One Thousand Five Hundred (P1,500.00) Pesos.
The Commission shall meet as often as may be necessary on such day or days as
the Chairman may fix. The notice of the meeting shall be given to all members of
the Commission and the presence of at least two (2) shall constitute a quorum. In
the absence of the Chairman, the more senior associate commissioner shall act as
presiding officer of the meeting.
The Chairman shall have the general executive control, direction and supervision
of the work and operation of the Commission and of its members, bodies, boards,
personnel and all of its administrative business.
There shall be a Secretary of the Commission, under the control and direction of
the Chairman, who shall be in charge of all the administrative business of the
Commission and shall perform such other duties and functions as may be assigned
to him. He shall be the recorder and official reporter of the proceedings of the
Commission and shall have authority to administer oath in all matters coming
under the jurisdiction of the Commission. He shall be the custodian of all records,
profiles, reports, minutes and other documents and papers filed with the
Commission or entrusted to his care and shall be responsible therefor to the
Commission.
There shall be an Executive Director of the Commission who shall be responsible
for the effective implementation of the policies, rules and standards promulgated
by the Commission, to coordinate and supervise the activities of the different
operating units; to report to the Chairman the operations of such units; to report
to the Chairman the operations of such units; and to perform such functions as
may be assigned to him by the Chairman and/or by Commission. The position of
the Executive Director is hereby declared primarily confidential in nature.
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control
over all corporations, partnerships or associations, who are the grantees of
primary franchise and/or a license or permit issued by the government to operate
in the Philippines; and in the exercise of its authority, it shall have the power to
enlist the aid and support of any and all enforcement agencies of the government,
civil or military.
Sec. 4. The Commission shall reorganize and restructure the present staff and
personnel of the agency. The proposed staffing pattern of the Commission with the
corresponding salary scale, attached as Annex "A" is hereby approved: Provided,
That except as to the technical staff and such other positions as the Commission,
with the approval of the President, may declare to be highly technical, policydetermining or primarily confidential, all positions in the Commission are subject
to the Civil Service Law and Rules.
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities
and Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and

decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving.
(a) Devices or schemes employed by or any acts, of the board of directors,
business associates, its officers or partnership, amounting to fraud and
misrepresentation which may be detrimental to the interest of the public and/or of
the stockholder, partners, members of associations or organizations registered
with the Commission;
(b) Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members, or associates; between any or all of them and
the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership
or association and the state insofar as it concerns their individual franchise or
right to exist as such entity; and
(c) Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations.
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall
possess the following powers:
(a) To issue preliminary or permanent injunctions, whether prohibitory or
mandatory, in all cases in which it has jurisdiction, and in which cases the
pertinent provisions of the Rules of Court shall apply;
(b) To punish for contempt of the Commission, both direct and indirect, in
accordance with the pertinent provisions of, and penalties prescribed by, the Rules
of Court;
(c) To compel the officers of any corporation or association registered by it to call
meetings of stockholders or members thereof under its supervision;
(d) To pass upon the validity of the issuance and use of proxies and voting trust
agreements for absent stockholders or members;
(e) To issue subpoena duces tecum and summon witnesses to appear in any
proceedings of the Commission and in appropriate cases order search and seizure
or cause the search and seizure of all documents, papers, files and records as well
as books of accounts of any entity or person under investigation as may be
necessary for the proper disposition of the cases before it;
(f) To impose fines and/or penalties for violation of this Decree or any other laws
being implemented by the Commission, the pertinent rules and regulations, its
orders, decisions and/or rulings;
(g) To authorize the establishment and operation of stock exchanges, commodity
exchanges and such other similar organization and to supervise and regulate the
same; including the authority to determine their number, size and location, in the
light of national or regional requirements for such activities with the view to
promote, conserve or rationalize investment;
(h) To pass upon, refuse or deny, after consultation with the Board of
Investments, Department of Industry, National Economic and Development
Authority or any other appropriate government agency, the application for
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registration of any corporation, partnership or association or any form of

organization falling within its jurisdiction, if their establishment, organization or
operation will not be consistent with the declared national economic policies.
(i) To suspend, or revoke, after proper notice and hearing, the franchise or
certificate of registration of corporations, partnerships or associations, upon any
of the grounds provided by law, including the following:
[1] Fraud in procuring its certificate of registration;
[2] Serious misrepresentation as to what the corporation can do or is doing to the
great prejudice of or damage to the general public;
[3] Refusal to comply or defiance of any lawful order of the Commission
restraining commission of acts which would amount to a grave violation of its
franchise;
[4] Continuous inoperation for a period of at least five (5) years;
[5] Failure to file by-laws within the required period;
[6] Failure to file required reports in appropriate forms as determined by the
Commission within the prescribed period;
(j) To exercise such other powers as implied, necessary or incidental to the
carrying out the express powers granted to the Commission or to achieve the
objectives and purposes of this Decree.
In the exercise of the foregoing authority and jurisdiction of the Commission,
hearings shall be conducted by the Commission or by a Commissioner or by such
other bodies, boards, committees and/or any officer as may be created or
designated by the Commission for the purpose. The decision, ruling or order of any
such Commissioner, bodies, boards, committees and/or officer may be appealed to
the Commission sittingen banc within thirty (30) days after receipt by the
appellant of notice of such decision, ruling or order. The Commission shall
promulgate rules of procedures to govern the proceedings, hearings and appeals
of cases falling within its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the Commission
sitting en banc to the Supreme Court by petition for petition for review in
accordance with the pertinent provisions of the Rules of Court.
Sec. 7. The Commission is authorized to recommend to the President the revision,
alteration, amendment or adjustment of the charges and fees, which by law, it is
authorized to collect.
Sec. 8. With the approval of the President, the Commission is further authorized to
create additional positions as it may deem necessary to carry out the provisions
and intents of this Decree.
Sec. 9. So much amount as may be needed to implement the provisions of this
Decree taken from the income of the Commission not to exceed twenty-five per
cent (25%) thereof and any unexpended balance in the current appropriation is
hereby authorized to be appropriated.
Sec. 10. When the exigency of the service so requires and with the approval of the
President, funds may be set aside from the appropriation provided for the
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Commission and/or from the fees collected under existing laws, decrees, rules and
regulations to defray expenses to be incurred by the Commission.
Sec. 11. The Commission shall submit an annual report to the President of the
Philippines not later than January 31 of each year with such recommendations as
may be necessary.
Sec. 12. All laws, executive orders, decrees, rules and regulations or parts thereof,
contrary to or inconsistent with the provision of this Decree are hereby repealed,
amended or modified accordingly.
This
decree
shall
take
effect
immediately.

ESPINO vs NLRC and PAL (1995)

FACTS:

Petitioner Leslie W. Espino was the Exec. Vice President-Chief Operating Officer of respondent
Phil Airlines (PAL) when his service was terminated in 1990 as a result of the findings of the panels
created by then President Corazon C. Aquino to investigate the administrative charges filed against
him. It appears that petitioner and other several senior officers of PAL were charged for their
involvement in 4 cases, labeled as Goldair, Robelle, Kabash/Primavera, and Middle East.
The PAL Board of Directors issued separate resolutions wherein Espino was considered resign
from the service effective immediately for loss of confidence
Espino filed a complaint for illegal dismissal against PAL with the NLRC, Arbitration Branch,
NCR.
PAL argued that board resolutions cannot be reviewed by the NLRC and that the recourse of
the petitioner Espino should have been addressed by way of appeal, to the OP.
Labor Arbiter Cresencio J. Ramos rendered a decision in favor of petitioner Espino
PAL asserted that the Labor Arbiters decision is null and void for lack of jurisdiction over the
subject matter as it is the SEC, and not the NLRC which has jurisdiction over involving dismissal or
removal of corporate officers.
NLRC promulgated a resolution and this time ruled in favor of PAL on the ground of lack of
jurisdiction
Petitioner Espino contended that it is the NLRC that has jurisdiction over the case as it involves
the termination of a regular employee and involves claim for backwages and other benefits and
damages

Issue: Whether the NLRC has jurisdiction over the complaint filed by the petitioner for illegal
dismissal
HELD: NO
Under P.D. No. 902-A, it is the Securities and Exchange Commission and not the NLRC that has
original and exclusive jurisdiction over cases involving the removal from employment of corporate
officers. Under the said decree, the SEC has the exclusive and original jurisdiction to hear and decide
cases involving Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnerships or associations.
It has been ruled that a corporate officers dismissal is always a corporate act and/or an intracorporate controversy and that nature is not altered by the reason or wisdom which the Board of
Directors may have in taking such action. Evidently, this intra-corporate controversy must be place
under the specialized competence and expertise of the SEC.
The fact that petitioner sought payment of his backwages, other benefits, as well as damages and
attorney's fees in his complaint for illegal dismissal will not operate to prevent the SEC from exercising

its jurisdiction under PD 902-A. As to the contention of Espino that PAL is estopped from questioning
the jurisdiction of the NLRC, it is well-settled that jurisdiction over the subject matter is conferred by
law and the question of lack of jurisdiction may be raised anytime even on appeal.
WHERFORE, PETITION IS DENIED

MAINLAND CONSTRUCTION CO., INC. vs MOVILLA (1995)

FACTS:

Ernest Movilla, who was a CPA during his lifetime, was hired by Mainland in 1977. Thereafter,
he was promoted to the position of Administrative Officer. He has a monthly salary of
P4,700.00/month and he was registered with SSS as an employee of petitioner corporation
In 1991, The DOLE conducted a routine inspection on petitioner corporation and found that it
committed some irregularities in the conduct of its business. On the basis of its findings, DOLE
ordered petitioner corporation to pay its 13 employees, which included Movilla, an amount
representing
their salaries, holiday pay, service incentive leave pay differentials, unpaid
wages and 13th month pay. All the employees listed in the DOLEs order were paid by
petitioner except Movilla.
Movilla filed a case against petitioner with the DOLE in Davao City. However, in 1992, Movilla
died while the case was being tried. Hence, he was substituted by his heirs, private respondents
herein.
The Labor Arbiter dismissed the complaint on the ground that the controversy is intracorporate in nature hence it is the SEC who has jurisdiction over and not the Labor Arbiter.
On appeal, the NLRC reversed the Labor Arbiter and ruled that the case was one which
involved a labor dispute, thus the NLRC has jurisdiction to resolve the case

Issue: Whether the NLRC has jurisdiction over the controversy and not the SEC
HELD: YES
The NLRC has jurisdiction over the case. The fact that the parties involved in the controversy are all
stockholders and the corporation does not necessarily place the dispute within the jurisdiction of SEC.
In order that the SEC can take cognizance of a case, the controversy must pertain to factors such as
the status or relationship of the parties or the nature of the question that is the subject of their
controversy. Furthermore, it does not necessarily follow that every conflict between corporation and its
stockholders can only be resolve by the SEC.
In the CAB, the claim for unpaid wages and separation pay involves a labor dispute. It does not
involve an intra-corporate matter, even when it is between a stockholder and a corporation. It relates
to an ER-EE relationship which is distinct from the corporate relationship of one with the other.
Therefore, since the complaint of Movilla involves a labor dispute, it is the NLRC which has jurisdiction
over the CAB.
WHEREFORE, PETITION IS DENIED

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. Nos. 82282-83 November 24, 1988

ANTONIO M. GARCIA, DYNETICS, INC., and MATRIX MANAGEMENT

CORPORATION, petitioners,
vs.
COURT OF APPEALS and SECURITY BANK AND TRUST COMPANY, respondents.
Sycip, Salazar, Hernandez & Gatmaitan for petitioners.
Bengson, Zarraga, Narciso, Cudala, Pecson & Bengson for private respondent.

GUTIERREZ, JR., J.:

In a summary judgment rendered by the Regional Trial Court of Makati in Civil Case No. 10398, the
complaint was dismissed for lack of merit and the petitioners were ordered to pay the private
respondent the following: (a) the unpaid principal sum of P15 million remaining unpaid out of
Chemark's availment of the P20 million credit line, plus 18% interest per annum and 36% as penalty
per annum for Promissory Note No. DLS/74/540/83 from March 23, 1984 until fully paid; and plus
24% interest per annum and 36% as penalty per annum for Promissory Note No. DLS/74/1358/83
from August 9, 1983 until fully paid; (b) attorney's fees equivalent to 10% of the total amount of
plaintiffs' obligations and (c) costs of suit.
The summary judgment was affirmed by the Court of Appeals. The appellate court's decision and the
resolution denying a motion for reconsideration are now challenged by the petitioners in the instant
petition.
The antecedent facts relevant to the instant petition are as follows:
On April 23, 1985 petitioners Dynetics, Inc., Matrix Management and Trading Corporation and
Antonio M. Garcia filed a complaint for declaratory relief and/or injunction with damages against
respondent Security Bank and Trust Company (SBTC). The plaintiffs sought a judicial declaration
that they were not liable to the defendant bank under certain Indemnity Agreements they executed in
favor of Chemark Electric Motors, Inc. which had been extended a credit accommodation of about
P20,000,000.00 by the defendant bank. They also prayed for payment of attorney's fees and costs of
suit. Thus, they alleged in their complaint:
xxx xxx xxx
a) There is no valid consideration for the execution of the said instruments;
b) The said instruments had become invalid and ineffective at the time the defendant
finally extended the loan accommodation to Chemark and that the parties to the said
instruments did not intend the said instruments to cover Chemark's obligations to the
defendant which were subsequently granted under separate and independent
transactions;

c) Assuming, without conceding, that there is a valid consideration for the execution
of the aforesaid instruments and that the said instruments continued to be valid and
effective when the defendant extended a credit accommodation to Chemark, said
instruments are null and void insofar as Dynetics is concerned as it is ultra vires,
being contrary to the purposes of Dynetics, its powers, licenses and franchise;
d) Assuming, without conceding, that the Indemnity Agreement instruments are valid
and enforceable, the obligations of the plaintiffs thereunder have been extinguished,
either by novation or by the acts and conduct of the defendant, who, under the
circumstances, in refusing the valid and legitimate plea of Chemark for a reasonable
restructuring plan of its obligations has practically rendered it impossible for Chemark
to pay its obligations to its creditors and to the plaintiffs in the event plaintiffs are
legally obligated to pay Chemark's obligations to the defendant;
e) In the light of present economic conditions, in general, and the condition of
Chemark in particular, as well as the financial condition of the plaintiffs, the demand
of the defendant for the plaintiffs to pay the Chemark obligations would constitute an
abuse of right as defined in the New Civil Code;
f) Considering the present adverse economic conditions plaguing the entire country,
the terms and conditions of the credit accommodation and the Indemnity Agreement
instruments, assuming that the latter are valid and enforceable, have become so
manifestly difficult as to be beyond the contemplation of the parties. Under the
provisions of Human Relations of the New Civil Code, as well as the general
principles of equity, especially the doctrine of the "rebus sic stantibus" and "the
frustration of the commercial object or frustration of enterprise" and under Article
1267 of the New Civil Code, when the service has become so difficult as to be
manifestly beyond the contemplation of the parties, the obligor may be released
therefrom;
g) In addition to the reasons stated in paragraphs e and f hereof, Chemark, the
principal obligor, is not liable for its obligations under the credit accommodations
extended to it by the defendant because it has been prohibited from complying
therewith by a lawful authority. Under the law on guaranty and surety, the guarantor
or the surety, not being a principal debtor, is not liable for the obligations unless the
principal obligor is likewise liable. (Article 2054 of the New Civil Code; Hospicio de
San Jose v. Fidelity and Surety Co., 52 Phil. 926; Uy Isabelo v. Yandoc, CA-G.R. No.
8801-R, June 20, 1956). The debtor in obligations to do shall also be released when
the prestation becomes legally impossible without the fault of the obligor. (Article
1266 of the New Civil Code);
h) Assuming, without conceding, that the plaintiffs are liable under the Indemnity
Agreement instruments, they are not liable for the amounts being claimed by the
defendant, considering that the said amounts include the payment of exorbitant
interests, excessive penalties and amounts imputed to be due which are not, in fact,
due. (Rollo, pp. 106-107)

On June 11, 1985 the respondent bank filed its Answer and Counterclaim with prayer for preliminary
attachment. The defendant alleged in its counter claim:
ALLEGATIONS COMMON TO ALL DEFENDANTS
21. Sometime in August, 1981, Chemark was granted by plaintiff a credit line of P4.0
million consisting of an import LC-TR line of P2.0 million and an export loan line of
P2.0 million.
22. Said credit line was increased in February, 1982 from P4.0 million to P20.0
million, to wit:
Export loan linefrom P2.0 million to P15.0 million
Import LC-TRfrom P2.0 million to P5.0 million
The terms and conditions of this P20.0 million credit are reflected in the Amended
Credit Line Agreement dated February 8, 1982 attached as Annex "1" hereof,
23. Chemark availed of said credit line and as evidence of said availments, Chemark
executed several promissory notes covering the following amounts drawn against
this credit line, viz;
a) The sum of P6,350,750.00 drawn on March 23, 1983 with interest
and penalty at the rate indicated in promissory Note No.
DLS/74/540/83 to mature on June 21, 1983, a copy is attached as
Annex "3";
b) The sum of P8,649,250.00 drawn on August 9, 1983 with interest
and penalty at the rate indicated in Promissory Note No.
DLS/74/1358/83 to mature on September 8, 1983, a copy of which is
hereto attached as Annex "4".
24. Chemark defaulted in paying its obligations under the aforesaid promissory notes
when these became due. Despite repeated demands, Chemark failed and refused to
pay its valid and just obligations to the defendant which, as of December 11, 1984,
amounted to P13,130,596.93 under Promissory Note No. DLS/74/540/83 and
P17,357,117.51 under PN No. DLS/74/1358/83.
CAUSE OF ACTION AGAINST ANTONIO M. GARCIA
25. Plaintiff Garcia personally bound himself jointly and severally with Chemark, to
pay defendant upon demand and without benefit of excussion of whatever amount or
amounts Chemark may be indebted to defendant under and by virtue of the aforesaid
credit line accommodation, including the substitutions, renewals, extensions,

increases and other amendments of the aforesaid credit accommodations, as well as

all other obligations that Chemark may owe the defendant.
26. Accordingly, plaintiff Garcia executed two (2) Indemnity Agreements, one dated
January 20, 1982, a copy of which is attached hereto and made integral part hereof
as Annex "E" and the other, an Indemnity Agreement dated February 8, 1982, as
Annex "B" of the Complaint;
27. Under the terms of the foregoing Indemnity Agreements executed by plaintiff
Garcia, he further bound himself solidarily with Chemark in favor of defendant for the
faithful compliance of all the terms and conditions contained in the Amended Credit
Line Agreement (Annex "l ").
28. Defendant demanded from plaintiff Garcia the payment of the outstanding
obligation of Chemark in a letter dated October 26, 1984, a copy of which is made
Annex "5" to form part hereof. Defendant reiterated said demand on April 15, 1985.
29. Notwithstanding said demands, plaintiff Garcia failed and refused, as he still fails
and refuses to pay his obligation pursuant to the indemnity agreements he executed.
CAUSES OF ACTION AGAINST MATRIX MANAGEMENT & TRADING
CORPORATION
30. Plaintiff Matrix bound itself jointly and severally with Chemark in favor of the
defendant for the payment, upon demand and without benefit of excussion, of
whatever amount or amounts Chemark may be indebted to defendant under and by
virtue of the aforesaid credit line accommodation including the substitutions,
renewals, extensions, increases and other amendments of the aforesaid credit
accommodations, as well as of the amount of such other obligations that Chemark
may owe the defendant.
31. Accordingly, Matrix through its duly authorized officers, executed an Indemnity
Agreement dated February 8, 1982, a copy of which is attached hereto as Annex "A"
and incorporated herein by reference.
32. Under the terms of the foregoing indemnity agreement executed by Matrix, it
further bound itself solidarily with Chemark in favor of defendant for the faithful
compliance of all the terms and conditions contained in the Credit Line Agreement
(Annex "B").
<re||an1w>

33. Defendant demanded from Matrix the payment of the outstanding obligation of
Chemark in a letter dated October 26, 1984, a copy of which is made Annex "5" to
form part hereof. Defendant reiterated said demand on April 25, 1985.

34. Notwithstanding said demands, Matrix failed and refused, as it still fails and
refuses, to pay its obligation pursuant to the indemnity agreement it executed in
plaintiffs favor.
CAUSE OF ACTION AGAINST DYNETICS, INC.
35. Plaintiff Dynetics bound itself jointly and severally with Chemark in favor of the
defendant for the payment, upon demand and without benefit of excussion, of
whatever amount or amounts Chemark may be indebted to defendant under and by
virtue of the aforesaid credit line accommodation including the substitutions,
renewals, extensions, increases and other amendments of the aforesaid credit
accommodations, as well as of the amount of such obligations that Chemark may
owe the defendant.
36. Dynetics executed an indemnity agreement dated February 8, 1982, copy of
which is attached as annex "A" of the Complaint.
37. Under the terms of the foregoing Indemnity Agreement executed by Dynetics, it
further bound itself solidarily with Chemark in favor of defendant for the faithful
compliance of all the terms and conditions contained in the Amended Credit Line
Agreement (Annex "I")
38. Defendant demanded from Dynetics the payment of the outstanding obligation of
Chemark in a letter dated October 26, 1984, a copy of which is made Annex "5", to
form part hereof. Defendant reiterated said demand on April 25, 1985.
39. Notwithstanding said demands, Dynetics failed and refused, as it still fails and
refuses to pay its obligation pursuant to the indemnity agreement it executed in
defendant's favor. (Rollo, pp. 108-111)
On August 21, 1985, the petitioners manifested that ... they are adopting all allegations in their
Complaint as their answer to the respective counterclaim against each of them." (Original Records,
p. 229)
On September 18, 1985, the respondent bank filed a motion for summary judgment on the ground
that the answer to the counterclaim "tenders no genuine issue as to any material fact, and consists
of mere conclusions of law and fact, and in paragraph 4 thereof, plaintiffs expressly acknowledged
their obligation to defendant and indemnity agreements dated February 8, 1982 when they admitted
"under said instruments, it was basically provided that for and in consideration of the credit
accommodation in the total amount of Twenty Million (20,000,000.00) Pesos, granted by defendant
in favor of Chemark Electric Motors, Inc., a corporation duly organized and existing under the laws of
the Philippines, plaintiffs agreed to indemnify defendant in the event Chemark should fail to comply
with its obligations."' (Original Records, p. 248) In support of the motion, the respondent bank
attached the affidavit dated September 17, 1985 of Ms. Charis Marquez, Senior Assistant Manager,
corporate banking group, SBTC including its annexes.

The petitioners filed an opposition to the motion for summary judgment but to no avail. The lower
court rendered a decision granting the motion for summary judgment. The petitioners' complaint was
dismissed and they were ordered to pay the respondent bank under the indemnity agreements.
The petitioners then filed with the Court of Appeals: 1) an appeal from the summary judgment and 2)
a special civil action for certiorari and prohibition with a prayer for preliminary injunction to annul the
orders of the lower, court granting motion for summary judgment and granting motion for execution
pending appeal. The two cases were consolidated.
The appellate court sustained the summary judgment. Both petitions were dismissed with costs
against the petitioners. A motion for reconsideration thereto was denied.
Hence, this petition.
On March 30, 1988, we issued a temporary restraining order to enjoin the enforcement of the
questioned decision of the appellate court. In a Resolution dated June 6, 1988, we gave due course
to the petition.
The issue raised in the petition is whether or not the appellate court committed reversible error when
it sustained the trial court's summary judgment.
The petitioners submit that the appellate court committed such an error, to wit:
a. The rendition of Judge Mendoza's Summary Judgment was improper because
petitioners' Complaint and SBTC's Answer with Counterclaim raise triable issues of
fact. The Court of Appeals, therefore, erred when it sustained Judge Mendoza's
Summary Judgment.
b. Assuming (the untrue) that there were no "genuine issues as to any material fact,"
the awards set out in Judge Mendoza's Summary Judgment were rendered in
violation of rules of evidence and laws and jurisprudence on interest, penalties and
attorney's fees. The appellate court, therefore, committed the same violation when it
upheld Judge Mendoza's Summary Judgment. (Rollo, p. 325).
A Summary Judgment may be rendered by a court upon motion of a party before trial and after
submission of pleadings, admissions, documents and/or affidavits and counter affidavits when it is
clear that "except as to the amount of damages, there is no genuine issue as to any material fact
and that the moving party is entitled to a judgment as a matter of law." (Rule 34, Rules of Court). By
genuine issue is meant an issue of fact which calls for the presentation of evidence Cadirao v.
Estenzo, 132 SCRA 93) as distinguished from an issue which is sham, fictitious, contrived, set up in
bad faith, or patently unsubstantial as not to constitute a genuine issue for trial. (Vergara, Sr. v.
Suelto, et al., G.R. No. 74766 December 21, 1987, Cadirao v. Estenzo supra; Mercado, et al. v.
Court of Appeals, G.R. No. L-44001 June 10, 1988) This can be determined by the court on the
basis of the pleadings, admissions, documents, affidavits and/or counter-affidavits submitted by the
parties to the court. (Section 3, Rule 34, Revised Rules of Court; Vergara v. Suelto supra; Cadirao v.
Estenzo supra).

The pleadings, admissions and affidavits submitted in court in this case reveal the following facts:
In August 1981, Chemark was granted by respondent bank a credit line of P4.0 million which was
increased in February 1982 to P20.0 million, to wit; Export loan line from P2.0 million to P15.00
million; Import LC/TR-from P2.0 million to P5.0 million. The terms and conditions of this P20 million
credit are stated in the Credit Line Agreement dated February 8, 1982 (p. 254, Records). On this
same day, February 8, 1982 the petitioners executed separate, but with similar terms, indemnity
agreements whereby they bound themselves jointly and severally with Chemark to pay respondent
bank upon demand and without excussion of whatever amount Chemark may be indebted to said
bank by virtue of said credit line accommodation including the substitution, renewals, extensions,
increases and other amendments thereof; and that upon default of Chemark, proper demands to pay
were made on the petitioners to comply with their obligations. The three indemnity agreements
binding each of the petitioners contain the following provisions:
INDEMNITY AGREEMENT
KNOW ALL MEN BY THESE PRESENTS: That
DYNETICS, INC., a corportion duly organized and existing under and by virtue of the
laws of the Philippines, with offices at the FTI Complex, Taguig, Metro Manila for and
in consideration of the credit accommodation in the total amount of TWENTY
MILLION (P20,000,000.00) PESOS granted by the SECURITY BANK & TRUST
COMPANY, a commercial banking corporation duly organized and existing under and
by virtue of the laws of the Philippines, with offices at 6778 Ayala Avenue, Makati,
Metro Manila, hereinafter referred to as the BANK, in favor of CHEMARK ELECTRIC
MOTORS, INC., ... a corporation duly organized and existing under and by virtue of
the laws of the Philippines, with offices at the 2nd Floor, Princess Building, Esteban
Street, Legaspi Village, Makati, Metro Manila, hereinafter referred to as the CLIENT,
with the stipulated interests and charges thereon, evidenced by that/those certain
AMENDED CREDIT LINE AGREEMENT made and executed by and between the
CLIENT and the BANK on even date hereby bind(s) himself/themselves jointly and
severally with the CLIENT in favor of the BANK for the payment, upon demand and
without benefit of excussion, of whatever amount or amounts the CLIENT may be
indebted to the BANK under and by virtue of aforesaid credit accommodation(s)
including the substitutions, renewals, extensions, increases, amendments,
conversions and revivals of the aforesaid credit accommodation(s), as well as of the
amount or amounts of such other obligations that the CLIENT may owe the BANK,
whether direct or indirect, principal or secondary, as appears in the accounts, books
and records of the BANK, plus interest and expenses arising from any agreement or
agreements that may have heretofore been made, or may hereafter be executed by
and between the parties thereto, including the substitutions, renewals, extensions,
increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s), and further bind(s) himself/themselves with the CLIENT in favor
of the BANK for the faithful compliance of all the aforesaid credit accommodation(s),
all of which are incorporated herein and made part hereof by reference.

IN WITNESS WHEREOF, these presents are signed at Makati, Metro Manila on this
8th day of February, 1982. ... and/or its trust accounts funding this loan
DYNETICS, INC.
(SGD.) ANTONIO M. GARCIA (SGD.) DOMINADOR GAMEZ
Signed in the Presence of.
(SGD.) JONA C. CAJUYONG (SGD.) TERESITA A. DE GUZMAN
(Original Records, pp. 306-307)
Both Dynetics and Matrix were authorized by their respective board of directors to
execute the indemnity agreements. In the case of Dynetics, Corporate Secretary
Antonio Pastelero certified that during a meeting of the Board of Directors held on
December 29, 1981 at its office address, it was unanimously adopted that the
corporation "... undertake to jointly and severally guarantee the credit line of
CHEMARK ELECTRIC MOTORS, INC. in favor of the SECURITY BANK & TRUST
COMPANY, in an amount not to exceed TWENTY MILLION (20,000,000.00) PESOS"
(p. 264, Original Records). In the case of MATRIX, Corporate Secretary Rene J.
Katigbak certified that at the meeting of the Board of Directors held on December 28,
1981, a resolution was unanimously adopted to have the corporation "... jointly and
severally guarantee the credit line of CHEMARK ELECTRIC MOTORS, INC. in favor
of the SECURITY BANK & TRUST COMPANY, in an amount not to exceed TWENTY
MILLION (P20,000,000.00) PESOS. (Original Records, p. 262)
Chemark then availed of the P20.0 million credit line and executed two (2) promissory notes
covering the following amounts drawn against the Export Loan Line, to wit:
a) The sum of P6,350,750.00 drawn on March 23, 1983 with interest and penalty at
the rate indicated in Promissory Note No. DLS/74/540/83 to mature on June 21, 1983
(p. 255, Original Records)
b) The sum of P8,649,250.00 drawn on August 9, 1983 with interest and penalty ac
the rate indicated in Promissory Note No. DLS/74/1358/83 to mature on September
8, 1983 (p. 256, Original Records)
These obligations were not paid by Chemark when they became due. Hence, the respondent bank
demanded from the petitioners under the indemnity agreements the payment of the outstanding
obligations of Chemark.
Undoubtedly, the obligations of the petitioners to the respondents are clearly defined in the
pleadings, admissions and the unrebutted affidavit of Ms. Marquez who handles the Chemark
account.

Nevertheless, the petitioners insist that their complaint for declaratory relief tenders genuine issues
which should be threshed out in a full-blown trial, to wit:
xxx xxx xxx
11.1 First Defense: that the principal obligation has not yet matured because SBTC,
agreed to allow Chemark a grace period within which to recover its liquidity and pay
the debt.
11.1A This defense is pleaded in the following allegations of the Complaint:
6. In the aftermath of the assassination of Senator Benigno S. Aquino, Jr., on August
21, 1983, the Philippine economy was plunged into a deep crisis. There was a
massive flight of capital; the country's balance of payments deteriorated; business
and industry practically stood still; and the foreign debts of the country could not be
serviced; banks collapsed, the exchange rate between the Philippine Peso and US
Dollar tripled and there was practically no foreign exchange available in the country.
The resultant extremely adverse economic conditions were not foreseen or
contemplated by persons or entities who became parties to a contract. None of the
parties to a contract expected nor did they intend that the terms and conditions they
agreed upon would operate under extreme adverse economic conditions.
7. Because of the recent economic developments here and abroad, the failure of one
of the stockholders of Chemark to comply with its commitments and Chemark's
inability to collect substantial receivables from its marketing representatives in the
United States, Chemark started to suffer liquidity problems. As a consequence, it was
unable to pay its creditors, among whom is the defendant. However, Chemark had
more than sufficient assets to pay all its obligations including its obligations to the
defendant, except that its liquidity problems prevented it from paying its creditors.
8. Chemark started negotiating with the defendant for the restructuring of its
obligations to the latter. For this purpose, it submitted several proposed courses of
action to the defendant whereby in time all of its obligations to the defendant would
be paid.
9. In the meantime, the defendant demanded payment from the plaintiffs of the
obligations of Chemark. Although plaintiffs are not legally liable for the payment of
such obligations, they nonetheless, proposed to the defendant that the latter allow
Chemark to recover its liquidity until such time that it shall have recovered its ability
to pay its obligations. An agreement in principle was reached on this proposal and
the defendant committed itself to allow Chemark to recover from its liquidity
problems and to refrain from demanding payment of the loans of Chemark from the
plaintiffs. (Emphasis supplied). (Rollo, pp. 328-329).
xxx xxx xxx

11.2 Second Defense: that SBTC and the petitioners did not intend to use petitioners'
Indemnity Agreements as collateral security for Chemark's loans and that SBTC
extended the loan solely on Chemark's viability as a business enterprise.
11.2A The Complaint pleads this defense in the following paragraphs:
5. ... when the defendant finally extended the loan to Chemark, it did so not because
of the aforesaid instruments (referring to the Indemnity Agreements) previously
executed by the (petitioners) which, in the meantime, were no longer valid and
effective and intended by the parties as collateral security for future Chemark loans,
but because of defendant's assessment of the viability of Chemark's business
operations and interest income expected to be generated from the loans to Chemark.
(Emphasis supplied) (Rollo, pp. 329-330)
xxx xxx xxx
11.3 Third Defense: that Dynetic's execution of the Indemnity Agreement is contrary
to its purposes and is therefore ultra vires and unenforceable against it.
11.3A This defense is pleaded in the Complaint as follows:
13. Plaintiffs are not liable to the defendant under the Indemnity Agreement
instruments xxx for the following reasons:
xxx xxx xxx
(c) Assuming, without, conceding, that there is a valid consideration for the execution
of the aforesaid instruments and that said instruments continued to be valid and
effective when the defendant extended a credit accommodation to Chemark, said
instruments are null and void insofar as Dynetics is concerned as it is ultra vires,
being contrary to the purpose of Dynetics, its powers, licenses and franchise:
(Emphasis supplied) (Rollo, pp. 332-333)
We find no material questions of facts tendered by these defenses as to the main issue on whether
or not the petitioners can be held liable to the respondent bank under their indemnity agreements.
The issue tendered in the first defense is "sham and fictitious" in the light of the terms of the
indemnity agreements. Thus, under the indemnity agreements, the petitioners bound themselves
jointly and severally with Chemark in favor of the respondent bank for the payment, upon demand
and without benefit of excussion, of whatever amount or amounts Chemark may be indebted to the
respondent bank under and by virtue of the credit accommodations. (Emphasis supplied) The
economic conditions of the country are immaterial to the issue on the liability of the petitioners under
their indemnity agreements.
The issue raised in the second defense, on whether or not the indemnity agreements were intended
as collaterals for future Chemark loans is likewise sham and fictitious. Under the indemnity

agreements, the petitioners bound themselves to pay whatever amount Chemark may be indebted
to the bank "under and by virtue of aforesaid credit accommodation(s) including the substitutions,
renewals, extensions, increases, amendments, conversions and revivals of the aforesaid credit
accommodation(s) ... (Emphasis supplied)
The argument as to whether or not Dynetics' execution of the indemnity agreement is contrary to its
purposes and therefore ultra vires and unenforceable against it does not tender a genuine issue.
The record shows that Dynetics was authorized to execute the indemnity agreements evidenced by
the Corporate Secretary's certificate (p. 38, 264 Original Records).
This was not rebutted.
Indeed, we find no genuine issues raised in the complaint which can not be resolved by the
pleadings, admissions and the affidavit of Charis Marquez submitted to the court. As the appellate
court said:
Dynetics, Garcia and Matrix attempted to avoid liability by trying hard to create
factual issues fit for trial. The attempt is but a hodgepodge of legal arguments and
conclusions which can be resolved without the rituals of trial. Thus, Dynetics urges
that there is need for trial to determine whether it can be compelled to pay
considering that SEC by its Order of September 27, 1984 has prohibited Chemark
from paying its creditors. The issue is strictly legal and can be decided by
determining the character of liability of Dynetics as joint and solidary debtor. Dynetics
also argues that it raised the issue of lack of consideration which must be tried on the
merits. The issue deserves scant consideration for the parties' Indemnity Agreement
specifies the consideration to be the grant of credit accommodation to Chemark in
the sum of P20 M. Also what is posed is a legal issue resolvable in light of the
character of Dynetics as a joint and solidary debtor. Dynetics also asseverates that it
did not intend its Indemnity Agreement as collaterals for future Chemark loans. This
is a clear pretense considering that again under its Indemnity Agreement, Dynetics
clearly bound itself to pay whatever amount Chemark may be indebted to Security
Bank "under and by virtue of the aforesaid credit accommodation(s) including the
substitutions, renewals, extensions, increases, amendments, conversions and
revivals of aforesaid credit accommodation(s.)" There is nothing on record to
substantiate the pretense of mistake of Dynetics. (Rollo, p. 121)
xxx xxx xxx
Then Dynetics argues that it has raised the issue of novation in light of the new loan
contracts between Security Bank and Chemark. Again, the alleged new contracts are
established facts and need not be the subject of trial. Upon their basis, the court can
conclude whether there is novation of contract. (Rollo, P. 125)
The petitioners also assail the awards of penalty charges at 36% per annum and interest at 18% and
24% per annum respectively on the loans. They contend that the interests are excessive and are not

sustained by the evidence because the rate of interest stipulated in the promissory notes is only 11
% per annum.
The lower courts based the computation of interests and penalty charges on the affidavit of Charis
Marquez, Assistant Manager of the Corporate Banking Group of Security Bank & Trust Co. Marquez
was the account officer who handled the account of Chemark. The pertinent portions of the affidavit
read as follows:
22. As per statements of Accounts dated June l5, 1985, under the said promissory
notes (Annexes "2" and "3" hereof) covered by the subject Indemnity Agreements
(Annexes "4", "7" and "8" hereof), the total outstanding obligation of Dynetics, Inc.,
Matrix Management & Trading Corporation and Antonio M. Garcia to Security Bank &
Trust Co. was P38,189,038.27, including interest and charges. Attached hereto as
Annexes "9" and "l0" are copies of said Statements of Accounts dated June 15,
1985;
23. In the said Statements of Accounts dated June 15, 1985, we charged 18% and
25% per annum, respectively, because the subject loans (Annexes "2" and "3"
hereof) were intended to be rediscounted at the Central Bank at 11% per annum.
However, when Chemark Electric Motors, Inc. failed to give us the required letter of
credit which was a requirement of the Central Bank, we charged them 18% and 24%
instead of 11% interest per annum. These higher interest charges were based on
and authorized under our Credit Proposal, copies of which are hereto attached as
Annexes "11" to "11-B". (Original Records, p. 252)
The increased interest rates are expressly provided for in the amended credit line agreement and in
the two promissory notes executed by Chemark in favor of Security Bank & Trust Co. We find no
reversible error in the award of interests.
The penalty of 36% per annum is provided in the promissory notes (Annexes "3", "4" Affidavit), as
follows:
If this note is not fully paid when due, the undersigned shall pay, in addition to the
stipulated interest, a penalty of 3% per month on the total outstanding principal and
interest due and unpaid. ... (Original Records, p. 256)
The affidavit and supporting documents were attached to the respondent bank's motion for summary
judgment. The petitioners failed to oppose Marquez' affidavit in their "Oppositions" to the motion for
summary judgment. Neither did they submit counter- affidavits, as was their right, to oppose these
amounts due from them including the increased interests and penalty charges. Under these
circumstances, the respondent bank was entitled to summary judgment (Philippine National Bank v.
Phil. Leather Co., Inc., et al. 105 Phil. 400; See also Mercado, et al. v. Court of Appeals supra). As
earlier stated, the lower court committed no reversible error in awarding the questioned interests. We
cannot, however, agree with the appellate court as regards the award of penalty charges at 36% per
annum.
<re||an1w>

Penalty interests are in the nature of liquidated damages (Cumagun v. Philippine American
Insurance Co., Inc., et al. G.R. No. 81453 August 15, 1988; Lambert v. Fox, 26 Phil. 588) and may
be equitably reduced by the courts if they are iniquitous or unconscionable. (See Articles 1229,
2227, New Civil Code).
The records show that on the first loan, the principal of which is P6,350,750.00, the penalty charges
as of June 15, 1986 are already equivalent to P6,774,378.06 (p. 265, Original Records) and that on
the second loan, the principal of which is P8,649,250.00 the penalty charges as of June 15, 1985 are
equivalent to P8,662,008.53. (p. 266, Original Records) The P6,774,378.06 penalty charges in the
first loan would have been earned by the private respondent after only 725 days (1 year and 360
days) of delay in the payment of the loan while the P8,662,008.53 penalty charges would have been
earned by the private respondent after only 646 days (1 year and 281 days) of delay in the payment
of the loan. The figures from 1985 to 1988 would amount to several times the principal loans.
We agree with the petitioner that the penalty charges are excessive and unconscionable. The
interest charges are enough punishment for the petitioners' failure to comply with their obligations.
Finally, the petitioners question the amount for attorney's fees equivalent to 10% of their obligation.
Again, Chemark's promissory notes provide for the award of attorney's fees in case of default to pay
the loans, to wit:
xxx xxx xxx
If this note is not fully paid when due, the undersigned shall pay, in addition to the
stipulated interest, a penalty of 3% per month on the total outstanding principal and
interest due and unpaid. The undersigned shall also pay, as and for attorney's fee, a
sum equivalent to 20% of the total amount due under this note plus expenses and
costs of collection, in case this note is placed in the hands of an attorney for
collection. (See Annexes "2", "3", Affidavit of Charis Marquez) (Original Records, p.
255)
The award for attorney's fees is justified and, in fact, is even lower than that agreed upon by the
parties.
WHEREFORE, the instant petition is DISMISSED. The questioned decision and resolution of the
Court of Appeals are AFFIRMED except for the award of penalty charges which is stricken from the
judgment. The Temporary Restraining Order issued on March 30, 1988 is LIFTED. Costs against the
petitioners.
SO ORDERED.
Fernan C.J., Bidin an