We do not find merit [in] the petition.

On 13 December 1993, the Board of Directors of the Islamic Bank [AIIBP] adopted
Resolution No. 2309 finding petitioner guilty of Dishonesty in the Performance of
Official Duties and/or Conduct Prejudicial to the Best Interest of the Service and
imposing the penalty of Dismissal from the Service.
On reconsideration, the Board of Directors of the Islamic Bank [AIIBP] adopted the
Resolution No. 2332 on 20 February 1994 reducing the penalty imposed on
petitioner from dismissal to suspension for a period of six (6) months and one (1)
day.
On 29 March 1994, petitioner filed a notice of appeal to the Merit System Protection
Board (MSPB).
On 11 August 1994, the CSC adopted Resolution No. 94-4483 dismissing the appeal
for lack of merit and affirming Resolution No. 2309 dated 13 December 1993 of the
Board of Directors of Islamic Bank.
On 11 April 1995, the CSC adopted Resolution No. 95-2574 denying petitioners
Motion for Reconsideration.
On 16 June 1995, the instant petition was filed with the Honorable Supreme Court on
the following assignment of errors:
I. Public respondent Al-Amanah Islamic Investment Bank of the Philippines has
committed a grave abuse of discretion amounting to excess or lack of jurisdiction
when it initiated and conducted administrative investigation without a validly
promulgated rules of procedure in the adjudication of administrative cases at the
Islamic Bank.
II. Public respondent Civil Service Commission has committed a grave abuse of
discretion amounting to lack of jurisdiction when it prematurely and falsely assumed
jurisdiction of the case not appealed to it, but to the Merit System Protection Board.
III. Both the Islamic Bank and the Civil Service Commission erred in finding
petitioner Sawadjaan of having deliberately reporting false information and therefore
guilty of Dishonesty and Conduct Prejudicial to the Best Interest of the Service and
penalized with dismissal from the service.
On 04 July 1995, the Honorable Supreme Court En Banc referred this petition to this
Honorable Court pursuant to Revised Administrative Circular No. 1-95, which took
effect on 01 June 1995.

Anent the first assignment of error, a reading of the records would reveal that
petitioner raises for the first time the alleged failure of the Islamic Bank [AIIBP] to
promulgate rules of procedure governing the adjudication and disposition of
administrative cases involving its personnel. It is a rule that issues not properly
brought and ventilated below may not be raised for the first time on appeal, save in
exceptional circumstances (Casolita, Sr. v. Court of Appeals, 275 SCRA 257) none of
which, however, obtain in this case. Granting arguendo that the issue is of such
exceptional character that the Court may take cognizance of the same, still, it must
fail. Section 26 of Republic Act No. 6848 (1990) provides:
Section 26. Powers of the Board. The Board of Directors shall have the broadest
powers to manage the Islamic Bank, x x x The Board shall adopt policy guidelines
necessary to carry out effectively the provisions of this Charter as well as internal
rules and regulations necessary for the conduct of its Islamic banking business and
all matters related to personnel organization, office functions and salary
administration. (Italics ours)
On the other hand, Item No. 2 of Executive Order No. 26 (1992) entitled Prescribing
Procedure and Sanctions to Ensure Speedy Disposition of Administrative Cases
directs, all administrative agencies to adopt and include in their respective Rules of
Procedure provisions designed to abbreviate administrative proceedings.
The above two (2) provisions relied upon by petitioner does not require the Islamic
Bank [AIIBP] to promulgate rules of procedure before administrative discipline may
be imposed upon its employees. The internal rules of procedures ordained to be
adopted by the Board refers to that necessary for the conduct of its Islamic banking
business and all matters related to personnel organization, office functions and salary
administration. On the contrary, Section 26 of RA 6848 gives the Board of Directors
of the Islamic Bank the broadest powers to manage the Islamic Bank. This grant of
broad powers would be an idle ceremony if it would be powerless to discipline its
employees.
The second assignment of error must likewise fail. The issue is raised for the first
time via this petition for certiorari. Petitioner submitted himself to the jurisdiction of
the CSC. Although he could have raised the alleged lack of jurisdiction in his Motion
for Reconsideration of Resolution No. 94-4483 of the CSC, he did not do so. By
filing the Motion for Reconsideration, he is estopped from denying the CSCs
jurisdiction over him, as it is settled rule that a party who asks for an affirmative
relief cannot later on impugn the action of the tribunal as without jurisdiction after an
adverse result was meted to him. Although jurisdiction over the subject matter of a
case may be objected to at any stage of the proceedings even on appeal, this

particular rule, however, means that jurisdictional issues in a case can be raised only
during the proceedings in said case and during the appeal of said case (Aragon v.
Court of Appeals, 270 SCRA 603). The case at bar is a petition [for] certiorari and
not an appeal.
But even on the merits the argument must falter. Item No. 1 of CSC Resolution No.
93-2387 dated 29 June 1993, provides:
Decisions in administrative cases involving officials and employees of the civil
service appealable to the Commission pursuant to Section 47 of Book V of the Code
(i.e., Administrative Code of 1987) including personnel actions such as contested
appointments shall now be appealed directly to the Commission and not to the
MSPB.
In Rubenecia v. Civil Service Commission, 244 SCRA 640, 651, it was categorically
held:
. . . The functions of the MSPB relating to the determination of administrative
disciplinary cases were, in other words, re-allocated to the Commission itself.
Be that as it may, (i)t is hornbook doctrine that in order `(t)o ascertain whether a
court (in this case, administrative agency) has jurisdiction or not, the provisions of
the law should be inquired into. Furthermore, `the jurisdiction of the court must
appear clearly from the statute law or it will not be held to exist.(Azarcon v.
Sandiganbayan, 268 SCRA 747, 757) From the provision of law abovecited, the
Civil Service Commission clearly has jurisdiction over the Administrative Case
against petitioner.
Anent the third assignment of error, we likewise do not find merit in petitioners
proposition that he should not be liable, as in the first place, he was not qualified to
perform the functions of appraiser/investigator because he lacked the necessary
training and expertise, and therefore, should not have been found dishonest by the
Board of Directors of Islamic Bank [AIIBP] and the CSC. Petitioner himself admits
that the position of appraiser/inspector is one of the most serious [and] sensitive job
in the banking operations. He should have been aware that accepting such a
designation, he is obliged to perform the task at hand by the exercise of more than
ordinary prudence. As appraiser/investigator, he is expected, among others, to check
the authenticity of the documents presented by the borrower by comparing them with
the originals on file with the proper government office. He should have made it sure
that the technical descriptions in the location plan on file with the Bureau of Lands of
Marikina, jibe with that indicated in the TCT of the collateral offered by CAMEC,
and that the mortgage in favor of the Islamic Bank was duly annotated at the back of
the copy of the TCT kept by the Register of Deeds of Marikina. This, petitioner
failed to do, for which he must be held liable. That he did not profit from his false

report is of no moment. Neither the fact that it was not deliberate or willful, detracts
from the nature of the act as dishonest. What is apparent is he stated something to be
a fact, when he really was not sure that it was so.
WHEREFORE, above premises considered, the instant Petition is DISMISSED, and
the assailed Resolutions of the Civil Service Commission are hereby AFFIRMED.
On 24 March 1999, Sawadjaans counsel notified the court a quo of his change of
address,[11] but apparently neglected to notify his client of this fact. Thus, on 23 July
1999, Sawadjaan, by himself, filed a Motion for New Trial[12] in the Court of
Appeals based on the following grounds: fraud, accident, mistake or excusable
negligence and newly discovered evidence. He claimed that he had recently
discovered that at the time his employment was terminated, the AIIBP had not yet
adopted its corporate by-laws. He attached a Certification[13] by the Securities and
Exchange Commission (SEC) that it was only on 27 May 1992 that the AIIBP
submitted its draft by-laws to the SEC, and that its registration was being held in
abeyance pending certain corrections being made thereon. Sawadjaan argued that
since the AIIBP failed to file its by-laws within 60 days from the passage of Rep. Act
No. 6848, as required by Sec. 51 of the said law, the bank and its stockholders had
already forfeited its franchise or charter, including its license to exist and operate as a
corporation,[14] and thus no longer have the legal standing and personality to initiate
an administrative case.
Sawadjaans counsel subsequently adopted his motion, but requested that it be treated
as a motion for reconsideration.[15] This motion was denied by the court a quo in its
Resolution of 15 December 1999.[16]
Still disheartened, Sawadjaan filed the present petition for certiorari under Rule 65 of
the Rules of Court challenging the above Decision and Resolution of the Court of
Appeals on the ground that the court a quo erred: i) in ignoring the facts and
evidences that the alleged Islamic Bank has no valid by-laws; ii) in ignoring the facts
and evidences that the Islamic Bank lost its juridical personality as a corporation on
16 April 1990; iii) in ignoring the facts and evidences that the alleged Islamic Bank
and its alleged Board of Directors have no jurisdiction to act in the manner they did
in the absence of a valid by-laws; iv) in not correcting the acts of the Civil Service
Commission who erroneously rendered the assailed Resolutions No. 94-4483 and
No. 95-2754 as a result of fraud, falsification and/or misrepresentations committed
by Farouk A. Carpizo and his group, including Roberto F. de Ocampo; v) in
affirming an unconscionably harsh and/or excessive penalty; and vi) in failing to
consider newly discovered evidence and reverse its decision accordingly.
Subsequently, petitioner Sawadjaan filed an Ex-parte Urgent Motion for Additional
Extension of Time to File a Reply (to the Comments of Respondent Al-Amanah
Investment Bank of the Philippines),[17] Reply (to Respondents Consolidated

Comment,)[18] and Reply (to the Alleged Comments of Respondent Al-Amanah

Islamic Bank of the Philippines).[19] On 13 October 2000, he informed this Court
that he had terminated his lawyers services, and, by himself, prepared and filed the
following: 1) Motion for New Trial;[20] 2) Motion to Declare Respondents in
Default and/or Having Waived their Rights to Interpose Objection to Petitioners
Motion for New Trial;[21] 3) Ex-Parte Urgent Motions to Punish Attorneys Amado
D. Valdez, Elpidio J. Vega, Alda G. Reyes, Dominador R. Isidoro, Jr., and Odilon A.
Diaz for Being in Contempt of Court & to Inhibit them from Appearing in this Case
Until they Can Present Valid Evidence of Legal Authority;[22] 4) Opposition/Reply
(to Respondent AIIBPs Alleged Comment);[23] 5) Ex-Parte Urgent Motion to Punish
Atty. Reynaldo A. Pineda for Contempt of Court and the Issuance of a Commitment
Order/Warrant for His Arrest;[24] 6) Reply/Opposition (To the Formal Notice of
Withdrawal of Undersigned Counsel as Legal Counsel for the Respondent Islamic
Bank with Opposition to Petitioners Motion to Punish Undersigned Counsel for
Contempt of Court for the Issuance of a Warrant of Arrest);[25] 7) Memorandum for
Petitioner;[26] 8) Opposition to SolGens Motion for Clarification with Motion for
Default and/or Waiver of Respondents to File their Memorandum;[27] 9) Motion for
Contempt of Court and Inhibition/Disqualification with Opposition to OGCCs
Motion for Extension of Time to File Memorandum;[28] 10) Motion for
Enforcement (In Defense of the Rule of Law);[29] 11) Motion and Opposition
(Motion to Punish OGCCs Attorneys Amado D. Valdez, Efren B. Gonzales, Alda G.
Reyes, Odilon A. Diaz and Dominador R. Isidoro, Jr., for Contempt of Court and the
Issuance of a Warrant for their Arrest; and Opposition to their Alleged Manifestation
and Motion Dated February 5, 2002);[30] 12) Motion for Reconsideration of Item (a)
of Resolution dated 5 February 2002 with Supplemental Motion for Contempt of
Court;[31] 13) Motion for Reconsideration of Portion of Resolution Dated 12 March
2002;[32] 14) Ex-Parte Urgent Motion for Extension of Time to File Reply
Memorandum (To: CSC and AIIBPs Memorandum);[33] 15) Reply Memorandum
(To: CSCs Memorandum) With Ex-Parte Urgent Motion for Additional Extension of
time to File Reply Memorandum (To: AIIBPs Memorandum);[34] and 16) Reply
Memorandum (To: OGCCs Memorandum for Respondent AIIBP).[35]
Petitioners efforts are unavailing, and we deny his petition for its procedural and
substantive flaws.
The general rule is that the remedy to obtain reversal or modification of the judgment
on the merits is appeal. This is true even if the error, or one of the errors, ascribed to
the court rendering the judgment is its lack of jurisdiction over the subject matter, or
the exercise of power in excess thereof, or grave abuse of discretion in the findings
of fact or of law set out in the decision.[36]
The records show that petitioners counsel received the Resolution of the Court of
Appeals denying his motion for reconsideration on 27 December 1999. The fifteen
day reglamentary period to appeal under Rule 45 of the Rules of Court therefore

lapsed on 11 January 2000. On 23 February 2000, over a month after receipt of the
resolution denying his motion for reconsideration, the petitioner filed his petition for
certiorari under Rule 65.
It is settled that a special civil action for certiorari will not lie as a substitute for the
lost remedy of appeal,[37] and though there are instances[38] where the
extraordinary remedy of certiorari may be resorted to despite the availability of an
appeal,[39] we find no special reasons for making out an exception in this case.
Even if we were to overlook this fact in the broader interests of justice and treat this
as a special civil action for certiorari under Rule 65,[40] the petition would
nevertheless be dismissed for failure of the petitioner to show grave abuse of
discretion. Petitioners recurrent argument, tenuous at its very best, is premised on the
fact that since respondent AIIBP failed to file its by-laws within the designated 60
days from the effectivity of Rep. Act No. 6848, all proceedings initiated by AIIBP
and all actions resulting therefrom are a patent nullity. Or, in his words, the AIIBP
and its officers and Board of Directors,
. . . [H]ave no legal authority nor jurisdiction to manage much less operate the
Islamic Bank, file administrative charges and investigate petitioner in the manner
they did and allegedly passed Board Resolution No. 2309 on December 13, 1993
which is null and void for lack of an (sic) authorized and valid by-laws. The CIVIL
SERVICE COMMISSION was therefore affirming, erroneously, a null and void
Resolution No. 2309 dated December 13, 1993 of the Board of Directors of AlAmanah Islamic Investment Bank of the Philippines in CSC Resolution No. 94-4483
dated August 11, 1994. A motion for reconsideration thereof was denied by the CSC
in its Resolution No. 95-2754 dated April 11, 1995. Both acts/resolutions of the CSC
are erroneous, resulting from fraud, falsifications and misrepresentations of the
alleged Chairman and CEO Roberto F. de Ocampo and the alleged Director Farouk
A. Carpizo and his group at the alleged Islamic Bank.[41]
Nowhere in petitioners voluminous pleadings is there a showing that the court a quo
committed grave abuse of discretion amounting to lack or excess of jurisdiction
reversible by a petition for certiorari. Petitioner already raised the question of AIIBPs
corporate existence and lack of jurisdiction in his Motion for New Trial/Motion for
Reconsideration of 27 May 1997 and was denied by the Court of Appeals. Despite
the volume of pleadings he has submitted thus far, he has added nothing substantial
to his arguments.
The AIIBP was created by Rep. Act No. 6848. It has a main office where it conducts
business, has shareholders, corporate officers, a board of directors, assets, and
personnel. It is, in fact, here represented by the Office of the Government Corporate
Counsel, the principal law office of government-owned corporations, one of which is
respondent bank.[42] At the very least, by its failure to submit its by-laws on time,

the AIIBP may be considered a de facto corporation[43] whose right to exercise

corporate powers may not be inquired into collaterally in any private suit to which
such corporations may be a party.[44]
Moreover, a corporation which has failed to file its by-laws within the prescribed
period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations,[45] details
the procedures and remedies that may be availed of before an order of revocation can
be issued. There is no showing that such a procedure has been initiated in this case.
In any case, petitioners argument is irrelevant because this case is not a corporate
controversy, but a labor dispute; and it is an employers basic right to freely select or
discharge its employees, if only as a measure of self-protection against acts inimical
to its interest.[46] Regardless of whether AIIBP is a corporation, a partnership, a sole
proprietorship, or a sari-sari store, it is an undisputed fact that AIIBP is the
petitioners employer. AIIBP chose to retain his services during its reorganization,
controlled the means and methods by which his work was to be performed, paid his
wages, and, eventually, terminated his services.[47]
And though he has had ample opportunity to do so, the petitioner has not alleged that
he is anything other than an employee of AIIBP. He has neither claimed, nor shown,
that he is a stockholder or an officer of the corporation. Having accepted
employment from AIIBP, and rendered his services to the said bank, received his
salary, and accepted the promotion given him, it is now too late in the day for
petitioner to question its existence and its power to terminate his services. One who
assumes an obligation to an ostensible corporation as such, cannot resist performance
thereof on the ground that there was in fact no corporation.[48]
Even if we were to consider the facts behind petitioner Sawadjaans dismissal from
service, we would be hard pressed to find error in the decision of the AIIBP.

rescheduled the hearing to give the petitioner another chance, but he still refused to
appear before it.
Thereafter, witnesses were presented, and a decision was rendered finding him guilty
of dishonesty and dismissing him from service. He sought a reconsideration of this
decision and the same committee whose impartiality he questioned reduced their
recommended penalty to suspension for six months and one day. The board of
directors, however, opted to dismiss him from service.
On appeal to the CSC, the Commission found that Sawadjaans failure to perform his
official duties greatly prejudiced the AIIBP, for which he should be held accountable.
It held that:
. . . (I)t is crystal clear that respondent SAPPARI SAWADJAAN was remiss in the
performance of his duties as appraiser/inspector. Had respondent performed his
duties as appraiser/inspector, he could have easily noticed that the property located at
Balintawak, Caloocan City covered by TCT No. C-52576 and which is one of the
properties offered as collateral by CAMEC is encumbered to Divina Pablico. Had
respondent reflected such fact in his appraisal/inspection report on said property the
ISLAMIC BANK would not have approved CAMECs loan of P500,000.00 in 1987
and CAMECs P5 Million loan in 1988, respondent knowing fully well the Banks
policy of not accepting encumbered properties as collateral.
Respondent SAWADJAANs reprehensible act is further aggravated when he failed to
check and verify from the Registry of Deeds of Marikina the authenticity of the
property located at Mayamot, Antipolo, Rizal covered by TCT No. N-130671 and
which is one of the properties offered as collateral by CAMEC for its P5 Million
loan in 1988. If he only visited and verified with the Register of Deeds of Marikina
the authenticity of TCT No. N-130671 he could have easily discovered that TCT No.
N-130671 is fake and the property described therein non-existent.

As appraiser/investigator, the petitioner was expected to conduct an ocular inspection

of the properties offered by CAMEC as collaterals and check the copies of the
certificates of title against those on file with the Registry of Deeds. Not only did he
fail to conduct these routine checks, but he also deliberately misrepresented in his
appraisal report that after reviewing the documents and conducting a site inspection,
he found the CAMEC loan application to be in order. Despite the number of
pleadings he has filed, he has failed to offer an alternative explanation for his actions.

...

When he was informed of the charges against him and directed to appear and present
his side on the matter, the petitioner sent instead a memorandum questioning the
fairness and impartiality of the members of the investigating committee and refusing
to recognize their jurisdiction over him. Nevertheless, the investigating committee

From the foregoing, we find that the CSC and the court a quo committed no grave
abuse of discretion when they sustained Sawadjaans dismissal from service. Grave
abuse of discretion implies such capricious and whimsical exercise of judgment as
equivalent to lack of jurisdiction, or, in other words, where the power is exercised in
an arbitrary or despotic manner by reason of passion or personal hostility, and it must

This notwithstanding, respondent cannot escape liability. As adverted to earlier, his

failure to perform his official duties resulted to the prejudice and substantial damage
to the ISLAMIC BANK for which he should be held liable for the administrative
offense of CONDUCT PREJUDICIAL TO THE BEST INTEREST OF THE
SERVICE.[49]

be so patent and gross as to amount to an evasion of positive duty or to a virtual

refusal to perform the duty enjoined or to act at all in contemplation of law.[50] The
records show that the respondents did none of these; they acted in accordance with
the law.
WHEREFORE, the petition is DISMISSED. The Decision of the Court of Appeals of
30 March 1999 affirming Resolutions No. 94-4483 and No. 95-2754 of the Civil
Service Commission, and its Resolution of 15 December 1999 are hereby
AFFIRMED. Costs against the petitioner.
1
G.R. No. 195580 April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO MINING
AND DEVELOPMENT, INC., and MCARTHUR MINING, INC.,
Petitioners, vs.
REDMONT CONSOLIDATED MINES CORP.,
Respondent. FACTS: Sometime in December 2006, respondent Redmont
Consolidated Mines Corp. (Redmont), a domestic corporation organized and existing
under Philippine laws, took interest in mining and exploring certain areas of the
province of Palawan. After inquiring with the Department of Environment and
Natural Resources (DENR), it learned that the areas where it wanted to undertake
exploration and mining activities where already covered by Mineral Production
Sharing Agreement (MPSA) applications of petitioners Narra, Tesoro and McArthur.
Petitioner McArthur Narra and Tesoro, filed an application for an MPSA and
Exploration Permit (EP) which was subsequently issued. On January 2, 2007,
Redmont filed before the Panel of Arbitrators (POA) of the DENR three (3) separate
petitions for the denial of petit
ioners applications for MPSA
. Redmont alleged that at least 60% of the capital stock of McArthur, Tesoro and
Narra are owned and controlled by MBMI Resources, Inc. (MBMI), a 100%
Canadian corporation. Redmont reasoned that since MBMI is a considerable s
tockholder of petitioners, it was the driving force behind petitioners filing
of the MPSAs over the areas covered by applications since it knows that it can only
participate in mining activities through corporations which are deemed Filipino
citizens. Redmont argued that given that
petitioners capital stocks were mostly owned by MBMI, they were likewise
disqualified from engaging in
mining activities through MPSAs, which are reserved only for Filipino citizens.
Petitioners averred that they were qualified persons under Section 3(aq) of Republic
Act No. (RA) 7942 or the Philippine Mining Act of 1995. They stated that their
nationality as applicants is immaterial because they also applied for Financial or
Technical Assistance Agreements (FTAA) denominated as AFTA-IVB-09 for

SO ORDERED.
Davide, Jr., C.J., Panganiban, Quisumbing, Ynares-Santiago, Sandoval-Gutierrez,
Carpio, Austria-Martinez, Corona, Carpio-Morales, Callejo, Sr., Azcuna, Tinga, and
Garcia, JJ., concur.
Puno, J., on official leave.
McArthur, AFTA-IVB-08 for Tesoro and AFTA-IVB-07 for Narra, which are granted
to foreign-owned corporations. Nevertheless, they claimed that the issue on
nationality should not be raised since McArthur, Tesoro and Narra are in fact
Philippine Nationals as 60% of their capital is owned by citizens of the Philippines.
On December 14, 2007, the POA issued a Resolution disqualifying petitioners from
gaining MPSAs. The POA considered petitioners as foreign corporations being
"effectively controlled" by MBMI, a 100% Canadian company and declared their
MPSAs null and void. Pending the resolution of the appeal filed by petitioners with
the MAB, Redmont filed a Complaint with the Securities and Exchange Commission
(SEC), seeking the revocation of the certificates for registration of petitioners on the
ground that they are foreign-owned or controlled corporations engaged in mining in
violation of Philippine laws. CA found that there was doubt as to the nationality of
petitioners when it realized that petitioners had a common major investor, MBMI, a
corporation composed of 100% Canadians. Pursuant to the first sentence of
paragraph 7 of Department of Justice (DOJ) Opinion No. 020, Series of 2005,
adopting the 1967 SEC Rules which implemented the requirement of the
Constitution and other laws pertaining to the exploitation of natural resources, the
CA used the "grandfather rule" to determine the nationality of petitioners
2
In determining the nationality of petitioners, the CA looked into their corporate
structures and their corresponding common shareholders.
Using the grandfather rule, the CA discovered that MBMI in effect owned majority
of the common stocks of the petitioners as well as at least 60% equity interest of
other majority shareholders of petitioners through joint venture agreements. The CA
found that through a "web of corporate layering, it is clear that one common
controlling investor in all mining corporations involved x x x is MBMI."
Thus, it concluded that petitioners McArthur, Tesoro and Narra are also in
partnership with, or privies-in-interest of, MBMI. ISSUE:
Whether or not
the Court of Appeals ruling that Narra, Tesoro and McArthur are foreign
corporations based on the "Grandfather Rule" is contrary to law, particularly the
express mandate of the Foreign Investments Act of 1991, as amended, and the FIA
Rules.

HELD:
No. There are two acknowledged tests in determining the nationality of a
corporation: the
control test and the grandfather rule
. Paragraph 7 of DOJ Opinion No. 020, Series of 2005, adopting the 1967 SEC Rules
which implemented the requirement of the Constitution and other laws pertaining to
the controlling interests in enterprises engaged in the exploitation of natural
resources owned by Filipino citizens, provides: Shares belonging to corporations or
partnerships at least 60% of the capital of which is owned by Filipino citizens shall
be considered as of Philippine nationality
(CONTROL TEST),
but if the percentage of Filipino ownership in the corporation or partnership is less
than 60%, only the number of shares corresponding to such percentage shall be
counted as of Philippine nationality
(GRANDFATHER RULE)
. Thus, if 100,000 shares are registered in the name of a corporation or partnership at
least 60% of the capital stock or capital, respectively, of which belong to Filipino
citizens, all of the shares shall be recorded as owned by Filipinos. But if less than
60%, or say, 50% of the capital stock or capital of the corporation or partnership,
respectively, belongs to Filipino citizens, only 50,000 shares shall be counted as
owned by Filipinos and the other 50,000 shall be recorded as belonging to aliens.
The grandfather rule, petitioners reasoned, has no leg to stand on in the instant case
EN BANC

WILSON P. GAMBOA,
Petitioner,
G.R. No. 176579

since the definition of a "Philippine National" under Sec. 3 of the FIA does not
provide for it. They further claim that the grandfather rule "has been abandoned and
is no longer the applicable rule." They also opined that the last portion of Sec. 3 of
the FIA admits the application of a "corporate layering" scheme of corporations.
Petitioners claim that the clear and unambiguous wordings of the statute preclude the
court from
construing it and prevent the courts use of discretion in applying the law. They said
that the plain, li
teral meaning of the statute meant the application of the control test is obligatory. SC
disagreed. "Corporate layering" is admittedly allowed by the FIA; but if it is used to
circumvent the Constitution and pertinent laws, then it becomes illegal. Further, the
pronouncement of petitioners that the grandfather rule has already been abandoned
must be discredited for lack of basis. Petitioners McArthur, Tesoro and Narra are not
Filipino since MBMI, a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from grandfathering
petitioners corporate owners, namely: MMI, SMMI and PLMDC.
The "control test" is still the prevailing mode of determining whether or not a
corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the 1987
Constitution, entitled to undertake the exploration, development and utilization of the
natural resources of the Philippines. When in the mind of the Court there is doubt,
based on the attendant facts and circumstances of the case, in the 60-40 Filipinoequity ownership in the corporation, then it may apply the "grandfather rule.
CHAIRMAN ANTHONI SALIM OF FIRST PACIFIC CO., LTD. IN HIS
CAPACITY AS DIRECTOR OF METRO PACIFIC ASSET HOLDINGS INC.,
CHAIRMAN MANUEL V. PANGILINAN OF PHILIPPINE LONG DISTANCE
TELEPHONE COMPANY (PLDT) IN HIS CAPACITY AS MANAGING
DIRECTOR OF FIRST PACIFIC CO., LTD., PRESIDENT NAPOLEON L.
NAZARENO OF PHILIPPINE LONG DISTANCE TELEPHONE COMPANY,
CHAIR FE BARIN OF THE SECURITIES EXCHANGE COMMISSION, and
PRESIDENT FRANCIS LIM OF THE PHILIPPINE STOCK EXCHANGE,
Respondents.

Present:
- versus CORONA, C.J.,
CARPIO,
FINANCE SECRETARY MARGARITO B. TEVES, FINANCE
UNDERSECRETARY JOHN P. SEVILLA, AND COMMISSIONER RICARDO
ABCEDE OF THE PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG) IN THEIR CAPACITIES AS CHAIR AND MEMBERS, RESPECTIVELY,
OF THE PRIVATIZATION COUNCIL,

VELASCO, JR.,
LEONARDO-DE CASTRO,
BRION,

PERALTA,
BERSAMIN,
DEL CASTILLO,
ABAD,
VILLARAMA, JR.,
PEREZ,
MENDOZA, and
SERENO, JJ.

PABLITO V. SANIDAD and

ARNO V. SANIDAD,
Petitioners-in-Intervention.
Promulgated:

June 28, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

CARPIO, J.:

The Case

This is an original petition for prohibition, injunction, declaratory relief and

declaration of nullity of the sale of shares of stock of Philippine Telecommunications
Investment Corporation (PTIC) by the government of the Republic of the Philippines
to Metro Pacific Assets Holdings, Inc. (MPAH), an affiliate of First Pacific Company
Limited (First Pacific).

The Antecedents

The facts, according to petitioner Wilson P. Gamboa, a stockholder of Philippine

Long Distance Telephone Company (PLDT), are as follows:1

On 28 November 1928, the Philippine Legislature enacted Act No. 3436 which
granted PLDT a franchise and the right to engage in telecommunications business. In
1969, General Telephone and Electronics Corporation (GTE), an American company
and a major PLDT stockholder, sold 26 percent of the outstanding common shares of
PLDT to PTIC. In 1977, Prime Holdings, Inc. (PHI) was incorporated by several
persons, including Roland Gapud and Jose Campos, Jr. Subsequently, PHI became
the owner of 111,415 shares of stock of PTIC by virtue of three Deeds of Assignment
executed by PTIC stockholders Ramon Cojuangco and Luis Tirso Rivilla. In 1986,
the 111,415 shares of stock of PTIC held by PHI were sequestered by the
Presidential Commission on Good Government (PCGG). The 111,415 PTIC shares,
which represent about 46.125 percent of the outstanding capital stock of PTIC, were
later declared by this Court to be owned by the Republic of the Philippines.2

In 1999, First Pacific, a Bermuda-registered, Hong Kong-based investment firm,

acquired the remaining 54 percent of the outstanding capital stock of PTIC. On 20
November 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 PTIC shares, or 46.125 percent
of the outstanding capital stock of PTIC, through a public bidding to be conducted on
4 December 2006. Subsequently, the public bidding was reset to 8 December 2006,
and only two bidders, Parallax Venture Fund XXVII (Parallax) and Pan-Asia
Presidio Capital, submitted their bids. Parallax won with a bid of P25.6 billion or
US$510 million.

Thereafter, First Pacific announced that it would exercise its right of first refusal as a
PTIC stockholder and buy the 111,415 PTIC shares by matching the bid price of
Parallax. However, First Pacific failed to do so by the 1 February 2007 deadline set
by IPC and instead, yielded its right to PTIC itself which was then given by IPC until
2 March 2007 to buy the PTIC shares. On 14 February 2007, First Pacific, through
its subsidiary, MPAH, entered into a Conditional Sale and Purchase Agreement of the
111,415 PTIC shares, or 46.125 percent of the outstanding capital stock of PTIC,
with the Philippine Government for the price of P25,217,556,000 or
US$510,580,189. The sale was completed on 28 February 2007.

Since PTIC is a stockholder of PLDT, the sale by the Philippine Government of

46.125 percent of PTIC shares is actually an indirect sale of 12 million shares or
about 6.3 percent of the outstanding common shares of PLDT. With the sale, First
Pacifics common shareholdings in PLDT increased from 30.7 percent to 37 percent,
thereby increasing the common shareholdings of foreigners in PLDT to about 81.47
percent. This violates Section 11, Article XII of the 1987 Philippine Constitution
which limits foreign ownership of the capital of a public utility to not more than 40
percent.3

On the other hand, public respondents Finance Secretary Margarito B. Teves,

Undersecretary John P. Sevilla, and PCGG Commissioner Ricardo Abcede allege the
following relevant facts:

On 9 November 1967, PTIC was incorporated and had since engaged in the business
of investment holdings. PTIC held 26,034,263 PLDT common shares, or 13.847
percent of the total PLDT outstanding common shares. PHI, on the other hand, was
incorporated in 1977, and became the owner of 111,415 PTIC shares or 46.125
percent of the outstanding capital stock of PTIC by virtue of three Deeds of
Assignment executed by Ramon Cojuangco and Luis Tirso Rivilla. In 1986, the
111,415 PTIC shares held by PHI were sequestered by the PCGG, and subsequently
declared by this Court as part of the ill-gotten wealth of former President Ferdinand
Marcos. The sequestered PTIC shares were reconveyed to the Republic of the
Philippines in accordance with this Courts decision4 which became final and
executory on 8 August 2006.
The Philippine Government decided to sell the 111,415 PTIC shares, which represent
6.4 percent of the outstanding common shares of stock of PLDT, and designated the
Inter-Agency Privatization Council (IPC), composed of the Department of Finance

and the PCGG, as the disposing entity. An invitation to bid was published in seven
different newspapers from 13 to 24 November 2006. On 20 November 2006, a prebid conference was held, and the original deadline for bidding scheduled on 4
December 2006 was reset to 8 December 2006. The extension was published in nine
different newspapers.

During the 8 December 2006 bidding, Parallax Capital Management LP emerged as

the highest bidder with a bid of P25,217,556,000. The government notified First
Pacific, the majority owner of PTIC shares, of the bidding results and gave First
Pacific until 1 February 2007 to exercise its right of first refusal in accordance with
PTICs Articles of Incorporation. First Pacific announced its intention to match
Parallaxs bid.

On 31 January 2007, the House of Representatives (HR) Committee on Good

Government conducted a public hearing on the particulars of the then impending sale
of the 111,415 PTIC shares. Respondents Teves and Sevilla were among those who
attended the public hearing. The HR Committee Report No. 2270 concluded that: (a)
the auction of the governments 111,415 PTIC shares bore due diligence,
transparency and conformity with existing legal procedures; and (b) First Pacifics
intended acquisition of the governments 111,415 PTIC shares resulting in First
Pacifics 100% ownership of PTIC will not violate the 40 percent constitutional limit
on foreign ownership of a public utility since PTIC holds only 13.847 percent of the
total outstanding common shares of PLDT.5 On 28 February 2007, First Pacific
completed the acquisition of the 111,415 shares of stock of PTIC.

Respondent Manuel V. Pangilinan admits the following facts: (a) the IPC conducted
a public bidding for the sale of 111,415 PTIC shares or 46 percent of the outstanding
capital stock of PTIC (the remaining 54 percent of PTIC shares was already owned
by First Pacific and its affiliates); (b) Parallax offered the highest bid amounting to
P25,217,556,000; (c) pursuant to the right of first refusal in favor of PTIC and its
shareholders granted in PTICs Articles of Incorporation, MPAH, a First Pacific
affiliate, exercised its right of first refusal by matching the highest bid offered for
PTIC shares on 13 February 2007; and (d) on 28 February 2007, the sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares. Respondent Pangilinan denies the other
allegations of facts of petitioner.

On 28 February 2007, petitioner filed the instant petition for prohibition, injunction,
declaratory relief, and declaration of nullity of sale of the 111,415 PTIC shares.
Petitioner claims, among others, that the sale of the 111,415 PTIC shares would
result in an increase in First Pacifics common shareholdings in PLDT from 30.7
percent to 37 percent, and this, combined with Japanese NTT DoCoMos common
shareholdings in PLDT, would result to a total foreign common shareholdings in
PLDT of 51.56 percent which is over the 40 percent constitutional limit.6 Petitioner
asserts:

If and when the sale is completed, First Pacifics equity in PLDT will go up from 30.7
percent to 37.0 percent of its common or voting- stockholdings, x x x. Hence, the
consummation of the sale will put the two largest foreign investors in PLDT First
Pacific and Japans NTT DoCoMo, which is the worlds largest wireless
telecommunications firm, owning 51.56 percent of PLDT common equity. x x x With
the completion of the sale, data culled from the official website of the New York
Stock Exchange (www.nyse.com) showed that those foreign entities, which own at
least five percent of common equity, will collectively own 81.47 percent of PLDTs
common equity. x x x
x x x as the annual disclosure reports, also referred to as Form 20-K reports x x x
which PLDT submitted to the New York Stock Exchange for the period 2003-2005,
revealed that First Pacific and several other foreign entities breached the
constitutional limit of 40 percent ownership as early as 2003. x x x7

Petitioner raises the following issues: (1) whether the consummation of the then
impending sale of 111,415 PTIC shares to First Pacific violates the constitutional
limit on foreign ownership of a public utility; (2) whether public respondents
committed grave abuse of discretion in allowing the sale of the 111,415 PTIC shares
to First Pacific; and (3) whether the sale of common shares to foreigners in excess of
40 percent of the entire subscribed common capital stock violates the constitutional
limit on foreign ownership of a public utility.8

On 13 August 2007, Pablito V. Sanidad and Arno V. Sanidad filed a Motion for
Leave to Intervene and Admit Attached Petition-in-Intervention. In the Resolution of
28 August 2007, the Court granted the motion and noted the Petition-in-Intervention.

Petitioners-in-intervention join petitioner Wilson Gamboa x x x in seeking, among

others, to enjoin and/or nullify the sale by respondents of the 111,415 PTIC shares to
First Pacific or assignee. Petitioners-in-intervention claim that, as PLDT subscribers,
they have a stake in the outcome of the controversy x x x where the Philippine
Government is completing the sale of government owned assets in [PLDT],
unquestionably a public utility, in violation of the nationality restrictions of the
Philippine Constitution.

The Issue

This Court is not a trier of facts. Factual questions such as those raised by
petitioner,9 which indisputably demand a thorough examination of the evidence of
the parties, are generally beyond this Courts jurisdiction. Adhering to this wellsettled principle, the Court shall confine the resolution of the instant controversy
solely on the threshold and purely legal issue of whether the term capital in Section
11, Article XII of the Constitution refers to the total common shares only or to the
total outstanding capital stock (combined total of common and non-voting preferred
shares) of PLDT, a public utility.

The Ruling of the Court

The petition is partly meritorious.

Petition for declaratory relief treated as petition for mandamus

At the outset, petitioner is faced with a procedural barrier. Among the remedies
petitioner seeks, only the petition for prohibition is within the original jurisdiction of
this court, which however is not exclusive but is concurrent with the Regional Trial
Court and the Court of Appeals. The actions for declaratory relief,10 injunction, and
annulment of sale are not embraced within the original jurisdiction of the Supreme
Court. On this ground alone, the petition could have been dismissed outright.

While direct resort to this Court may be justified in a petition for prohibition,11 the
Court shall nevertheless refrain from discussing the grounds in support of the
petition for prohibition since on 28 February 2007, the questioned sale was
consummated when MPAH paid IPC P25,217,556,000 and the government delivered
the certificates for the 111,415 PTIC shares.

However, since the threshold and purely legal issue on the definition of the term
capital in Section 11, Article XII of the Constitution has far-reaching implications to
the national economy, the Court treats the petition for declaratory relief as one for
mandamus.12

In Salvacion v. Central Bank of the Philippines,13 the Court treated the petition for
declaratory relief as one for mandamus considering the grave injustice that would
result in the interpretation of a banking law. In that case, which involved the crime of
rape committed by a foreign tourist against a Filipino minor and the execution of the
final judgment in the civil case for damages on the tourists dollar deposit with a local
bank, the Court declared Section 113 of Central Bank Circular No. 960, exempting
foreign currency deposits from attachment, garnishment or any other order or
process of any court, inapplicable due to the peculiar circumstances of the case. The
Court held that injustice would result especially to a citizen aggrieved by a foreign
guest like accused x x x that would negate Article 10 of the Civil Code which
provides that in case of doubt in the interpretation or application of laws, it is
presumed that the lawmaking body intended right and justice to prevail. The Court
therefore required respondents Central Bank of the Philippines, the local bank, and
the accused to comply with the writ of execution issued in the civil case for damages
and to release the dollar deposit of the accused to satisfy the judgment.

In Alliance of Government Workers v. Minister of Labor,14 the Court similarly

brushed aside the procedural infirmity of the petition for declaratory relief and

10

treated the same as one for mandamus. In Alliance, the issue was whether the
government unlawfully excluded petitioners, who were government employees, from
the enjoyment of rights to which they were entitled under the law. Specifically, the
question was: Are the branches, agencies, subdivisions, and instrumentalities of the
Government, including government owned or controlled corporations included
among the four employers under Presidential Decree No. 851 which are required to
pay their employees x x x a thirteenth (13th) month pay x x x ? The Constitutional
principle involved therein affected all government employees, clearly justifying a
relaxation of the technical rules of procedure, and certainly requiring the
interpretation of the assailed presidential decree.

In short, it is well-settled that this Court may treat a petition for declaratory relief as
one for mandamus if the issue involved has far-reaching implications. As this Court
held in Salvacion:

The Court has no original and exclusive jurisdiction over a petition for declaratory
relief. However, exceptions to this rule have been recognized. Thus, where the
petition has far-reaching implications and raises questions that should be resolved, it
may be treated as one for mandamus.15 (Emphasis supplied)

In the present case, petitioner seeks primarily the interpretation of the term capital in
Section 11, Article XII of the Constitution. He prays that this Court declare that the
term capital refers to common shares only, and that such shares constitute the sole
basis in determining foreign equity in a public utility. Petitioner further asks this
Court to declare any ruling inconsistent with such interpretation unconstitutional.

The interpretation of the term capital in Section 11, Article XII of the Constitution
has far-reaching implications to the national economy. In fact, a resolution of this
issue will determine whether Filipinos are masters, or second class citizens, in their
own country. What is at stake here is whether Filipinos or foreigners will have
effective control of the national economy. Indeed, if ever there is a legal issue that
has far-reaching implications to the entire nation, and to future generations of
Filipinos, it is the threshhold legal issue presented in this case.

The Court first encountered the issue on the definition of the term capital in Section
11, Article XII of the Constitution in the case of Fernandez v. Cojuangco, docketed
as G.R. No. 157360.16 That case involved the same public utility (PLDT) and
substantially the same private respondents. Despite the importance and novelty of the
constitutional issue raised therein and despite the fact that the petition involved a
purely legal question, the Court declined to resolve the case on the merits, and
instead denied the same for disregarding the hierarchy of courts.17 There, petitioner
Fernandez assailed on a pure question of law the Regional Trial Courts Decision of
21 February 2003 via a petition for review under Rule 45. The Courts Resolution,
denying the petition, became final on 21 December 2004.
The instant petition therefore presents the Court with another opportunity to finally
settle this purely legal issue which is of transcendental importance to the national
economy and a fundamental requirement to a faithful adherence to our Constitution.
The Court must forthwith seize such opportunity, not only for the benefit of the
litigants, but more significantly for the benefit of the entire Filipino people, to
ensure, in the words of the Constitution, a self-reliant and independent national
economy effectively controlled by Filipinos.18 Besides, in the light of vague and
confusing positions taken by government agencies on this purely legal issue, present
and future foreign investors in this country deserve, as a matter of basic fairness, a
categorical ruling from this Court on the extent of their participation in the capital of
public utilities and other nationalized businesses.

Despite its far-reaching implications to the national economy, this purely legal issue
has remained unresolved for over 75 years since the 1935 Constitution. There is no
reason for this Court to evade this ever recurring fundamental issue and delay again
defining the term capital, which appears not only in Section 11, Article XII of the
Constitution, but also in Section 2, Article XII on co-production and joint venture
agreements for the development of our natural resources,19 in Section 7, Article XII
on ownership of private lands,20 in Section 10, Article XII on the reservation of
certain investments to Filipino citizens,21 in Section 4(2), Article XIV on the
ownership of educational institutions,22 and in Section 11(2), Article XVI on the
ownership of advertising companies.23

Petitioner has locus standi

11

There is no dispute that petitioner is a stockholder of PLDT. As such, he has the right
to question the subject sale, which he claims to violate the nationality requirement
prescribed in Section 11, Article XII of the Constitution. If the sale indeed violates
the Constitution, then there is a possibility that PLDTs franchise could be revoked, a
dire consequence directly affecting petitioners interest as a stockholder.

economic development of the country and the magnitude of the financial

consideration involved. We concluded that, as a consequence, the disclosure
provision in the Constitution would constitute sufficient authority for upholding the
petitioners standing. (Emphasis supplied)

Clearly, since the instant petition, brought by a citizen, involves matters of

transcendental public importance, the petitioner has the requisite locus standi.
More importantly, there is no question that the instant petition raises matters of
transcendental importance to the public. The fundamental and threshold legal issue in
this case, involving the national economy and the economic welfare of the Filipino
people, far outweighs any perceived impediment in the legal personality of the
petitioner to bring this action.

Definition of the Term Capital in

In Chavez v. PCGG,24 the Court upheld the right of a citizen to bring a suit on
matters of transcendental importance to the public, thus:

Section 11, Article XII (National Economy and Patrimony) of the 1987 Constitution
mandates the Filipinization of public utilities, to wit:

In Taada v. Tuvera, the Court asserted that when the issue concerns a public right and
the object of mandamus is to obtain the enforcement of a public duty, the people are
regarded as the real parties in interest; and because it is sufficient that petitioner is a
citizen and as such is interested in the execution of the laws, he need not show that
he has any legal or special interest in the result of the action. In the aforesaid case,
the petitioners sought to enforce their right to be informed on matters of public
concern, a right then recognized in Section 6, Article IV of the 1973 Constitution, in
connection with the rule that laws in order to be valid and enforceable must be
published in the Official Gazette or otherwise effectively promulgated. In ruling for
the petitioners legal standing, the Court declared that the right they sought to be
enforced is a public right recognized by no less than the fundamental law of the land.
Legaspi v. Civil Service Commission, while reiterating Taada, further declared that
when a mandamus proceeding involves the assertion of a public right, the
requirement of personal interest is satisfied by the mere fact that petitioner is a
citizen and, therefore, part of the general public which possesses the right.

Section 11, Article XII of the 1987 Constitution

Section 11. No franchise, certificate, or any other form of authorization for the
operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines, at least
sixty per centum of whose capital is owned by such citizens; nor shall such franchise,
certificate, or authorization be exclusive in character or for a longer period than fifty
years. Neither shall any such franchise or right be granted except under the condition
that it shall be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in public
utilities by the general public. The participation of foreign investors in the governing
body of any public utility enterprise shall be limited to their proportionate share in its
capital, and all the executive and managing officers of such corporation or
association must be citizens of the Philippines. (Emphasis supplied)

Further, in Albano v. Reyes, we said that while expenditure of public funds may not
have been involved under the questioned contract for the development, management
and operation of the Manila International Container Terminal, public interest [was]
definitely involved considering the important role [of the subject contract] . . . in the

12

The above provision substantially reiterates Section 5, Article XIV of the 1973
Constitution, thus:

Section 5. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or associations organized under the laws of the Philippines at least sixty
per centum of the capital of which is owned by such citizens, nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period
than fifty years. Neither shall any such franchise or right be granted except under the
condition that it shall be subject to amendment, alteration, or repeal by the National
Assembly when the public interest so requires. The State shall encourage equity
participation in public utilities by the general public. The participation of foreign
investors in the governing body of any public utility enterprise shall be limited to
their proportionate share in the capital thereof. (Emphasis supplied)

Father Joaquin G. Bernas, S.J., a leading member of the 1986 Constitutional

Commission, reminds us that the Filipinization provision in the 1987 Constitution is
one of the products of the spirit of nationalism which gripped the 1935 Constitutional
Convention.25 The 1987 Constitution provides for the Filipinization of public
utilities by requiring that any form of authorization for the operation of public
utilities should be granted only to citizens of the Philippines or to corporations or
associations organized under the laws of the Philippines at least sixty per centum of
whose capital is owned by such citizens. The provision is [an express] recognition of
the sensitive and vital position of public utilities both in the national economy and
for national security.26 The evident purpose of the citizenship requirement is to
prevent aliens from assuming control of public utilities, which may be inimical to the
national interest.27 This specific provision explicitly reserves to Filipino citizens
control of public utilities, pursuant to an overriding economic goal of the 1987
Constitution: to conserve and develop our patrimony28 and ensure a self-reliant and
independent national economy effectively controlled by Filipinos.29

Any citizen or juridical entity desiring to operate a public utility must therefore meet
the minimum nationality requirement prescribed in Section 11, Article XII of the
Constitution. Hence, for a corporation to be granted authority to operate a public
utility, at least 60 percent of its capital must be owned by Filipino citizens.
The foregoing provision in the 1973 Constitution reproduced Section 8, Article XIV
of the 1935 Constitution, viz:

Section 8. No franchise, certificate, or any other form of authorization for the

operation of a public utility shall be granted except to citizens of the Philippines or to
corporations or other entities organized under the laws of the Philippines sixty per
centum of the capital of which is owned by citizens of the Philippines, nor shall such
franchise, certificate, or authorization be exclusive in character or for a longer period
than fifty years. No franchise or right shall be granted to any individual, firm, or
corporation, except under the condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the public interest so requires. (Emphasis
supplied)

The crux of the controversy is the definition of the term capital. Does the term
capital in Section 11, Article XII of the Constitution refer to common shares or to the
total outstanding capital stock (combined total of common and non-voting preferred
shares)?

Petitioner submits that the 40 percent foreign equity limitation in domestic public
utilities refers only to common shares because such shares are entitled to vote and it
is through voting that control over a corporation is exercised. Petitioner posits that
the term capital in Section 11, Article XII of the Constitution refers to the ownership
of common capital stock subscribed and outstanding, which class of shares alone,
under the corporate set-up of PLDT, can vote and elect members of the board of
directors. It is undisputed that PLDTs non-voting preferred shares are held mostly by
Filipino citizens.30 This arose from Presidential Decree No. 217,31 issued on 16
June 1973 by then President Ferdinand Marcos, requiring every applicant of a PLDT
telephone line to subscribe to non-voting preferred shares to pay for the investment
cost of installing the telephone line.32

13

Petitioners-in-intervention basically reiterate petitioners arguments and adopt

petitioners definition of the term capital.33 Petitioners-in-intervention allege that the
approximate foreign ownership of common capital stock of PLDT x x x already
amounts to at least 63.54% of the total outstanding common stock, which means that
foreigners exercise significant control over PLDT, patently violating the 40 percent
foreign equity limitation in public utilities prescribed by the Constitution.

Respondents, on the other hand, do not offer any definition of the term capital in
Section 11, Article XII of the Constitution. More importantly, private respondents
Nazareno and Pangilinan of PLDT do not dispute that more than 40 percent of the
common shares of PLDT are held by foreigners.

In particular, respondent Nazarenos Memorandum, consisting of 73 pages, harps

mainly on the procedural infirmities of the petition and the supposed violation of the
due process rights of the affected foreign common shareholders. Respondent
Nazareno does not deny petitioners allegation of foreigners dominating the common
shareholdings of PLDT. Nazareno stressed mainly that the petition seeks to divest
foreign common shareholders purportedly exceeding 40% of the total common
shareholdings in PLDT of their ownership over their shares. Thus, the foreign natural
and juridical PLDT shareholders must be impleaded in this suit so that they can be
heard.34 Essentially, Nazareno invokes denial of due process on behalf of the foreign
common shareholders.

While Nazareno does not introduce any definition of the term capital, he states that
among the factual assertions that need to be established to counter petitioners
allegations is the uniform interpretation by government agencies (such as the SEC),
institutions and corporations (such as the Philippine National Oil Company-Energy
Development Corporation or PNOC-EDC) of including both preferred shares and
common shares in controlling interest in view of testing compliance with the 40%
constitutional limitation on foreign ownership in public utilities.35

Similarly, respondent Manuel V. Pangilinan does not define the term capital in
Section 11, Article XII of the Constitution. Neither does he refute petitioners claim
of foreigners holding more than 40 percent of PLDTs common shares. Instead,

respondent Pangilinan focuses on the procedural flaws of the petition and the alleged
violation of the due process rights of foreigners. Respondent Pangilinan emphasizes
in his Memorandum (1) the absence of this Courts jurisdiction over the petition; (2)
petitioners lack of standing; (3) mootness of the petition; (4) non-availability of
declaratory relief; and (5) the denial of due process rights. Moreover, respondent
Pangilinan alleges that the issue should be whether owners of shares in PLDT as well
as owners of shares in companies holding shares in PLDT may be required to
relinquish their shares in PLDT and in those companies without any law requiring
them to surrender their shares and also without notice and trial.

Respondent Pangilinan further asserts that Section 11, [Article XII of the
Constitution] imposes no nationality requirement on the shareholders of the utility
company as a condition for keeping their shares in the utility company. According to
him, Section 11 does not authorize taking one persons property (the shareholders
stock in the utility company) on the basis of another partys alleged failure to satisfy a
requirement that is a condition only for that other partys retention of another piece of
property (the utility company being at least 60% Filipino-owned to keep its
franchise).36

The OSG, representing public respondents Secretary Margarito Teves,

Undersecretary John P. Sevilla, Commissioner Ricardo Abcede, and Chairman Fe
Barin, is likewise silent on the definition of the term capital. In its Memorandum37
dated 24 September 2007, the OSG also limits its discussion on the supposed
procedural defects of the petition, i.e. lack of standing, lack of jurisdiction, noninclusion of interested parties, and lack of basis for injunction. The OSG does not
present any definition or interpretation of the term capital in Section 11, Article XII
of the Constitution. The OSG contends that the petition actually partakes of a
collateral attack on PLDTs franchise as a public utility, which in effect requires a
full-blown trial where all the parties in interest are given their day in court.38

Respondent Francisco Ed Lim, impleaded as President and Chief Executive Officer

of the Philippine Stock Exchange (PSE), does not also define the term capital and
seeks the dismissal of the petition on the following grounds: (1) failure to state a
cause of action against Lim; (2) the PSE allegedly implemented its rules and required
all listed companies, including PLDT, to make proper and timely disclosures; and (3)
the reliefs prayed for in the petition would adversely impact the stock market.

14

In the earlier case of Fernandez v. Cojuangco, petitioner Fernandez who claimed to

be a stockholder of record of PLDT, contended that the term capital in the 1987
Constitution refers to shares entitled to vote or the common shares. Fernandez
explained thus:

The forty percent (40%) foreign equity limitation in public utilities prescribed by the
Constitution refers to ownership of shares of stock entitled to vote, i.e., common
shares, considering that it is through voting that control is being exercised. x x x

Obviously, the intent of the framers of the Constitution in imposing limitations and
restrictions on fully nationalized and partially nationalized activities is for Filipino
nationals to be always in control of the corporation undertaking said activities.
Otherwise, if the Trial Courts ruling upholding respondents arguments were to be
given credence, it would be possible for the ownership structure of a public utility
corporation to be divided into one percent (1%) common stocks and ninety-nine
percent (99%) preferred stocks. Following the Trial Courts ruling adopting
respondents arguments, the common shares can be owned entirely by foreigners thus
creating an absurd situation wherein foreigners, who are supposed to be minority
shareholders, control the public utility corporation.

it must be shown that the legal and beneficial ownership rests in the hands of Filipino
citizens. Consequently, in the case of petitioner PLDT, since it is already admitted
that the voting interests of foreigners which would gain entry to petitioner PLDT by
the acquisition of SMART shares through the Questioned Transactions is equivalent
to 82.99%, and the nominee arrangements between the foreign principals and the
Filipino owners is likewise admitted, there is, therefore, a violation of Section 11,
Article XII of the Constitution.
Parenthetically, the Opinions dated February 15, 1988 and April 14, 1987 cited by
the Trial Court to support the proposition that the meaning of the word capital as
used in Section 11, Article XII of the Constitution allegedly refers to the sum total of
the shares subscribed and paid-in by the shareholder and it allegedly is immaterial
how the stock is classified, whether as common or preferred, cannot stand in the face
of a clear legislative policy as stated in the FIA which took effect in 1991 or way
after said opinions were rendered, and as clarified by the above-quoted Amendments.
In this regard, suffice it to state that as between the law and an opinion rendered by
an administrative agency, the law indubitably prevails. Moreover, said Opinions are
merely advisory and cannot prevail over the clear intent of the framers of the
Constitution.

In the same vein, the SECs construction of Section 11, Article XII of the Constitution
is at best merely advisory for it is the courts that finally determine what a law
means.39

xxxx

Thus, the 40% foreign ownership limitation should be interpreted to apply to both
the beneficial ownership and the controlling interest.

On the other hand, respondents therein, Antonio O. Cojuangco, Manuel V.

Pangilinan, Carlos A. Arellano, Helen Y. Dee, Magdangal B. Elma, Mariles CachoRomulo, Fr. Bienvenido F. Nebres, Ray C. Espinosa, Napoleon L. Nazareno, Albert
F. Del Rosario, and Orlando B. Vea, argued that the term capital in Section 11,
Article XII of the Constitution includes preferred shares since the Constitution does
not distinguish among classes of stock, thus:

xxxx
16. The Constitution applies its foreign ownership limitation on the corporations
capital, without distinction as to classes of shares. x x x
Clearly, therefore, the forty percent (40%) foreign equity limitation in public utilities
prescribed by the Constitution refers to ownership of shares of stock entitled to vote,
i.e., common shares. Furthermore, ownership of record of shares will not suffice but

15

In this connection, the Corporation Code which was already in force at the time the
present (1987) Constitution was drafted defined outstanding capital stock as follows:

Section 137. Outstanding capital stock defined. The term outstanding capital stock,
as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or
partially paid, except treasury shares.

Section 137 of the Corporation Code also does not distinguish between common and
preferred shares, nor exclude either class of shares, in determining the outstanding
capital stock (the capital) of a corporation. Consequently, petitioners suggestion to
reckon PLDTs foreign equity only on the basis of PLDTs outstanding common
shares is without legal basis. The language of the Constitution should be understood
in the sense it has in common use.
xxxx

17. But even assuming that resort to the proceedings of the Constitutional
Commission is necessary, there is nothing in the Record of the Constitutional
Commission (Vol. III) which petitioner misleadingly cited in the Petition x x x which
supports petitioners view that only common shares should form the basis for
computing a public utilitys foreign equity.
xxxx

18. In addition, the SEC the government agency primarily responsible for
implementing the Corporation Code, and which also has the responsibility of
ensuring compliance with the Constitutions foreign equity restrictions as regards
nationalized activities x x x has categorically ruled that both common and preferred
shares are properly considered in determining outstanding capital stock and the
nationality composition thereof.40

We agree with petitioner and petitioners-in-intervention. The term capital in Section

11, Article XII of the Constitution refers only to shares of stock entitled to vote in the
election of directors, and thus in the present case only to common shares,41 and not
to the total outstanding capital stock comprising both common and non-voting
preferred shares.
The Corporation Code of the Philippines42 classifies shares as common or preferred,
thus:

Sec. 6. Classification of shares. - The shares of stock of stock corporations may be

divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as preferred or redeemable shares, unless otherwise
provided in this Code: Provided, further, That there shall always be a class or series
of shares which have complete voting rights. Any or all of the shares or series of
shares may have a par value or have no par value as may be provided for in the
articles of incorporation: Provided, however, That banks, trust companies, insurance
companies, public utilities, and building and loan associations shall not be permitted
to issue no-par value shares of stock.
Preferred shares of stock issued by any corporation may be given preference in the
distribution of the assets of the corporation in case of liquidation and in the
distribution of dividends, or such other preferences as may be stated in the articles of
incorporation which are not violative of the provisions of this Code: Provided, That
preferred shares of stock may be issued only with a stated par value. The Board of
Directors, where authorized in the articles of incorporation, may fix the terms and
conditions of preferred shares of stock or any series thereof: Provided, That such
terms and conditions shall be effective upon the filing of a certificate thereof with the
Securities and Exchange Commission.
Shares of capital stock issued without par value shall be deemed fully paid and nonassessable and the holder of such shares shall not be liable to the corporation or to its
creditors in respect thereto: Provided; That shares without par value may not be
issued for a consideration less than the value of five (P5.00) pesos per share:
Provided, further, That the entire consideration received by the corporation for its nopar value shares shall be treated as capital and shall not be available for distribution
as dividends.
A corporation may, furthermore, classify its shares for the purpose of insuring
compliance with constitutional or legal requirements.

16

Except as otherwise provided in the articles of incorporation and stated in the

certificate of stock, each share shall be equal in all respects to every other share.

vote.46 Common shares cannot be deprived of the right to vote in any corporate
meeting, and any provision in the articles of incorporation restricting the right of
common shareholders to vote is invalid.47

Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to vote
on the following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;

Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term capital in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term capital shall include such preferred shares because the right to participate in the
control or management of the corporation is exercised through the right to vote in the
election of directors. In short, the term capital in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors.

5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
8. Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.

This interpretation is consistent with the intent of the framers of the Constitution to
place in the hands of Filipino citizens the control and management of public utilities.
As revealed in the deliberations of the Constitutional Commission, capital refers to
the voting stock or controlling interest of a corporation, to wit:

MR. NOLLEDO. In Sections 3, 9 and 15, the Committee stated local or Filipino
equity and foreign equity; namely, 60-40 in Section 3, 60-40 in Section 9 and 2/3-1/3
in Section 15.

MR. VILLEGAS. That is right.

Indisputably, one of the rights of a stockholder is the right to participate in the

control or management of the corporation.43 This is exercised through his vote in the
election of directors because it is the board of directors that controls or manages the
corporation.44 In the absence of provisions in the articles of incorporation denying
voting rights to preferred shares, preferred shares have the same voting rights as
common shares. However, preferred shareholders are often excluded from any
control, that is, deprived of the right to vote in the election of directors and on other
matters, on the theory that the preferred shareholders are merely investors in the
corporation for income in the same manner as bondholders.45 In fact, under the
Corporation Code only preferred or redeemable shares can be deprived of the right to

MR. NOLLEDO. In teaching law, we are always faced with this question: Where do
we base the equity requirement, is it on the authorized capital stock, on the
subscribed capital stock, or on the paid-up capital stock of a corporation? Will the
Committee please enlighten me on this?

MR. VILLEGAS. We have just had a long discussion with the members of the team
from the UP Law Center who provided us a draft. The phrase that is contained here
which we adopted from the UP draft is 60 percent of voting stock.

17

MR. NOLLEDO. That must be based on the subscribed capital stock, because unless
declared delinquent, unpaid capital stock shall be entitled to vote.

MR. AZCUNA. Hence, without the Davide amendment, the committee report would
read: corporations or associations at least sixty percent of whose CAPITAL is owned
by such citizens.

MR. VILLEGAS. That is right.

MR. VILLEGAS. Yes.
MR. NOLLEDO. Thank you.
MR. AZCUNA. So if the Davide amendment is lost, we are stuck with 60 percent of
the capital to be owned by citizens.
With respect to an investment by one corporation in another corporation, say, a
corporation with 60-40 percent equity invests in another corporation which is
permitted by the Corporation Code, does the Committee adopt the grandfather rule?

MR. VILLEGAS. Yes, that is the understanding of the Committee.

MR. NOLLEDO. Therefore, we need additional Filipino capital?

MR. VILLEGAS. Yes.48

MR. VILLEGAS. That is right.

MR. AZCUNA. But the control can be with the foreigners even if they are the
minority. Let us say 40 percent of the capital is owned by them, but it is the voting
capital, whereas, the Filipinos own the nonvoting shares. So we can have a situation
where the corporation is controlled by foreigners despite being the minority because
they have the voting capital. That is the anomaly that would result here.

MR. BENGZON. No, the reason we eliminated the word stock as stated in the 1973
and 1935 Constitutions is that according to Commissioner Rodrigo, there are
associations that do not have stocks. That is why we say CAPITAL.

xxxx
MR. AZCUNA. May I be clarified as to that portion that was accepted by the
Committee.

MR. VILLEGAS. The portion accepted by the Committee is the deletion of the
phrase voting stock or controlling interest.

MR. AZCUNA. We should not eliminate the phrase controlling interest.

MR. BENGZON. In the case of stock corporations, it is assumed.49 (Emphasis

supplied)

18

Thus, 60 percent of the capital assumes, or should result in, controlling interest in the
corporation. Reinforcing this interpretation of the term capital, as referring to
controlling interest or shares entitled to vote, is the definition of a Philippine national
in the Foreign Investments Act of 1991,50 to wit:

by citizens of the Philippines; or a trustee of funds for pension or other employee

retirement or separation benefits, where the trustee is a Philippine national and at
least sixty percent [60%] of the fund will accrue to the benefit of the Philippine
nationals; Provided, that where a corporation its non-Filipino stockholders own
stocks in a Securities and Exchange Commission [SEC] registered enterprise, at least
sixty percent [60%] of the capital stock outstanding and entitled to vote of both
corporations must be owned and held by citizens of the Philippines and at least sixty
percent [60%] of the members of the Board of Directors of each of both corporation
must be citizens of the Philippines, in order that the corporation shall be considered a
Philippine national. The control test shall be applied for this purpose.

SEC. 3. Definitions. - As used in this Act:

a. The term Philippine national shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned and held
by citizens of the Philippines; or a corporation organized abroad and registered as
doing business in the Philippines under the Corporation Code of which one hundred
percent (100%) of the capital stock outstanding and entitled to vote is wholly owned
by Filipinos or a trustee of funds for pension or other employee retirement or
separation benefits, where the trustee is a Philippine national and at least sixty
percent (60%) of the fund will accrue to the benefit of Philippine nationals:
Provided, That where a corporation and its non-Filipino stockholders own stocks in a
Securities and Exchange Commission (SEC) registered enterprise, at least sixty
percent (60%) of the capital stock outstanding and entitled to vote of each of both
corporations must be owned and held by citizens of the Philippines and at least sixty
percent (60%) of the members of the Board of Directors of each of both corporations
must be citizens of the Philippines, in order that the corporation, shall be considered
a Philippine national. (Emphasis supplied)

Compliance with the required Filipino ownership of a corporation shall be

determined on the basis of outstanding capital stock whether fully paid or not, but
only such stocks which are generally entitled to vote are considered.

For stocks to be deemed owned and held by Philippine citizens or Philippine

nationals, mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of which have been assigned or transferred
to aliens cannot be considered held by Philippine citizens or Philippine nationals.

Individuals or juridical entities not meeting the aforementioned qualifications are

considered as non-Philippine nationals. (Emphasis supplied)

In explaining the definition of a Philippine national, the Implementing Rules and

Regulations of the Foreign Investments Act of 1991 provide:

b. Philippine national shall mean a citizen of the Philippines or a domestic

partnership or association wholly owned by the citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent [60%] of the capital stock outstanding and entitled to vote is owned and held

19

Mere legal title is insufficient to meet the 60 percent Filipino-owned capital required
in the Constitution. Full beneficial ownership of 60 percent of the outstanding capital
stock, coupled with 60 percent of the voting rights, is required. The legal and
beneficial ownership of 60 percent of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the constitutional mandate. Otherwise,
the corporation is considered as non-Philippine national[s].

Under Section 10, Article XII of the Constitution, Congress may reserve to citizens
of the Philippines or to corporations or associations at least sixty per centum of
whose capital is owned by such citizens, or such higher percentage as Congress may
prescribe, certain areas of investments. Thus, in numerous laws Congress has
reserved certain areas of investments to Filipino citizens or to corporations at least
sixty percent of the capital of which is owned by Filipino citizens. Some of these
laws are: (1) Regulation of Award of Government Contracts or R.A. No. 5183; (2)
Philippine Inventors Incentives Act or R.A. No. 3850; (3) Magna Carta for Micro,
Small and Medium Enterprises or R.A. No. 6977; (4) Philippine Overseas Shipping
Development Act or R.A. No. 7471; (5) Domestic Shipping Development Act of
2004 or R.A. No. 9295; (6) Philippine Technology Transfer Act of 2009 or R.A. No.
10055; and (7) Ship Mortgage Decree or P.D. No. 1521. Hence, the term capital in
Section 11, Article XII of the Constitution is also used in the same context in
numerous laws reserving certain areas of investments to Filipino citizens.

To construe broadly the term capital as the total outstanding capital stock, including
both common and non-voting preferred shares, grossly contravenes the intent and
letter of the Constitution that the State shall develop a self-reliant and independent
national economy effectively controlled by Filipinos. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily equates to
control of the public utility.

We shall illustrate the glaring anomaly in giving a broad definition to the term
capital. Let us assume that a corporation has 100 common shares owned by
foreigners and 1,000,000 non-voting preferred shares owned by Filipinos, with both
classes of share having a par value of one peso (P1.00) per share. Under the broad
definition of the term capital, such corporation would be considered compliant with
the 40 percent constitutional limit on foreign equity of public utilities since the
overwhelming majority, or more than 99.999 percent, of the total outstanding capital
stock is Filipino owned. This is obviously absurd.

In the example given, only the foreigners holding the common shares have voting
rights in the election of directors, even if they hold only 100 shares. The foreigners,
with a minuscule equity of less than 0.001 percent, exercise control over the public
utility. On the other hand, the Filipinos, holding more than 99.999 percent of the
equity, cannot vote in the election of directors and hence, have no control over the
public utility. This starkly circumvents the intent of the framers of the Constitution,
as well as the clear language of the Constitution, to place the control of public
utilities in the hands of Filipinos. It also renders illusory the State policy of an
independent national economy effectively controlled by Filipinos.

The example given is not theoretical but can be found in the real world, and in fact
exists in the present case.

Holders of PLDT preferred shares are explicitly denied of the right to vote in the
election of directors. PLDTs Articles of Incorporation expressly state that the holders
of Serial Preferred Stock shall not be entitled to vote at any meeting of the
stockholders for the election of directors or for any other purpose or otherwise
participate in any action taken by the corporation or its stockholders, or to receive
notice of any meeting of stockholders.51

On the other hand, holders of common shares are granted the exclusive right to vote
in the election of directors. PLDTs Articles of Incorporation52 state that each holder
of Common Capital Stock shall have one vote in respect of each share of such stock
held by him on all matters voted upon by the stockholders, and the holders of
Common Capital Stock shall have the exclusive right to vote for the election of
directors and for all other purposes.53

In short, only holders of common shares can vote in the election of directors,
meaning only common shareholders exercise control over PLDT. Conversely,
holders of preferred shares, who have no voting rights in the election of directors, do
not have any control over PLDT. In fact, under PLDTs Articles of Incorporation,
holders of common shares have voting rights for all purposes, while holders of
preferred shares have no voting right for any purpose whatsoever.

20

It must be stressed, and respondents do not dispute, that foreigners hold a majority of
the common shares of PLDT. In fact, based on PLDTs 2010 General Information
Sheet (GIS),54 which is a document required to be submitted annually to the
Securities and Exchange Commission,55 foreigners hold 120,046,690 common
shares of PLDT whereas Filipinos hold only 66,750,622 common shares.56 In other
words, foreigners hold 64.27% of the total number of PLDTs common shares, while
Filipinos hold only 35.73%. Since holding a majority of the common shares equates
to control, it is clear that foreigners exercise control over PLDT. Such amount of
control unmistakably exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article XII of the Constitution.

Moreover, the Dividend Declarations of PLDT for 2009,57 as submitted to the SEC,
shows that per share the SIP58 preferred shares earn a pittance in dividends
compared to the common shares. PLDT declared dividends for the common shares at
P70.00 per share, while the declared dividends for the preferred shares amounted to a
measly P1.00 per share.59 So the preferred shares not only cannot vote in the
election of directors, they also have very little and obviously negligible dividend
earning capacity compared to common shares.

As shown in PLDTs 2010 GIS,60 as submitted to the SEC, the par value of PLDT
common shares is P5.00 per share, whereas the par value of preferred shares is
P10.00 per share. In other words, preferred shares have twice the par value of
common shares but cannot elect directors and have only 1/70 of the dividends of
common shares. Moreover, 99.44% of the preferred shares are owned by Filipinos
while foreigners own only a minuscule 0.56% of the preferred shares.61 Worse,
preferred shares constitute 77.85% of the authorized capital stock of PLDT while
common shares constitute only 22.15%.62 This undeniably shows that beneficial
interest in PLDT is not with the non-voting preferred shares but with the common
shares, blatantly violating the constitutional requirement of 60 percent Filipino
control and Filipino beneficial ownership in a public utility.

The legal and beneficial ownership of 60 percent of the outstanding capital stock
must rest in the hands of Filipinos in accordance with the constitutional mandate.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with
60 percent of the voting rights, is constitutionally required for the States grant of
authority to operate a public utility. The undisputed fact that the PLDT preferred

shares, 99.44% owned by Filipinos, are non-voting and earn only 1/70 of the
dividends that PLDT common shares earn, grossly violates the constitutional
requirement of 60 percent Filipino control and Filipino beneficial ownership of a
public utility.
In short, Filipinos hold less than 60 percent of the voting stock, and earn less than 60
percent of the dividends, of PLDT. This directly contravenes the express command in
Section 11, Article XII of the Constitution that [n]o franchise, certificate, or any
other form of authorization for the operation of a public utility shall be granted
except to x x x corporations x x x organized under the laws of the Philippines, at
least sixty per centum of whose capital is owned by such citizens x x x.

To repeat, (1) foreigners own 64.27% of the common shares of PLDT, which class of
shares exercises the sole right to vote in the election of directors, and thus exercise
control over PLDT; (2) Filipinos own only 35.73% of PLDTs common shares,
constituting a minority of the voting stock, and thus do not exercise control over
PLDT; (3) preferred shares, 99.44% owned by Filipinos, have no voting rights; (4)
preferred shares earn only 1/70 of the dividends that common shares earn;63 (5)
preferred shares have twice the par value of common shares; and (6) preferred shares
constitute 77.85% of the authorized capital stock of PLDT and common shares only
22.15%. This kind of ownership and control of a public utility is a mockery of the
Constitution.

Incidentally, the fact that PLDT common shares with a par value of P5.00 have a
current stock market value of P2,328.00 per share,64 while PLDT preferred shares
with a par value of P10.00 per share have a current stock market value ranging from
only P10.92 to P11.06 per share,65 is a glaring confirmation by the market that
control and beneficial ownership of PLDT rest with the common shares, not with the
preferred shares.

Indisputably, construing the term capital in Section 11, Article XII of the
Constitution to include both voting and non-voting shares will result in the abject
surrender of our telecommunications industry to foreigners, amounting to a clear
abdication of the States constitutional duty to limit control of public utilities to
Filipino citizens. Such an interpretation certainly runs counter to the constitutional
provision reserving certain areas of investment to Filipino citizens, such as the
exploitation of natural resources as well as the ownership of land, educational
institutions and advertising businesses. The Court should never open to foreign

21

control what the Constitution has expressly reserved to Filipinos for that would be a
betrayal of the Constitution and of the national interest. The Court must perform its
solemn duty to defend and uphold the intent and letter of the Constitution to ensure,
in the words of the Constitution, a self-reliant and independent national economy
effectively controlled by Filipinos.

Section 11, Article XII of the Constitution, like other provisions of the Constitution
expressly reserving to Filipinos specific areas of investment, such as the
development of natural resources and ownership of land, educational institutions and
advertising business, is self-executing. There is no need for legislation to implement
these self-executing provisions of the Constitution. The rationale why these
constitutional provisions are self-executing was explained in Manila Prince Hotel v.
GSIS,66 thus:
x x x Hence, unless it is expressly provided that a legislative act is necessary to
enforce a constitutional mandate, the presumption now is that all provisions of the
constitution are self-executing. If the constitutional provisions are treated as
requiring legislation instead of self-executing, the legislature would have the power
to ignore and practically nullify the mandate of the fundamental law. This can be
cataclysmic. That is why the prevailing view is, as it has always been, that

. . . in case of doubt, the Constitution should be considered self-executing rather than

non-self-executing. . . . Unless the contrary is clearly intended, the provisions of the
Constitution should be considered self-executing, as a contrary rule would give the
legislature discretion to determine when, or whether, they shall be effective. These
provisions would be subordinated to the will of the lawmaking body, which could
make them entirely meaningless by simply refusing to pass the needed implementing
statute. (Emphasis supplied)

In Manila Prince Hotel, even the Dissenting Opinion of then Associate Justice
Reynato S. Puno, later Chief Justice, agreed that constitutional provisions are
presumed to be self-executing. Justice Puno stated:

Courts as a rule consider the provisions of the Constitution as self-executing, rather

than as requiring future legislation for their enforcement. The reason is not difficult
to discern. For if they are not treated as self-executing, the mandate of the
fundamental law ratified by the sovereign people can be easily ignored and nullified
by Congress. Suffused with wisdom of the ages is the unyielding rule that legislative
actions may give breath to constitutional rights but congressional inaction should not
suffocate them.

Thus, we have treated as self-executing the provisions in the Bill of Rights on

arrests, searches and seizures, the rights of a person under custodial investigation, the
rights of an accused, and the privilege against self-incrimination. It is recognized that
legislation is unnecessary to enable courts to effectuate constitutional provisions
guaranteeing the fundamental rights of life, liberty and the protection of property.
The same treatment is accorded to constitutional provisions forbidding the taking or
damaging of property for public use without just compensation. (Emphasis supplied)

Thus, in numerous cases,67 this Court, even in the absence of implementing

legislation, applied directly the provisions of the 1935, 1973 and 1987 Constitutions
limiting land ownership to Filipinos. In Soriano v. Ong Hoo,68 this Court ruled:

x x x As the Constitution is silent as to the effects or consequences of a sale by a

citizen of his land to an alien, and as both the citizen and the alien have violated the
law, none of them should have a recourse against the other, and it should only be the
State that should be allowed to intervene and determine what is to be done with the
property subject of the violation. We have said that what the State should do or could
do in such matters is a matter of public policy, entirely beyond the scope of judicial
authority. (Dinglasan, et al. vs. Lee Bun Ting, et al., 6 G. R. No. L-5996, June 27,
1956.) While the legislature has not definitely decided what policy should be

22

followed in cases of violations against the constitutional prohibition, courts of justice

cannot go beyond by declaring the disposition to be null and void as violative of the
Constitution. x x x (Emphasis supplied)

Constitution. Thus, the SEC is the government agency tasked with the statutory duty
to enforce the nationality requirement prescribed in Section 11, Article XII of the
Constitution on the ownership of public utilities. This Court, in a petition for
declaratory relief that is treated as a petition for mandamus as in the present case, can
direct the SEC to perform its statutory duty under the law, a duty that the SEC has
apparently unlawfully neglected to do based on the 2010 GIS that respondent PLDT
submitted to the SEC.

To treat Section 11, Article XII of the Constitution as not self-executing would mean
that since the 1935 Constitution, or over the last 75 years, not one of the
constitutional provisions expressly reserving specific areas of investments to
corporations, at least 60 percent of the capital of which is owned by Filipinos, was
enforceable. In short, the framers of the 1935, 1973 and 1987 Constitutions
miserably failed to effectively reserve to Filipinos specific areas of investment, like
the operation by corporations of public utilities, the exploitation by corporations of
mineral resources, the ownership by corporations of real estate, and the ownership of
educational institutions. All the legislatures that convened since 1935 also miserably
failed to enact legislations to implement these vital constitutional provisions that
determine who will effectively control the national economy, Filipinos or foreigners.
This Court cannot allow such an absurd interpretation of the Constitution.

Under Section 5(m) of the Securities Regulation Code,71 the SEC is vested with the
power and function 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. The SEC is mandated under Section 5(d)
of the same Code with the power and function to investigate x x x the activities of
persons to ensure compliance with the laws and regulations that SEC administers or
enforces. The GIS that all corporations are required to submit to SEC annually
should put the SEC on guard against violations of the nationality requirement
prescribed in the Constitution and existing laws. This Court can compel the SEC, in a
petition for declaratory relief that is treated as a petition for mandamus as in the
present case, to hear and decide a possible violation of Section 11, Article XII of the
Constitution in view of the ownership structure of PLDTs voting shares, as admitted
by respondents and as stated in PLDTs 2010 GIS that PLDT submitted to SEC.

This Court has held that the SEC has both regulatory and adjudicative functions.69
Under its regulatory functions, the SEC can be compelled by mandamus to perform
its statutory duty when it unlawfully neglects to perform the same. Under its
adjudicative or quasi-judicial functions, the SEC can be also be compelled by
mandamus to hear and decide a possible violation of any law it administers or
enforces when it is mandated by law to investigate such violation.

Under Section 17(4)70 of the Corporation Code, the SEC has the regulatory function
to reject or disapprove the Articles of Incorporation of any corporation where the
required percentage of ownership of the capital stock to be owned by citizens of the
Philippines has not been complied with as required by existing laws or the
ERIC L. LEE, G.R. No. 164648
Petitioner,
Present:
Ynares-Santiago, J. (Chairperson),
- versus - Corona,*
Chico-Nazario,
Nachura, and

WHEREFORE, we PARTLY GRANT the petition and rule that the term capital in
Section 11, Article XII of the 1987 Constitution refers only to shares of stock entitled
to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting
preferred shares). Respondent Chairperson of the Securities and Exchange
Commission is DIRECTED to apply this definition of the term capital in determining
the extent of allowable foreign ownership in respondent Philippine Long Distance
Telephone Company, and if there is a violation of Section 11, Article XII of the
Constitution, to impose the appropriate sanctions under the law.

SO ORDERED.
Peralta, JJ.**
HON. HENRY J. TROCINO,
PRESIDING JUDGE OF THE
REGIONAL TRIAL COURT, SIXTH
JUDICIAL REGION, BRANCH 62,
BAGO CITY, THE OFFICE OF THE
EX-OFFICIO SHERIFF OF THE

23

REGIONAL TRIAL COURT, SIXTH

JUDICIAL REGION, BRANCH 62, BAGO
CITY, and MAGDALENO M. PEA, Promulgated:
Respondents.
June 19, 2009
x ---------------------------------------------------------------------------------------- x
RESOLUTION
YNARES-SANTIAGO, J.:

For resolution are the petitioners Motion for Reconsideration[1] and Supplement to
Motion for Reconsideration[2] of the August 6, 2008 Decision disposing as follows:
WHEREFORE, the petition is DENIED for lack of merit. The March 19, 2004
Decision of the Court of Appeals in CA-G.R. SP No. 65023, dismissing the petition
for indirect contempt and the petition for prohibition and certiorari instituted to
enjoin the Regional Trial Court of Bago City, Branch 62, from further proceeding
with Civil Case Nos. 754 and 1088, as well as the July 27, 2004 Resolution denying
the motion for reconsideration, are AFFIRMED.
SO ORDERED.[3]
On October 13, 2008, petitioner filed an Urgent Motion for Consolidation seeking
that the instant case be consolidated with the following petitions pending with the
other Divisions of the Court, notably:
1. G.R. No. 145817 (Urban Bank, Inc. v. Pea), where the First Division of the Court
resolved, on November 13, 2002, to suspend or stay the running of Urban Banks
one-year period to redeem its properties sold at the public auction held on October 4,
11 and 25, 2001, as well as the consolidation of the titles thereto in favor of the
buyers at auction. In said case, Makati Sports Club, Inc. was prohibited from
transferring Urban Banks club shares therein to the winning bidders in the October
11, 2001 execution sale;
2. G.R. No. 145822 (Gonzales, Jr. v. Pea), which is a petition for review of the
decision in CA-G.R. SP No. 55667, and which specifically assails the validity of the
October 29, 1999 Special Order and Writ of Execution, and prays to set aside the
levies, garnishments and auction sales conducted pursuant to said order and writ. The
November 13, 2002 Resolution of the First Division of the Court covers this case as
well; and

3. G.R. No. 162562 (Pea v. Urban Bank), which is a petition for review on certiorari
of the November 6, 2003 Decision in CA-G.R. CV No. 65756 declaring the absence
of an agency relationship between Urban Bank and Pea, but granting to the latter on
equitable considerations damages in the amount of P3,000,000.00 for his efforts at
settling the ejectment case.
Petitioner argues that there are good and compelling grounds to allow the
consolidation of the instant case with the above-mentioned cases because they
involve the same material facts and circumstances; consolidation would prevent any
unwitting or unwarranted interference by one Division with the issues pending in or
being resolved by the others; it would forestall chaos that results from conflicting or
divergent appreciation of facts, application of law and pronouncements by the
different divisions of the Court; and certain pronouncements in the August 6, 2008
Decision pre-empt the result of the other pending petitions, specifically on the
following concerns:
1. Our ruling that Urban Bank is liable under an agency agreement. Petitioner claims
that the issue is subject of the November 6, 2003 decision of the Court of Appeals in
CA- G.R. CV No. 65756 and pending in this Court via G.R. No. 162562. Petitioner
posits that since the judgment of the trial court in Civil Case No. 754 which forms
the basis for the grant of execution pending appeal was reversed in CA-G.R. CV No.
65756, it is premature for us to declare Pea as the owner of the shares subject of the
present petition, because there remains the possibility that the judgment in CA-G.R.
CV No. 65756 could be affirmed or that respondent therein could be exonerated
entirely from liability in G.R. No. 162562;
2. Our pronouncement that there was good ground to allow execution pending
appeal. Petitioner asserts that the propriety of the trial courts grant of execution
pending appeal is the issue sought to be resolved in the petition in G.R. No. 145822;
3. Our pronouncement that Civil Case No. 1088 is not considered as part of the
execution proceedings in Civil Case No. 754 which would otherwise pose an
obstacle to the transfer of title over EQLPI, Manila Polo Club, Manila Golf and
Country Club, Sta. Elena Golf and Country Club and Tagaytay Highlands
International Golf Club stock in favor of the buyers at auction thereof, which
petitioner asserts, is contrary to the November 13, 2002 disposition of the Courts
First Division in G.R. Nos. 145817 and 145822, which resolved as follows:
WHEREFORE, the Court hereby RESOLVES to clarify that, as a consequence of its
approval of the supersedeas bond, the running of the one-year period for petitioner
Urban Bank to redeem the properties sold at the public auctions held on October 4,
11 and 25, 2001, as well as the consolidation of the titles in favor of the buyers, is
SUSPENDED OR STAYED. MSCI (Makati Sports Club, Inc.) is also prohibited

24

from transferring petitioner Urban Banks MSCI club shares to the winning bidders in
the execution sale held on October 11, 2001.
SO ORDERED.
According to petitioner, the above Resolution of the First Division suspended or
stayed the transfer or consolidation of titles in favor of buyers at any prior execution
sale, which includes buyers of petitioners shares of stock at the execution
proceedings in issue here.
On January 12, 2009, the Court issued a Resolution denying for lack of merit
petitioners Urgent Motion for Consolidation.
Petitioners motion for reconsideration and the supplement thereto essentially assert
the same arguments contained in his petition, to wit: that the August 18, 2000
Amended Decision of the Court of Appeals did not vacate the January 12, 2000
Decision and therefore the Special Order and Writ of Execution must unavoidably
remain annulled and set aside, and the enjoining of the writ of execution and lifting
of the garnishment and levy made pursuant thereto must necessarily subsist. This
reiteration, of course, remains manifestly unsound. The August 18, 2000 Amended
Decision[4] is an entirely new decision which superseded and extinguished the
original January 12, 2000 decision.[5]
There is a difference between an amended judgment and a supplemental judgment.
In an amended and clarified judgment, the lower court makes a thorough study of the
original judgment and renders the amended and clarified judgment only after
considering all the factual and legal issues. The amended and clarified decision is an
entirely new decision which supersedes the original decision. Following the Court's
differentiation of a supplemental pleading from an amending pleading, it can be said
that a supplemental decision does not take the place or extinguish the existence of
the original. As its very name denotes, it only serves to bolster or adds something to
the primary decision. A supplement exists side by side with the original. It does not
replace that which it supplements.[6] (Emphasis supplied)
Next, petitioner argues that execution pending appeal is not possible in the absence
of an indemnity bond that was subsequently required of the judgment creditor. This
argument is without basis, because the Rules do not require the posting of an
indemnity bond before execution pending appeal may be made.
We need not review in length the justification of the Court of Appeals in allowing
execution pending appeal. The standard set under Section 2(a), Rule 39 merely
requires good reasons, a special order, and due hearing. Due hearing would not
require a hearing in open court, but simply the right to be heard, which SIDDCOR

availed of when it filed its opposition to the motion for immediate execution. The
Resolution dated 16 October 1998 satisfies the special order requirement, and it does
enumerate at length the good reasons for allowing execution pending appeal. As to
the appreciation of good reasons, we simply note that the advanced age alone of
Sandoval would have sufficiently justified execution pending appeal, pursuant to the
well-settled jurisprudential rule. The wrongfulness of the attachment, and the length
of time respondents have been deprived of their money by reason of the wrongful
attachment further justifies execution pending appeal under these circumstances.[7]
Moreover, petitioners argument that a bond must first be posted before the writ of
execution pending appeal may issue, is without merit because there may be good
reasons allowing execution pending appeal that have a direct bearing on the
prevailing partys ability and capacity to post a bond. Petitioners posture would limit
the courts ability to determine what are good and compelling reasons that would
allow a writ of execution pending appeal, since the prevailing partys ability to post a
bond would be the primary consideration in the grant or denial of the writ, and not
the good and compelling reasons attendant to the case. Finally, just as we have held
that the mere filing of a bond alone does not constitute the good reason envisioned
by the Rules,[8] then neither may the failure of the court to require the posting of a
bond automatically render the execution pending appeal irregular.
What petitioner appears to do is to attempt to evade the effects of the sale of his
shares of stock to the buyers at the execution sale, which sale immediately
transferred title thereto to the buyers. It should be restated that since there is no right
to redeem personal property, the rights of ownership are vested to the purchaser at
the foreclosure (or execution) sale and are not entangled in any suspensive condition
that is implicit in a redemptive period.[9] Besides, the Resolution of the First
Division of the Court dated November 13, 2002 refers to or affects only real and
personal property, specifically, the Makati Sports Club, Inc. shares of stock
belonging to Urban Bank; it cannot extend to the property or shares of stock subject
of the present petition, which are nowhere mentioned in the said Resolution.
Thus said, we find no valid reason why the buyers at execution sale of petitioners
shares of stock should be prevented from obtaining title to the same. The pendency
of a case involving the petitioner and Pea does not affect the registrability of the
shares of stock bought at execution sale, although the registration is without
prejudice to the proceedings to determine the liability of the parties as against each
other, specifically between Urban Bank, its directors and officers (which includes
petitioner), and Pea. As we have ruled before,
Respondent SEC correctly ruled in favor of the registering of the shares of stock in
question in private respondent's names. Such ruling finds support under Section 63
of the Corporation Code, to wit:

25

SEC. 63. x x x Shares of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer. No transfer,
however, shall be valid, except as between the parties, until the transfer is recorded
in the books of the corporation x x x.
In the case of Fleisher vs. Botica Nolasco, 47 Phil. 583, the Court interpreted Sec. 63
in this wise:
Said Section (Sec. 35 of Act 1459, [now Sec. 63 of the Corporation Code])
contemplates no restriction as to whom the stocks may be transferred. It does not
suggest that any discrimination may be created by the corporation in favor of, or
against a certain purchaser. The owner of shares, as owner of personal property, is at
liberty, under said section to dispose them in favor of whomever he pleases, without
limitation in this respect, than the general provisions of law. x x x
The only limitation imposed by Section 63 of the Corporation Code is when the
corporation holds any unpaid claim against the shares intended to be transferred,
which is absent here.
A corporation, either by its board, its by-laws, or the act of its officers, cannot create
restrictions in stock transfers, because:
x x x Restrictions in the traffic of stock must have their source in legislative
enactment, as the corporation itself cannot create such impediment. By-laws are
intended merely for the protection of the corporation, and prescribe regulation, not
restriction; they are always subject to the charter of the corporation. The corporation,
in the absence of such power, cannot ordinarily inquire into or pass upon the legality
of the transactions by which its stock passes from one person to another, nor can it
question the consideration upon which a sale is based. x x x
The right of a transferee/assignee to have stocks transferred to his name is an
inherent right flowing from his ownership of the stocks. Thus:
Whenever a corporation refuses to transfer and register stock in cases like the
present, mandamus will lie to compel the officers of the corporation to transfer said
stock in the books of the corporation.
The corporations obligation to register is ministerial.
In transferring stock, the secretary of a corporation acts in purely ministerial
capacity, and does not try to decide the question of ownership.

The duty of the corporation to transfer is a ministerial one and if it refuses to make
such transaction without good cause, it may be compelled to do so by mandamus.
For the petitioner Rural Bank of Salinas to refuse registration of the transferred
shares in its stock and transfer book, which duty is ministerial on its part, is to render
nugatory and ineffectual the spirit and intent of Section 63 of the Corporation Code.
Thus, respondent Court of Appeals did not err in upholding the Decision of
respondent SEC affirming the Decision of its Hearing Officer directing the
registration of the 473 shares in the stock and transfer book in the names of private
respondents. At all events, the registration is without prejudice to the proceedings in
court to determine the validity of the Deeds of Assignment of the shares of stock in
question.[10] (Emphasis supplied)
Petitioner faults us for making pronouncements that are beyond the issues raised in
his petition; yet it is clear that by raising these issues, petitioner has placed the whole
execution process into question. Thus, apart from claiming that respondents acted
contumaciously during proceedings in the Court of Appeals, petitioner questioned as
well the proceedings in the lower court prior to the proceedings in the appellate
court. In his petition, petitioner squarely raised the issue that the trial court had no
jurisdiction to issue the Special Order and the Writ of Execution, and therefore it
should be made accountable for nonetheless issuing them thereby placing the
proceedings leading to the issuance of the order and writ effectively under our
scrutiny.
Nevertheless, in the interest of an orderly and judicious administration of justice, we
resolve to amend specific portions of our Decision which do not affect in any
significant manner the integrity of our original disposition of the case. Thus, with
regard to whether or not there exists an agency relationship between Urban Bank and
Pea, the matter should be left to the final determination of the Court in G.R. No.
162562. Anent the soundness of the lower courts grant of execution pending appeal,
which necessarily settles the validity of the Special Order and Writ of Execution, the
decision in G.R. No. 145822 must be awaited. Accordingly, our original dispositions
regarding Urban Banks liability to Pea and finding good reasons for execution
pending appeal are hereby withdrawn in order to make way for their resolution in the
other petitions pending with the Court.
As far as the instant petition is concerned, we continue to fail to appreciate how the
lower court, its sheriff, and respondent Peas actions and conduct may be
characterized as contemptuous.
WHEREFORE, petitioners Motion for Reconsideration and the Supplement thereto
are hereby DENIED for lack of merit.

26

SO ORDERED.
[G.R. No. 150976. October 18, 2004]
CECILIA CASTILLO, OSCAR DEL ROSARIO, ARTURO S. FLORES, XERXES
NAVARRO, MARIA ANTONIA TEMPLO and MEDICAL CENTER PARAAQUE,
INC., petitioners, vs. ANGELES BALINGHASAY, RENATO BERNABE, ALODIA
DEL ROSARIO, ROMEO FUNTILA, TERESITA GAYANILO, RUSTICO
JIMENEZ, ARACELI** JO, ESMERALDA MEDINA, CECILIA MONTALBAN,
VIRGILIO OBLEPIAS, CARMENCITA PARRENO, CESAR REYES,
REYNALDO SAVET, SERAPIO TACCAD, VICENTE VALDEZ, SALVACION
VILLAMORA, and HUMBERTO VILLAREAL, respondents.
DECISION
QUISUMBING, J.:
For review on certiorari is the Partial Judgment[1] dated November 26, 2001 in Civil
Case No. 01-0140, of the Regional Trial Court (RTC) of Paraaque City, Branch 258.
The trial court declared the February 9, 2001, election of the board of directors of the
Medical Center Paraaque, Inc. (MCPI) valid. The Partial Judgment dismissed
petitioners first cause of action, specifically, to annul said election for depriving
petitioners their voting rights and to be voted on as members of the board.
The facts, as culled from records, are as follows:
Petitioners and the respondents are stockholders of MCPI, with the former holding
Class B shares and the latter owning Class A shares.
MCPI is a domestic corporation with offices at Dr. A. Santos Avenue, Sucat,
Paraaque City. It was organized sometime in September 1977. At the time of its
incorporation, Act No. 1459, the old Corporation Law was still in force and effect.
Article VII of MCPIs original Articles of Incorporation, as approved by the
Securities and Exchange Commission (SEC) on October 26, 1977, reads as follows:
SEVENTH. That the authorized capital stock of the corporation is TWO MILLION
(P2,000,000.00) PESOS, Philippine Currency, divided into TWO THOUSAND
(2,000) SHARES at a par value of P100 each share, whereby the ONE THOUSAND
SHARES issued to, and subscribed by, the incorporating stockholders shall be
classified as Class A shares while the other ONE THOUSAND unissued shares shall
be considered as Class B shares. Only holders of Class A shares can have the right to
vote and the right to be elected as directors or as corporate officers.[2] (Stress
supplied)
On July 31, 1981, Article VII of the Articles of Incorporation of MCPI was amended,
to read thus:

SEVENTH. That the authorized capital stock of the corporation is FIVE MILLION
(P5,000,000.00) PESOS, divided as follows:
CLASS NO. OF SHARES PAR VALUE
A 1,000 P1,000.00
B 4,000 P1,000.00
Only holders of Class A shares have the right to vote and the right to be elected as
directors or as corporate officers.[3] (Emphasis supplied)
The foregoing amendment was approved by the SEC on June 7, 1983. While the
amendment granted the right to vote and to be elected as directors or corporate
officers only to holders of Class A shares, holders of Class B stocks were granted the
same rights and privileges as holders of Class A stocks with respect to the payment
of dividends.
On September 9, 1992, Article VII was again amended to provide as follows:
SEVENTH: That the authorized capital stock of the corporation is THIRTY TWO
MILLION PESOS (P32,000,000.00) divided as follows:
CLASS NO. OF SHARES PAR VALUE
A 1,000 P1,000.00
B 31,000 1,000.00
Except when otherwise provided by law, only holders of Class A shares have the
right to vote and the right to be elected as directors or as corporate officers[4] (Stress
and underscoring supplied).
The SEC approved the foregoing amendment on September 22, 1993.
On February 9, 2001, the shareholders of MCPI held their annual stockholders
meeting and election for directors. During the course of the proceedings, respondent
Rustico Jimenez, citing Article VII, as amended, and notwithstanding MCPIs history,
declared over the objections of herein petitioners, that no Class B shareholder was
qualified to run or be voted upon as a director. In the past, MCPI had seen holders of
Class B shares voted for and serve as members of the corporate board and some
Class B share owners were in fact nominated for election as board members.
Nonetheless, Jimenez went on to announce that the candidates holding Class A
shares were the winners of all seats in the corporate board. The petitioners protested,
claiming that Article VII was null and void for depriving them, as Class B
shareholders, of their right to vote and to be voted upon, in violation of the
Corporation Code (Batas Pambansa Blg. 68), as amended.

27

On March 22, 2001, after their protest was given short shrift, herein petitioners filed
a Complaint for Injunction, Accounting and Damages, docketed as Civil Case No.
CV-01-0140 before the RTC of Paraaque City, Branch 258. Said complaint was
founded on two (2) principal causes of action, namely:
a. Annulment of the declaration of directors of the MCPI made during the February
9, 2001 Annual Stockholders Meeting, and for the conduct of an election whereat all
stockholders, irrespective of the classification of the shares they hold, should be
afforded their right to vote and be voted for; and
b. Stockholders derivative suit challenging the validity of a contract entered into by
the Board of Directors of MCPI for the operation of the ultrasound unit.[5]
Subsequently, the complaint was amended to implead MCPI as party-plaintiff for
purposes only of the second cause of action.
Before the trial court, the herein petitioners alleged that they were deprived of their
right to vote and to be voted on as directors at the annual stockholders meeting held
on February 9, 2001, because respondents had erroneously relied on Article VII of
the Articles of Incorporation of MCPI, despite Article VII being contrary to the
Corporation Code, thus null and void. Additionally, respondents were in estoppel,
because in the past, petitioners were allowed to vote and to be elected as members of
the board. They further claimed that the privilege granted to the Class A shareholders
was more in the nature of a right granted to founders shares.
In their Answer, the respondents averred that the provisions of Article VII clearly and
categorically state that only holders of Class A shares have the exclusive right to vote
and be elected as directors and officers of the corporation. They denied that the
exclusivity was intended only as a privilege granted to founders shares, as no such
proviso is found in the Articles of Incorporation. The respondents further claimed
that the exclusivity of the right granted to Class A holders cannot be defeated or
impaired by any subsequent legislative enactment, e.g. the New Corporation Code,
as the Articles of Incorporation is an intra-corporate contract between the corporation
and its members; between the corporation and its stockholders; and among the
stockholders. They submit that to allow Class B shareholders to vote and be elected
as directors would constitute a violation of MCPIs franchise or charter as granted by
the State.

WHEREFORE, viewed in the light of the foregoing, the election held on February 9,
2001 is VALID as the holders of CLASS B shares are not entitled to vote and be
voted for and this case based on the First Cause of Action is DISMISSED.
SO ORDERED.[6]
In finding for the respondents, the trial court ruled that corporations had the power to
classify their shares of stocks, such as voting and non-voting shares, conformably
with Section 6[7] of the Corporation Code of the Philippines. It pointed out that
Article VII of both the original and amended Articles of Incorporation clearly
provided that only Class A shareholders could vote and be voted for to the exclusion
of Class B shareholders, the exception being in instances provided by law, such as
those enumerated in Section 6, paragraph 6 of the Corporation Code. The RTC found
merit in the respondents theory that the Articles of Incorporation, which defines the
rights and limitations of all its shareholders, is a contract between MCPI and its
shareholders. It is thus the law between the parties and should be strictly enforced as
to them. It brushed aside the petitioners claim that the Class A shareholders were in
estoppel, as the election of Class B shareholders to the corporate board may be
deemed as a mere act of benevolence on the part of the officers. Finally, the court
brushed aside the founders shares theory of the petitioners for lack of factual basis.
Hence, this petition submitting the sole legal issue of whether or not the Court a quo,
in rendering the Partial Judgment dated November 26, 2001, has decided a question
of substance in a way not in accord with law and jurisprudence considering that:
1. Under the Corporation Code, the exclusive voting right and right to be voted
granted by the Articles of Incorporation of the MCPI to Class A shareholders is null
and void, or already extinguished;
2. Hence, the declaration of directors made during the February 9, 2001 Annual
Stockholders Meeting on the basis of the purported exclusive voting rights is null
and void for having been done without the benefit of an election and in violation of
the rights of plaintiffs and Class B shareholders; and
3. Perforce, another election should be conducted to elect the directors of the MCPI,
this time affording the holders of Class B shares full voting right and the right to be
voted.[8]

At the pre-trial, the trial court ruled that a partial judgment could be rendered on the
first cause of action and required the parties to submit their respective position
papers or memoranda.

The issue for our resolution is whether or not holders of Class B shares of the MCPI
may be deprived of the right to vote and be voted for as directors in MCPI.

On November 26, 2001, the RTC rendered the Partial Judgment, the dispositive
portion of which reads:

Before us, petitioners assert that Article VII of the Articles of Incorporation of MCPI,
which denied them voting rights, is null and void for being contrary to Section 6 of

28

the Corporation Code. They point out that Section 6 prohibits the deprivation of
voting rights except as to preferred and redeemable shares only. Hence, under the
present law on corporations, all shareholders, regardless of classification, other than
holders of preferred or redeemable shares, are entitled to vote and to be elected as
corporate directors or officers. Since the Class B shareholders are not classified as
holders of either preferred or redeemable shares, then it necessarily follows that they
are entitled to vote and to be voted for as directors or officers.
The respondents, in turn, maintain that the grant of exclusive voting rights to Class A
shares is clearly provided in the Articles of Incorporation and is in accord with
Section 5[9] of the Corporation Law (Act No. 1459), which was the prevailing law
when MCPI was incorporated in 1977. They likewise submit that as the Articles of
Incorporation of MCPI is in the nature of a contract between the corporation and its
shareholders and Section 6 of the Corporation Code could not retroactively apply to
it without violating the non-impairment clause[10] of the Constitution.
We find merit in the petition.
When Article VII of the Articles of Incorporation of MCPI was amended in 1992, the
phrase except when otherwise provided by law was inserted in the provision
governing the grant of voting powers to Class A shareholders. This particular
amendment is relevant for it speaks of a law providing for exceptions to the
exclusive grant of voting rights to Class A stockholders. Which law was the
amendment referring to? The determination of which law to apply is necessary.
There are two laws being cited and relied upon by the parties in this case. In this
instance, the law in force at the time of the 1992 amendment was the Corporation
Code (B.P. Blg. 68), not the Corporation Law (Act No. 1459), which had been
repealed by then.
We find and so hold that the law referred to in the amendment to Article VII refers to
the Corporation Code and no other law. At the time of the incorporation of MCPI in
1977, the right of a corporation to classify its shares of stock was sanctioned by
Section 5 of Act No. 1459. The law repealing Act No. 1459, B.P. Blg. 68, retained
the same grant of right of classification of stock shares to corporations, but with a
significant change. Under Section 6 of B.P. Blg. 68, the requirements and restrictions
on voting rights were explicitly provided for, such that no share may be deprived of
voting rights except those classified and issued as preferred or redeemable shares,
unless otherwise provided in this Code and that there shall always be a class or series
of shares which have complete voting rights. Section 6 of the Corporation Code
being deemed written into Article VII of the Articles of Incorporation of MCPI, it
necessarily follows that unless Class B shares of MCPI stocks are clearly categorized
to be preferred or redeemable shares, the holders of said Class B shares may not be
deprived of their voting rights. Note that there is nothing in the Articles of
Incorporation nor an iota of evidence on record to show that Class B shares were

categorized as either preferred or redeemable shares. The only possible conclusion is

that Class B shares fall under neither category and thus, under the law, are allowed to
exercise voting rights.
One of the rights of a stockholder is the right to participate in the control and
management of the corporation that is exercised through his vote. The right to vote is
a right inherent in and incidental to the ownership of corporate stock, and as such is a
property right. The stockholder cannot be deprived of the right to vote his stock nor
may the right be essentially impaired, either by the legislature or by the corporation,
without his consent, through amending the charter, or the by-laws.[11]
Neither do we find merit in respondents position that Section 6 of the Corporation
Code cannot apply to MCPI without running afoul of the non-impairment clause of
the Bill of Rights. Section 148[12] of the Corporation Code expressly provides that it
shall apply to corporations in existence at the time of the effectivity of the Code.
Hence, the non-impairment clause is inapplicable in this instance. When Article VII
of the Articles of Incorporation of MCPI were amended in 1992, the board of
directors and stockholders must have been aware of Section 6 of the Corporation
Code and intended that Article VII be construed in harmony with the Code, which
was then already in force and effect. Since Section 6 of the Corporation Code
expressly prohibits the deprivation of voting rights, except as to preferred and
redeemable shares, then Article VII of the Articles of Incorporation cannot be
construed as granting exclusive voting rights to Class A shareholders, to the
prejudice of Class B shareholders, without running afoul of the letter and spirit of the
Corporation Code.
The respondents then take the tack that the phrase except when otherwise provided
by law found in the amended Articles is only a handwritten insertion and could have
been inserted by anybody and that no board resolution was ever passed authorizing
or approving said amendment.
Said contention is not for this Court to pass upon, involving as it does a factual
question, which is not proper in this petition. In an appeal via certiorari, only
questions of law may be reviewed.[13] Besides, respondents did not adduce
persuasive evidence, but only bare allegations, to support their suspicion. The
presumption that in the amendment process, the ordinary course of business has been
followed[14] and that official duty has been regularly performed[15] on the part of
the SEC, applies in this case.
WHEREFORE, the petition is GRANTED. The Partial Judgment dated November
26, 2001 of the Regional Trial Court of Paraaque City, Branch 258, in Civil Case No.
01-0140 is REVERSED AND SET ASIDE. No pronouncement as to costs.
SO ORDERED.

29

Azcuna, J., on leave.

Davide, Jr., C.J., (Chairman), Ynares-Santiago, and Carpio, JJ., concur.
[G.R. No. 51765. March 3, 1997]
REPUBLIC PLANTERS BANK, petitioner, vs. HON. ENRIQUE A. AGANA, SR.,
as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay City,
ROBES-FRANCISCO REALTY & DEVELOPMENT CORPORATION and
ADALIA F. ROBES, respondents.
DECISION
HERMOSISIMA, JR., J.:
This is a petition for certiorari seeking the annulment of the Decision[1] of the then
Court of First Instance of Rizal[2] for having been rendered in grave abuse of
discretion. Private respondents Robes-Francisco Realty and Development
Corporation (hereafter, "the Corporation") and Adalia F. Robes filed in the court a
quo, an action for specific performance to compel petitioner to redeem 800 preferred
shares of stock with a face value of P8,000.00 and to pay 1% quarterly interest
thereon as quarterly dividend owing them under the terms and conditions of the
certificates of stock.
The court a quo rendered judgment in favor of private respondents; hence, this
instant petition.
Herein parties debate only legal issues, no issues of fact having been raised by them
in the court a quo. For ready reference, however, the following narration of pertinent
transactions and events is in order:
On September 18, 1961, private respondent Corporation secured a loan from
petitioner in the amount of P120,000.00. As part of the proceeds of the loan,
preferred shares of stocks were issued to private respondent Corporation, through its
officers then, private respondent Adalia F. Robes and one Carlos F. Robes. In other
words, instead of giving the legal tender totaling to the full amount of the loan,
which is P120,000.00, petitioner lent such amount partially in the form of money and
partially in the form of stock certificates numbered 3204 and 3205, each for 400
shares with a par value of P10.00 per share, or for P4,000.00 each, for a total of
P8,000.00. Said stock certificates were in the name of private respondent Adalia F.
Robes and Carlos F. Robes, who subsequently, however, endorsed his shares in favor
of Adalia F. Robes.
Said certificates of stock bear the following terms and conditions:
"The Preferred Stock shall have the following rights, preferences, qualifications and
limitations, to wit:

1. Of the right to receive a quarterly dividend of One Per Centum (1%), cumulative
and participating.
xxx
2. That such preferred shares may be redeemed, by the system of drawing lots, at
any time after two (2) years from the date of issue at the option of the Corporation. x
x x."
On January 31, 1979, private respondents proceeded against petitioner and filed a
Complaint anchored on private respondents' alleged rights to collect dividends under
the preferred shares in question and to have petitioner redeem the same under the
terms and conditions of the stock certificates. Private respondents attached to their
complaint, a letter-demand dated January 5, 1979 which, significantly, was not
formally offered in evidence.
Petitioner filed a Motion to Dismiss[3] private respondents' Complaint on the
following grounds: (1) that the trial court had no jurisdiction over the subject-matter
of the action; (2) that the action was unenforceable under substantive law; and (3)
that the action was barred by the statute of limitations and/or laches.
Petitioner's Motion to Dismiss was denied by the trial court in an Order dated March
16, 1979.[4] Petitioner then filed its Answer on May 2, 1979.[5] Thereafter, the trial
court gave the parties ten (10) days from July 30, 1979 to submit their respective
memoranda after the submission of which the case would be deemed submitted for
resolution.[6]
On September 7, 1979, the trial court rendered the herein assailed decision in favor
of private respondents. In ordering petitioner to pay private respondents the face
value of the stock certificates as redemption price, plus 1% quarterly interest thereon
until full payment, the trial court ruled:
"There being no issue of fact raised by either of the parties who filed their respective
memoranda delineating their respective contentions, a judgment on the pleadings,
conformably with an earlier order of the Court, appears to be in order.
From a further perusal of the pleadings, it appears that the provision of the stock
certificates in question to the effect that the plaintiffs shall have the right to receive a
quarterly dividend of One Per Centum (1%), cumulative and participating, clearly
and unequivocably [sic] indicates that the same are 'interest bearing stocks' which are
stocks issued by a corporation under an agreement to pay a certain rate of interest
thereon (5 Thompson, Sec. 3439). As such, plaintiffs become entitled to the payment
thereof as a matter of right without necessity of a prior declaration of dividend.

30

On the question of the redemption by the defendant of said preferred shares of stock,
the very wordings of the terms and conditions in said stock certificates clearly allows
the same.

E.
THE TRIAL COURT ERRED IN NOT HOLDING THAT THE
CLAIM OF RESPONDENT ADALIA F. ROBES IS BARRED BY
PRESCRIPTION OR LACHES."[8]

To allow the herein defendant not to redeem said preferred shares of stock and/or pay
the interest due thereon despite the clear import of said provisions by the mere
invocation of alleged Central Bank Circulars prohibiting the same is tantamount to
an impairment of the obligation of contracts enshrined in no less than the
fundamental law itself.

The petition is meritorious.

Moreover, the herein defendant is considered in estoppel from taking shelter behind
a General Banking Act provision to the effect that it cannot buy its own shares of
stocks considering that the very terms and conditions in said stock certificates
allowing their redemption are its own handiwork.

A preferred share of stock, on one hand, is one which entitles the holder thereof to
certain preferences over the holders of common stock. The preferences are designed
to induce persons to subscribe for shares of a corporation.[9] Preferred shares take a
multiplicity of forms. The most common forms may be classified into two: (1)
preferred shares as to assets; and (2) preferred shares as to dividends. The former is a
share which gives the holder thereof preference in the distribution of the assets of the
corporation in case of liquidation;[10] the latter is a share the holder of which is
entitled to receive dividends on said share to the extent agreed upon before any
dividends at all are paid to the holders of common stock.[11] There is no guaranty,
however, that the share will receive any dividends. Under the old Corporation Law in
force at the time the contract between the petitioner and the private respondents was
entered into, it was provided that "no corporation shall make or declare any dividend
except from the surplus profits arising from its business, or distribute its capital stock
or property other than actual profits among its members or stockholders until after
the payment of its debts and the termination of its existence by limitation or lawful
dissolution."[12] Similarly, the present Corporation Code[13] provides that the board
of directors of a stock corporation may declare dividends only out of unrestricted
retained earnings.[14] The Code, in Section 43, adopting the change made in
accounting terminology, substituted the phrase unrestricted retained earnings," which
may be a more precise term, in place of "surplus profits arising from its business" in
the former law. Thus, the declaration of dividends is dependent upon the availability
of surplus profit or unrestricted retained earnings, as the case may be. Preferences
granted to preferred stockholders, moreover, do not give them a lien upon the
property of the corporation nor make them creditors of the corporation, the right of
the former being always subordinate to the latter. Dividends are thus payable only
when there are profits earned by the corporation and as a general rule, even if there
are existing profits, the board of directors has the discretion to determine whether or
not dividends are to be declared.[15] Shareholders, both common and preferred, are
considered risk takers who invest capital in the business and who can look only to
what is left after corporate debts and liabilities are fully paid.[16]

As to the claim by the defendant that plaintiffs' cause of action is barred by

prescription, suffice it to state that the running of the prescriptive period was
considered interrupted by the written extrajudicial demands made by the plaintiffs
from the defendant."[7]
Aggrieved by the decision of the trial court, petitioner elevated the case before us
essentially on pure questions of law. Petitioner's statement of the issues that it
submits for us to adjudicate upon, is as follows:
"A.
RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
ORDERING PETITIONER TO PAY RESPONDENT ADALIA F. ROBES THE
AMOUNT OF P8,213.69 AS INTERESTS FROM 1961 To 1979 ON HER
PREFERRED SHARES.
B.
RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
ORDERING PETITIONER TO REDEEM RESPONDENT ADALIA F. ROBES'
PREFERRED SHARES FOR P8,000.00
C.
RESPONDENT JUDGE COMMITTED A GRAVE ABUSE OF
DISCRETION AMOUNTING TO LACK OR EXCESS OF JURISDICTION IN
DISREGARDING THE ORDER OF THE CENTRAL BANK TO PETITIONER TO
DESIST FROM REDEEMING ITS PREFERRED SHARES AND FROM PAYING
DIVIDENDS THEREON x x x.
D.
THE TRIAL COURT ERRED IN NOT HOLDING THAT THE
COMPLAINT DOES NOT STATE A CAUSE OF ACTION.

Before passing upon the merits of this petition, it may be pertinent to provide an
overview on the nature of preferred shares and the redemption thereof, considering
that these issues lie at the heart of the dispute.

Redeemable shares, on the other hand, are shares usually preferred, which by their
terms are redeemable at a fixed date, or at the option of either issuing corporation, or
the stockholder, or both at a certain redemption price.[17] A redemption by the

31

corporation of its stock is, in a sense, a repurchase of it for cancellation.[18] The

present Code allows redemption of shares even if there are no unrestricted retained
earnings on the books of the corporation. This is a new provision which in effect
qualifies the general rule that the corporation cannot purchase its own shares except
out of current retained earnings.[19] However, while redeemable shares may be
redeemed regardless of the existence of unrestricted retained earnings, this is subject
to the condition that the corporation has, after such redemption, assets in its books to
cover debts and liabilities inclusive of capital stock. Redemption, therefore, may not
be made where the corporation is insolvent or if such redemption will cause
insolvency or inability of the corporation to meet its debts as they mature.[20]
We come now to the merits of the case. The petitioner argues that it cannot be
compelled to redeem the preferred shares issued to the private respondent. We agree.
Respondent judge, in ruling that petitioner must redeem the shares in question, stated
that:
"On the question of the redemption by the defendant of said preferred shares of
stock, the very wordings of the terms and conditions in said stock certificates clearly
allows the same."[21]
What respondent Judge failed to recognize was that while the stock certificate does
allow redemption, the option to do so was clearly vested in the petitioner bank. The
redemption therefore is clearly the type known as "optional". Thus, except as
otherwise provided in the stock certificate, the redemption rests entirely with the
corporation and the stockholder is without right to either compel or refuse the
redemption of its stock.[22] Furthermore, the terms and conditions set forth therein
use the word "may". It is a settled doctrine in statutory construction that the word
"may" denotes discretion, and cannot be construed as having a mandatory effect. We
fail to see how respondent judge can ignore what, in his words, are the "very
wordings of the terms and conditions in said stock certificates" and construe what is
clearly a mere option to be his legal basis for compelling the petitioner to redeem the
shares in question.
The redemption of said shares cannot be allowed. As pointed out by the petitioner,
the Central Bank made a finding that said petitioner has been suffering from chronic
reserve deficiency,[23] and that such finding resulted in a directive, issued on
January 31, 1973 by then Gov. G. S. Licaros of the Central Bank, to the President
and Acting Chairman of the Board of the petitioner bank prohibiting the latter from
redeeming any preferred share, on the ground that said redemption would reduce the
assets of the Bank to the prejudice of its depositors and creditors.[24] Redemption of
preferred shares was prohibited for a just and valid reason. The directive issued by
the Central Bank Governor was obviously meant to preserve the status quo, and to
prevent the financial ruin of a banking institution that would have resulted in adverse
repercussions, not only to its depositors and creditors, but also to the banking

industry as a whole. The directive, in limiting the exercise of a right granted by law
to a corporate entity, may thus be considered as an exercise of police power. The
respondent judge insists that the directive constitutes an impairment of the obligation
of contracts. It has, however, been settled that the Constitutional guaranty of nonimpairment of obligations of contract is limited by the exercise of the police power
of the state, the reason being that public welfare is superior to private rights.[25]
The respondent judge also stated that since the stock certificate granted the private
respondents the right to receive a quarterly dividend of one Per Centum (1%),
cumulative and participating, it "clearly and unequivocably (sic) indicates that the
same are 'interest bearing stocks' or stocks issued by a corporation under an
agreement to pay a certain rate of interest thereon. As such, plaintiffs (private
respondents herein) become entitled to the payment thereof as a matter of right
without necessity of a prior declaration of dividend."[26] There is no legal basis for
this observation. Both Sec. 16 of the Corporation Law and Sec. 43 of the present
Corporation Code prohibit the issuance of any stock dividend without the approval
of stockholders, representing not less than two-thirds (2/3) of the outstanding capital
stock at a regular or special meeting duly called for the purpose. These provisions
underscore the fact that payment of dividends to a stockholder is not a matter of right
but a matter of consensus. Furthermore, "interest bearing stocks", on which the
corporation agrees absolutely to pay interest before dividends are paid to common
stockholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only.[27] Clearly, the respondent judge, in
compelling the petitioner to redeem the shares in question and to pay the
corresponding dividends, committed grave abuse of discretion amounting to lack or
excess of jurisdiction in ignoring both the terms and conditions specified in the stock
certificate, as well as the clear mandate of the law.
Anent the issue of prescription, this Court so holds that the claim of private
respondent is already barred by prescription as well as laches. Art. 1144 of the New
Civil Code provides that a right of action that is founded upon a written contract
prescribes in ten (10) years. The letter-demand made by the private respondents to
the petitioner was made only on January 5, 1979, or almost eighteen years after
receipt of the written contract in the form of the stock certificate. As noted earlier,
this letter-demand, significantly, was not formally offered in evidence, nor were any
other evidence of demand presented. Therefore, we conclude that the only time the
private respondents saw it fit to assert their rights, if any, to the preferred shares of
stock, was after the lapse of almost eighteen years. The same clearly indicates that
the right of the private respondents to any relief under the law has already prescribed.
Moreover, the claim of the private respondents is also barred by laches. Laches has
been defined as the failure or neglect, for an unreasonable length of time, to do that
which by exercising due diligence could or should have been done earlier; it is
negligence or omission to assert a right within a reasonable time, warranting a

32

presumption that the party entitled to assert it either has abandoned it or declined to
assert it.[28]
Considering that the terms and conditions set forth in the stock certificate clearly
indicate that redemption of the preferred shares may be made at any time after the
lapse of two years from the date of issue, private respondents should have taken it
upon themselves, after the lapse of the said period, to inquire from the petitioner the
reason why the said shares have not been redeemed. As it is, not only two years had
lapsed, as agreed upon, but an additional sixteen years passed before the private
respondents saw it fit to demand their right. The petitioner, at the time it issued said
preferred shares to the private respondents in 1961, could not have known that it
would be suffering from chronic reserve deficiency twelve years later. Had the
CHEMPHIL EXPORT & IMPORT CORPORATION v. GONZALES G.R. No.
11243839, December 12, 1995 | G.R. No. 113394, December 12, 1995
FACTS: Dynetics and Garcia filed a complaint for declaratory relief and/or
injunction against PISO, BPI, LBP, PCI Bank and RCBC or the consortium
with the RTC of Makati, seeking judicial declaration, construction and
interpretation of the validity of the surety agreement that Dynetics and Garcia
entered into with the consortium and to perpetually enjoin the latter from claiming,
collecting and enforcing any purported obligations which Dynetics and Garcia
might have undertaken in the agreement.
Seven months later, Dynetics, Garcia and Matrix Management filed a
complaint for declaratory relief and/or injunction against Security Bank & Trust
Co. The court granted SBTCs prayer for the issuance of a writ of preliminary
attachment, where a notice of garnishment on the shares of Garcia in Chemphil was
served on Chemphil. However, this writ was thereafter lifted, and then reinstated.
In the meantime, the court denied the application of Dynetics and Garcia for
preliminary injunction and instead granted the consortiums prayer for a
consolidated writ of preliminary attachment (case 8527). The garnishment for this
attachment was NOT annotated in Chemphils stock and transfer book. Motion to
dismiss was filed by PCI Bankgranted. MR filed by consortiumdenied.
During the pendency of the appeal, a compromise agreement was entered into
between Garcia and the consortium.
In 1988, Garcia under a Deed of Sale transferred to Ferro Chemicals (FCI) the
disputed shares and other properties for P79M. It was agreed that part of the
purchase price shall be paid to Security Bank for whatever judgment credits it
may be adjudged against Garcia.
FCI issued a checkrefused by Security Bank because it was insufficient to cover
the debt.
FCI assigned 4M shares in Chemphil to CEIC.
Garcia failed to comply with the compromise agreementconsortium filed a motion
for executiongranted by the court. Garcias properties were levied upon on
execution were his 1.7M shares in Chemphil previously garnished. The consortium

private respondents been vigilant in asserting their rights, the redemption could have
been effected at a time when the petitioner bank was not suffering from any financial
crisis.
WHEREFORE, the instant petition, being impressed with merit, is hereby
GRANTED. The challenged decision of respondent judge is set aside and the
complaint against the petitioner is dismissed.
Costs against the private respondents.
SO ORDERED.
acquired the disputed shares of stock in the public sale conducted by the sheriff for
P85M.
CEIC filed a motion to intervene saying that it is the owner of the sharedgranted
by the court, but limited only to the incidents covered by the order. Consortium
opposed to CEICs motiontheir attachment lien over the shares must prevail over
the private sale in favor of CEIC considering that the shares were garnished in the
consortiums favor. On December 1989 Trial court granted CEICs motion and
denied consortiums.
Consortium and PCIB filed separate motions for reconsideration for the aforesaid
order which was denied (March 1990). Consortium appealed to the CA and PCIB
separately filed to the same court petition for certiorari, prohibition and mandamus
with a prayer for the issuance of the writ of preliminary injunction, likewise assailing
the very same orders (dated December 1989 and March 1990).
CA rendered decision confirming the ownership of Consortium over disputed shares
and dismissing PCIBs petition for certiorari on the grounds that PCIB violated the
rule against forum-shopping and that no grave abuse of discretion was committed by
the Trial court issuing the assailed orders. PCIB filed to the SC petition for review.
ISSUE: WON PCIB is guilty of forum-shopping.
RULING: The SC upholds the decision of the CA finding PCIB guilty of forumshopping. Rule 65 of the Rules of Court is not difficult to understand. Certiorari is
available only if there is no appeal or other plain, speedy and adequate remedy in the
ordinary course of law. Hence, in instituting a separate petition for certiorari, PCIB
has deliberately resorted to forum-shopping. PCIB cannot hide behind the subterfuge
that SC Circular 28-91 was not yet in force when it filed the certiorari proceedings in
the CA. The rule against forum-shopping has long been established. SC Circular 2891 merely formalized the prohibition and provided the appropriate penalties against
transgressors.
Forum-shopping or the act of the party against whom an adverse judgment has been
rendered in one forum, of seeking another opinion (and possibly favorable) in
another forum (other than by appeal or the special civil action for certiorari), or the

33

institution of two (2) or more actions or proceedings grounded on the same cause on
the supposition that one or the other court would make a favorable disposition, has
been characterized as an act of malpractice that is prohibited and condemned as
trifling with the Courts and abusing their processes. It constitutes improper conduct
FACTS:
On January 25, 1996, Vicente C. Ponce, filed a complaint with the SEC for
mandamus and damages against Alsons Cement Corporation and its corporate
secretary Francisco M. Giron, Jr. In his complaint, petitioner alleged, among others,
that:
x x x 5. The late Fausto G. Gaid was an incorporator of Victory Cement Corporation
(VCC), having subscribed to and fully paid 239,500 shares of said corporation.
6. On February 8, 1968, plaintiff and Fausto Gaid executed a Deed of Undertaking
and Indorsement whereby the latter acknowledges that the former is the owner of
said shares and he was therefore assigning/endorsing the same to the plaintiff. A
copy of the said deed/indorsement is attached as Annex A.
7. On April 10, 1968, VCC was renamed Floro Cement Corporation (FCC for
brevity).
8. On October 22, 1990, FCC was renamed Alsons Cement Corporation (ACC for
brevity) as shown by the Amended Articles of Incorporation of ACC, a copy of
which is attached as Annex B.
9. From the time of incorporation of VCC up to the present, no certificates of stock
corresponding to the 239,500 subscribed and fully paid shares of Gaid were issued in
the name of Fausto G. Gaid and/or the plaintiff.
10. Despite repeated demands, the defendants refused and continue to refuse without
any justifiable reason to issue to plaintiff the certificates of stocks corresponding to
the 239,500 shares of Gaid, in violation of plaintiffs right to secure the
corresponding certificate of stock in his name.
Attached to the complaint was the Deed of Undertaking and Indorsement upon
which petitioner based his petition for mandamus.
DEED OF UNDERTAKING
KNOW ALL MEN BY THESE PRESENTS:
I, VICENTE C. PONCE, is the owner of the total subscription of Fausto Gaid with
Victory Cement Corporation in the total amount of TWO HUNDRED THIRTY
NINE THOUSAND FIVE HUNDRED (P239,500.00) PESOS and that Fausto Gaid
does not have any liability whatsoever on the subscription agreement in favor of
Victory Cement Corporation x x x
INDORSEMENT
I, FAUSTO GAID is indorsing the total amount of TWO HUNDRED THIRTY
NINE THOUSAND FIVE HUNDRED (239,500.00) stocks of Victory Cement
Corporation to VICENTE C. PONCE. x x x
With these allegations, petitioner prayed that judgment be rendered ordering
respondents (a) to issue in his name certificates of stocks covering the 239,500
shares of stocks and its legal increments and (b) to pay him damages.

which tends to degrade the administration of justice. It has also been aptly described
as deplorable because it adds to the congestion of the already heavily burdened
dockets of the courts.
For resorting for forum-shopping, PCIB was reprimanded and warned by the SC.
Instead of filing an answer, respondents moved to dismiss the complaint. They
argued, inter alia, that there being no allegation that the alleged INDORSEMENT
was recorded in the books of the corporation, said indorsement by Gaid to the
plaintiff of the shares of stock in questionassuming that the indorsement was in
fact a transfer of stockswas not valid against third persons such as ALSONS under
Section 63 of the Corporation Code. There was, therefore, no specific legal duty on
the part of the respondents to issue the corresponding certificates of stock, and
mandamus will not lie.
Petitioner filed his opposition to the motion to dismiss on February 19, 1996
contending that: (1) mandamus is the proper remedy when a corporation and its
corporate secretary wrongfully refuse to record a transfer of shares and issue the
corresponding certificates of stocks; (2) he is the proper party in interest since he
stands to be benefited or injured by a judgment in the case; (3) the statute of
limitations did not begin to run until defendant refused to issue the certificates of
stock in favor of the plaintiff on April 13, 1992.
SEC granted the motion to dismiss saying that there is no record of any assignment
or transfer in the books of the defendant corporation, and there is no instruction or
authority from the transferor (Gaid) for such assignment or transfer. There is not
even any indorsement of any stock certificate to speak of. What the plaintiff
possesses is a document by which Gaid supposedly transferred the shares to him.
Petitioner appealed the Order of dismissal. On January 6, 1997, the Commission En
Banc reversed the appealed Order and directed the Hearing Officer to proceed with
the case. In ruling that a transfer or assignment of stocks need not be registered first
before it can take cognizance of the case to enforce the petitioners rights as a
stockholder. A transfer or assignment of stocks need not be registered first before the
Commission can take cognizance of the case to enforce his rights as a stockholder.
Also, the problem encountered in securing the certificates of stock made by the
buyer must be expeditiously taken up through the so-called administrative
mandamus proceedings with the SEC than in the regular courts. It also found that the
Hearing Officer erred in holding that petitioner is not the real party in interest.
Their MR having been denied, respondents appealed the decision of the SEC En
Banc and the resolution denying their MR to the CA. In its decision, the CA held that
in the absence of any allegation that the transfer of the shares between Fausto Gaid
and Vicente C. Ponce was registered in the stock and transfer book of ALSONS,
Ponce failed to state a cause of action. Thus, said the CA, the complaint for
mandamus should be dismissed for failure to state a cause of action. Petitioners MR
was likewise denied.
Petitioner first contends that the act of recording the transfer of shares in the stock
and transfer book and that of issuing a certificate of stock for the transferred shares
involves only one continuous process. Thus, when a corporate secretary is presented

34

with a document of transfer of fully paid shares, it is his duty to record the transfer in
the stock and transfer book of the corporation, issue a new stock certificate in the
name of the transferee, and cancel the old one. A transferee who requests for the
issuance of a stock certificate need not spell out each and every act that needs to be
done by the corporate secretary, as a request for issuance of stock certificates
necessarily includes a request for the recording of the transfer. Ergo, the failure to
record the transfer does not mean that the transferee cannot ask for the issuance of
stock certificates.
Secondly, according to petitioner, there is no law, rule or regulation requiring a
transferor of shares of stock to first issue express instructions or execute a power of
attorney for the transfer of said shares before a certificate of stock is issued in the
name of the transferee and the transfer registered in the books of the corporation. He
contends that Hager vs. Bryan, 19 Phil. 138 (1911), and Rivera vs. Florendo, 144
SCRA 643 (1986), cited by respondents, do not apply to this case. These cases
contemplate a situation where a certificate of stock has been issued by the company
whereas in this case at bar, no stock certificates have been issued even in the name of
the original stockholder, Fausto Gaid.
Finally, petitioner maintains that since he is under no compulsion to register the
transfer or to secure stock certificates in his name, his cause of action is deemed not
to have accrued until respondent ALSONS denied his request.
Respondents, in their comment, maintain that the transfer of shares of stock not
recorded in the stock and transfer book of the corporation is non-existent insofar as
the corporation is concerned and no certificate of stock can be issued in the name of
the transferee. Until the recording is made, the transfer cannot be the basis of
issuance of a certificate of stock. They add that petitioner is not the real party in
interest, the real party in interest being Fausto Gaid since it is his name that appears
in the records of the corporation. They conclude that petitioners cause of action is
barred by prescription and laches since 24 years elapsed before he made any demand
upon ALSONS.
Issue: (1) W/N CA erred in holding that petitioner has no cause of action for a writ of
mandamus. (2) W/N the transfer of shares of stocks not recorded in the stock and
transfer book of the corporation is non-existent(3) W/N notice to a corporation of the
sale of the shares and presentation of certificates for transfer is equivalent to
registration
Held: No. The CA did not err in ruling that petitioner had no cause of action, and that
his petition for mandamus was properly dismissed.
In Rural Bank of Salinas, Inc., private respondent Melania Guerrero had a Special
Power of Attorney executed in her favor by Clemente Guerrero, the registered
stockholder. It gave Guerrero full authority to sell or otherwise dispose of the 473
shares of stock registered in Clementes name and to execute the proper documents
therefor. Pursuant to the authority so given, Melania assigned the 473 shares of
stock owned by Guerrero and presented to the Rural Bank of Salinas the deeds of
assignment covering the assigned shares. Melania Guerrero prayed for the transfer

of the stocks in the stock and transfer book and the issuance of stock certificates in
the name of the new owners thereof. Based on those circumstances, there was a
clear duty on the part of the corporate secretary to register the 473 shares in favor of
the new owners, since the person who sought the transfer of shares had express
instructions from and specific authority given by the registered stockholder to cause
the disposition of stocks registered in his name.
That cannot be said of this case. The deed of undertaking with indorsement
presented by petitioner does not establish, on its face, his right to demand for the
registration of the transfer and the issuance of certificates of stocks. In Hager vs.
Bryan, 19 Phil. 138 (1911), this Court held that a petition for mandamus fails to state
a cause of action where it appears that the petitioner is not the registered stockholder
and there is no allegation that he holds any power of attorney from the registered
stockholder, from whom he obtained the stocks, to make the transfer.
Without discussing or deciding the respective rights of the parties which might be
properly asserted in an ordinary action or an action in the nature of an equitable suit,
we are all agreed that in a case such as that at bar, a mandamus should not issue to
compel the secretary of a corporation to make a transfer of the stock on the books of
the company, unless it affirmatively appears that he has failed or refused so to do,
upon the demand either of the person in whose name the stock is registered, or of
some person holding a power of attorney for that purpose from the registered owner
of the stock. There is no allegation in the petition that the petitioner or anyone else
holds a power of attorney from the Bryan-Landon Company authorizing a demand
for the transfer of the stock, or that the Bryan-Landon Company has ever itself made
such demand upon the Visayan Electric Company, and in the absence of such
allegation we are not able to say that there was such a clear indisputable duty, such a
clear legal obligation upon the respondent, as to justify the issuance of the writ to
compel him to perform it.
Under the provisions of our statute touching the transfer of stock (secs. 35 and 36 of
Act No. 1459), the mere indorsement of stock certificates does not in itself give to
the indorsee such a right to have a transfer of the shares of stock on the books of the
company as will entitle him to the writ of mandamus to compel the company and its
officers to make such transfer at his demand, because, under such circumstances the
duty, the legal obligation, is not so clear and indisputable as to justify the issuance of
the writ. As a general rule and especially under the above-cited statute, as between
the corporation on the one hand, and its shareholders and third persons on the other,
the corporation looks only to its books for the purpose of determining who its
shareholders are, so that a mere indorsee of a stock certificate, claiming to be the
owner, will not necessarily be recognized as such by the corporation and its officers,
in the absence of express instructions of the registered owner to make such transfer
to the indorsee, or a power of attorney authorizing such transfer.
(2) A transfer of shares of stock not recorded in the stock and transfer book of the
corporation is non-existent as far as the corporation is concerned. As between the
corporation on the one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its

35

shareholders are. It is only when the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard the transferee as one of its
stockholders. From this time, the consequent obligation on the part of the
corporation to recognize such rights as it is mandated by law to recognize arises.
Hence, without such recording, the transferee may not be regarded by the
corporation as one among its stockholders and the corporation may legally refuse the
issuance of stock certificates in the name of the transferee even when there has been
compliance with the requirements of Section 64 of the Corporation Code. This is the
import of Section 63 which states that No transfer, however, shall be valid, except
between the parties, until the transfer is recorded in the books of the corporation
showing the names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares transferred. The
situation would be different if the petitioner was himself the registered owner of the
stock which he sought to transfer to a third party, for then he would be entitled to the
remedy of mandamus.
x x x until registration is accomplished, the transfer, though valid between the
parties, cannot be effective as against the corporation. Thus, in the absence of any
allegation that the transfer of the shares between Gaid and the private respondent
[herein petitioner] was registered in the stock and transfer book of the petitioner
corporation, the private respondent has failed to state a cause of action.
(3) Petitioners reliance on our ruling in Abejo vs. De la Cruz, 149 SCRA 654
(1987), that notice given to the corporation of the sale of the shares and presentation
of the certificates for transfer is equivalent to registration is misplaced. In the case,
there is no allegation in the complaint that petitioner ever gave notice to respondents
of the alleged transfer in his favor. Moreover, that case arose between and among
the principal stockholders of the corporation, Pocket Bell, due to the refusal of the
corporate secretary to record the transfers in favor of Telectronics of the
corporations controlling 56% shares of stock which were covered by duly endorsed
stock certificates. As aforesaid, the request for the recording of a transfer is different
from the request for the issuance of stock certificates in the transferees name.
Finally, in Abejo, the Court did not say that transfer of shares need not be recorded in
the books of the corporation before the transferee may ask for the issuance of stock
certificates. The Courts statement, that there is no requirement that a stockholder
of a corporation must be a registered one in order that the Securities and Exchange
Commission may take cognizance of a suit seeking to enforce his rights as such
stockholder among which is the stock purchasers right to secure the corresponding
certificate in his name, was addressed to the issue of jurisdiction, which is not
pertinent to the issue at hand.
NOTE: That petitioner was under no obligation to request for the registration of the
transfer is not in issue. It has no pertinence in this controversy. One may own shares
Donnina Halley vs. Printwell, Inc.
Facts:

of corporate stock without possessing a stock certificate. In Tan vs. SEC, 206 SCRA
740 (1992), we had occasion to declare that a certificate of stock is not necessary to
render one a stockholder in a corporation. But a certificate of stock is the tangible
evidence of the stock itself and of the various interests therein. The certificate is the
evidence of the holders interest and status in the corporation, his ownership of the
share represented thereby. The certificate is in law, so to speak, an equivalent of
such ownership. It expresses the contract between the corporation and the
stockholder, but it is not essential to the existence of a share in stock or the creation
of the relation of shareholder to the corporation. In fact, it rests on the will of the
stockholder whether he wants to be issued stock certificates, and a stockholder may
opt not to be issued a certificate. In Won vs. Wack Wack Golf and Country Club,
Inc., 104 Phil. 466 (1958), we held that considering that the law does not prescribe a
period within which the registration should be effected, the action to enforce the right
does not accrue until there has been a demand and a refusal concerning the transfer.
In the present case, petitioners complaint for mandamus must fail, not because of
laches or estoppel, but because he had alleged no cause of action sufficient for the
issuance of the writ.
Mandamus will not lie to compel the corporate secretary to register the transfer of
shares in the corporate books when the petitioner is not the registered stockholder
nor does he hold a power of attorney from the latter. This is under the general rule
that as between the corporation one the one hand and its shareholders on other, the
corporation looks only to its books for the purpose of determining who its
shareholders are, so that a mere indorsee of a certificate of stock, claiming to be the
owner, will not necessarily be recognized as such by the corporation and its officers,
in absence of express instructions of the registered owner to make such transfer to
the indorsee, or a power of attorney authorizing such transfer. Hager v. Bryan, 19
Phil. 138 (1911); Rivera v. Florendo, 144 SCRA 643, 657 (1986).
The claim for damages of what the shares could have sold had the demand been
complied with is deemed to be speculative damage and non-recoverable Batong
Buhay Gold Mines v. CA, 147 SCRA 4 (1987)
Period to Enforce: Considering that the law does not prescribe a period within
which the registration of purchase of shares should be effected, the action to enforce
the right does not accrue until there has been a demand and a refusal concerning the
transfer. Ponce v. Alsons Cement Corp., 393 SCRA 602 (2002).
A stipulation on the stock certificate that any assignment would not be binding on the
corporation unless registered in the corporate books as required under the by-laws
and without providing when registration should be made, would mean that the cause
of action and the determination of prescription period would begin only when
demand for registration is made and not at the time of the assignment of the
certificate. Won v. Wack Wack Golf & Country Club, 104 Phil. 466 (1958).
o BMPI (Business Media Philippines Inc.) is a corporation under the control
of its stockholders, including Donnina Halley.
o In the course of its business, BMPI commissioned PRINTWELL to print
Philippines, Inc. (a magazine published and distributed by BMPI)

36

o
o
o
o
o
o

PRINTWELL extended 30-day credit accommodation in favor of BMPI and

in a period of 9 mos. BMPI placed several orders amounting to 316,000.
However, only 25,000 was paid hence a balance of 291,000
PRINTWELL sued BMPI for collection of the unpaid balance and later on
impleaded BMPIs original stockholders and incorporators to recover on
their unpaid subscriptions.
It appears that BMPI has an authorized capital stock of 3M divided into
300,000 shares with P10 par value.
Only 75,000 shares worth P750,000 were originally subscribed of which
P187,500 were paid up capital.
Halley subscribed to 35,000 shares worth P350,000 but only paid P87,500.

Halley contends that:

1 They all had already paid their subscriptions in full
2 BMPI had a separate and distinct personality
3 BOD and SH had resolved to dissolve BMPI
RTC and CA
o Defendant merely used the corporate fiction as a cloak/cover to create an
injustice (against PRINTWELL)
o Rejected allegations of full payment in view of irregularity in the issuance
of ORs (Payment made on a later date was covered by an OR with a lower
serial number than payment made on an earlier date.
Issue: WON a stockholder who was in active management of the business of the
corporation and still has unpaid subscriptions should be made liable for the
debts of the corporation by piercing the veil of corporate fiction
Held: YES! Such stockholder should be made liable up to the extent of her
unpaid subscription
Ratio:

China Banking Corporation v CA

Facts:
China Banking Corporation made a 53% equity investment (P16,227,851.80) in the
First CBC Capital a Hongkong subsidiary engaged in financing and investment
with deposit-taking function.
It was shown that CBC has become insolvent so China Banking wrote-off its
investment as worthless and treated it as a bad debt or as an ordinary loss deductible
from its gross income.

It was found that at the time the obligation was incurred, BMPI was under
the control of its stockholders who know fully well that the corporation was
not in a position to pay its account (thinly capitalized).
And, that the stockholders personally benefited from the operations of the
corporation even though they never paid their subscriptions in full.

The stockholders cannot now claim the doctrine of corporate fiction otherwise (to
deny creditors to collect from SH) it would create an injustice because creditors
would be at a loss (limbo) against whom it would assert the right to collect.
On piercing the veil:
Although the corporation has a personality separate and distinct from its SH, such
personality is merely a legal fiction (for the convenience and to promote the ends of
justice) which may be disregarded by the courts if it is used as a cloak or cover for
fraud, justification of a wrong, or an alter ego for the sole benefit of the SH.
As to the Trust Fund Doctrine:
The RTC and CA correctly applied the Trust Fund Doctrine
Under which corporate debtors might look to the unpaid subscriptions for
the satisfaction of unpaid corporate debts
Subscriptions to the capital of a corporation constitutes a trust fund for the
payment of the creditors (by mere analogy) In reality, corporation is a
simple debtor.
Moreover, the corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part, without valuable consideration, or fraudulently, to the
prejudice of the creditors.
The creditor is allowed to maintain an action upon any unpaid subscriptions
and thereby steps into the shoes of the corporation for the satisfaction of its
debt.
The trust fund doctrine is not limited to reaching the SHs unpaid
subscriptions. The scope of the doctrine when the corporation is
insolvent encompasses not only the capital stock but also other property
and assets generally regarded in equity as a trust fund for the payment
of corporate debts.
CIR disallowed the deduction on the ground that the investment should not be
classified as being worthless. It also held that assuming that the securities were
worthless, then they should be classified as a capital loss and not as a bad debt since
there was no indebtedness between China Banking and CBC.
Issue:
Whether or not the investment should be classified as a capital loss.

37

Held:
Yes. Section 29.d.4.B of the NIRC contains provisions on securities becoming
worthless. It conveys that capital loss normally requires the concurrence of 2
conditions:
a.
there is a sale or exchange
b.
the thing sold or exchanges is a capital asset.
When securities become worthless, there is strictly no sale or exchange but the law
deems it to be a loss. These are allowed to be deducted only to the extent of capital
gains and not from any other income of the taxpayer. A similar kind of treatment is
given by the NIRC on the retirement of certificates of indebtedness with interest
coupons or in registered form, short sales and options to buy or sell property where
no sale or exchange strictly exists. In these cases, The NIRC dispenses with the
standard requirements.
China Banking Corporation v. Court of Appeals
327 SCRA 378
Facts:
Alfonso Roxas Chua and his wife Kiang Ming Chu Chua were the owners of a
residential land in San Juan, Metro Manila, covered by Transfer Certificate of Title
No. 410603. On June 19, 1985, petitioner China Bank filed with the Regional Trial
Court of Manila, Branch 29, an action for collection of sum of money against Pacific
Multi Agro-Industrial Corporation and Alfonso Chua which was docketed as Civil
Case No. 85-31257. On November 7, 1985, the trial court promulgated its decision in
Civil Case No. 85-31257 in favor of China Banking Corporation.On November 21,
1988, Alfonso Roxas Chua executed a public instrument denominated as
"Assignment of Rights to Redeem," whereby he assigned his rights to redeem the
one-half undivided portion of the property to his son, private respondent Paulino
Roxas Chua. Paulino redeemed said one-half share on the very same day. On the
other hand, in connection with Civil Case No. 85-31257, another notice of levy on
execution was issued on February 4, 1991 by the Deputy Sheriff of Manila against
the right and interest of Alfonso Roxas Chua in TCT 410603. Thereafter, a certificate
of sale on execution dated April 13, 1992 was issued by the Sheriff of Branch 39,
RTC Manila in Civil Case No. 85-31257, in favor of China Bank and inscribed at the
back of TCT 410603 as Entry No. 01896 on May 4, 1992. On May 20, 1993, Paulino
Roxas Chua and Kiang Ming Chu Chua instituted Civil Case No. 63199 before the
RTC of Pasig, Metro Manila against China Bank, averring that Paulino has a prior
and better right over the rights, title, interest and participation of China Banking
Corporation in TCT 410603. The trial court rendered a decision on July 15, 1994 in
Valle Verde Country Club vs. Africa
G.R. No. 151969; September 4, 2009

There is ordinary loss when the property sold is not a capital asset.
In the case, CBC as an investee corporation, is a subsidiary corporation of China
Banking whose shares in CBC are not intended for purchase or sale but as an
investment. An equity investment is a capital asset of the investor. Unquestionably,
any loss is a capital loss to the investor.
-Additional notes:
*The loss cannot be deductible as bad debt since the shares of stock do not constitute
a loan extended by it to its subsidiary or a debt subject to obligatory repayment by
the latter.
favor of private respondent Paulino Roxas Chua.:On appeal, the Court of Appeals
affirmed the ruling of the trial court.
Issue:
Whether or not the assignment of the right of redemption made by Alfonso Roxas
Chua in favor of private respondent Paulino was done to defraud his creditors and
may be rescinded under Article 1387 of the Civil Code.
Held:
Existence of fraud or intent to defraud creditors may either be presumed in
accordance with Article 1387 of the Civil Code or duly proved as the case may
be.After his conjugal share in TCT 410603 was foreclosed by Metrobank, the only
property that Alfonso Roxas Chua had was his right to redeem the same, it forming
part of his patrimony. "Property" under civil law comprehends every species of title,
inchoate or complete, legal or equitable. In the case at bar, the presumption that the
conveyance is fraudulent has not been overcome. At the time a judgment was
rendered in favor of China Bank against Alfonso and the corporation, Paulino was
still living with his parents in the subject property. Paulino himself admitted that he
knew his father was heavily indebted and could not afford to pay his debts. The
transfer was undoubtedly made between father and son at a time when the father was
insolvent and had no other property to pay off his creditors. Hence, it is of no
consequence whether or not Paulino had given valuable consideration for the
conveyance. Petition is granted.
Ernesto Villaluna, Jaime C. Dinglasan (Dinglasan), Eduardo Makalintal
(Makalintal), Francisco Ortigas III, Victor Salta, Amado M. Santiago, Jr., Fortunato
Dee, Augusto Sunico, and Ray Gamboa were elected as BOD during the Annual

FACTS:

38

Stockholders Meeting of petitioner Valle Verde Country Club, Inc. (VVCC).

Requisite quorum could not be obtained so they continued in a hold-over capacity.
First resignation: Dinglasan, BOD still constituting a quorum elected Eric
Roxas (Roxas). Second resignation: Makalintal, Jose Ramirez (Ramirez) was elected
by the remaining BOD.
Respondent Africa (Africa), a member of VVCC, questioned the election of
Roxas and Ramirez as members of the petitioners Board with the SEC and the RTC
as contrary to Sec. 23 and 29 of the Corporation Code. He claimed that a year after
Makalintals election as member of the petitioners Board in 1996, his term as well
as those of the other members should be considered to have already expired. Thus,
according to him, the resulting vacancy should have been filled by the stockholders
in a regular or special meeting called for that purpose, and not by the remaining
members of the petitioners Board. RTC favored respondent. SEC ruled on the same
ground as RTC. Petitioner appealed in SC for certiorari being partially contrary to
law and jurisprudence.
ISSUE:
Can the members of a corporations board of directors elect another director
to fill in a vacancy caused by the resignation of a hold-over director?
HELD:
NO. The holdover period is not part of the term of office of a member of the
board of directors. When Section 23 of the Corporation Code declares that the board
of directorsshall hold office for one (1) year until their successors are elected and
qualified, we construe the provision to mean that the term of the members of the
board of directors shall be only for one year; their term expires one year after
election to the office. The holdover period that time from the lapse of one year
from a members election to the Board and until his successors election and
qualification is not part of the directors original term of office, nor is it a new
term; the holdover period, however, constitutes part of his tenure. Corollary, when
an incumbent member of the board of directors continues to serve in a holdover
SUPREME COURT
Manila

capacity, it implies that the office has a fixed term, which has expired, and the
incumbent is holding the succeeding term.
The powers of the corporations board of directors emanate from its
stockholders. This theory of delegated power of the board of directors similarly
explains why, under Section 29 of the Corporation Code, in cases where the vacancy
in the corporations board of directors is caused not by the expiration of a members
term, the successor so elected to fill in a vacancy shall be elected only for the
unexpired term of the his predecessor in office. The law has authorized the
remaining members of the board to fill in a vacancy only in specified instances, so as
not to retard or impair the corporations operations; yet, in recognition of the
stockholders right to elect the members of the board, it limited the period during
which the successor shall serve only to the unexpired term of his predecessor in
office.
It also bears noting that the vacancy referred to in Section 29 contemplates a
vacancy occurring within the directors term of office. When a vacancy is created by
the expiration of a term, logically, there is no more unexpired term to speak of.
Hence, Section 29 declares that it shall be the corporations stockholders who shall
possess the authority to fill in a vacancy caused by the expiration of a members
term.
NOTE: The court distinguished term and tenure.
Term is the time during which the officer may claim to hold the office as of
right, and fixes the interval after which the several incumbents shall succeed one
another. The term of office is not affected by the holdover. The term is fixed by
statute and it does not change simply because the office may have become vacant,
nor because the incumbent holds over in office beyond the end of the term due to the
fact that a successor has not been elected and has failed to qualify.
Tenure represents the term during which the incumbent actually holds
office. The tenure may be shorter (or, in case of holdover, longer) than the term for
reasons within or beyond the power of the incumbent.
HON. COURT OF APPEALS, THOMAS P. BATONG, JUANITO BASALONG,
AUGUSTO CATANGI, PAUL GARCIA, QUIDO RIVERA, VICTORIO Y.
SAQUILAYAN and DANILO ZAMORA, Respondents.

FIRST DIVISION
DECISION
G.R. No. 128464

June 20, 2006

CHICO-NAZARIO, J.:

REV. LUIS AO-AS, REV. JOSE LAKING, EUSQUICIO GALANG, REV.

ISABELO MONONGGIT, REV. EDWINO MERCADO, REV. DANIEL
PONDEVIDA, REV. TEODORICO TARAN and DR. BENJAMIN GALAPIA,
Petitioners,
vs.

This is a Petition for Certiorari under Rule 45 of the Rules of Court to seek the
reversal of the Court of Appeals Decision1 dated 10 October 1996 in favor of
respondents [hereinafter referred to as the Batong group] and Resolution2 dated 3
March 1997 denying the Motion for Reconsideration of the herein petitioners
[hereinafter referred to as the Ao-As group].

39

The Court of Appeals found the facts to be as follows:

The Lutheran Church in the Philippines (hereinafter referred to as the LCP) is a
religious organization duly registered with the Securities and Exchange Commission
on May 8, 1967. Its members are comprised of the Lutheran clergymen and the local
Lutheran congregations in the Philippines which, at the time of its incorporation, was
divided into three districts, namely: the North Luzon District (hereinafter referred to
as the NLD); the South Luzon District (hereinafter referred to as the SLD); [and] the
Mindanao district (hereinafter referred to as the MDD).
The governing body of the LCP is its national board of directors (hereinafter referred
to as the LCP Board) which was originally composed of seven (7) members serving a
term of two years. Six members of the LCP Board are elected separately in district
conferences held in each district, with two members representing each district the
elected district president becomes the clergy representative to the LCP Board and the
other is a lay representative to the LCP Board. The seventh member of the Board is
the National President of the LCP who is elected at large in a national convention
held in October of every even-numbered year.
During the 1976 LCP national convention, a resolution was passed dividing the
North Luzon district (NLD) into two districts: the NLD Highland District (NLHD)
and the NLD Lowland District (NLLD) -- thereby increasing the number of directors
from seven (7) to nine (9). Again in the 1984 LCP national convention, a resolution
was passed creating another district, namely, the Visayan Islands District (VID)
thereby increasing further the number of directors to eleven (11). Both resolutions
were passed pursuant to Section 2 of Article 7 of the LCP By-Laws which provides
that: "LCP in convention may form additional districts as it sees fit".
Since the addition of two or more districts, an eleven (11) member board of directors
representing the five (5) districts managed the LCP without any challenge from the
membership until several years later when certain controversies arose involving the
resolutions of the Board terminating the services of the LCP business manager and
corporate treasurer since 1979, Mr. Eclesio Hipe.
The termination of Mr. Hipe sparked a series of intracorporate complaints lodged
before the Securities and Exchange Commission (SEC). For the first time, the
legality of the eleven (11) member Board was put in issue as being in excess of the
number of directors provided in the Articles of Incorporation since no amendments
were made thereto to reflect the increase.
Aside from the present case, SEC-SICD Case no. 3556 entitled "Excelsio Hipe, et.
al. vs. Thomas Batong, et. al." and SEC-SICD Case No. 3524, "Domingo Shambu,
et. al. vs. Thomas Batong, et. al." respectively, sought to declare null and void Board

Resolution Nos. LCP-BD-6-89 and LCP-BD-7-89; and SEC-SICD Case No. 3550
entitled "The Lutheran Church in the Philippines vs. Exclesio Hipe" which sought to
recover the corporate records still in the possession of Mr. Hipe.
[The members of the Batong group] are the duly elected board of directors of the
LCP at the time of the filing of SEC-SICD Case No. 3857. On the other hand, [the
Ao-As group] have served in various capacities as directors or officers of the LCP.
On August 17, 1990, [the Ao-As group] filed SEC-SICD Case No. 3857 for
accounting and damages with prayer for preliminary injunction and appointment of a
management committee asserting the following causes of action:
"First, the alleged non-liquidation and/or non-accounting of a part of the proceeds of
the La Trinidad land transaction in the amount of P64,000.00 by petitioner Thomas
Batong;
Second, the alleged non-liquidation and/or unaccounting of cash advances in the
aggregate amount of P323,750.00 by petitioner Thomas Batong;
Third, the alleged dissipation and/or unaccounting of the LCP general fund in the
amount of 4.8 million;
Fourth, the non-registration of the Leyte land purchased with LCP funds by
petitioner Victorio Saquilayan;
Fifth, severance of church-partnership relationship with Lutheran Church-Missouri
Synod (LCMS); and
Sixth, the transfer of LCP corporate books from the Sta. Mesa office to the Caloocan
office."
During the hearings on the application for creation of a management committee, [the
Batong group] filed an Urgent Motion to Suspend the Proceedings of the Case in
view of an amicable settlement agreed upon by the parties entitled "A FORMULA
FOR CONCORD". However, notwithstanding the FORMULA FOR CONCORD, the
SEC-SICD denied [the Batong groups] motion to suspend proceedings.
On January 23, 1992, petitioners filed a Motion to Dismiss alleging again the
FORMULA OF CONCORD. Again, the SEC-SICD denied [the Batong groups]
motion.
Subsequently, on September 3, 1992, the SEC-SICD Hearing Officer after the
presentation of the parties respective evidence, issued an Order creating a
management committee. Said Order reads, in part:

40

" x x x All board resolutions and/or management actions or decisions passed and
approved by them are deemed null and void ab initio for they were passed, and
approved by an illegally constituted Board of Directors. . . And worse, several
resolutions or Boards actions are not only (deemed) null and void but have caused
irreparable damage to the corporation such as the termination of all LCP staff and
employee (LCP-BD-29-90); dissolution of LCP Business Office (LCP-BD-37-90);
termination of the partner-church relationship between the LCP and the Lutheran
Church Missouri Synod which is the major benefactor and source of funds of LCP
(LCP-BD-28-90); forcible taking of almost all official records and equipment of LCP
by respondent Thomas B. Batong and transferring the (same) from the LCP business
office; acquisition of some lands using the corporate funds were in the name of some
person other than the LCP; and various cash advances of corporate funds by the
respondents are not liquidated up to the present.
WHEREFORE, premises considered, A MANAGEMENT COMMITTEE is hereby
created to undertake the management of the Lutheran Church in the Philippines until
such time that new members of the LCP Board of Directors shall have been elected
and qualified in the election to be called and conducted by the Management
Committee in accordance with the LCPs Articles of Incorporation and By-Laws
preferably in October 1992."
On September 14, 1992, [the Batong group] filed their Motion for Reconsideration
which was subsequently denied in an Order dated September 23, 1992.
On September 23, 1992, [the Batong group] filed with the SEC En Banc a Petition
for Certiorari with prayer for a temporary restraining order alleging that the SECSIDC acted with grave abuse of discretion in creating the management committee.
Shortly thereafter, on September 29, 1992, the following were appointed to the
management committee: Atty. Puno as Chairman; and private respondents Jose
Laking, Eduardo Ladlad, Romeo Celiz as members. However, Atty. Puno later
resigned and was replaced by Atty. Oscar Almazan who was appointed as Chairman.
After the death of Romeo Celiz, he was replaced by private respondent Luis Ao-As.
On October 6, 1992, [the Ao-As group] filed a motion for issuance of a writ of
preliminary injunction seeking to enjoin [the Batong group] not only from continuing
to act as LCP board of directors but also from calling a national convention to elect
new set of officers and members of the Board as provided in the LCP Constitution
and By-Laws.

convention or general or special membership meeting as well as election of the

members of the LCP board of directors, until further orders".
The [the Batong group] allege that the SEC-SIDC management committee used the
Order dated October 16, 1992 to carry out ultra vires acts, more specifically: (i) to
take control of and closing down church buildings; (ii) to evict LCP clergymen from
their church parsonages; (iii) to ordain and appoint new clergymen to replace
incumbent members of the church hierarchy. In at least one case which has reached
this Court, CA-G.R. No. 34504, it was found that:
"On August 13, 1993, [members of the Ao-As group] Oscar Almazan, James
Cerdenola, Edgar Balunsat and Edwino Mercado, together with armed security
guards, acting in behalf of LCP, forcibly took possession of the houses occupied by
[the Batong group]. In view of the latters refusal to leave the premises, they
permanently padlocked the main gate of the compound confining [the Batong group]
and their families therein and prevented the ingress and egress thereto. Later the
[Batong group] left their houses due to the alleged intimidation and threats employed
by the [Ao-As group]. Thereafter, the latter entered the dwelling and took possession
of the same."
However, even before the creation of the management committee, the LCP national
convention had already been called in a Board meeting held on September 26, 1991
at the Lutheran Hospice, Quezon City. Hence, by the time the writ of preliminary
injunction was issued, all notices had already been received by all local
congregations and convention delegates had likewise already been chosen to attend
the national convention.
Thus, the 17th LCP National Convention was held on October 26 to 30, 1992 as
earlier scheduled at the Immanuel Lutheran Church and School, Tugatong, Malabon,
Metro-Manila. The list of official delegates to the Convention is shown in pages 32
to 33 of the Convention Records.
During the 17th LCP National Convention, the delegates representing the majority of
the members which comprised the three districts (North Luzon, South Luzon and
Mindanao) issued a "Manifesto" to initiate by themselves the election for a new set
of church leaders because the incumbent directors were enjoined to act as a board. In
the election, the following were elected as LCP officers, namely:
President -- Rev. Victorino Saquilayan
Vice-President -- Rev. Juanito Basalong

On October 16, 1992, the SEC-SIDC ordered the issuance of a writ of preliminary
injunction prohibiting [the Batong group] from "acting as a board of directors or
officers of Lutheran Church in the Philippines, Inc. (LCP) and from holding any

Secretary -- Rev. Charlito Mercado

41

Treasurer -- Rev. Benjamin Lasegan

Similarly, prior to the issuance of the writ of preliminary injunction and the
appointment of the management committee, the SLD (South Luzon District) of LCP
already held its district conference on august 26 to 28, 1992 which elected, among
other of its officers, the SLD Lay Representative pursuant to the LCP Constitution
and By Laws. The following were elected:
SLD President and
Clergy Representative : Rev. Elmer Banes
SLD Lay Representative: Roman Moscoso
The district conference for NLD was likewise held before the issuance of the writ of
preliminary injunction on October 7 to 9, 1992. In said convention, the local
congregations and clergymen executed a manifesto expressing their own opposition
to the appointment of a management committee.
[The Batong group] then filed with the SEC En Banc a Supplemental Petition dated
November 13, 1992 alleging the supervening events in the case which took place
after the filing of the original petition on September 23, 1992.
Subsequent to the 17th LCP national convention of October 1992, a special
convention was called by the SEC Management Committee on January 25 to 29,
1993 at Cagayan de Oro City to elect a different set of officers for LCP. [The Batong
group] allege that the required notices were not sent to several local congregations
and even fewer LCP members were permitted by [the Ao-As group] to attend the
special convention as evidenced by the list of official delegates contained in the
minutes of the special convention.
On July 21, 1993, [the Batong Group] filed a Second Supplement to its petition for
certiorari in the SEC En Banc alleging the supervening events and seeking the
review of an Order of the Hearing Officer dated June 9, 1993 which enlisted the aid
of the Secretary of the Department of Interior and Local Government and the PNP
Director General to enforce the writ of preliminary injunction.
Pending the resolution of the above-mentioned petitions, the management committee
took control of several church properties, replaced clergymen from their parsonages
and froze all bank accounts in the name of LCP.
[The Batong group] then filed a Petition for Mandamus and Damages with Prayer for
Preliminary Mandatory Injunction on August 19, 1993 seeking to unfreeze the bank
accounts and recover the seized buildings.

All of the aforementioned petitioners (sic) were denied by the SEC En Banc. A
motion for reconsideration was filed but the same was likewise denied.3
The Batong group then filed a Petition for Review with the Court of Appeals seeking
to annul the Decision of the Securities and Exchange Commission En Banc. In said
Petition, the Batong group alleged that the Ao-As group persisted in carrying out
ultra vires and illegal acts, to wit:
(a) Private respondent Luis L. Ao-As, purportedly on the strength of a board action
held at Baguio on February 22-24, 1994 and of the assailed Order dated October 16,
1992, closed the premises of the Gloria Dei School after school year 1993-1994 in an
attempt to take-over the management and operations of the said school. The closure
of the Gloria Dei School is the subject of SEC Case No. 05-93-4463.
(b) On February 1, 1994, Rev. Eduardo Ladlad, acting as President of the LCP,
executed a Contract to Sell with Solid Gold Realty Corporation whereby he agreed to
sell a portion of LCPs property in Cavite with an area of 7,218 square meters at a
price of P1,000 per square meter or a total of P7,218,000 with a down payment of
P1,000,000.
(c) Upon application of the [Ao-As group], the SEC-SIDC issued an Order dated
June 1, 1994 ex parte and on June 14, 1994 at around 7 p.m., a certain Rev. Laking,
using the Order of the SEC-SIDC dated June 1, 1994 and October 16, 1992 writ of
preliminary injunction, entered the premises of the Abatan Hospital located in
Baguias, Benguet Province, took over the management and control of the Abatan
Hospital and forced the pastor previously assigned therein Pastor Laapniten to
leave his post simply because Pastor Lapniten is identified with the Saquilayan
Group.4
On 30 June 1994, the Batong group filed with the Court of Appeals a motion for the
issuance of a Temporary Restraining Order and/or Preliminary Injunction. On 12
July 1994, the Court of Appeals issued a Temporary Restraining Order to enjoin the
Ao-As group "from implementing the contract to sell between the Lutheran church in
the Philippines (LCP) and Solid Gold Realty Corporation and from selling,
transferring, assigning and/or disposing of any other property of the LCP; to enjoin
the Ao-As group and/or those officers elected in their convention from enforcing or
implementing the Order dated October 16, 1992 and the writ of preliminary
injunction issued in SEC Case 3857."
On 22 September 1994, the Batong group filed a Motion/ Manifestation to cite
Eduardo Ladlad, Harry Roa, James Cerdenola and Luis Ao-As in contempt of court,
alleging that the latter, on 15 September 1994, entered the Olongapo Lutheran
Church with six armed men and there and then padlocked the main gate of the

42

church. Consequently, Rev. Elmer Baes, the assigned overseer at said church, was
barred from entering the premises on 17 September 1994.
On 10 October 1996, the Court of Appeals ruled in favor of the Batong group,
disposing the petition as follows:
WHEREFORE, the petition is hereby granted. The Decision dated August 25, 1993
of the SEC En Banc is hereby RECONSIDERED and SET-ASIDE and the Orders of
the SEC-SIDC dated September 3, 1992 and October 16, 1992 are hereby
ANNULLED and SET ASIDE. The SEC is hereby directed to conduct a new
election of the directors of the LCP consistent with the provisions of the Corporation
Code.5

1. x x x x
2. Declaring the Board of Directors elected at the National Convention called by the
Management Committee on January 25-27, 1993 in Cagayan de Oro as the legitimate
members of the Board of LCP;
3. Declaring all acts and resolutions passed by the Batong group invalid and of no
legal effect; and
4. Ordering the Batong group to return all the properties seized from the LCP and to
refrain from the representing the LCP.7

Hence, this petition, where the Ao-As group brings forth the following issues to be
resolved by this Court:

The Ao-As group did not commit willful and deliberate forum shopping in the filing
of SEC-SIDC Case No. 3857.

I.

Since a ruling upholding the Court of Appeals on the issue of forum shopping would
render all the other issues in this petition moot, we resolve to pass upon the same at
the onset.

Whether or not the Court of Appeals gravely erred in utterly ignoring and
disregarding all the evidence adduced by [the Ao-As group], and in making findings
of facts contradicted by the evidence on record and not supported by any evidence
whatsoever.

The Ao-As group claims that the Court of Appeals reversibly erred in ruling that
SEC-SICD Case No. 3857 is a case of forum shopping. The Court of Appeals had
ruled:

II.
Whether or not the Court of Appeals reversibly erred in ruling that SEC-SICD Case
No. 3857 is a case of forum shopping.

Finally, SEC-SICD Case No. 3857 is a clear case of forum shopping. The acts of [the
Batong group], as embodied in several board resolutions, have already been raised
and passed upon in other cases pending at the time the [Ao-As group] instituted the
present controversy.

III.
Whether or not the Court of Appeals committed reversible error in declaring as
invalid the manner of elections of the Board of Directors of the Lutheran Church in
the Philippines as provided for in its By-Laws.
IV.
Whether or not the Court of Appeals committed reversible error in ruling that the
SEC-SICD had no jurisdiction to call for a special election of the Board of Directors
of the Lutheran Church in the Philippines.6
In addition to the prayer to reverse the 10 October 1996 Decision and 3 March 1997
Resolution of the Court of Appeals, and the revival of Resolution of the SEC En
Banc in SEC-EB Case No. 330 and the Order of the SEC-SIDC in Case No. 3857,
the Ao-As group prays for the following:

The board resolutions denominated as LCP-BD-29-90 and LCP-BD-37-90

authorizing the dissolution of the LCP business office and termination of the
employees connected therewith was the subject of NLRC CASE NOS. 03-0193590 and 04-01979-90 pending before the National Labor Relations Commission.
The board resolution denominated as LCP-BD-28-90 authorizing the transfer of the
LCP corporate records from the Sta. Mesa Office to the Caloocan Office was the
subject of Civil Case No. 133394-CV and 131879-CV pending before the
Metropolitan Trial Court of Manila, Branches 20 and 21 and subsequently dismissed
in view of the FORMULA OF CONCORD entered into between the parties.
On the other hand, the legality of the composition of the eleven-member LCP Board
was already the subject matter of SICD Case No. 3524 which was appealed to the
SEC En Banc and docketed as SEC Case No. 352.

43

SEC Case No. 3857 is not the first case where the [Ao-As group], or those with
similar interests, have asked for the appointment of a management committee. In
SEC Case 3556 entitled "Exclesio Hipe and Lutheran Church of the Philippines v.
Thomas Batong, et al.", in a motion dated June 18, 1991, private respondent Exclesio
Hipe prayed for the appointment of a management committee for LCP. In an Order
dated August 15, 1991, the SEC-SICD ruled that the Motion for the Appointment of
a Management Committee and Accounting filed by the petitioners cannot be given
due course considering that the same is one of the incidents in SEC Case No. 3857
entitled Rev. Luis Ao-As, et al. vs. Thomas Batong now pending in the sala of Hon.
Elpidio Salgado". Petitioners knew that similar petitions have been previously
commenced because Atty. Oscar Almazan who is also a co-counsel in the case was
the counsel of record in SEC Case No. 3556 and the other cases.
Clearly, the act of the [Ao-as group] in filing multiple petitions involving the same
issues constitutes forum shopping and should be sanctioned with dismissal. x x x8
SEC-SICD Case No. 3857 is a petition for accounting with prayer for the
appointment of a management committee and the issuance of a writ of injunction.
The Ao-As group claims that the issue involved in the case is whether the Ao-As
group is entitled to an accounting and to the creation of a management committee
due to the Batong groups alleged dissipation and waste of the assets of the LCP, and
the subject matter is the act of dissipation and waste committed by the Batong group.
On the other hand:
1. NLRC Cases No. 03-01935-90 and 04-01979-90 pending before the National
Labor Relations Commission, is a case for illegal termination, which allegedly
"obviously involves a different cause of action";
2. The cases pending before Branches 20 and 21 of the Municipal Trial Court of
Manila, docketed as Civil Cases No. 133394-CV and 131879-CV, respectively, are
actions for forcible entry and unlawful detainer; and
3. SEC-SICD Case No. 3556 puts in issue the validity of LCP Board resolutions
LCP-BD-6-89 and LCP-BD-7-89, where what are involved are the incidents
resulting from the issuance of the resolutions the unjust termination of Mr.
Exclesio Hipe as LCP Business Manager and treasurer and the illegal appointment of
one Hildelberto Espejo in his place. SEC-SIDC Case No. 3524 puts in issue the
legality of the composition of the eleven-member LCP Board. These are allegedly
different issues from that of SEC-SIDC Case No. 3857 where the acts of respondents
are claimed to the basis of a prayer for accounting and appointment of a management
committee.
As elucidated above, the causes of action under SEC-SIDC Case No. 3857 are the
following:

First, the alleged non-liquidation and/or non-accounting of a part of the proceeds of

the La Trinidad land transaction in the amount of P64,000.00 by petitioner Thomas
Batong;
Second, the alleged non-liquidation and/or unaccounting of cash advances in the
aggregate amount of P323,750.00 by petitioner Thomas Batong;
Third, the alleged dissipation and/or unaccounting of the LCP general fund in the
amount of 4.8 million;
Fourth, the non-registration of the Leyte land purchased with LCP funds by
petitioner Victorio Saquilayan;
Fifth, severance of church-partnership relationship with Lutheran Church-Missouri
Synod (LCMS); and
Sixth, the transfer of LCP corporate books from the Sta. Mesa office to the Caloocan
office.
The elements of forum shopping are: (a) identity of parties, or at least such parties as
represent the same interests in both actions; (b) identity of rights asserted and the
relief prayed for, the relief being founded on the same facts; and (c) the identity of
the two preceding particulars, such that any judgment rendered in the other action
will, regardless of which party is successful, amount to res judicata in the action
under consideration.9
Otherwise stated, there is forum shopping where a litigant sues the same party
against whom another action or actions for the alleged violation of the same right
and the enforcement of the same relief is/are still pending. The defense of litis
pendentia in one case is a bar to the other/others; and, a final judgment is one that
would constitute res judicata and thus would cause the dismissal of the rest. Absolute
identity of the parties is not required. It is enough that there is substantial identity of
the parties. It is enough that the party against whom the estoppel is set up is actually
a party to the former case. There is identity of causes of action if the same evidence
will sustain the second action. The principle applies even if the relief sought in the
two cases may be different. Forum shopping consists of filing multiple suits
involving the same parties for the same cause of action, either simultaneously or
successively, for the purpose of obtaining a favorable judgment.10
As the present jurisprudence now stands, forum shopping can be committed in three
ways: (1) filing multiple cases based on the same cause of action and with the same
prayer, the previous case not having been resolved yet (litis pendentia); (2) filing
multiple cases based on the same cause of action and the same prayer, the previous

44

case having been finally resolved (res judicata); and (3) filing multiple cases based
on the same cause of action but with different prayers (splitting of causes of action,
where the ground for dismissal is also either litis pendentia or res judicata11 ). If the
forum shopping is not considered willful and deliberate, the subsequent cases shall
be dismissed without prejudice on one of the two grounds mentioned above.
However, if the forum shopping is willful and deliberate, both (or all, if there are
more than two) actions shall be dismissed with prejudice.12lavvphi1.net

d) To create and appoint a management committee, board or body upon petition or

motu propio to undertake the management of corporations, partnerships or other
associations not supervised or regulated by other government agencies in appropriate
cases when there is imminent danger of dissipation, loss, wastage or destruction of
assets or other properties or paralization of business operations of such corporations
or entities which may be prejudicial to the interest of the minority stockholders,
parties-litigants or the general public.

The six grounds originally relied upon by the Ao-As group in SEC-SICD Case No.
3857 are entirely different from the causes of action in NLRC Cases No. 03-0193590 and 04-01979-90, Civil Cases No. 133394-CV and 131879-CV, and SEC-SICD
Cases No. 3556 and 3524. It is true that the causes of action in the latter cases were
included as additional grounds in SEC-SICD Case No. 3857 for the appointment of
the management committee and for accounting "of all funds, properties and assets of
LCP which may have come into their possession during their incumbency as officers
and/or directors of LCP."13 However, the creation of a management committee and
the prayer for accounting could not have been asked for in the labor (NLRC Cases
No. 03-01935-90 and 04-01979-90) and forcible entry (Civil Cases No. 133394-CV
and 131879-CV) cases.

Evidently, it should be difficult to deduce the "imminent danger of dissipation, loss,

wastage or destruction of assets or other properties" from an allegation of a single act
of previous misappropriation or dissipation on the part of the Batong group. It is
often only when the previous misappropriations and dissipations have become
extensive and out of control that it can be candidly said that there is an imminent
danger of further dissipation. The Ao-As group cannot be faulted therefore for not
praying for the creation of a management committee in the first couple of cases it
filed with the SEC, and neither can they be faulted for using the causes of action in
previously filed cases to prove their allegation of imminent dissipation. We cannot
rule out the possibility that the danger of imminent dissipation of the corporate assets
became apparent only in the acts of the respondents subsequent to the filing of the
first two SEC cases.

As regards the other SEC Cases, though, the Ao-As group could have indeed prayed
for the creation of the management committee and the accounting of the funds of the
LCP. In fact, as stated by the Court of Appeals, the petitioner in SEC-SICD Case No.
3556 had prayed for the appointment of a management committee in a motion dated
18 June 1991. This motion, however, was subsequent to the filing of SEC-SICD
Case No. 3857 on 17 August 1990, for which reason the SEC-SICD ruled that such
motion cannot be given due course considering that it was one of the incidents of
SEC-SIDC Case No. 3857. In effect, the SEC-SIDC had denied the subsequent
motion on the ground of litis pendentia. But should SEC-SICD Case No. 3857,
which contains the earlier prayer to create a management committee, be likewise
dismissed? Following the rules set forth in the preceding paragraphs, it would
depend on whether the different SEC cases constitute willful and deliberate forum
shopping on the part of Ao-As group.
We hold that this is not a case of willful and deliberate forum shopping and, hence,
the SEC-SICD Case No. 3857, which contains the earlier prayer to create a
management committee, should not be dismissed. The reason for this is the strict
evidentiary requirement needed to grant a prayer to create a management committee.
The power of the SEC14 to create a management committee is found in Section 6(d)
of Presidential Decree No. 902-A, as amended, which provides:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall
possess the following powers:

The creation of a management committee is not warranted by the facts of the case.
The Ao-As group claims that the Court of Appeals "unceremoniously disregarded all
the undisputed testimonial and documentary evidence presented before the SEC,"15
and strongly pointed to their evidence which "clearly show the dissipation, wastage
and loss of LCP funds and assets."16 These pieces of evidence supposedly proved
the following:
1. The alleged anomaly concerning the sale of the land and the purchase of another
land, both located in La Trinidad. The La Trinidad Land Transaction, the proceeds
whereof were allegedly unliquidated, was testified to by petitioner Ao-As and Mr.
Excelsio Hipe before the SEC-SICD in a hearing conducted on 11 September 1990.
2. Unliquidated cash advances and unaccounted funds. Petitioners presented
evidence to prove the failure of respondent Batong to liquidate cash advances and
account for P4,000,000 of LCP funds.
3. Purchase of Leyte Land in the name of respondent Saquilayan with LCP funds.
Respondent LCP Vice-President Victorio Y. Saquilayan allegedly purchased a parcel
of land in Albuera, Leyte in his name, using LCP funds. Respondent Saquilayan
subsequently donated to the LCP, and explained that the purchase in his name was
upon advice of LCPs lawyers to comply with the rulings in Republic of the

45

Philippines v. Hon. Arsenio M. Gonong17 and Republic of the Philippines v. Iglesia

Ni Cristo.18
4. Severance of partner-church relationship between the LCP and the LCMS.
Respondents issued LCP Board Resolution No. LCP-BD-28-90 severing all relations
with the Lutheran Church-Missouri Synod (LCMS), allegedly in violation of LCP
Board Resolution No. LCP-BD-33-70 which stated that "all actions taken by LCP in
convention can only be amended, modified and changed by LCP in convention."
5. Taking of LCP Books of Account. Respondent Batong, accompanied by members
of the LCP Board and about 15 armed security guards allegedly barged into the
premises of the LCP in Old Sta. Mesa, Manila, and removed all of the official
records and documents of the LCP (including the books of account, official receipts,
check and journal vouchers, official papers and titles to property) and had the same
relocated to his residence in Caloocan City and to the offices of Immanuel Lutheran
Church in Malabon.
The Court of Appeals had ruled:

All of the grounds relied upon by [the Ao-As group] pertain to past delinquencies for
which there are other available remedies such as accounting and reconveyance. The
[Ao-As group] did not allege, much less prove, any present or imminent loss or
destruction of LCP properties and assets. At best, it expresses merely a general
apprehension for possible mismanagement by respondent on the basis of the
aforementioned past transactions.
It must be stressed that the appointment of a management committee inevitably
results in the drastic summary removal of all directors and officers of LCP. Clearly,
the appointment of a management committee is not justified due to the failure of
only two (2) of the LCP Board members to liquidate past cash advances and other
transactions involving corporate property and funds.
Where the corporation is solvent, a receiver will not be appointed because of past
misconduct and a subsequent mere apprehension of a future misdoing, where the
present situation and the prospects for the future are not such as to warrant a
receivership. x x x"

Nothing in [Ao-As groups] evidence presented in support for their application for a
management committee showed an impending or imminent danger of dissipation of
funds. In the assailed SEC-SICD Order dated September 3, 1992, the appointment of
a management committee was justified because of "acquisition of some lands using
the corporate funds . . . in the name of some person other than the LCP, and various
cash advances of corporate funds by the respondents not liquidated up to the
present".

Significantly, the SEC En Banc even pointed out that: "the question of whether or not
the [Batong group] have to account for all funds, properties and assets of LCP which
may come into their possession as directors and/or officers of LCP is still to be
resolved by the hearing officer after trial on the merits."

The SEC-SICD Order refers to the La Trinidad and Leyte land transactions and the
alleged non-liquidation or unaccountability of cash advances and other funds
which constitutes the four causes of action alleged in the petition.

"It is the general rule that a receiver (or a management committee) will not be
appointed unless it appears that the appointment is necessary either to prevent fraud,
or to save the property from fraud or threatened destruction, or at least in case of
solvent corporation x x x. The burden of proof is a heavy one which requires a clear
showing that an emergency exists.

[The Ao-As group] admit[s] that the La Trinidad Land transactions [were]
consummated in 1984 while the Leyte transaction was made in 1989. Both occurred
prior to the Commencement (sic) of the present petition in 1990. Similarly, the
alleged unliquidated cash advances referred to accumulated funds long withdrawn in
the past by Dr. Thomas Batong "(in varying amounts) for personal, travel and other
miscellaneous purposes, all in the aggregate amount of not less than P 323,750.00".
And the alleged unaccounted funds referred to the "trial balance of LCP as of
September 15, 1989".
Notably, the remaining two causes of action in the aforementioned petition do not
involve dissipation of funds, namely: (i) the severance of partner-church relationship
between LCP and Lutheran Church-Missouri Synod; and (ii) the transfer of corporate
books from the Sta. Mesa Office to Caloocan City.

Under prevailing law, the SEC-SICD should have refused the appointment of a
management committee.

"x x x Similarly, a receiver (or a management committee) should not be appointed in

an action by a minority stockholder against corporate officers for an accounting
where the corporation is solvent and going concern and a receiver is not necessary to
preserve the corporate property pending the accounting".
Furthermore, a management committee should not be created when there was an
adequate remedy available to private respondents for the liquidation of unaccounted
funds.19
The Court of Appeals went on to rule that the members of the Ao-As group "have not
positively shown that the said funds are unaccounted for,"20 and analyzed the

46

evidence presented by the Ao-As group to illustrate that the unaccounted funds were
only P1,572.43, "which may be attributable to adjustment errors but certainly not a
case of misappropriation or misuse."21
The Ao-As group maintains that the unaccounted funds amount to around P4.8
million, and claim that if the Court of Appeals "had only given the [the Ao-As group]
a chance to prove their allegations (concerning acts committed by respondents
subsequent to the creation of the management committee), then it would have
confirmed the earlier determination made by the SEC-SICD regarding the necessity
for the creation of the management committee."22 It further asseverates:
20. The acts constituting [the Ao-As groups] six causes of action in the petition filed
with the SEC-SICD (the La Trinidad land transaction, the unliquidated cash
advances, the unaccounted funds amounting to P4.8 million, the Leyte land
transaction, the severance of the sister-church relationship and forcible removal of
the LCP books of account) could not be characterized merely as "past
delinquencies". The six causes of action and the subsequent acts of the [Batong
group], after the filing of the petition with the SEC-SICD, clearly show a continuing
and deliberate scheme of the dissipation and wastage of LCP properties and assets,
which if unrestricted would cause further destruction of LCP assets and paralyzation
of its operations, as it had already done. The creation of the Management Committee
was, therefore, perfectly legal and justified. And the ruling of respondent Court of
Appeals that these acts do not justify its appointment is, [the Ao-As group] humbly
submit, reversible error.
21. In addition, the CA Decision also declared that "in any event, the past anomalies
were only done by some of the Batong group." This is erroneous. Under the ByLaws of the LCP, the Board of Directors is in charge of the disbursement of funds.
Sections 1 and 2 of Article 6 of the LCP By-Laws state:
"Section 1. The President of the LCP shall be given the following executive powers
and supervisory duties:

c. The Board of Directors shall prepare the annual budget of the LCP.
d. The Board of Directors shall be responsible for the annual auditing of all the LCP
Properties and may initiate special auditing at any time."
22. From the foregoing, it is clear that respondent Batong did not act alone, but in
concert with the other members of the LCP Board. The creation of the management
committee was therefore justified.
23. The CA Decision also noted that since there were other remedies available to the
petitioners to correct these anomalies, the creation of the management committee
was unjustified. [The Ao-As group] again humbly submit again (sic) that respondent
Court of Appeals erred when it made this statement. The LCP management
committee was created precisely because of the extreme urgency that [mere] caused
by the continued dissipation, loss and wastage of LCP funds and assets by the
Batong group. If [the Ao-As group] were to avail of these so-called available
remedies then by the time a decision is to be rendered in these "available remedies"
the assets and funds of the LCP would have indubitably been lost forever since the
dissipation, loss and wastage were then, and still is, an on going process.
Consequently, it is clearly unreasonable for respondent Court of Appeals to declare
that the [Ao-As group] should have first availed of these so-called remedies.23
Even without delving into the analysis of the prosecution evidence concerning the
six causes of action and the alleged acts subsequent to these six causes of action, it is
already appropriate for us to rule that the facts as they appear to us now do not
warrant the creation of a management committee.
Refusal to allow stockholders (or members of a non-stock corporation) to examine
books of the company is not a ground for appointing a receiver (or creating a
management committee) since there are other adequate remedies, such as a writ of
mandamus.24 Misconduct of corporate directors or other officers is not a ground for
the appointment of a receiver where there are one or more adequate legal action
against the officers, where they are solvent, or other remedies.25

xxx xxx xxx

b. The President together with two other members of the LCP Board of Directors,
may authorize the release of surplus funds in emergencies or in cases of sudden need.
xxx xxx xxx
Section 2. The Board of Directors of the LCP
xxx xxx xxx

The appointment of a receiver for a going corporation is a last resort remedy, and
should not be employed when another remedy is available. Relief by receivership is
an extraordinary remedy and is never exercised if there is an adequate remedy at law
or if the harm can be prevented by an injunction or a restraining order. Bad judgment
by directors, or even unauthorized use and misapplication of the companys funds,
will not justify the appointment of a receiver for the corporation if appropriate relief
can otherwise be had.26
The fact that the President of the LCP needs the concurrence of only two other
directors to authorize the release of surplus funds plainly contradicts the conclusion

47

of conspiracy among the presently 11-man board. Neither does the fact that the
Board of Directors of the LCP prepares the annual budget and the annual auditing of
properties of the LCP justify the conclusion that the alleged acts of respondent
Batong was done in concert with the other directors. There should have been
evidence that such dissipation took place with the knowledge and express or implied
consent of most or the entire board. Good faith is always presumed.27 As it is the
obligation of one who alleges bad faith to prove it, so should he prove that such bad
faith was shared by all persons to whom he attributes the same. The last resort
remedy of replacing the entire board, therefore, with a management committee, is
uncalled for.

be struck down as invalid. Consequently, the directors elected by district cannot be

considered as bona fide directors. Even the election of LCP officers in the SECSICD sponsored national convention of the LCP must be considered as invalid.28

The Court of Appeals erred in declaring as invalid the manner of elections of the
Board of Directors of the LCP as provided in its By-Laws.

Sec. 8. Questions that may be decided. No error which does not affect the
jurisdiction over the subject matter or the validity of the judgment appealed from or
the proceedings therein will be considered unless stated in the assignment of errors,
or closely related to or dependent on an assigned error and properly argued in the
brief, save as the court may pass upon plain errors and clerical errors.

The Ao-As group stresses that the Court of Appeals committed reversible error in
declaring as invalid the manner of elections of the Board of Directors of the Lutheran
Church in the Philippines as provided in its By-Laws. The Court of Appeals ruled:
The Court notes that the LCP By-Laws provide for a special procedure for the
election of its directors. This was the procedure followed by both the [Batong group]
and the [Ao-As group].
"Section 2. Composition of the Board of Directors of LCP.
a. The Board of Directors shall be composed of the President of LCP and the
President and lay representative of each District.
b. Newly elected members of the LCP Board of Directors shall assume their
positions immediately after LCP conventions or the October LCP Board of Directors
meeting in the year in which they are elected."
However, Section 24 of the Corporation Code provides that "[a]t all elections of
directors or trustees, there must be present, either in person or by representative to
act by written proxy, x x x if there be no capital stock, a majority of the members
entitled to vote."
It is clear from Section 24 that in the election of the trustees of a non-stock
corporation, it is necessary that at least "a majority of the members entitled to vote"
must be present at the meeting held for the purpose. It follows that trustees cannot be
elected by zones or regions, each zone or region electing independently and
separately a member of the board of trustees of the corporation, such method being
violative of Section 24. (SEC Opinions, Jan. 30, 1969, April 1, 1981). The election of
the directors by district or regions as provided in the LCP By-Laws where a majority
of the members are not present is inconsistent with the Corporation [Code] and must

As argued by the Ao-As group, however, the validity of the LCP By-Laws providing
for a special procedure in the election of the LCP Board of Directors was never put
in issue, either by the Ao-As group or the Batong group. The Court of Appeals,
therefore, should have refrained from passing upon such issue, motu propio.
According to Rule 51, Section 8 of the Rules of Court, which pertains to matters
which may be decided on appeal:

The ruling of the SEC En Banc setting aside the SEC-SICD determination that LCP
Board of Directors was illegally constituted has therefore become final and
executory, subject to the determination by the SEC-SICD of the seven members that
should comprise the Board, as likewise provided in said Decision.29
Even the Batong group agrees with the Ao-As group on the validity of the by-laws
provision concerning the election of the directors by districts:
[The Batong group] respectfully submit[s] that the matter of how the directors or
other leaders of a church shall be chosen is a matter of ecclesiastical law or custom
which is outside the jurisdiction of civil courts. Hence, even assuming arguendo, that
the mode of election of the LCP is not strictly in accordance with the Corporation
Code, it was improper for the Securities and Exchange Commission to apply the
provisions of the said Code to the LCP.30
In any case, the stipulation in the By-Laws is not contrary to the Corporation Code.
Section 89 of the Corporation Code pertaining to non-stock corporations provides
that "(t)he right of the members of any class or classes (of a non-stock corporation)
to vote may be limited, broadened or denied to the extent specified in the articles of
incorporation or the by-laws."31 This is an exception to Section 6 of the same code
where it is provided that "no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided
in this Code."32 The stipulation in the By-Laws providing for the election of the
Board of Directors by districts is a form of limitation on the voting rights of the
members of a non-stock corporation as recognized under the aforesaid Section 89.
Section 24, which requires the presence of a majority of the members entitled to vote
in the election of the board of directors, applies only when the directors are elected

48

by the members at large, such as is always the case in stock corporations by virtue of
Section 6.
WHEREFORE, the Decision of the Court of Appeals annulling and setting aside the
order to create a management committee is thereby AFFIRMED, with the
G.R. No. 153468 August 17, 2006
Lessons Applicable: Release from Subscription Obligation (Corporate Law)
FACTS:
Grace Christian High School (GCHS) is a nonstock, non-profit educational
corporation w/ 15 regular members, who also constitute the board of trustees.
April 6, 1998: During the annual members meeting only 11 living member-trustees,
as 4 had already died.
7 attended the meeting through their respective proxies.
The meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection
of Atty. Antonio C. Pacis, who argued that there was no quorum.
In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith
Tan were voted to replace the 4 deceased member-trustees.
SEC: meeting void due to lack of quorum (NOT living but based on AIC)
Sec 24 read together with Sec 89
CA: Dismissed due to technicalities
ISSUE: W/N dead members should still be counted in the quorum - NO based on bylaws
HELD: NO. remaining members of the board of trustees of GCHS may convene and
fill up the vacancies in the board
Except as provided, the vote necessary to approve a particular corporate act as
provided in this Code shall be deemed to refer only to stocks with voting rights:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially
all of the corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance
with this Code; and
PAUL LEE TAN, ANDREW G.R. No. 153468
LIUSON, ESTHER WONG,
STEPHEN CO, JAMES TAN, Present:
JUDITH TAN, ERNESTO
TANCHI JR., EDWIN NGO, PANGANIBAN, CJ.,Chairperson,
VIRGINIA KHOO, SABINO YNARES-SANTIAGO,

MODIFICATION that every subsequent election of the directors of Lutheran Church

in the Philippines shall henceforth be in accordance with the By-Laws and Articles of
Incorporation of the same. Costs against petitioners.
SO ORDERED.
8. Dissolution of the corporation.
quorum in a members meeting is to be reckoned as the actual number of members of
the corporation
stock corporations - shareholders may generally transfer their shares
on the death of a shareholder, the executor or administrator duly appointed by the
Court is vested with the legal title to the stock and entitled to vote it
Until a settlement and division of the estate is effected, the stocks of the decedent are
held by the administrator or executor
nonstock corporation - personal and non-transferable unless the articles of
incorporation or the bylaws of the corporation provide otherwise
Section 91 of the Corporation Code: termination extinguishes all the rights of a
member of the corporation, unless otherwise provided in the articles of incorporation
or the bylaws.
whether or not "dead members" are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of incorporation or bylaws
By-Laws of GCHS: membership in the corporation shall be terminated by the death
of the member
With 11 remaining members, the quorum = 6.
SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for
the unexpired term of his predecessor in office.
the filling of vacancies in the board by the remaining directors or trustees
constituting a quorum is merely permissive, not mandatory
either by the remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose
By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in its
board of directors; that is, by a majority vote of the remaining members of the board
remaining member-trustees must sit as a board (as a body in a lawful meeting)
in order to validly elect the new ones
PADILLA JR., EDUARDO P. AUSTRIA-MARTINEZ,
LIZARES and GRACE CALLEJO, SR., and
CHRISTIAN HIGH SCHOOL, CHICO-NAZARIO, JJ.
Petitioners,
- versus PAUL SYCIP and MERRITTO

49

LIM, Promulgated:
Respondents. August 17, 2006
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x

DECISION
PANGANIBAN, CJ.:

For stock corporations, the quorum referred to in Section 52 of the Corporation Code
is based on the number of outstanding voting stocks. For nonstock corporations, only
those who are actual, living members with voting rights shall be counted in
determining the existence of a quorum during members meetings. Dead members
shall not be counted.
The Case
The present Petition for Review on Certiorari[1] under Rule 45 of the Rules of Court
seeks the reversal of the January 23[2] and May 7, 2002,[3] Resolutions of the Court
of Appeals (CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed
the appeal filed by petitioners with the CA. Allegedly, without the proper
authorization of the other petitioners, the Verification and Certification of NonForum Shopping were signed by only one of them -- Atty. Sabino Padilla Jr. The
second Resolution denied reconsideration.
The Facts

Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational

corporation with fifteen (15) regular members, who also constitute the board of
trustees.[4] During the annual members meeting held on April 6, 1998, there were
only eleven (11)[5] living member-trustees, as four (4) had already died. Out of the
eleven, seven (7)[6] attended the meeting through their respective proxies. The
meeting was convened and chaired by Atty. Sabino Padilla Jr. over the objection of
Atty. Antonio C. Pacis, who argued that there was no quorum.[7] In the meeting,
Petitioners Ernesto Tanchi, Edwin Ngo, Virginia Khoo, and Judith Tan were voted to
replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC),
petitioners maintained that the deceased member-trustees should not be counted in
the computation of the quorum because, upon their death, members automatically
lost all their rights (including the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and
void for lack of quorum. She held that the basis for determining the quorum in a
meeting of members should be their number as specified in the articles of

incorporation, not simply the number of living members.[8] She explained that the
qualifying phrase entitled to vote in Section 24[9] of the Corporation Code, which
provided the basis for determining a quorum for the election of directors or trustees,
should be read together with Section 89.[10]
The hearing officer also opined that Article III (2)[11] of the By-Laws of GCHS,
insofar as it prescribed the mode of filling vacancies in the board of trustees, must be
interpreted in conjunction with Section 29[12] of the Corporation Code. The SEC en
banc denied the appeal of petitioners and affirmed the Decision of the hearing officer
in toto.[13] It found to be untenable their contention that the word members, as used
in Section 52[14] of the Corporation Code, referred only to the living members of a
nonstock corporation.[15]
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification
and Certification of Non-Forum Shopping had been signed only by Atty. Sabino
Padilla Jr. No Special Power of Attorney had been attached to show his authority to
sign for the rest of the petitioners.
Hence, this Petition.[16]
Issues
Petitioners state the issues as follows:
Petitioners principally pray for the resolution of the legal question of whether or not
in NON-STOCK corporations, dead members should still be counted in
determination of quorum for purposed of conducting the Annual Members Meeting.
Petitioners have maintained before the courts below that the DEAD members should
no longer be counted in computing quorum primarily on the ground that members
rights are personal and non-transferable as provided in Sections 90 and 91 of the
Corporation Code of the Philippines.
The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that
did not even involve a non-stock corporation as petitioner GCHS.
The Honorable Court of Appeals on the other hand simply refused to resolve this
question and instead dismissed the petition for review on a technicality the failure to
timely submit an SPA from the petitioners authorizing their co-petitioner Padilla,
their counsel and also a petitioner before the Court of Appeals, to sign the petition on
behalf of the rest of the petitioners.
Petitioners humbly submit that the action of both the SEC and the Court of Appeals
are not in accord with law particularly the pronouncements of this Honorable Court
in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development

50

Corporation v. Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360
SCRA 183). Due course should have been given the petition below and the merits of
the case decided in petitioners favor.[17]

In sum, the issues may be stated simply in this wise: 1) whether the CA erred in
denying the Petition below, on the basis of a defective Verification and Certification;
and 2) whether dead members should still be counted in the determination of the
quorum, for purposes of conducting the annual members meeting.
The Courts Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification
of Non-Forum Shopping

The Petition before the CA was initially flawed, because the Verification and
Certification of Non-Forum Shopping were signed by only one, not by all, of the
petitioners; further, it failed to show proof that the signatory was authorized to sign
on behalf of all of them. Subsequently, however, petitioners submitted a Special
Power of Attorney, attesting that Atty. Padilla was authorized to file the action on
their behalf.[18]
In the interest of substantial justice, this initial procedural lapse may be excused. [19]
There appears to be no intention to circumvent the need for proper verification and
certification, which are aimed at assuring the truthfulness and correctness of the
allegations in the Petition for Review and at discouraging forum shopping.[20] More
important, the substantial merits of petitioners case and the purely legal question
involved in the Petition should be considered special circumstances[21] or
compelling reasons that justify an exception to the strict requirements of the
verification and the certification of non-forum shopping.[22]
Main Issue:
Basis for Quorum

Generally, stockholders or members meetings are called for the purpose of electing
directors or trustees[23] and transacting some other business calling for or requiring
the action or consent of the shareholders or members,[24] such as the amendment of
the articles of incorporation and bylaws, sale or disposition of all or substantially all
corporate assets, consolidation and merger and the like, or any other business that
may properly come before the meeting.

Under the Corporation Code, stockholders or members periodically elect the board
of directors or trustees, who are charged with the management of the corporation.
[25] The board, in turn, periodically elects officers to carry out management
functions on a day-to-day basis. As owners, though, the stockholders or members
have residual powers over fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits,
the management and direction of the corporation are lodged with their
representatives and agents -- the board of directors or trustees.[26] In other words,
acts of management pertain to the board; and those of ownership, to the stockholders
or members. In the latter case, the board cannot act alone, but must seek approval of
the stockholders or members.[27]
Conformably with the foregoing principles, one of the most important rights of a
qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to
manage the corporate affairs.[28] The right to choose the persons who will direct,
manage and operate the corporation is significant, because it is the main way in
which a stockholder can have a voice in the management of corporate affairs, or in
which a member in a nonstock corporation can have a say on how the purposes and
goals of the corporation may be achieved.[29] Once the directors or trustees are
elected, the stockholders or members relinquish corporate powers to the board in
accordance with law.
In the absence of an express charter or statutory provision to the contrary, the general
rule is that every member of a nonstock corporation, and every legal owner of shares
in a stock corporation, has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right to vote.[30]
Voting may be expressed personally, or through proxies who vote in their
representative capacities.[31] Generally, the right to be present and to vote in a
meeting is determined by the time in which the meeting is held.[32]
Section 52 of the Corporation Code states:
Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations.

In stock corporations, the presence of a quorum is ascertained and counted on the

basis of the outstanding capital stock, as defined by the Code thus:
SECTION 137. Outstanding capital stock defined. The term outstanding capital stock
as used in this Code, means the total shares of stock issued under binding

51

subscription agreements to subscribers or stockholders, whether or not fully or

partially paid, except treasury shares. (Underscoring supplied)

The Right to Vote in

Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate stocks.
[33] It is settled that unissued stocks may not be voted or considered in determining
whether a quorum is present in a stockholders meeting, or whether a requisite
proportion of the stock of the corporation is voted to adopt a certain measure or act.
Only stock actually issued and outstanding may be voted.[34] Under Section 6 of the
Corporation Code, each share of stock is entitled to vote, unless otherwise provided
in the articles of incorporation or declared delinquent[35] under Section 67 of the
Code.
Neither the stockholders nor the corporation can vote or represent shares that have
never passed to the ownership of stockholders; or, having so passed, have again been
purchased by the corporation.[36] These shares are not to be taken into consideration
in determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have
passed from the corporation, and that may be voted.[37]
Section 6 of the Corporation Code, in part, provides:
Section 6. Classification of shares. The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of which classes or series of
shares may have such rights, privileges or restrictions as may be stated in the articles
of incorporation: Provided, That no share may be deprived of voting rights except
those classified and issued as preferred or redeemable shares, unless otherwise
provided in this Code: Provided, further, that there shall always be a class or series of
shares which have complete voting rights.
xxxxxxxxx
Where the articles of incorporation provide for non-voting shares in the cases
allowed by this Code, the holders of such shares shall nevertheless be entitled to vote
on the following matters:
1.
2.

Amendment of the articles of incorporation;

Adoption and amendment of by-laws;

3.
Sale, lease, exchange, mortgage, pledge or other disposition of all or
substantially all of the corporation property;
4.
Incurring, creating or increasing bonded indebtedness;
5.
Increase or decrease of capital stock;
6.
Merger or consolidation of the corporation with another corporation or other
corporations;
7.
Investment of corporate funds in another corporation or business in accordance
with this Code; and
8.
Dissolution of the corporation.
Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer
only to stocks with voting rights.
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the
intention of the lawmakers was to base the quorum mentioned in Section 52 on the
number of outstanding voting stocks.[38]
The Right to Vote in
Nonstock Corporations

In nonstock corporations, the voting rights attach to membership.[39] Members vote

as persons, in accordance with the law and the bylaws of the corporation. Each
member shall be entitled to one vote unless so limited, broadened, or denied in the
articles of incorporation or bylaws.[40] We hold that when the principle for
determining the quorum for stock corporations is applied by analogy to nonstock
corporations, only those who are actual members with voting rights should be
counted.
Under Section 52 of the Corporation Code, the majority of the members representing
the actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum.[41]
The March 3, 1986 SEC Opinion[42] cited by the hearing officer uses the phrase
majority vote of the members; likewise Section 48 of the Corporation Code refers to
50 percent of 94 (the number of registered members of the association mentioned
therein) plus one. The best evidence of who are the present members of the
corporation is the membership book; in the case of stock corporations, it is the stock
and transfer book.[43]

52

Section 25 of the Code specifically provides that a majority of the directors or

trustees, as fixed in the articles of incorporation, shall constitute a quorum for the
transaction of corporate business (unless the articles of incorporation or the bylaws
provide for a greater majority). If the intention of the lawmakers was to base the
quorum in the meetings of stockholders or members on their absolute number as
fixed in the articles of incorporation, it would have expressly specified so.
Otherwise, the only logical conclusion is that the legislature did not have that
intention.

Effect of the Death

of a Member or Shareholder
Having thus determined that the quorum in a members meeting is to be reckoned as
the actual number of members of the corporation, the next question to resolve is what
happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the
death of a shareholder, the executor or administrator duly appointed by the Court is
vested with the legal title to the stock and entitled to vote it. Until a settlement and
division of the estate is effected, the stocks of the decedent are held by the
administrator or executor.[44]
On the other hand, membership in and all rights arising from a nonstock corporation
are personal and non-transferable, unless the articles of incorporation or the bylaws
of the corporation provide otherwise.[45] In other words, the determination of
whether or not dead members are entitled to exercise their voting rights (through
their executor or administrator), depends on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be
terminated by the death of the member.[46] Section 91 of the Corporation Code
further provides that termination extinguishes all the rights of a member of the
corporation, unless otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are
dropped from the membership roster in the manner and for the cause provided for in
the By-Laws of GCHS are not to be counted in determining the requisite vote in
corporate matters or the requisite quorum for the annual members meeting. With 11
remaining members, the quorum in the present case should be 6. Therefore, there
being a quorum, the annual members meeting, conducted with six[47] members
present, was valid.

Board of Trustees

As regards the filling of vacancies in the board of trustees, Section 29 of the

Corporation Code provides:
SECTION 29. Vacancies in the office of director or trustee. -- Any vacancy occurring
in the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said
vacancies must be filled by the stockholders in a regular or special meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only for
the unexpired term of his predecessor in office.

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining
still constitute a quorum. The phrase may be filled in Section 29 shows that the
filling of vacancies in the board by the remaining directors or trustees constituting a
quorum is merely permissive, not mandatory.[48] Corporations, therefore, may
choose how vacancies in their respective boards may be filled up -- either by the
remaining directors constituting a quorum, or by the stockholders or members in a
regular or special meeting called for the purpose.[49]
The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies
in its board of directors; that is, by a majority vote of the remaining members of the
board.[50]
While a majority of the remaining corporate members were present, however, the
election of the four trustees cannot be legally upheld for the obvious reason that it
was held in an annual meeting of the members, not of the board of trustees. We are
not unmindful of the fact that the members of GCHS themselves also constitute the
trustees, but we cannot ignore the GCHS bylaw provision, which specifically
prescribes that vacancies in the board must be filled up by the remaining trustees. In
other words, these remaining member-trustees must sit as a board in order to validly
elect the new ones.
Indeed, there is a well-defined distinction between a corporate act to be done by the
board and that by the constituent members of the corporation. The board of trustees
must act, not individually or separately, but as a body in a lawful meeting. On the
other hand, in their annual meeting, the members may be represented by their
respective proxies, as in the contested annual members meeting of GCHS.

Vacancy in the

53

WHEREFORE, the Petition is partly GRANTED. The assailed Resolutions of the

Court of Appeals are hereby REVERSED AND SET ASIDE. The remaining
members of the board of trustees of Grace Christian High School (GCHS) may
SEC v CA, Omico Corp, Teng and Kin Hing Tia (GR 187702)
Astra Securities Corp v Omico Corp, Teng and Kin Hing Tia (GR 189014)
2014 | Sereno, C.J.
Omico corp is has stocks listed in Phil Stock Exhange (PSE). Astra Securities Corp
(Astra) is one of the stockholders of Omico. It owns about 18% of the latters
outstanding stock.
2008, Omico scheduled dates for submission and validation of proxies.
Astra objected to the validation of the proxies in favor of Tia, and Tia and/or Buncio.
The proxies represented 38% and 2% of the outstanding capital stock of Omico,
respectively.
Astra said that the proxy issuers (who were brokers) did not comply with
certain rules under Amended Securities Regulation Code.
Omicos Board of Inspectors, however, declared the proxies in favor of Tia
valid.
Astra then filed a complaint with SEC praying for the invalidation of the
proxies. SEC then issued a cease and desist order (CDO) enjoining Omico from
accepting and including the questioned proxies in determining a quorum and in
electing the members of the board of directors during the annual stockholders
meeting in Nov 2008.
Attempts to serve the CDO, however, failed so Astra filed for indirect
contempt against Omico for disobedience of the CDO. Omico, on the other hand,
filed a petition for Certiorari with CA.
CA ruled in favor of Omico. The CA Decision ruled that because
controversies involving the validation of proxies are considered election contests
under the Interim Rules of Procedure Governing Intra-Corporate Controversies, they
are properly cognizable by the regular courts, not by the Securities and Exchange
Commission.
Issue: W/N SEC has jurisdiction over controversies arising from the validation of
proxies for the election of a corporation. No.
Held and Ratio:
SC noted first GSIS v CA case (issued a month after CA decision) which answered
the issue in the negative.
PD 902-A (dated 1976) conferred upon SEC the power to pass upon the validity of
the issuance and use of proxies and voting trust agreements for absent stockholders
or members;
However, the court said that power to pass upon the validity of proxies was
merely incidental or ancillary to the powers conferred on the SEC under Section 5 of
the same decree;
Expert Travel vs. CA
Facts:

convene and fill up the vacancies in the board, in accordance with this Decision. No
pronouncement as to costs in this instance.
SO ORDERED.
Why? Because the opening statement of section 6 reads: In order to
effectively exercise such jurisdiction x x x.
With the passage of the SRC, the powers granted to SEC under Section 5
were withdrawn, together with the incidental and ancillary powers enumerated in
Section 6.
Section 5(c) of PD 902-A provides that the jurisdiction of RTCs with respect to
election-related controversies is specifically confined to controversies in the
election or appointment of directors, trustees, officers or managers of corporations,
partnerships, or associations
Thus, it does not extend to every potential subject that may be voted on by
shareholders, but only to the election of directors or trustees, in which stockholders
are authorized to participate under Section 24 of the Corporation Code;
SEC has the power to investigate violations of its rules on proxy
solicitation; HOWEVER, when proxies are solicited in relation to the election of
corporate directors, the resulting controversy, even if it ostensibly raised the violation
of the SEC rules on proxy solicitation, should be properly seen as an election
controversy within the original and exclusive jurisdiction of the trial courts by virtue
of Section 5.2 of the SRC in relation to Section 5 (c) of Presidential Decree No. 902A.
Said ruling harmonizes the seeming conflict between the Amended SRC Rules
promulgated by the SEC and the Interim Rules of Procedure Governing IntraCorporate Disputes promulgated by the Court;
SRC Rule 20 ; Rule 1, section 1 (c) of Interim Rules cited; Rule 6, section
2 (Definition) cited;
Astra seeks to remove the instant case form GSIS v CA saying:
1)
the validation of proxies in this case relates to the determination of the
existence of a quorum; and 2) no actual voting for the members of the board of
directors was conducted, as the directors were merely elected by motion;
SC: NO;
The validation of proxies in this case relates to the determination of the
existence of a quorum. Nonetheless, it is a quorum for the election of the directors,
and, as such, which requires the presence in person or by proxy of the owners of
the majority of the outstanding capital stock of Omico.
CA Affirmed.

Korean Airlines (KAL), private respondent, is a corporation established and

registered in the Republic of South Korea and licensed to do business in the

54

Philippines. Its general manager in the Philippines is Suk Kyoo Kim, while its
appointed counsel was Atty. Mario Aguinaldo and his law firm.

On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint

against ETI (Expertravel & Tours Inc.) with the RTC of Manila, for the collection of
sum of money.

The verification and certification against forum shopping was signed by

Atty. Aguinaldo, who indicated therein that he was the resident agent and legal
counsel of KAL and had caused the preparation of the complaint.

ETI filed a motion to dismiss the complaint on the ground that Atty.
Aguinaldo was not authorized to execute the verification and certificate of nonforum shopping as required by Section 5, Rule 7 of the Rules of Court.

KAL alleged that the board of directors conducted a special teleconference

on June 25, 1999, which he and Atty. Aguinaldo attended. It was also averred that in
that same teleconference, the board of directors approved a resolution authorizing
Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the
complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written
copy of the aforesaid resolution.

TC - denied the motion to dismiss, giving credence to the claims of Atty.

Aguinaldo and Suk Kyoo Kim that the KAL Board of Directors indeed conducted a
teleconference on June 25, 1999, during which it approved a resolution.

ETI filed a motion for the reconsideration of the Order, contending that it
was inappropriate for the court to take judicial notice of the said teleconference
without any prior hearing. However, the same was denied by the TC.

ETI then filed a petition for certiorari and mandamus, assailing the orders of
the RTC. In its comment on the petition, KAL appended a certificate signed by Atty.
Aguinaldo dated January 10, 2000 which states that, Mario A. Aguinaldo and his
law firm M.A. Aguinaldo & Associates or any of its lawyers are hereby appointed
and authorized to take with whatever legal action necessary to effect the collection of
the unpaid account of Expert Travel & Tours..

CA dismissed the petition and ruled that the verification and certificate of
non-forum shopping executed by Atty. Aguinaldo was sufficient compliance with the
Rules of Court. According to the appellate court, Atty. Aguinaldo had been duly
authorized by the board resolution approved on June 25, 1999, and was the resident
agent of KAL. As such, the RTC could not be faulted for taking judicial notice of the
said teleconference of the KAL Board of Directors.

The petitioner asserts that compliance with Section 5, Rule 7, of the Rules
of Court can be determined only from the contents of the complaint and not by
documents or pleadings outside thereof. Hence, the trial court committed grave abuse
of discretion amounting to excess of jurisdiction, and the CA erred in considering the
affidavit of the respondents general manager, as well as the Secretarys/Resident
Agents Certification and the resolution of the board of directors contained therein,
as proof of compliance with the requirements of Section 5, Rule 7 of the Rules of
Court.

The petitioner also maintains that the RTC cannot take judicial notice of the
said teleconference without prior hearing, nor any motion therefor. The petitioner
reiterates its submission that the teleconference and the resolution adverted to by the
respondent was a mere fabrication.

The respondent, for its part, avers that Atty. Aguinaldo, as the resident agent
and corporate secretary, is authorized to sign and execute the certificate of non-forum
shopping required by Section 5, Rule 7 of the Rules of Court, on top of the board
resolution approved during the teleconference of June 25, 1999.

The respondent also points out that the courts are aware of the development
in technology; hence, may take judicial notice thereof without need of hearings.
Issues/Held:
1.
WON respondent complied with sec. 5 rule 7 of the rules of court. (Whether
Atty. Aguinaldo has the authority to execute the requisite verification and certificate
of non-forum shopping)

No. Section 5, Rule 7 of the Rules of Court provides:

SEC. 5. Certification against forum shopping. The plaintiff or principal party shall
certify under oath in the complaint or other initiatory pleading asserting a claim for
relief, or in a sworn certification annexed thereto and simultaneously filed therewith:
(a) that he has not theretofore commenced any action or filed any claim involving the
same issues in any court, tribunal or quasi-judicial agency and, to the best of his
knowledge, no such other action or claim is pending therein; (b) if there is such other
pending action or claim, a complete statement of the present status thereof; and (c) if
he should thereafter learn that the same or similar action or claim has been filed or is
pending, he shall report that fact within five (5) days therefrom to the court wherein
his aforesaid complaint or initiatory pleading has been filed.

It is settled that the requirement to file a certificate of non-forum shopping

is mandatory8 and that the failure to comply with this requirement cannot be
excused. The certification is a peculiar and personal responsibility of the party, an
assurance given to the court or other tribunal that there are no other pending cases
involving basically the same parties, issues and causes of action. Hence, the
certification must be accomplished by the party himself because he has actual
knowledge of whether or not he has initiated similar actions or proceedings in
different courts or tribunals. Even his counsel may be unaware of such facts. Hence,
the requisite certification executed by the plaintiffs counsel will not suffice.

In a case where the plaintiff is a private corporation, the certification may be

signed, for and on behalf of the said corporation, by a specifically authorized person,
including its retained counsel, who has personal knowledge of the facts required to
be established by the documents.

Indeed, the certificate of non-forum shopping may be incorporated in the

complaint or appended thereto as an integral part of the complaint. The rule is that
compliance with the rule after the filing of the complaint, or the dismissal of a
complaint based on its non-compliance with the rule, is impermissible. However, in

55

exceptional circumstances, the court may allow subsequent compliance with the rule.
If the authority of a partys counsel to execute a certificate of non-forum shopping is
disputed by the adverse party, the former is required to show proof of such authority
or representation.

In this case, the petitioner, as the defendant in the RTC, assailed the
authority of Atty. Aguinaldo to execute the requisite verification and certificate of
non-forum shopping as the resident agent and counsel of the respondent. It was, thus,
incumbent upon the respondent, as the plaintiff, to allege and establish that Atty.
Aguinaldo had such authority to execute the requisite verification and certification
for and in its behalf. The respondent, however, failed to do so.

While Atty. Aguinaldo is the resident agent of the respondent in the

Philippines, this does not mean that he is authorized to execute the requisite
certification against forum shopping.

Under the law, Atty. Aguinaldo was not specifically authorized to execute a
certificate of non-forum shopping as required by Section 5, Rule 7 of the Rules of
Court. This is because while a resident agent may be aware of actions filed against
his principal (a foreign corporation doing business in the Philippines), such resident
may not be aware of actions initiated by its principal, whether in the Philippines
against a domestic corporation or private individual, or in the country where such
corporation was organized and registered, against a Philippine registered corporation
or a Filipino citizen.
2.
WON Courts are allowed to take judicial notice with respect to
teleconferencing as a mode of transacting business.

Yes. Generally speaking, matters of judicial notice have three material

requisites: (1) the matter must be one of common and general knowledge; (2) it must
be well and authoritatively settled and not doubtful or uncertain; and (3) it must be
known to be within the limits of the jurisdiction of the court.

Things of "common knowledge," of which courts take judicial matters

coming to the knowledge of men generally in the course of the ordinary experiences
of life, or they may be matters which are generally accepted by mankind as true and
are capable of ready and unquestioned demonstration.

In this age of modern technology, the courts may take judicial notice that
business transactions may be made by individuals through teleconferencing.
Teleconferencing is interactive group communication (three or more people in two or
more locations) through an electronic medium.

In the Philippines, teleconferencing and videoconferencing of members of

board of directors of private corporations is a reality, in light of Republic Act No.
8792. The Securities and Exchange Commission issued SEC Memorandum Circular
ANTONIO CARAG vs. NLRC
G.R. No. 147590
April 2, 2007
FACTS: National Federation of Labor Unions and Mariveles Apparel Corporation
Labor Union (collectively, complainants), on behalf of all of Mariveles Apparel

No. 15, providing the guidelines to be complied with related to such conferences.
Thus, the Court agrees with the RTC that persons in the Philippines may have a
teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.
3.
WON a teleconference was conducted by the Respondents BOD wherein
Atty. Aguinaldo was authorized by the former to file the complaint and execute the
required certification against forum shopping.

No. Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim
participated in a teleconference along with the respondents Board of Directors, the
Court is not convinced that one was conducted; even if there had been one, the Court
is not inclined to believe that a board resolution was duly passed specifically
authorizing Atty. Aguinaldo to file the complaint and execute the required
certification against forum shopping.

The records show that the petitioner filed a motion to dismiss the complaint
on the ground that the respondent failed to comply with Section 5, Rule 7 of the
Rules of Court. The respondent opposed the motion on December 1, 1999, on its
contention that Atty. Aguinaldo, its resident agent, was duly authorized to sue in its
behalf. The respondent, however, failed to establish its claim that Atty. Aguinaldo
was its resident agent in the Philippines. Even the identification card of Atty.
Aguinaldo which the respondent appended to its pleading merely showed that he is
the company lawyer of the respondents Manila Regional Office.

The respondents allegation that its board of directors conducted a

teleconference on June 25, 1999 and approved the said resolution (with Atty.
Aguinaldo in attendance) is incredible, given the additional fact that no such
allegation was made in the complaint. If the resolution had indeed been approved on
June 25, 1999, long before the complaint was filed, the respondent should have
incorporated it in its complaint, or at least appended a copy thereof. The respondent
failed to do so. It was only on January 28, 2000 that the respondent claimed, for the
first time, that there was such a meeting of the Board of Directors held on June 25,
1999

The Court is, thus, more inclined to believe that the alleged teleconference
on June 25, 1999 never took place, and that the resolution allegedly approved by the
respondents Board of Directors during the said teleconference was a mere
concoction purposefully foisted on the RTC, the CA and this Court, to avert the
dismissal of its complaint against the petitioner.

Petition is Granted.
Corporations rank and file employees, filed a complaint against MAC for illegal
dismissal brought about by its illegal closure of business. In their position paper
dated 3 January 1994, NAFLU and MACLU moved to implead Atty. Antonio Carag
and Armando David, being owners of the MAC Corporation, to guarantee the
satisfaction of any judgment award on the basis of Article 212(c) of the Philippine

56

Labor Code. Atty. Joshua Pastores, as counsel for respondents, submitted a position
paper dated 21 February 1994 and stated that complainants should not have
impleaded Carag and David because MAC is actually owned by a consortium of
banks. Carag and David own shares in MAC only to qualify them to serve as MAC's
officers. Without any further proceedings, Arbiter Ortiguerra rendered her Decision
dated 17 June 1994 granting the motion to implead Carag and David. In the same
Decision, Arbiter Ortiguerra declared Carag and David solidarily liable with MAC
ruling that corporate officers who dismissed employees in bad faith or wantonly
violate labor standard laws or when the company had already ceased operations and
there is no way by which a judgment in favor of employees could be satisfied,
corporate officers can be held jointly and severally liable with the company. Carag,
through a separate counsel, filed an appeal dated 30 August 1994 before the NLRC.
He also filed a motion to reduce bond. In a Resolution promulgated on 5 January
1995, the NLRC Third Division denied the motion to reduce bond. The NLRC stated
that to grant a reduction of bond on the ground that the appeal is meritorious would
be tantamount to ruling on the merits of the appeal. On February 13, 1995, Carag
filed his petition for certiorari before CA. The CA affirmed the decision of Arbiter
Ortiguerra and the resolution of NLRC. Motion for reconsideration was likewise
denied. Hence this petition for review on certiorari.
ISSUE: Whether or not Antonio Carag shall be held personally liable for the
payment of illegally dismissed employees.
RULING: Section 31 makes a director personally liable for corporate debts if he
wilfully and knowingly votes for or assents to patently unlawful acts of the
corporation. Section 31 also makes a director personally liable if he is guilty of gross
negligence or bad faith in directing the affairs of the corporation.
Complainants did not allege in their complaint that Carag wilfully and knowingly
voted for or assented to any patently unlawful act of MAC. Complainants did not
present any evidence showing that Carag wilfully and knowingly voted for or
assented to any patently unlawful act of MAC. Neither did Arbiter Ortiguerra make
any finding to this effect in her Decision.
Complainants did not also allege that Carag is guilty of gross negligence or bad faith
in directing the affairs of MAC. Complainants did not present any evidence showing
that Carag is guilty of gross negligence or bad faith in directing the affairs of MAC.
Neither did Arbiter Ortiguerra make any finding to this effect in her Decision.
[G.R. No. 156306. January 28, 2005]
REPUBLIC OF THE PHILIPPINES, petitioner, vs. INSTITUTE FOR SOCIAL
CONCERN, FELIPE SUZARA and RAMON GARCIA, respondents.
DECISION
CARPIO MORALES, J.:
In issue in the present Petition for Review on Certiorari assailing the Court of
Appeals decision[1] of November 29, 2002 which modified the trial courts decision
is whether defendant appellant-respondent Felipe Suzara can be made solidarily

After stating what she believed is the law on the matter, Arbiter Ortiguerra stopped
there and did not make any finding that Carag is guilty of bad faith or of wanton
violation of labor standard laws. Arbiter Ortiguerra did not specify what act of bad
faith Carag committed, or what particular labor standard laws he violated.
To hold a director personally liable for debts of the corporation, and thus pierce the
veil of corporate fiction, the bad faith or wrongdoing of the director must be
established clearly and convincingly. Bad faith is never presumed. Bad faith does not
connote bad judgment or negligence. Bad faith imports a dishonest purpose. Bad
faith means breach of a known duty through some ill motive or interest. Bad faith
partakes of the nature of fraud. Neither does bad faith arise automatically just
because a corporation fails to comply with the notice requirement of labor laws on
company closure or dismissal of employees. The failure to give notice is not an
unlawful act because the law does not define such failure as unlawful. Such failure to
give notice is a violation of procedural due process but does not amount to an
unlawful or criminal act. Such procedural defect is called illegal dismissal because it
fails to comply with mandatory procedural requirements, but it is not illegal in the
sense that it constitutes an unlawful or criminal act.
For a wrongdoing to make a director personally liable for debts of the corporation,
the wrongdoing approved or assented to by the director must be a patently unlawful
act. Mere failure to comply with the notice requirement of labor laws on company
closure or dismissal of employees does not amount to a patently unlawful act.
Patently unlawful acts are those declared unlawful by law which imposes penalties
for commission of such unlawful acts. There must be a law declaring the act
unlawful and penalizing the act.
In this case, Article 283 of the Labor Code, requiring a one-month prior notice to
employees and the Department of Labor and Employment before any permanent
closure of a company, does not state that non-compliance with the notice is an
unlawful act punishable under the Code. There is no provision in any other Article of
the Labor Code declaring failure to give such notice an unlawful act and providing
for its penalty. Complainants did not allege or prove, and Arbiter Ortiguerra did not
make any finding, that Carag approved or assented to any patently unlawful act to
which the law attaches a penalty for its commission. On this score alone, Carag
cannot be held personally liable for the separation pay of complainants.
liable, along with his co-respondents Institute for Social Concern (ISC) and its
Executive Director Ramon Garcia.
On September 28, 1989, the Government of the Republic of the Philippines, through
the Office of the President (the Republic), and the ISC, represented by its Executive
Director Ramon Garcia, entered into a Memorandum of Agreement (MOA)[2]
wherein ISC, for a consideration of P8,488,880.00, undertook to construct forty-five
(45) one storey two-classroom school buildings in the Cordillera Autonomous
Region, Region 2 and Region 5.

57

For its part, the Republic undertook, upon the signing and execution of the MOA, to
deposit in trust in a non-interest earning account with ISC 70% of the contract price,
with the balance of 30% to be remitted after submission of monthly delivery report
indicating 50% completion as attested and certified by the [Republic].
It was made clear in the MOA that ISC would deliver the 45 two-classroom school
buildings within 90 days from the release of funds as specified in this agreement and
should it fail to comply therewith, the Republic may exact liquidated damages
equivalent to one-tenth of one percent (0.1%) of the total amount for each day of
delay.
The Republic complied with its undertaking by issuing a check dated October 6,
1989 in the amount of P5,942,160.00 in the name of ISC which the latter had
encashed.
ISC, however, failed to comply with its obligation, it having been found that the
construction of school buildings lagged behind . . . time schedule.[3]
On July 5, 1990, the Republic issued another check in the name of ISC in the amount
of P2,546,640.00 which check had been cleared.
Subsequently, or on September 12, 1990, the parties forged an amendment to the
MOA[4] by adding the following conditions:
1. That upon release of the 30% fund balance, the school buildings which are ongoing must be completed within thirty (30) days for Cagayan and forty-five (45)
days for Masbate. Those which are not yet started must be completed within one
hundred twenty (120) days.
2. The specified 120 days shall be devoted to physical construction works/activities
provided that the buildings shall strictly follow the standard design of the PSF school
building program. If the ORGANIZATION fails to deliver the completed school
buildings, the REPUBLIC may exact liquidated damages equivalent to one-tenth of
one (0.1%) percent of the total amount for each day of delay.

In its Complaint, the Republic alleged, inter alia, that

3.2 Defendants are guilty of fraud in contracting their obligations for they had no
intention whatsoever to perform them and had falsely represented to Presidential
Management and Staff that they were financially capable and had all the technical
expertise and experience to construct the school buildings when in truth and in fact,
they were not, as shown by the fact that they could not even start the construction of
some school buildings and could not complete the construction of some of them.
(Emphasis and underscoring supplied)
ISC and Suzara jointly filed an Answer with Counterclaims but Garcia did not file
any and was, on the Republics motion, declared in default.
On the allegation of fraud in the complaint, ISC and Suzara specifically den[ied] the
averments contained in pars. 3.1 to 3.7 inclusive, they alleging as SPECIAL AND
AFFIRMATIVE DEFENSES the following:
xxx
9. That answering defendant Suzaras participation was limited to his official capacity
as Chairman of ISC and did not at any time made (sic) any representation or
undertakings in his personal capacity;
10. That the participation of answering defendant ISC in the completion and delivery
of the subject school buildings, with the full knowledge and consent of plaintiff, was
merely for purposes of supervision and monitoring;
11. That answering defendants complied with all its obligations and undertaking
under the pertinent agreement entered into with the plaintiff;
12. That if there are any obligation due to plaintiff, the same are liabilities to be
answered for and paid by the defaulting contractors of the project concerned as
contracted by defendant ISC;

x x x (Underscoring supplied)[5]

x x x (Underscoring supplied)[6]

In the amendment to the MOA, ISC was represented by its Chairman Suzara.

At the pre-trial, ISC and Suzara, as well as their counsel, failed to show up. Hence,
on motion of the Republic, they were declared as in default.

The full payment to ISC of the contract price and the amendment to the MOA
notwithstanding, ISC failed to honor its commitment under the MOA, as amended,
drawing the Republic to file on December 8, 1993 a complaint for Damages before
the Regional Trial Court (RTC) of Manila against ISC, its Chairman Suzara, and its
Executive Director Garcia.

ISC and Suzara filed a motion to lift the order declaring them as in default, but the
trial court denied the same.

58

The Republic was thus allowed to present evidence ex-parte by Branch 14 of the
RTC of Manila to which the case was raffled, following which it rendered a
decision[7] in favor of the Republic and disposed as follows:
WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the
defendants by ordering the latter to pay the former, jointly and solidarily, the sum of
P3,757,288.26 representing a return of the consideration of the Memorandum of
Agreement with liquidated damages equivalent to 0.1% from the filing of this suit
until fully paid, and exemplary damages in the sum of P50,000.00. (Underscoring
supplied)[8]

FIFTH ASSIGNMENT OF ERROR

THE LOWER COURT ERRED WHEN IT STRICTLY INTERPRETED THE
RULES ON DEFAULT ON DEFENDANTS-APPELLANTS, RATHER THAN
APPLYING ITS ACCEPTED LIBERAL CONSTRUCITON.
SIXTH ASSIGNMENT OF ERROR

ISC and Suzara appealed the decision of the trial court to the Court of Appeals,
raising the following errors:

THE TRIAL COURT ERRED WHEN IT ADJUDGED THAT DEFENDANTAPPELLANT SUZARA WAS PERSONALLY LIABLE FOR THE OBLIGATIONS
OF DEFENDANTAPPELLANT ISC WHEN HE MERELY ACTED IN A
REPRESENTATIVE CAPACITY, THERE BEING NO EVIDENCE AVAILABLE
TO SHOW THAT HE ACTED ON HIS PERSONAL CAPACITY.

FIRST ASSIGNMENT OF ERROR

SEVENTH ASSIGNMENT OF ERROR

THE LOWER COURT ERRED IN NOT PROPERLY APPLYING THE BASIC

PROCEDURAL RULE AND WELL ESTABLISHED LEGAL DOCTRINE, THAT
THE PLAINTIFF-APPELLEE, IN ESTABLISHING THE CAUSE OF ACTION
ASSERTED IN ITS COMPLAINT, MUST RELY UPON THE STRENGTH OF ITS
OWN EVIDENCE, RATHER THAN ON THE PERCEIVED WEAKNESS OR
INSUFFICIENCIES IN THE DEFENDANTS-APPELLANTS DEFENSES.

THE LOWER COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF

THE PLAINTIFF-APPELLEE AND AGAINST DEFENDANTS-APPELLANTS
FOR REIMBURSEMENT OF CONSIDERATION, LIQUIDATED AND
EXEMPLARY DAMAGES. (Emphasis and underscoring supplied)[9]
By its present challenged decision of November 29, 2002, the Court of Appeals
found the assigned errors, except No. 6, bereft of merit.

SECOND ASSIGNMENT OF ERROR.

THE LOWER COURT ERRED IN FAILING TO APPRECIATE, FIND AND
DECLARE THAT THERE WAS NO EVIDENCE TO SHOW THAT THE
DEFENDANT-APPELLANT BENEFITTED FROM THE ALLEGED
TRANSACTION.
THIRD ASSIGNMENT OF ERROR
THE LOWER COURT ERRED IN NOT DECLARING THAT THE PLAINTIFFAPPELLEE FAILED TO ADDUCE PREPONDERANCE EVIDENCE, TO
ESTABLISH THE CAUSE OF ACTION ASSERTED IN ITS COMPLAINT
AGAINST THE DEFENDANTS-APPELLANTS.
FOURTH ASSIGNMENT OF ERROR
THE LOWER COURT ERRED IN NOT SETTING ASIDE ITS ORDER DATED
APRIL 17, 1995 (ANNEX A, PETITION) AND LIKEWISE ERRED IN NOT
GRANTING THE MOTION FOR RECONSIDERATION DATED MAY 2, 1995
FILED BY DEFENDANTS-APPELLANTS.

On assigned error No. 6, the appellate court held that indeed the trial court erred in
holding Suzara jointly and severally liable with ISC, for Suzara acted in his personal
capacity as Chairman of ISC which has a separate and distinct personality at the time
of the execution of the MOA and its amendment. Citing the case of Tramat
Mercantile Inc. v. Court of Appeals[10] wherein this Court cited instances when,
without necessarily piercing the veil of corporate fiction, personal civil liability can
also lawfully attach to a corporate director, trustee or officer, to wit:
Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when
1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;
2. He consents to the issuance of watered stocks or who, having knowledge thereof,
does not forthwith file with the corporate secretary his written objection thereto;
3. He agrees to hold himself personally and solidarily liable with the corporation; or

59

4. He is made, by a specific provision of law, to personally answer for his corporate

action,[11]

organized and controlled and its affairs are so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation.,[15]

the Court of Appeals, noting that none of the above enumerated instances is present
in the case to call for the imposition of personal civil liability of Suzara, modified the
trial courts decision by sparing Suzara from liability.

the Republic pleads that Suzara and Garcia must be made jointly and severally liable
with ISC, [t]he non application of the doctrine of piercing the veil of corporate entity
. . . not be[ing] allowed to in a way justify the wrong and protect the fraud committed
by. . . Suzara and Garcia.

Hence, the present petition of the Republic raising the following sole issue:
The petition fails.
WHETHER OR NOT THE ASSAILED DECISION DATED NOVEMBER 29, 2002
OF THE COURT OF APPEALS IS CORRECT IN NOT APPLYING THE
DOCTRINE OF PIERCING THE VEIL OF CORPORATE ENTITY AND IN NOT
ADJUDGING RESPONDENTS SUZARA AND GARCIA JOINTLY AND
SOLIDARILY LIABLE WITH RESPONDENT ISC. (Underscoring supplied)[12]
The Republic argues that the dispositive portion of the Court of Appeals decision
speaks in no uncertain terms that it is only respondent ISC that should be liable to the
petitioner [and] by absolving even Ramon Garcia who did not appeal, it . . .
committed grave abuse of discretion. The Republic goes on to argue as follows:
The evidence on record clearly shows that respondents Suzara and Garcia diverted
the funds provided by petitioner to respondent ISC intended for the construction of
the buildings. There is a need to apply the doctrine of piercing the veil of corporate
entity in the instant case. Respondents Suzara and Garcia used respondent ISC, a
corporation, as a shield to justify their wrong deeds and in order to protect the fraud
they committed. The purpose of respondent ISC, a non-stock, non-profit and nongovernmental organization organized under and by virtue of the laws of the
Philippines is being used to defeat public convenience. Respondent ISC was
contracted by petitioner due to its being organized as a non-governmental
organization. This privilege was abused by respondents Suzara and Garcia.
It is not disputed that part of the amount given in consideration of the memorandum
of agreement was invested in securities through Philippine Commercial Capital Inc.
This could not have happened without the knowledge and consent of respondents
Suzara and Garcia.[13]
Citing Robledo v. National Labor Relations Commission[14] wherein this Court
held:
The doctrine of piercing the veil of corporate entity is used whenever a court finds
that the corporate fiction is being used to defeat public convenience, justify wrong,
protect fraud, or defend crime or to confuse legitimate issues, or that a corporation is
the mere alter ego or business conduit of a person or where the corporation is so

As quoted earlier, the Republic in its complaint charged ISC et al. to be guilty of
fraud for they had no intention whatsoever to perform them and had falsely
represented . . . that they were financially capable and had all the technical expertise
and experience. But as stated earlier, Suzara in the Answer he jointly filed with ISC
denied the allegation of misrepresentation, he claiming that his participation in the
execution of the MOA was limited to his official capacity as Chairman of ISC.
Issues having been joined after ISC and Suzara jointly filed their Answer, it was
incumbent for the Republic to prove the issue, inter alia, of whether Suzaras
participation in the MOA was limited to his official capacity as Chairman of ISC.
Albeit ISC and Suzara were declared as in default on December 12, 1994 under Rule
20 of the Revised Rules of Court,[16] the Republic had the burden of proving that
first, Suzara, contrary to his claim, participated in the MOA not only in his official
capacity as Chairman but also in his personal capacity, and second, that he, along
with ISC, committed fraud. For fraud cannot be presumed and it must be established
by clear and sufficient evidence.[17] Courts never sustain findings of fraud upon
circumstances which, at most, create only suspicion.[18]
It does not mean, however, that fraud can only be proved by direct evidence. For, it
being a state of mind, it may be inferred from the circumstances of the case.[19]
A scrutiny of the evidence presented ex-parte by the Republic shows that it is
documentary.
Among the documents presented and offered in evidence were Schedule I of Audit
findings and recommendation (Exh. H-3) showing ISC Investments as of August 31,
1991,[20] herein reproduced as follows:
PERIOD
PARTICULARS
PRINCIPAL

60

INTEREST EARNED

PCCI

Sept. 30 Oct. 30, 1990

713,416.67

Urban Bank

13,475.00

P1,500,000.00

May 7 June 6, 1991

P 34,684.41

PCCI reduced

Oct. 31 Dec. 4, 1990

* * 500,000.00

PCCI

7,965.28

1,534,684.41

June 7 July 12, 1991

37,685.03

PCCI

Dec. 4, 1990 Jan. 17, 1991

507,965.28

PCCI rolled over

8,642.46

1,572,369.44
49,966.41
Jan. 17 Mar. 4, 1991

P8,650,771.65

PCCI - rolled over

==========

1,622,335.85

P223,022.60

57, 187.34

=========

Mar. 5 Apr. 4, 1991

* - net of P979,523.19 withdrawal.

PCCI reduced

* - net of P213,475.00 withdrawal,

* 700,000.00

the purpose of which document was To show the interests made by defendants of the
amount received by them from plaintiff and the amount of P223,022.60 as interest
earned from investments;[21] and Financial analysis of investments made by
defendants of the money received from plaintiff (Exh. S)[22] and Documents issued
by Philippine Commercial Capital, Inc. showing investments of defendants (Exhs. S-

13,416.67
April 4 May 6, 1991

61

1 S-25),[23] the purpose of which was To show that instead of using the funds
received from plaintiff in the construction of the school buildings, defendants
invested the same in certain financial institutions or Philippine Commercial Capital,
Inc.
In its decision, the trial court found that the ISC, Suzara and Garcia diverted the
funds intended for the construction of the buildings by investing the same in certain
financial institutions (Exhs. S, S-1 to S-24) . . . naturally result[ing] in the noncompletion of the school buildings and in some instances, although the buildings
were completed, the same were defective . . .[24]
Both the Schedule I, ISC Investments Exh. H-3 and the Financial Analysis Exh. S as
well as the documents Exhs. S-1 S-25 issued by Philippine Commercial Capital, Inc.
indicate that placement of investments by ISC began on the last quarter of 1990. It
bears noting, in this connection, that the Republic paid ISC P5,942,160.00 on
October 6, 1989. And it paid P2,546,640.00 on July 5, 1990. There is no showing,
however, that the same or part of the funds received from the Republic were those
invested by ISC in financial institutions.
To infer from the above-specified documents, as what the Republic did in its brief
before the appellate and this Court, that Suzara being then Chairman of ISC clearly
assented to a patently unlawful act by agreeing to divert the funds intended for the
construction of 45 school buildings is a non sequitor. Parenthetically, the allegation
of fraud involving Suzara in the complaint was one arising from misrepresentation of
financial capability and technical expertise and experience to construct the school
buildings, not from diversion.
In fine, the participation, if any, by Suzara in the alleged diversion is not
unexplainable.[25] Unfortunately, he was declared as in default. At all events, it is
G.R. No. 144805 June 8, 2006
LINTONJUA, JR. vs. ETERNIT CORPORATION
Facts: The Eternit Corporation (EC) manufactures roofing materials and pipe
products. Ninety (90%) percent of the shares of stocks of EC were owned by
Eteroutremer S.A. Corporation (ESAC), a corporation registered under the laws of
Belgium. Glanville was the General Manager and President of EC, while Delsaux
was the Regional Director for Asia of ESAC. In 1986, because of the political
situation in the Philippines the management of ESAC wanted to stop its operations
and to dispose the land in Mandaluyong City. They engaged the services of
realtor/broker Lauro G. Marquez.
Marquez thereafter offered the land to Eduardo B. Litonjua, Jr. for P27,000,000.00.
Litonjua counter offered P20,000,000.00 cash. Marquez apprised Glanville &
Delsaux of the offer. Delsaux sent a telex stating that, based on the "Belgian/Swiss
decision," the final offer was "US$1,000,000.00 and P2,500,000.00. The Litonjua

speculatory. As such, fraud as the Republics basis in urging the piercing the veil of
corporate fiction does not lie.
This Court would not also hold Suzara personally liable for, as correctly found by the
appellate court which cited Tramat Mercantile, Inc. v. CA[26] enumerating instances
when personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may, as a rule, attach, none of those or of analogous
instances is present in Suzaras case.
As for the Republics lament in the appellate courts not adjudging . . . Garcia jointly
and solidarily liable with . . . ISC, its attention is invited to Tropical Homes, Inc. v.
Fortun et al.[27] wherein this Court held:
We have always recognized the general rule that in appellate proceedings, the
reversal of the judgment on appeal is binding only on the parties in the appealed case
and does not affect or inure to the benefit of those who did not join or were not made
parties to the appeal. An exception to the rule exists, however, where a judgment
cannot be reversed as to the party appealing without affecting the rights of his codebtor, or where the rights and liabilities of the parties appealing are so interwoven
and dependent on each other as to be inseparable, in which case a reversal as to one
operates as a reversal as to all. This exception which is based on a communality of
interest of said parties is recognized in this jurisdiction.[28]
WHEREFORE, the petition is hereby DENIED.
No costs.
SO ORDERED.
brothers deposited US$1,000,000.00 with the Security Bank & Trust Company, and
drafted an Escrow Agreement to expedite the sale.
Meanwhile, with the assumption of Corazon C. Aquino as President, the political
situation improved. Marquez received a letter from Delsaux that the ESAC Regional
Office decided not to proceed with the sale. When informed of this, the Litonjuas,
filed a complaint for specific performance and payment for damages on account of
the aborted sale. Both the trial court and appellate court rendered judgment in favor
of defendants and dismissed the complaint.
The lower court declared that since the authority of the agents/realtors was not in
writing, the sale is void and not merely unenforceable.
Issue: WON the appellate court committed grave error of law in holding that
Marquez needed a written authority from respondent ETERNIT before the sale can
be perfected.

62

Held: Respondents maintain that Glanville, Delsaux and Marquez had no authority
from the stockholders of EC and its Board of Directors to offer the properties for sale
to the petitioners.
Petitioners assert that there was no need for a written authority from the Board of
Directors of EC for Marquez to validly act as broker. As broker, Marquez was not an
ordinary agent because his only job as a broker was to look for a buyer and to bring
together the parties to the transaction. He was not authorized to sell the properties;
hence, petitioners argue, Article 1874 of the New Civil Code does not apply.
A corporation is a juridical person separate and distinct from its stockholders and is
not affected by the personal rights, obligations and transactions of the latter. It may
act only through its board of directors or, when authorized by its board resolution,
through its officers or agents. The general principles of agency govern the relation
between the corporation and its officers or agents, subject to the articles of
incorporation, by-laws, or relevant provisions of law.
Marc II Marketing, Inc. and Lucila Joson, petitioners, v. Alfredo M. Joson,
respondent
Facts:Marc II Marketing, Inc. and Lucila Joson is assailing the decision of the CA for
reversing andsettling aside the Resolution of the National Labor Relations
Commission.Marc II Marketing, Inc. is a corporation duly organized and existing
under and by virtue of the laws of the Philippines. It is primarily engaged in buying,
marketing, selling and distributing inretail or wholesale for export or import
household appliances and products and other items.Petitioner Lucila V. Joson is the
President and majority stockholder of the corporation.Before Marc II Marketing, Inc.
was officially incorporated, Alfredo M. Joson has already beenengaged by Lucila, in
her capacity as President, to work as General Manager of the corporaton and itwas
formalized through the execution of a Management Contract dated in 1994 under
MarcMarketing, Inc., as Marc II Marketing, Inc. was yet to be incorporated. For
occupying the said
position, respondent was among the corporations c
orporate officers by the express provision of Section 1, Article IV of its bylaws.Alfredo was appointed as one of its officers with the designation or title of
General Managerto function as a managing director with other duties and
responsibilities that the Board may provideand authorized.However, in 1997, Marc II
Marketing Inc. decided to stop and cease its operation asevidenced by an Affidavit of
Non-Operation due to poor sales collection aggravated by theinefficient management
of its affairs. Alfredo was informed of the cessation of its businessoperations and the
termination of his services as General Manager. He filed action forreinstatement and
money claim against petitioners.Issue:
Whether or not Marc II Marketing Inc.s Board of Director
Supreme Court

Agency may be oral unless the law requires a specific form. However, to create or
convey real rights over immovable property, a special power of attorney is necessary.
Thus, when a sale of a piece of land or any portion thereof is through an agent, the
authority of the latter shall be in writing, otherwise, the sale shall be void.
In this case, the petitioners failed to adduce in evidence any resolution of the Board
of Directors of EC empowering Marquez, Glanville or Delsaux as its agents, to sell,
let alone offer for sale, for and in its behalf, the eight parcels of land owned by it.
Moreover, the evidence of petitioners shows that Adams and Glanville acted on the
authority of Delsaux, who, in turn, acted on the authority of ESAC, through its
Committee for Asia, and the Belgian/Swiss component of the management of ESAC.
The offer of Delsaux emanated only from the "Belgian/Swiss decision," and not the
entire management or Board of Directors of ESAC. While it is true that petitioners
accepted the counter-offer of ESAC, EC was not a party to the transaction between
them; hence, EC was not bound by such acceptance. Decision of the lower court is
affirmed.
s could create a position forcorporate officers through an enabling clause found in its
corporate by-laws?
Decision:The Court held that in the context of PD 902-A, corporate officers are those
officers of acorporation who are given that character either
by the Corporation Code or by the corporations by
-laws.
Section 25 of the Corporation Code specifically enumerated who are these
corporateofficers, namely: president, secretary, treasurer and such other officers as
may be provided for inthe by-laws.A
careful examination of Marc II Marketing Inc.s by
-laws, particularly paragraph 1, Section 1of Article IV explicitly revealed that its
corporate officers are composed only of chairman, president,one/more vice president,
treasurer and secretary. The position of general manager was not among
those enumerated. Meanwhile, paragraph 2, Section 1 of Article IV of the
corporations by
-lawsempowered its Board of Directors to appoint such officers as it may determine
necessary or proper,making this an enabling provision for approving a resolution to
make the position of generalmanager a corporate officer. All of these acts were done
without first amending its by-laws so as toinclude the General Manager in its roster
of corporate officers.Though the Board of Directors may create appointive positions
other than the positions of corporate officers, the persons occupying such positions
cannot be viewed as corporate officersunder Section 25 of the Corporation Code.
The said provision of the Corporation Code safeguardsthe constitutionally enshrined
right of every employee to security of tenure and prevents thecreation of a corporate
officer position by a simple inclusion in the corporate by-laws of an enablingclause
empowering the Board of Directors
Manila

63

FIRST DIVISION

PETRONILO J. BARAYUGA,
Petitioner,
-versus-

ADVENTIST UNIVERSITY OF THE PHILIPPINES, THROUGH ITS BOARD OF

TRUSTEES, REPRESENTED BY ITS CHAIRMAN, NESTOR D. DAYSON,
Respondents.
G.R. No. 168008

Present:
CORONA, C.J., Chairperson,
LEONARDO-DE CASTRO,
BERSAMIN,
DEL CASTILLO, and
VILLARAMA, JR., JJ.
Promulgated:

issued by the Regional Trial Court (RTC), Branch 21, in Imus, Cavite to prevent
AUP from removing the petitioner.
Antecedents
AUP, a non-stock and non-profit domestic educational institution incorporated under
Philippine laws on March 3, 1932, was directly under the North Philippine Union
Mission (NPUM) of the Southern Asia Pacific Division of the Seventh Day
Adventists. During the 3rd Quinquennial Session of the General Conference of
Seventh Day Adventists held from November 27, 2000 to December 1, 2000, the
NPUM Executive Committee elected the members of the Board of Trustees of AUP,
including the Chairman and the Secretary. Respondent Nestor D. Dayson was elected
Chairman while the petitioner was chosen Secretary.
On January 23, 2001, almost two months following the conclusion of the 3rd
Quinquennial Session, the Board of Trustees appointed the petitioner President of
AUP.[2] During his tenure, or from November 11 to November 13, 2002, a group
from the NPUM conducted an external performance audit. The audit revealed the
petitioners autocratic management style, like making major decisions without the
approval or recommendation of the proper committees, including the Finance
Committee; and that he had himself done the canvassing and purchasing of materials
and made withdrawals and reimbursements for expenses without valid supporting
receipts and without the approval of the Finance Committee. The audit concluded
that he had
committed serious violations of fundamental rules and procedure in the disbursement
and use of funds.

BERSAMIN, J:

The NPUM Executive Committee and the Board of Trustees decided to immediately
request the services of the General Conference Auditing Service (GCAS) to
determine the veracity of the audit findings. Accordingly, GCAS auditors worked in
the campus from December 4 to December 20, 2002 to review the petitioners
transactions during the period from April 2002 to October 2002. On December 20,
2002, CGAS auditors reported the results of their review, and submitted their
observations and recommendations to the Board of Trustees.

The injunctive relief protects only a right in esse. Where the plaintiff does not
demonstrate that he has an existing right to be protected by injunction, his suit for
injunction must be dismissed for lack of a cause of action.

Upon receipt of the CGAS report that confirmed the initial findings of the auditors
on January 8, 2003, the NPUM informed the petitioner of the findings and required
him to explain.

The dispute centers on whether the removal of the petitioner as President of

respondent Adventist University of the Philippines (AUP) was valid, and whether his
term in that office was five years, as he insists, or only two years, as AUP insists.
We hereby review the decision promulgated on August 5, 2004,[1] by which the
Court of Appeals (CA) nullified and set aside the writ of preliminary injunction

On January 15, 2003, Chairman Dayson and the NPUM Treasurer likewise informed
the petitioner inside the NPUM office on the findings of the auditors in the presence
of the AUP Vice-President for Financial Affairs, and reminded him of the possible
consequences should he fail to satisfactorily explain the irregularities cited in the
report. He replied that he had already prepared his written explanation.

August 17, 2011

x-----------------------------------------------------------------------------------------x
DECISION

64

The Board of Trustees set a special meeting at 2 p.m. on January 22, 2003. Being the
Secretary, the petitioner himself prepared the agenda and included an item on his
case. In that meeting, he provided copies of the auditors report and his answers to the
members of the Board of Trustees. After hearing his explanations and oral answers to
the questions raised on issues arising from the report, the members of the Board of
Trustees requested him to leave to allow them to analyze and evaluate the report and
his answers. Despite a long and careful deliberation, however, the members of the
Board of Trustees decided to adjourn that night and to set another meeting in the
following week considering that the meeting had not been specifically called for the
purpose of deciding his case. The adjournment would also allow the Board of
Trustees more time to ponder on the commensurate disciplinary measure to be meted
on him.
On January 23, 2003, Chairman Dayson notified the petitioner in writing that the
Board of Trustees would hold in abeyance its deliberation on his answer to the
auditors report and would meet again at 10:00 a.m. on January 27, 2003. Chairman
Dayson indicated that some sectors in the campus had not been properly represented
in the January 22, 2003 special meeting, and requested the petitioner as Secretary to
ensure that all sectors are duly represented in the next meeting of the Board of
Trustees.[3]
In the January 27, 2003 special meeting, the petitioner sent a letter to the Board of
Trustees. The members, by secret ballot, voted to remove him as President because
of his serious violations of fundamental rules and procedures in the disbursement and
use of funds as revealed by the special audit; to appoint an interim committee
consisting of three members to assume the powers and functions of the President;
and to recommend him to the NPUM for consideration as Associate Director for
Secondary Education.[4]
On January 28, 2003, the petitioner was handed inside the NPUM office a letter,
together with a copy of the minutes of the special meeting held the previous day. In
turn, he handed to Chairman Dayson a letter requesting two weeks within which to
seek a reconsideration, stating that he needed time to obtain supporting documents
because he was then attending to his dying mother.[5]
In the evening of January 28, 2003, the Board of Trustees, most of whose members
had not yet left Cavite, reconvened to consider and decide the petitioners request for
reconsideration. During the meeting, he made an emotional appeal to allow him to
continue as President, promising to immediately vacate his office should he again
commit any of the irregularities cited in the auditors report. He added that should the
Board of Trustees not favor his appeal, he would settle for a retirement package for
him and his wife and would leave the church.

The Board of Trustees denied the petitioners request for reconsideration because his
reasons were not meritorious. Board Member Elizabeth Role served the notice of the
denial on him the next day, but he refused to receive the notice, simply saying Alam
ko na yan.[6]
The petitioner later obtained a copy of the inter-school memorandum dated January
31, 2003 informing AUP students, staff, and faculty members about his relief as
President and the appointment of an interim committee to assume the powers and
duties of the President.
On February 4, 2003, the petitioner brought his suit for injunction and damages in
the RTC, with prayer for the issuance of a temporary restraining order (TRO),
impleading AUP and its Board of Trustees, represented by Chairman Dayson, and the
interim committee. His complaint alleged that the Board of Trustees had relieved him
as President without valid grounds despite his five-year term; that the Board of
Trustees had thereby acted in bad faith; and that his being denied ample and
reasonable time to present his evidence deprived him of his right to due process.[7]
The suit being intra-corporate and summary in nature, the application for TRO was
heard by means of affidavits. In the hearing of February 7, 2003, the parties agreed
not to harass each other. The RTC used the mutual agreement as its basis to issue a
status quo order on February 11, 2003.[8]
In their answer with counterclaim, the respondents denied the allegations of the
petitioner, and averred that he had been validly removed for cause; and that he had
been granted ample opportunity to be heard in his defense.[9]
Order of the RTC
On March 21, 2003, after summary hearing, the RTC issued the TRO enjoining the
respondents and persons acting for and in their behalf from implementing the
resolution removing him as President issued by the Board of Trustees during the
January 27, 2003 special meeting, and enjoining the interim committee from
performing the functions of President of AUP. The RTC did not require a bond.[10]
After further hearing, the RTC issued on April 25, 2003 its controversial order,[11]
granting the petitioners application for a writ of preliminary injunction. It thereby
resolved three issues, namely: (a) whether the special board meetings were valid; (b)
whether the conflict-of-interest provision in the By-Laws and Working Policy was
violated; and (c) whether the petitioner was denied due process. It found for the
petitioner upon all the issues. On the first issue, it held that there was neither a
written request made by any two members of the Board of Trustees nor proper
notices sent

65

to the members as required by AUPs By-Laws, which omissions, being patent

defects, tainted the special board meetings with nullity. Anent the second issue, it
ruled that the purchase of coco lumber from his balae (i.e., mother-in-law of his son)
was not covered by the conflict-of-interest provision, for AUPs Model Statement of
Acceptance form mentioned only the members of the immediate family and did not
extend to the relationship between him and his balae. On the third issue, it concluded
that he was deprived of due process when the Board of Trustees refused to grant his
motion for reconsideration and his request for additional time to produce his
evidence, and instead immediately implemented its decision by relieving him from
his position without according him the treatment befitting a university President.

of the writ of preliminary injunction issued by the RTC. In clarifying the TRO, the
CA explained that it did not go beyond the reliefs prayed for in the respondents
motion for TRO and preliminary injunctive hearings.
On August 5, 2004, the CA rendered its decision nullifying the RTCs writ of
preliminary injunction. It rejected the petitioners argument that Article IV, Section 3
of AUPs Constitution and By-Laws and Working Policy of the Conference provided
a five-year term for him, because the provision was inexistent. It ruled that the
petitioners term of office had expired on January 22, 2003, or two years from his
appointment, based on AUPs amended By-Laws; that, consequently, he had been a
mere de facto officer appointed by the members of the Board of Trustees; and that he
held no legal right warranting the issuance of the writ of preliminary injunction.

Proceedings in the CA
With the Interim Rules for Intra-Corporate Controversies prohibiting a motion for
reconsideration, the respondents forthwith filed a petition for certiorari in the CA,
[12] contending that the petitioners complaint did not meet the requirement that an
injunctive writ should be anchored on a legal right; and that he had been merely
appointed, not elected, as President for a term of office of only two years, not five
years, based on AUPs amended By-Laws.
In the meanwhile, on September 17, 2003, the petitioner filed a supplemental petition
in the CA,[13] alleging that after the commencement of his action, he filed in the
RTC an urgent motion for the issuance of a second TRO to enjoin the holding of an
AUP membership meeting and the election of a new Board of Trustees, capitalizing
on the admission in the respondents answer that he had been elected in 2001 to a
five-year term of office. He argued that the admission estopped the respondents from
insisting to the contrary.
The respondents filed in the CA a verified urgent motion for a TRO and to set a
hearing on the application for preliminary injunction to enjoin the RTC from
implementing the assailed order granting a writ of preliminary injunction and from
further proceeding in the case. The petitioner opposed the motion for TRO, but did
not object to the scheduling of preliminary injunctive hearings.
On February 24, 2004, the CA issued a TRO to enjoin the RTC from proceeding for a
period of 60 days, and declared that the prayer for injunctive relief would be resolved
along with the merits of the main case.
The petitioner sought a clarification of the TRO issued by the CA, considering that
his cause of action in his petitions to cite the respondents in indirect contempt dated
March 5, 2004 and March 16, 2004 filed in the RTC involved the election of a
certain Robin Saban as the new President of AUP in blatant and malicious violation

The CA declared that the rule on judicial admissions admitted of exceptions, as held
in National Power Corporation v. Court of Appeals,[14] where the Court held that
admissions were not evidence that prevailed over documentary proof; that the
petitioners being able to answer the results of the special audit point-by-point belied
his allegation of denial of due process; that AUP was the party that stood to be
injured by the issuance of the injunctive writ in the form of a demoralized
administration, studentry, faculty and staff, sullied reputation, and dishonest
leadership; and that the assailed RTC order sowed confusion and chaos because the
RTC thereby chose to subordinate the interest of the entire AUP community to that of
the petitioner who had been deemed not to have satisfied the highest ideals required
of his office.
Issues
Undeterred, the petitioner has appealed, contending that:
I.
THE COURT OF APPPEALS HAS DECIDED CONTRARY TO LAW AND
JURISPRUDENCE WHEN IT RULED THAT THE EXTRAORDINARY WRIT OF
CERTIORARI APPLIED IN THE CASE AT BAR.
II.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A
WAY NOT IN ACCORD WITH THE ESTABLISHED LAW AND
JURISPRUDENCE THAT ADMISSIONS, VERBAL OR WRITTEN, MADE BY A
PARTY IN THE COURSE OF THE PROCEEDINGS IN THE SAME CASE, DOES
NOT REQUIRE PROOF, BY REQUIRING PETITIONER BARAYUGA TO
PRESENT EVIDENCE THAT HIS TERM AS PRESIDENT OF AUP IS FOR FIVE
(5) YEARS.

66

III.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A
WAY NOT IN ACCORD WITH LAW AND ESTABLISHED FACTS WHEN IT
RULED THAT PETITIONER BARAYUGA HAS ONLY A TERM OF TWO (2)
YEARS INSTEAD OF FIVE (5) YEARS AS CLEARLY ADMITTED BY PRIVATE
RESPONDENT AUP IN ITS ANSWER.
IV.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A
WAY NOT IN ACCORD WITH LAW AND JURISPRUDENCE BY SOLELY
RELYING ON THE CASE OF NATIONAL POWER CORPORATION v. COURT
OF APPEALS, WHICH INVOLVE FACTS DIFFERENT FROM THE PRESENT
CASE.
V.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A
WAY NOT IN ACCORD WITH LAW AND ESTABLISHED FACTS WHEN IT
UNJUSTIFIABLY ALLOWED THE WAIVER OF NOTICE FOR THE SPECIAL
MEETING OF THE BOARD OF TRUSTEES.

I
PETITIONER IS NOT AN ELECTED TRUSTEE OF THE AUP BOARD, NOR
WAS (HE) ELECTED AS PRESIDENT, AND AS SUCH, HE CAN CLAIM NO
RIGHT TO THE AUP PRESIDENCY, BEING TWICE DISQUALIFIED BY LAW,
WHICH RENDERS MOOT AND ACAMEDIC ALL OF THE ARGUMENTS IN
THIS PETITION.
II
EVEN IF WE FALSELY ASSUME EX GRATIA THAT PETITIONER IS AN
ELECTED TRUSTEE AND ELECTED PRESIDENT, THE TWO (2) YEAR TERM
PROVIDED IN AUPS BY-LAWS REQUIRED BY THE CORPORATION CODE
AND APPROVED BY THE SEC IS WHAT GOVERNS THE INTRACORPORATE CONTROVERSY, THE AUPS ADMISSION IN ITS ANSWER
THAT HE HAS A FIVE (5) YEAR TERM BASED ON HIS INVOKED SAMPLE
CONSTITUTION, BY-LAWS AND POLICY OF THE SEVENTH DAY
ADVENTIST NOTWITHSTANDING.
III
PURSUANT TO THE RULES AND SETTLED JURISPRUDENCE, THE
ADMISSION IN THE ANSWER IS NOT EVEN PREJUDICIAL AT ALL.

VI.
THE COURT OF APPEALS DECIDED A QUESTION OF SUBSTANCE IN A
WAY NOT IN ACCORD WITH LAW AND ESTABLISHED FACTS WHEN IT
ERRONEOUSLY CONCLUDED THAT PETITIONER BARAYUGA WAS
MERELY OCCUPYING THE POSITION OF AUP PRESIDENT IN A HOLDOVER CAPACITY.

IV
EVEN IF WE FALSELY ASSUME, JUST FOR THE SAKE OF ARGUMENT,
THAT THE PETITIONER HAD A FIVE (5) YEAR TERM AS UNIVERSITY
PRESIDENT, HE WAS NONETHELESS VALIDLY TERMINATED FOR LOSS
OF CONFIDENCE, GIVEN THE NUMEROUS ADMITTED ANOMALIES HE
COMMITTED.

The petitioner argues that the assailed RTC order, being supported by substantial
evidence, accorded with law and jurisprudence; that his tenure as President under the
Constitution, By-Laws and the Working Policy of the Conference was for five years,
contrary to the CAs findings that he held the position in a hold-over capacity; that
instead, the CA should have applied the rule on judicial admission, because the
holding in National Power Corporation v. Court of Appeals, cited by the CA, did not
apply, due to AUP not having presented competent evidence to prove that he had not
been elected by the Board of Trustees as President of AUP; and that his removal
during the special board meeting that was invalidly held for lack of notice denied
him due process.

V
PETITIONER CANNOT COMPLAIN THAT NOTICES OF THE BOARD
MEETING WERE NOT SENT TO ALL THE TWENTY FIVE (25) TRUSTEES OF
THE AUP BOARD, SINCE: [1] AS THE AUP SECRETARY, IT WAS HE WHO
HAD THE DUTY TO SEND THE NOTICES; [2] WORSE, HE ATTENDED AND
EXHAUSTIVELY DEFENDED HIS WRITTEN ANSWER IN THE AUP BOARD
OF TRUSTEES MEETING, THUS, WAIVING ANY NOTICE OBJECTION; [3]
WORST OF ALL, HIS AFTERTHOUGHT OBJECTION IS DECEPTIVELY
FALSE IN FACT.

AUP counters that:

The decisive question is whether the CA correctly ruled that the petitioner had no
legal right to the position of President of AUP that could be protected by the
injunctive writ issued by the RTC.

67

Ruling
We deny the petition for review for lack of merit.
1.
Petition is already moot

doubtful or disputed, injunction is not proper. The possibility of irreparable damage

sans proof of an actual existing right is not a ground for a preliminary injunction.[24]
It is clear to us, based on the foregoing principles guiding the issuance of the TRO
and the writ of injunction, that the issuance of the assailed order constituted patently
grave abuse of discretion on the part of the RTC, and that the CA rightly set aside the
order of the RTC.

The injunctive writ issued by the RTC was meant to protect the petitioners right to
stay in office as President. Given that the lifetime of the writ of preliminary
injunction was co-extensive with the duration of the act sought to be prohibited,[15]
this injunctive relief already became moot in the face of the admission by the
petitioner himself, through his affidavit,[16] that his term of office premised on his
alleged five-year tenure as President had lasted only until December 2005. In short,
the injunctive writ granted by the RTC had expired upon the end of the term of office
(as posited by him).

To begin with, the petitioner rested his claim for injunction mainly upon his
representation that he was entitled to serve for five years as President of AUP under
the Constitution, By-Laws and Working Policy of the General Conference of the
Seventh Day Adventists (otherwise called the Bluebook). All that he presented in that
regard, however, were mere photocopies of pages 225-226 of the Bluebook, which
read:

The mootness of the petition warranted its denial. When the resolution of the issue
submitted in a case has become moot and academic, and the prayer of the complaint
or petition, even if granted, has become impossible of enforcement for there is
nothing more to enjoin the case should be dismissed.[17] No useful purpose would
then be served by passing on the merits of the petition, because any ruling could
hardly be of any practical or useful purpose in the premises. It is a settled rule that a
court will not determine a moot question or an abstract proposition, nor express an
opinion in a case in which no practical relief can be granted.[18] Indeed, moot and
academic cases cease to present any justiciable controversies by virtue of
supervening events,[19] and the courts of law will not determine moot questions,[20]
for the courts should not engage in academic declarations and determine a moot
question.[21]

Sec. 1. This school operated by the _____________ Union Conference/Mission of

Seventh-Day Adventists shall be under the direct control of a board of directors,
elected by the constituency in its quinquennial sessions. The board of directors shall
consist of 15 to 21 members, depending on the size of the institution. Ex officio
members shall be the union president as chairperson, the head of the school as
secretary, the union secretary, the union treasurer, the union director of education, the
presidents of the conferences/missions within the union. xxx.

2.
RTC acted in patently grave abuse of discretion
in issuing the TRO and writ of injunction
Nonetheless, the aspect of the case concerning the petitioners claim for damages has
still to be decided. It is for this reason that we have to resolve whether or not the
petitioner had a right to the TRO and the injunctive writ issued by the RTC.

Yet, the document had no evidentiary value. It had not been officially adopted for
submission to and approval of the Securities and Exchange Commission. It was
nothing but an unfilled model form. As such, it was, at best, only a private document
that could not be admitted as evidence in judicial proceedings until it was first
properly authenticated in court.

A valid writ of preliminary injunction rests on the weight of evidence submitted by

the plaintiff establishing: (a) a present and unmistakable right to be protected; (b) the
acts against which the injunction is directed violate such right; and (c) a special and
paramount necessity for the writ to prevent serious damages.[22] In the absence of a
clear legal right, the issuance of the injunctive writ constitutes grave abuse of
discretion[23] and will result to nullification thereof. Where the complainants right is

Article IV-Board of Directors

Sec. 2. The term of office of members of the board of directors shall be five years to
coincide with the ______________ Union Conference/Mission quinquennial period.
Sec. 3. The duties of the board of directors shall be to elect quinquenially the
president, xxx.

Section 20, Rule 132 of the Rules of Court requires authentication as a condition for
the admissibility of a private document, to wit:
Section 20. Proof of private document. Before any private document offered as
authentic is received in evidence, its due execution and authenticity must be proved
either:

68

(a) By anyone who saw the document executed or written; or

(b) By evidence of the genuineness of the signature or handwriting of the maker.
Any other private document need only be identified as that which it is claimed to be.
(21 a)

duration to what is otherwise provided in the articles of incorporation or by-laws of

the educational corporation. That contrary provision controls on the term of office.
[25]
In AUPs case, its amended By-Laws provided the term of the members of the Board
of Trustees, and the period within which to elect the officers, thusly:
Article I

For the RTC to base its issuance of the writ of preliminary injunction on the mere
photocopies of the document, especially that such document was designed to play a
crucial part in the resolution of the decisive issue on the length of the term of office
of the petitioner, was gross error.

Board of Trustees

Secondly, even assuming that the petitioner had properly authenticated the
photocopies of the Bluebook, the provisions contained therein did not vest the right
to an office in him. An unfilled model form creates or establishes no rights in favor
of anyone.
Thirdly, the petitioners assertion of a five-year duration for his term of office lacked
legal basis.

Section 1. At the first meeting of the members of the corporation, and thereafter
every two years, a Board of Trustees shall be elected. It shall be composed of fifteen
members in good and regular standing in the Seventh-day Adventist denomination,
each of whom shall hold his office for a term of two years, or until his successor has
been elected and qualified. If a trustee ceases at any time to be a member in good and
regular standing in the Seventh-day Adventist denomination, he shall thereby cease
to be a trustee.
xxxx

Section 108 of the Corporation Code determines the membership and number of
trustees in an educational corporation, viz:

Article IV

Section 108. Board of trustees. Trustees of educational institutions organized as

educational corporations shall not be less than five (5) nor more than fifteen (15):
Provided, however, That the number of trustees shall be in multiples of five (5).
Unless otherwise provided in the articles of incorporation or the by-laws, the board
of trustees of incorporated schools, colleges, or other institutions of learning shall, as
soon as organized, so classify themselves that the term of office of one-fifth (1/5) of
their number shall expire every year. Trustees thereafter elected to fill vacancies,
occurring before the expiration of a particular term, shall hold office only for the
unexpired period. Trustees elected thereafter to fill vacancies caused by expiration of
term shall hold office for five (5) years. A majority of the trustees shall constitute a
quorum for the transaction of business. The powers and authority of trustees shall be
defined in the by-laws.

Officers
Section 1. Election of officers. At their organization meeting, the members of the
Board of Trustees shall elect from among themselves a Chairman, a Vice-Chairman,
a President, a Secretary, a Business Manager, and a Treasurer. The same persons may
hold and perform the duties of more than one office, provided they are not
incompatible with each other.[26]

For institutions organized as stock corporations, the number and term of directors
shall be governed by the provisions on stock corporations.

In light of foregoing, the members of the Board of Trustees were to serve a term of
office of only two years; and the officers, who included the President, were to be
elected from among the members of the Board of Trustees during their organizational
meeting, which was held during the election of the Board of Trustees every two
years. Naturally, the officers, including the President, were to exercise the powers
vested by Section 2 of the amended By-Laws for a term of only two years, not five
years.

The second paragraph of the provision, although setting the term of the members of
the Board of Trustees at five years, contains a proviso expressly subjecting the

Ineluctably, the petitioner, having assumed as President of AUP on January 23, 2001,
could serve for only two years, or until January 22, 2003. By the time of his removal
for cause as President on January 27, 2003, he was already occupying the office in a

69

hold-over capacity, and could be removed at any time, without cause, upon the
election or appointment of his successor. His insistence on holding on to the office
was untenable, therefore, and with more reason when one considers that his removal
was due to the loss of confidence on the part of the Board of Trustees.
4.
Petitioner was not denied due process
The petitioner complains that he was denied due process because he was deprived of
the right to be heard and to seek reconsideration; and that the proceedings of the
Board of Trustees were illegal due to its members not being properly notified of the
meeting.
Still, the petitioner fails to convince us.
The requirements of due process in an administrative context are satisfied when the
parties are afforded fair and reasonable opportunity to explain their respective sides
of the controversy,[27] for the essence of due process is an opportunity to be heard.
[28] Here, the petitioner was accorded the full opportunity to be heard, as borne by
the fact that he was granted the opportunity to refute the adverse findings contained
in the GCAS audit report and that the Board of Trustees first heard his side during
the board meetings before his removal. After having voluntarily offered his
refutations in the proceedings before the Board of Trustees, he should not now be
permitted to denounce the proceedings and to plead the denial of due process after
the decision of the Board of Trustees was adverse to him.
E.B. Villarosa & Partners Co., Ltd. i. Benito, 312 SCRA 65 ,1999|FACTS:
E.B. Villarosa & Partners is a limited partnership with principal officeaddress at 102
Juan Luna St., Davao City and with branch offices at Paraaque andCagayan de Oro
City (CDO). Villarosa and Imperial Development (ID) executedan Agreement
wherein Villarosa agreed to develop certain parcels of land in CDO belonging to ID
into a housing subdivision. ID, filed a Complaint for Breach of Contract and
Damages against Villarosa before the RTC allegedly for failure of thelatter to comply
with its contractual obligation.Summons, together with the complaint, were served
upon Villarosa, through itsBranch Manager Wendell Sabulbero at the address at
CDO but the Sheriffs Returnof Service stated that the summons was duly served
"E.B. Villarosa & Partner thruits Branch Manager at their new office Villa Gonzalo,
CDO, and evidenced by thesignature on the face of the original copy of the
summons." Villarosa prayed for the dismissal of the complaint on the ground of
improper service of summons andfor lack of jurisdiction over the person of the
defendant. Villarosa contends that theRTC did not acquire jurisdiction over its person
since the summons wasimproperly served upon its employee in its branch office at
CDO who is not one of those persons named in Sec. 11, Rule 14 upon whom service
of summons may bemade. ID filed a Motion to Declare Villarosa in Default alleging

Nor can his urging that the proceedings were illegal for lack of prior notification be
plausible in light of the fact that he willingly participated therein without raising the
objection of lack of notification. Thereby, he effectively waived his right to object to
the validity of the proceedings based on lack of due notice.[29]
5.
Conclusion
The removal of the petitioner as President of AUP, being made in accordance with
the AUP Amended By-Laws, was valid. With that, our going into the other issues
becomes unnecessary. We conclude that the order of the RTC granting his application
for the writ of preliminary injunction was tainted with manifestly grave abuse of
discretion; that the CA correctly nullified and set aside the order; and that his claim
for damages, being bereft of factual and legal warrant, should be dismissed.
WHEREFORE, we DENY the petition for review on certiorari for lack of merit, and
hereby DISMISS SEC Case No. 028-03 entitled Dr. Petronilo Barayuga v. Nelson D.
Dayson, et al.

The petitioner shall pay the cost of suit.

SO ORDERED.
that Villarosa hasfailed to file an Answer despite its receipt allegedly on May 5, 1998
of thesummons and the complaint, as shown in the Sheriff's Return.
Issue:
Won an agent of a corporation can receive summons in behalf of their corporation?
HELD:
The court agrees with the contention of Villarosa. Earlier cases haveuphold service
of summons upon a construction project manager; a corporation'sassistant manager;
ordinary clerk of a corporation; private secretary of corporateexecutives; retained
counsel; officials who had charge or control of the operationsof the corporation, like
the assistant general manager; or the corporation's Chief Finance and Administrative
Office. In these cases, these persons were consideredas "agent" within the
contemplation of the old rule.Notably, under the new Rules, service of summons
upon an AGENT of thecorporation is NO LONGER authorized.The designation of
persons or officers who are authorized to accept summons for a domestic corporation
or partnership is now limited and more clearly specified inSection11, Rule 14. The
rule now states "general manager" instead of only"manager";"corporate secretary"
instead of "secretary"; and "treasurer" instead of "cashier." The phrase agent, or any
of its directors" is conspicuously deleted inthe new rule.A strict compliance with
the mode of service is necessary to confer jurisdiction of the court over a

70

corporation. The officer upon whom service is made must be onewho is named in the
statute; otherwise the service is insufficient. . . The liberalconstruction rule cannot be
Yu vs. Yukayguan
G.R. No. 177549; June 18, 2009
FACTS:
The case stemmed from the petition of Anthony Yu et. al. against his
younger half-brother Joseph Yukayguan et. al., who were all shareholders of
Winchester Industrial Supply Inc., a company engaged in hardware and industrial
equipment business.
Accusing his older brothers family of misappropriating funds and assets of
the company, Yukayguan filed a derivative suit. After trial, the Cebu Regional Trial
Court dismissed the case, saying Yukayguan failed to follow and observe the
essentials for filing of a derivative suit or action. The ruling was upheld but later
reversed by the Court of Appeals, prompting Yu to elevate the matter to the SC.
ISSUE:
Mandatory requirements before courts can give due course to derivative
suits or legal actions that may be taken by a stockholders on behalf of a corporation
or association.
HELD:
HiYield Realty vs. CAJune 23, 2009Facts:
On July 31, 2003, Roberto H. Torres (Roberto), for and onbehalf of Honorio Torres
& Sons, Inc. (HTSI), filed a Petitionfor Annulment of Real Estate Mortgage and
ForeclosureSale
over two parcels of land located in Marikina andQuezon City. The suit was filed
against Leonora, Ma.Theresa, Glenn and Stephanie, all surnamed Torres, theRegister
of Deeds of Marikina and Quezon City, andpetitioner Hi-Yield Realty, Inc. (HiYield). It was docketedas Civil Case No. 03-892 with Branch 148 of the
RegionalTrial Court (RTC) of Makati City.On September 15, 2003, petitioner moved
to dismiss thepetition on grounds of improper venue and payment of insufficient
docket fees. The RTC denied said motion in anOrder
dated January 22, 2004. The trial court held that thecase was, in nature, a real action
in the form of aderivative suit cognizable by a special commercial courtpursuant to
Administrative Matter No. 00-11-03-SC.Petitioner sought reconsideration, but its
motion wasdenied in an Order dated April 27, 2004.
Issue:
Whether the action to annul the real estate mortgage andforeclosure sale is a mere
incident of the derivative suit.
Held:

invoked and utilized as a substitute for the plain legalrequirements as to the manner
in which summons should be served on a domesticcorporation. .
The fact that Winchester, Inc. is a family corporation should not in any way
exempt respondents from complying with the clear requirements and formalities of
the rules for filing a derivative suit.
A stockholders right to institute a derivative suit is not based on any
express provision of the Corporation Code, or even the Securities Regulation Code,
but is impliedly recognized when the said laws make corporate directors or officers
liable for damages suffered by the corporation and its stockholders for violation of
their fiduciary duties.
However, there are mandatory requirements before a derivative suit can be
given due course by the Court. Citing Section 1, Rule 8 of the Interim Rules of
Procedure Governing Intra-Corporate Controversies, the SC said derivative actions
may be filed provided that the suing party was a stockholder or member at the time
the acts or transactions subject of the action occurred and at the time the action was
filed; and he exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of incorporation,
by-laws, laws or rules governing the corporation or partnership to obtain the relief he
desires. As additional requirements, the SC said there must be no appraisal rights
which would allow a stockholder to sell his holdings back to the company
available and the suit is not a nuisance or harassment suit.
Both the RTC and Court of Appeals ruled that the action isin the form of a derivative
suit although captioned as apetition for annulment of real estate mortgage
andforeclosure sale.
A derivative action is a suit by a shareholder to enforce acorporate cause of
action.Under the Corporation Code,where a corporation is an injured party, its power
to sue islodged with its board of directors or trustees. But anindividual stockholder
may be permitted to institute aderivative suit on behalf of the corporation in order
toprotect or vindicate corporate rights whenever the officialsof the corporation refuse
to sue, or are the ones to besued, or hold control of the corporation. In such
actions,the corporation is the real party-in-interest while the suingstockholder, on
behalf of the corporation, is only anominal party
Hi- Yield Realty Inc. v. CA
Facts: Respondents entered into a loan contract amounting to PHP100,000 with
Petitioner thereby mortgaging a parcel of land located in Lumang Dayap, Cainta,
Rizal. Upon respondent's failure to pay the loan upon demand petitioner, thereafter
moved for the extrajudicial foreclosure of the said property and a new TCT was
transferred in its name.
Respondent claims that he made an offer to pay twice during the redemption
period but was refused by petitioner hence, on the last day of redemption period he

71

filed an action to the court. When all the interest and other charges were fixed. The
court asks respondent to pay the redemption price to petitioner on a specified date
(On or before April 8, 1994) but petitioner instead thereafter seeks the extension of
45days for it has no sufficient money. At first the court denied the extension but in
another order contradicting its previous order it allowed respondent the extension to
pay within 45 days.
Frustrated, petitioner seeks this court to review the decision of the trial
court.
Issue: whether or not the extension of the redemptive period by the trial court was
well within private respondents preserved right to redeem?
Held: It was serious error to make the final redemption of the foreclosed property
dependent on the financial condition of private respondent. It may have been difficult
for private respondent to raise the money to redeem the property but financial
hardship is not a ground to extend the period of redemption. The opportunity to
redeem the subject property was never denied to private respondent. His timely
formal offer through judicial action to redeem was likewise recognized. But that is
where it ends. The court cannot sanction and grant every succeeding motion or
petition specially if frivolous or unreasonable filed by him because this would
manifestly and unreasonably delay the final resolution of ownership of the subject
property.
As a result of the trial courts grant of a 45-day extended period to redeem,
almost nine (9) years have elapsed with both parties claims over the property
dangling in limbo, to the serious impairment of petitioners rights. This court calls
the trial courts attention to the prejudice it has wittingly or unwittingly caused the
petitioner. It was really all too simple. The trial court should have seen, as in fact it
EN BANC
G.R. No. 207161, September 08, 2015
Y-I LEISURE PHILIPPINES, INC., YATS INTERNATIONAL LTD. AND Y-I
CLUBS AND RESORTS, INC., Petitioners, v. JAMES YU, Respondent.
DECISION
MENDOZA, J.:
The present case attempts to unravel whether the transfer of all or substantially all
the assets of a corporation under Section 40 of the Corporation Code carries with it
the assumption of corporate liabilities.
This is a petition for review on certiorari under Rule 45 of the Rules of Court
assailing the January 30, 2012 Decision1 and the April 29, 2013 Resolution2 of the

had already initially seen, that the 45-day extension sought by private respondent on
April 8, 1994 was just a play to cover up his lack of funds to redeem the foreclosed
property.
The right of redemption should be exercised within the specified time limit,
which is one year from the date of registration of the certificate of sale. Moreover,
the redemptioner should make an actual tender in good faith of the full amount of the
purchase price as provided above, which means the auction price of the property plus
the creditors other legitimate expenses like taxes, registration fees, etc.
Redemptioners option when the redemption period is about to expire and
the redemption cannot take place on account of disagreement over the redemption
price: may preserve his right of redemption through judicial action which in every
case must be filed within the one-year period of redemption. The filing of the court
action to enforce redemption, being equivalent to a formal offer to redeem, would
have the effect of preserving his redemptive rights and freezing the expiration of
the one-year period provided the action is filed on time and in good faith, the
redemption price is finally determined and paid within a reasonable time, and the
rights of the parties are respected.
Three critical dimensions:
(1)
timely redemption or redemption by expiration date (or, as what happened
in this case, the redemptioner was forced to resort to judicial action to freeze the
expiration of the redemption period);
(2)
good faith as always, meaning, the filing of the private respondents action
on August 13, 1993 must have been for the sole purpose of determining the
redemption price and not to stretch the redemptive period indefinitely; and
(3)
once the redemption price is determined within a reasonable time, the
redemptioner must make prompt payment in full.
Court of Appeals (CA), in CA-G.R. CV No. 96036, which affirmed with
modification the August 31, 2010 Decision3 of the Regional Trial Court, Branch 81,
Quezon City (RTC).
The Facts
Mt. Arayat Development Co. Inc. (MADCI) was a real estate development
corporation, which was registered4 on February 7, 1996 before the Security and
Exchange Commission (SEC). On the other hand, respondent James Yu (Yu) was a
businessman, interested in purchasing golf and country club shares.
Sometime in 1997, MADCI offered for sale shares of a golf and country club located
in the vicinity of Mt. Arayat in Arayat, Pampanga, for the price of P550.00 per share.
Relying on the representation of MADCI's brokers and sales agents, Yu bought 500
golf and 150 country club shares for a total price of P650,000.00 which he paid by
installment with fourteen (14) Far East Bank and Trust Company (FEBTC)
checks.5cralawrednad

72

Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf
and country club and discovered that it was non-existent. In a letter, dated February
5, 2000, Yu demanded from MADCI that his payment be returned to him.6 MADCI
recognized that Yu had an investment of P650,000.00, but the latter had not yet
received any refund.7cralawrednad
On August 14, 2000, Yu filed with the RTC a complaint8 for collection of sum of
money and damages with prayer for preliminary attachment against MADCI and its
president Rogelio Sangil (Sangil) to recover his payment for the purchase of golf and
country club shares. In his transactions with MADCI, Yu alleged that he dealt with
Sangil, who used MADCI's corporate personality to defraud him.
In his Answer,9 Sangil alleged that Yu dealt with MADCI as a juridical person and
that he did not benefit from the sale of shares. He added that the return of Yu's money
was no longer possible because its approval had been blocked by the new set of
officers of MADCI, which controlled the majority of its board of directors.
In its Answer,10 MADCI claimed that it was Sangil who defrauded Yu. It invoked
the Memorandum of Agreement11 (MOA), dated May 29, 1999, entered into by
MADCI, Sangil and petitioner Yats International Ltd. (YIL). Under the MOA, Sangil
undertook to redeem MADCI proprietary shares sold to third persons or settle in full
all their claims for refund of payments.12 Thus, it was MADCI's position that Sangil
should be ultimately liable to refund the payment for shares purchased.
After the pre-trial, Yu filed an Amended Complaint,13 wherein he also impleaded
YIL, Y-I Leisure Phils., Inc. (YILPI) and Y-I Club & Resorts, Inc. (YICRI).
According to Yu, he discovered in the Registry of Deeds of Pampanga that,
substantially, all the assets of MADCI, consisting of one hundred twenty (120)
hectares of land located in Magalang, Pampanga, were sold to YIL, YILPI and
YICRI. The transfer was done in fraud of MADCI's creditors, and without the
required approval of its stockholders and board of directors under Section 40 of the
Corporation Code. Yu also alleged that Sangil even filed a case in Pampanga which
assailed the said irregular transfers of lands.
In their Answer,14 YIL, YILPI and YICRI alleged that they only had an interest in
MADCI in 1999 when YIL bought some of its corporate shares pursuant to the
MOA. This occurred two (2) years after Yu bought his golf and country club shares
from MADCI. As a mere stockholder of MADCI, YIL could not be held responsible
for the liabilities of the corporation. As to the transfer of properties from MADCI to
YILPI15 and subsequently to YICRI,16 they averred that it was not undertaken to
defraud MADCI's creditors and it was done in accordance with the MOA. In fact, it
was stipulated in the MOA that Sangil undertook to settle all claims for refund of
third parties.

During the trial, the MOA was presented before the RTC. It stated that Sangil
controlled 60% of the capital stock of MADCI, while the latter owned 120 hectares
of agricultural land in Magalang, Pampanga, the property intended for the
development of a golf course; that YIL was to subscribe to the remaining 40% of the
capital stock of MADCI for a consideration of P31,000,000.00; that YIL also gave
P500,000.00 to acquire the shares of minority stockholders; that as a condition for
YIL's subscription, MADCI and Sangil were obligated to obtain several government
permits, such as an environmental compliance certificate and land conversion permit;
that should MADCI and Sangil fail in their obligations, they must return the amounts
paid by YIL with interests; that if they would still fail to return the same, YIL would
be authorized to sell the 120 hectare land to satisfy their obligation; and that, as an
additional security, Sangil undertook to redeem all the MADCI proprietary shares
sold to third parties or to settle in full all their claims for refund.
Sangil then testified that MADCI failed to develop the golf course because its
properties were taken over by YIL after he allegedly violated the MOA.17 The lands
of MADCI were eventually sold to YICRI for a consideration of P9.3 million, which
was definitely lower than their market price.18 Unfortunately, the case assailing the
transfers was dismissed by a trial court in Pampanga.19cralawrednad
The president and chief executive officer of YILPI and YICRI, and managing
director of YIL, Denny On Yat Wang (Wang), was presented as a witness by YIL. He
testified that YIL was an investment company engaged in the development of real
estates, projects, leisure, tourism, and related businesses.20 He explained that YIL
subscribed to. the shares of MADCI because it was interested in its golf course
development project in Pampanga.21 Thus, he signed the MOA on behalf of YIL and
he paid P31.5 million to subscribe to MADCI's shares, subject to the fulfilment of
Sangil's obligations.22cralawrednad
Wang further testified that the MOA stipulated that MADCI would execute a special
power of attorney in his favor, empowering him to sell the property of MADCI in
case of default in the performance of obligations.23 Due to Sangil's subsequent
default, a deed of absolute sale over the lands of MADCI was eventually executed in
favor of YICRI, its designated company.24 Wang also stated that, aside from its
lands, MADCI had other assets in the form of loan advances of its
directors.25cralawredcralawrednad
The RTC Ruling
In its August 31, 2010 Decision, the RTC ruled that because MADCI did not deny its
contractual obligation with Yu, it must be liable for the return of his payments. The
trial court also ruled that Sangil should be solidarily liable with MADCI because he
used the latter as a mere alter ego or business conduit. The RTC was convinced that

73

Sangil had absolute control over the corporation and he started selling golf and
country club shares under the guise of MADCI even without clearance from SEC.
The RTC, however, exonerated YIL, YILPI and YICRI from liability because they
were not part of the transactions between MADCI and Sangil, on one hand and Yu,
on the other hand. It opined that YIL, YILPI and YICRI even had the foresight of
protecting the creditors of MADCI when they made Sangil responsible for settling
the claims of refunds of thirds persons in the proprietary shares. The decretal portion
of the decision reads:ChanRoblesvirtualLawlibrary
WHEREFORE, premises considered, judgment is hereby rendered as
follows:ChanRoblesvirtualLawlibrary
1. Ordering defendants Mt. Arayat Development Corporation, Inc. and Rogelio
Sangil to pay plaintiff James Yu jointly and severally the amounts of P650,000.04
with 6% legal rate of interest from the filing of the amended complaint until full
payment and and P50,000.00 as attorney's fees.
2. Dismissing the instant case against defendant Y-I Leisure Philippines, Inc., YATS
International Limited and Y-I Clubs and Resorts, Inc.; and
3. Dismissing the counterclaims of Y-I Leisure Philippines, Inc., YATS International
Limited and Y-I Clubs and Resorts, Inc.

that Yu, as creditor of MADCI, had no knowledge of the "change of debtors," the
MOA could not validly take effect against him. Accordingly, MADCI remained to be
a debtor of Yu.
Consequently, as the CA further held, the transfer of the entire assets of MADCI to
YICRI should not prejudice the transferor's creditors. Citing the case of Caltex
Philippines, Inc. v, PNOC Shipping and Transport Corporation27 (Caltex), the CA
ruled that the sale by MADCI of all its corporate assets to YIL and its companies
necessarily included the assumption of the its liabilities. Otherwise, the assets were
put beyond the reach of the creditors, like Yu. The CA stated that the liability of YIL
and its companies was determined not by their participation in the sale of the golf
and country club shares, but by the fact that they bought the entire assets of MADCI
and its creditors might not have other means of collecting the amounts due to them,
except by going after the assets sold.
Anent Sangil's liability, the CA ruled that he could not use the separate corporate
personality of MADCI as a tool to evade his existing personal obligations under the
MOA. The dispositive portion of the decision reads:ChanRoblesvirtualLawlibrary
WHEREFORE, the appeals are PARTLY GRANTED. Accordingly, the assailed
Decision dated August 31, 2010 in Civil Case No. Q-oo-41579 of the RTC of
Quezon City, Branch 81, is hereby AFFIRMED WITH MODIFICATION, in that
defendants-appellees YIL, YILPI and YICRI are hereby held jointly and severally
liable with defendant-appellee MADCI and defendant-appellant Sangil for the
satisfaction of plaintiff-appellant Yu's claim.

SO ORDERED.26
In all other respects, the assailed decision stands.
In two separate appeals, the parties elevated the case to the CA.
SO ORDERED.28
The CA Ruling
In its assailed Decision, dated January 30, 2012, the CA partly granted the appeals
and modified the RTC decision by holding YIL and its companies, YILPI and YICRI,
jointly and severally, liable for the satisfaction of Yu's claim.
The CA held that the sale of lands between MADCI and YIL must be upheld because
Yu failed to prove that it was simulated or that fraud was employed. This did not
mean, however, that YIL and its companies were free from any liability for the
payment of Yu's claim.
The CA explained that YIL, YILPI and YICRI could not escape liability by simply
invoking the provision in the MOA that Sangil undertook the responsibility of paying
all the creditors' claims for refund. The provision was, in effect, a novation under
Article 1293 of the Civil Code, specifically the substitution of debtors. Considering

YIL and its companies, YILPI and YICRI, moved for reconsideration, but their
motion was denied by the CA in its assailed Resolution, dated April 29,2013.
Hence, this petition.
ISSUE
WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT
PETITIONERS YATS GROUP SHOULD BE HELD JOINTLY AND SEVERALLY
LIABLE TO RESPONDENT YU DESPITE THE ABSENCE OF FRAUD IN THE
SALE OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS
GROUP.29

74

Petitioners YIL, YILPI and YICRI contend that the facts of Caltex are not on all
fours with the case at bench. In Caltex, there was an express stipulation of the
assumption of all the obligations of the judgment debtor. Here, there was no
stipulation whatsoever stating that the petitioners shall assume the payment of
MADCI's debts.
The petitioners also argue that fraud must exist to hold third parties liable. The sale
in this case was not in any way tainted by any of the "badges of fraud" cited in Oria
v. McMicking.30 The CA itself stated that the alleged simulation of the sale was not
established by respondent Yu. Moreover, Article 1383 of the Civil Code requires that
the creditor must prove that he has no other legal remedy to satisfy his claim. Such
requirement must be followed whether by an action for rescission or action for sum
of money.

Background on the corporate

assumption of liabilities
In the 1965 case of Nell v. Pacific Farms, Inc.,33 the Court first pronounced the rule
regarding the transfer of all the assets of one corporation to another (hereafter
referred to as the Nell Doctrine) as follows:ChanRoblesvirtualLawlibrary
Generally, where one corporation sells or otherwise transfers all of its assets to
another corporation, the latter is not liable for the debts and liabilities of the
transferor, except:
Where the purchaser expressly or impliedly agrees to assume such debts;
Where the transaction amounts to a consolidation or merger of the corporations;

On September 20, 2013, respondent Yu filed his Comment.31 He asserted that the
CA correctly applied Caltex in the present case as the lands sold to the petitioners
were the only assets of MADCI. After the sale, MADCI became incapable of
continuing its business, and its corporate existence has just remained to this day in a
virtual state of suspended animation. Thus, unless the creditors had agreed to the sale
of all the assets of the corporation and had accepted the purchasing corporation as
the new debtor, sufficient assets should have been reserved to pay their claims.

Where the purchasing corporation is merely a continuation of the selling corporation;

and
Where the transaction is entered into fraudulently in order to escape liability for such
debts.

On June 19, 2014, the petitioners filed their Reply,32 reiterating their previous
argument that the element of fraud was required in order for a third party buyer to be
liable to the seller's creditors.

The Nell Doctrine states the general rule that the transfer of all the assets of a
corporation to another shall not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are present, then the transferee
corporation shall assume the liabilities of the transferor.

The Court's Ruling

Legal bases of the Nell Doctrine

The petition lacks merit.

To recapitulate, respondent Yu bought several golf and country club shares from
MADCI. Regrettably, the latter did not develop the supposed project. Yu then
demanded the return of his payment, but MADCI could not return it anymore
because all its assets had been transferred. Through the acts of YIL, MADCI sold all
its lands to YILPI and, subsequently to YICRI. Thus, Yu now claims that the
petitioners inherited the obligations of MADCI. On the other hand, the petitioners
counter that they did not assume such liabilities because the transfer of assets was
not committed in fraud of the MADCI's creditors.
Hence, the issue at hand presents a complex question of law - whether fraud must
exist in the transfer of all the corporate assets in order for the transferee to assume
the liabilities of the transferor. To resolve this issue, a review of the laws and
jurisprudence concerning corporate assumption of liabilities must be undertaken.

An evaluation of our contract and corporation laws validates that the Nell Doctrine is
fully supported by Philippine statutes. The general rule expressed by the doctrine
reflects the principle of relativity under Article 131134 of the Civil Code. Contracts,
including the rights and obligations arising therefrom, are valid and binding only
between the contracting parties and their successors-in-interest. Thus, despite the sale
of all corporate assets, the transferee corporation cannot be prejudiced as it is not in
privity with the contracts between the transferor corporation and its creditors.
The first exception under the Nell Doctrine, where the transferee corporation
expressly or impliedly agrees to assume the transferor's debts, is provided under
Article 204735 of the Civil Code. When a person binds himself solidarity with the
principal debtor, then a contract of suretyship is produced. Necessarily, the
corporation which expressly or impliedly agrees to assume the transferor's debts
shall be liable to the same.

75

The second exception under the doctrine, as to the merger and consolidation of
corporations, is well-established under Sections 76 to 80, Title X of the Corporation
Code. If the transfer of assets of one corporation to another amounts to a merger or
consolidation, then the transferee corporation must take over the liabilities of the
transferor.
Another exception of the doctrine, where the sale of all corporate assets is entered
into fraudulently to escape liability for transferor's debts, can be found under Article
1388 of the Civil Code. It provides that whoever acquires in bad faith the things
alienated in fraud of creditors, shall indemnify the latter for damages suffered. Thus,
if there is fraud in the transfer of all the assets of the transferor corporation, its
creditors can hold the transferee liable.
The legal basis of the last in the four (4) exceptions to the Nell Doctrine, where the
purchasing corporation is merely a continuation of the selling corporation, is
challenging to determine. In his book, Philippine Corporate Law,36 Dean Cesar
Villanueva explained that this exception contemplates the "business-enterprise
transfer." In such transfer, the transferee corporation's interest goes beyond the assets
of the transferor's assets and its desires to acquire the latter's business enterprise,
including its goodwill.
In Villa Rev Transit, Inc. v. Ferrer,37 the Court held that when one were to buy the
business of another as a going concern, he would usually wish to keep it going; he
would wish to get the location, the building, the stock in trade, and the customers. He
would wish to step into the seller's shoes and to enjoy the same business relations
with other men. He would be willing to pay much more if he could get the "good
will" of the business, meaning by this, the good will of the customers, that they may
continue to tread the old footpath to his door and maintain with him the business
relations enjoyed by the seller.
In other words, in this last exception, the transferee purchases not only the assets of
the transferor, but also its business. As a result of the sale, the transferor is merely
left with its juridical existence, devoid of its industry and earning capacity. Fittingly,
the proper provision of law that is contemplated by this exception would be Section
40 of the Corporation Code,38 which provides:ChanRoblesvirtualLawlibrary
Sec. 40. Sale or other disposition of assets. - Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote
of its board of directors or trustees, sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its property and assets, including its
goodwill, upon such terms and conditions and for such consideration, which may be
money, stocks, bonds or other instruments for the payment of money or other
property or consideration, as its board of directors or trustees may deem expedient,
when authorized by the vote of the stockholders representing at least two-thirds (2/3)

of the outstanding capital stock, or in case of non-stock corporation, by the vote of at

least two-thirds (2/3) of the members, in a stockholder's or member's meeting duly
called for the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member at his place of
residence as shown on the books of the corporation and deposited to the addressee in
the post office with postage prepaid, or served personally: Provided, That any
dissenting stockholder may exercise his appraisal right under the conditions provided
in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
After such authorization or approval by the stockholders or members, the board of
directors or trustees may, nevertheless, in its discretion, abandon such sale, lease,
exchange, mortgage, pledge or other disposition of property and assets, subject to the
rights of third parties under any contract relating thereto, without further action or
approval by the stockholders or members.
Nothing in this section is intended to restrict the power of any corporation, without
the authorization by the stockholders or members, to sell, lease, exchange, mortgage,
pledge or otherwise dispose of any of its property and assets if the same is necessary
in the usual and regular course of business of said corporation or if the proceeds of
the sale or other disposition of such property and assets be appropriated for the
conduct of its remaining business.
In non-stock corporations where there are no members with voting rights, the vote of
at least a majority of the trustees in office will be sufficient authorization for the
corporation to enter into any transaction authorized by this section.
[Emphases Supplied]
To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or
substantially all of the corporation's assets, including its goodwill.39 The sale under
this provision does not contemplate an ordinary sale of all corporate assets; the
transfer must be of such degree that the transferor corporation is rendered incapable
of continuing its business or its corporate purpose.40cralawrednad
Section 40 suitably reflects the business-enterprise transfer under the exception of
the Nell Doctrine because the purchasing or transferee corporation necessarily
continued the business of the selling or transferor corporation. Given that the
transferee corporation acquired not only the assets but also the business of the
transferor corporation, then the liabilities of the latter are inevitably assigned to the
former.

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It must be clarified, however, that not every transfer of the entire corporate assets
would qualify under Section 40. It does not apply (1) if the sale of the entire property
and assets is necessary in the usual and regular course of business of corporation, or
(2) if the proceeds of the sale or other disposition of such property and assets will be
appropriated for the conduct of its remaining business. 41 Thus, the litmus test to
determine the applicability of Section 40 would be the capacity of the corporation to
continue its business after the sale of all or substantially all its assets.
Jurisprudential recognition of the
business-enterprise transfer
Jurisprudence has held that in a business-enterprise transfer, the transferee is liable
for the debts and liabilities of his transferor arising from the business enterprise
conveyed. Many of the application of the business-enterprise transfer have been
related by the Court to the application of the piercing doctrine.42cralawrednad
In A.D. Santos, Inc. v. Vasquez,43 a taxi driver filed a suit for workmen's
compensation against the petitioner corporation therein. The latter's defense was that
the taxi driver's employer was Amador Santos, and not the corporation. Initially, the
taxi driver was employed by City Cab, a sole proprietary by Amador Santos. The taxi
business was, however, transferred to the petitioner. Applying the piercing doctrine,
the Court held that the petitioner must still be held liable due to the transfer of the
business and should not be allowed to confuse the legitimate issues.
In Buan v. Alcantara,44 the Spouses Buan were the owners of Philippine Rabbit Bus
Lines. They died in a vehicular accident and the administrators of their estates were
appointed. The administrators then incorporated the Philippine Rabbit Bus Lines.
The issue raised was whether the liabilities of the estates of the spouses were
conveyed to the new corporation due to the transfer of the business. Utilizing the
alter-ego doctrine, the Court ruled in the affirmative and stated
that:ChanRoblesvirtualLawlibrary
As between the estate and the corporation, the intention of incorporation was to
make the corporation liable for past and pending obligations of the estate as the
transportation business itself was being transferred to and placed in the name of the
corporation. That liability on the part of the corporation, vis-a-vis the estate, should
continue to remain with it even after the percentage of the estate's shares of stock in
the corporation should be diluted.45
The Court, however, applied the business-enterprise transfer doctrine independent of
the piercing doctrine in other cases. In San Teodoro Development Enterprises v.
SSS,46 the petitioner corporation therein attempted to avoid the compulsory
coverage of the Social Security Law by alleging that it was a distinct and separate

entity from its limited partnership predecessor, Chua Lam & Company, Ltd. The
Court, however, upheld the findings of the SSS that the entire business of the
previous partnership was transferred to the corporation ostensibly for a valuable
consideration. Hence, "[t]he juridical person owning and operating the business
remain the same even if its legal personality was changed."47cralawrednad
Similarly, in Laguna Trans. Co., Inc. v. SSS,48 the Court held that the transferee
corporation continued the same transportation business of the unregistered
partnership therein, using the same lines and equipment. There was, in effect, only a
change in the form of the organization of the entity engaged in the business of
transportation of passengers.
Perhaps the most telling jurisprudence which recognized the business-enterprise
transfer would be the assailed case of Caltex. In that case, under an agreement of
assumption of obligations, LUSTEVECO transferred, conveyed and assigned to
respondent PSTC all of its business, properties and assets pertaining to its tanker and
bulk business together with all the obligations, properties and assets.49 Meanwhile,
petitioner Caltex, Inc. obtained a judgment debt against LUSTEVECO, and it sought
to enforce the same against PSTC. The Court ruled that PSTC was bound by its
agreement with LUSTEVECO and the former assumed all of the latter's obligations
pertaining to such business.
More importantly, the Court held that, even without the agreement, PSTC was still
liable to Caltex, Inc. based on Section 40, as follows:ChanRoblesvirtualLawlibrary
While the Corporation Code allows the transfer of all or substantially all the
properties and assets of a corporation, the transfer should not prejudice the creditors
of the assignor. The only way the transfer can proceed without prejudice to the
creditors is to hold the assignee liable for the obligations of the assignor. The
acquisition by the assignee of all or substantially all of the assets of the assignor
necessarily includes the assumption of the assignor's liabilities, unless the creditors
who did not consent to the transfer choose to rescind the transfer on the ground of
fraud. To allow an assignor to transfer all its business, properties and assets without
the consent of its creditors and without requiring the assignee to assume the
assignor's obligations will defraud the creditors. The assignment will place the
assignor's assets beyond the reach of its creditors.
Here, Caltex could not enforce the judgment debt against LUSTEVECO. The writ of
execution could not be satisfied because LUSTEVECO's remaining properties had
been foreclosed by lienholders. In addition, all of LUSTEVECO's business,
properties and assets pertaining to its tanker and bulk business had been assigned to
PSTC without the knowledge of its creditors. Caltex now has no other means of
enforcing the judgment debt except against PSTC.50cralawrednad

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[Emphasis Supplied]
The Caltex case, thus, affirmed that the transfer of all or substantially all the proper
from one corporation to another under Section 40 necessarily entails the assumption
of the assignor's liabilities, notwithstanding the absence of any agreement on the
assumption of obligations. The transfer of all its business, properties and assets
without the consent of its creditors must certainly include the liabilities; or else, the
assignment will place the assignor's assets beyond the reach of its creditors. In order
to protect the creditors against unscrupulous conveyance of the entire corporate
assets, Caltex justifiably concluded that the transfer of assets of a corporation under
Section 40 must likewise carry with it the transfer of its liabilities.
Fraud is not an essential
consideration in a businessenterprise transfer
Notably, an evaluation of the relevant jurisprudence reveals that fraud is not an
essential element for the application of the business-enterprise transfer.51 The
petitioners in this case, however, assert otherwise. They insist that under the Caltex
case, there was an assumption of liabilities because fraud existed on the part of
PSTC, as the transferee corporation.
The Court disagrees.
The exception of the Nell doctrine,52 which finds its legal basis under Section 40,
provides that the transferee corporation assumes the debts and liabilities of the
transferor corporation because it is merely a continuation of the latter's business. A
cursory reading of the exception shows that it does not require the existence of fraud
against the creditors before it takes full force and effect. Indeed, under the Nell
Doctrine, the transferee corporation may inherit the liabilities of the transferor
despite the lack of fraud due to the continuity of the latter's business.
The purpose of the business-enterprise transfer is to protect the creditors of the
business by allowing them a remedy against the new owner of the assets and
business enterprise. Otherwise, creditors would be left "holding the bag," because
they may not be able to recover from the transferor who has "disappeared with the
loot," or against the transferee who can claim that he is a purchaser in good faith and
for value.53 Based on the foregoing, as the exception of the Nell doctrine relates to
the protection of the creditors of the transferor corporation, and does not depend on
any deceit committed by the transferee -corporation, then fraud is certainly not an
element of the business enterprise doctrine.
The Court also agrees with the CA, in its assailed April 29, 2013 resolution, that
there was no finding of fraud in the Caltex case; otherwise it should have been

clearly and categorically stated.54 The discussion in Caltex relative to fraud seems
more hypothetical than factual, thus:ChanRoblesvirtualLawlibrary
If PSTC refuses to honor its written commitment to assume the obligations of
LUSTEVECO, there will be a fraud on the creditors of LUSTEVECO. x x x To
allow PSTC now to welsh on its commitment is to sanction a fraud on
LUSTEVECO's creditors.55
Besides, the supposed fraud in Caltex referred to PSTC's refusal to pay
LUSTEVECO's creditors despite the agreement on assumption of the latter's
obligations. Again, the Court emphasizes in the said case, even without the
agreement, PSTC was still liable to Caltex, Inc. under Section 40, due to the transfer
of all or substantially all of the corporate assets. At best, transfers of all or
substantially all of the assets to a transferee corporation without the consent of the
transferor corporation's creditor gives rise to a presumption of fraud against the said
creditors.56cralawrednad
Applicability of the
business-enterprise transfer
in the present case
Bearing in mind that fraud is not required to apply the business-enterprise transfer,
the next issue to be resolved is whether the petitioners indeed became a continuation
of MADCI's business. Synthesizing Section 40 and the previous rulings of this
Court, it is apparent that the business-enterprise transfer rule applies when two
requisites concur: (a) the transferor corporation sells all or substantially all of its
assets to another entity; and (b) the transferee corporation continues the business of
the transferor corporation. Both requisites are present in this case.
According to its articles of incorporation, the primary purpose of MADCI was "[t]o
acquire by purchase, lease, donation or otherwise, and to own, use, improve,
develop, subdivide, sell, mortgage, exchange, lease, develop and hold for investment
or otherwise, real estate of all kinds, whether improved, managed or otherwise
disposed of buildings, houses, apartment, and other structures of whatever kind,
together with their appurtenance."57 During the trial before the RTC, Sangil testified
that MADCI was a development company which acquired properties in Magalang,
Pampanga to be developed into a golf course.58cralawrednad
The CA found that MADCI had an entire asset consisting of 120 hectares of land,
and that its sale to the petitioners rendered it incapable of continuing its intended golf
and country club business.59 The Court holds that such finding is fully substantiated
by the records of the case. The MOA itself stated that MADCI had 120 hectares of
agricultural land in Magalang, Pampanga, for the development of a golf course.60
MADCI had the right of ownership over these properties consisting of 97 land titles,

78

except for the 27 titles previous delivered to YIL.61 The 120-hectare land, however,
was then sold to YILPI,62 and then transferred to YICRI.63cralawrednad
Respondent Yu testified that he verified the landholdings of MADCI with the
Register of Deeds in Pamapanga and discovered that all its lands were transferred to
YICRI.64 Because the properties of MADCI were already conveyed, Yu had no
other way of collecting his refund.65cralawrednad
Sangil also testified that MADCI had no more properties left after the sale of the
lands to the petitioners:ChanRoblesvirtualLawlibrary
Atty. Nuguid: And after the sale, it has no more properties?
Sangil: That's right, Sir.
Q: And the business of MADCI was to operate and build golf course?
A: That's right, Sir.
Q: And because of the sale of all these properties, MADCI was not able to build the
golf course?
A: Yes, Sir.
Q: And did not anymore operate as a corporation?
A: MADCI is still there but as far the development of the golf course, it was taken
over by Mr. Wang.66cralawrednad
[Emphasis Supplied]
As a witness for the petitioners, Wang testified that Y1L bought the shares of stock
of MADCI because it had some interest in the project involving the development of a
golf course. The petitioners then found that MADCI had landholdings in Pampanga
which it would be able to develop into a golf course.67 Hence, the petitioners were
fully aware of the nature of MADCFs business and its assets, but they continued to
acquire its lands through the designated company, YICRI.68cralawrednad
Based on these factual findings, the Court is convinced that MADCI indeed had
assets consisting of 120 hectares of landholdings in Magalang, Pampanga, to be
developed into a golf course, pursuant to its primary purpose. Because of its alleged
violation of the MOA, however, MADCI was made to transfer all its assets to the
petitioners. No evidence existed that MADCI subsequently acquired other lands for
its development projects. Thus, MADCI, as a real estate development corporation,
was left without any property to develop eventually rendering it incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
Section 40 must apply.

Consequently, the transfer of the assets of MADCI to the petitioners should have
complied with the requirements under Section 40. Nonetheless, the present petition is
not concerned with the validity of the transfer; but the respondent's claim of refund
of his P650,000.00 payment for golf and country club shares. Both the CA and the
RTC ruled that MADCI and Sangil were liable.
On the question of whether the petitioners must also be held solidarily liable to Yu,
the Court answers in the affirmative.
While the Corporation Code allows the transfer of all or substantially all of the assets
of a corporation, the transfer should not prejudice the creditors of the assignor
corporation.69 Under the business-enterprise transfer, the petitioners have
consequently inherited the liabilities of MADCI because they acquired all the assets
of the latter corporation. The continuity of MADCI's land developments is now in
the hands of the petitioners, with all its assets and liabilities. There is absolutely no
certainty that Yu can still claim its refund from MADCI with the latter losing all its
assets. To allow an assignor to transfer all its business, properties and assets without
the consent of its creditors will place the assignor's assets beyond the reach of its
creditors. Thus, the only way for Yu to recover his money would be to assert his
claim against the petitioners as transferees of the assets.
The MOA cannot
prejudice respondent
The MOA, which contains a provision that Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all their claims for refund of
payments, should not prejudice respondent Yu. The CA correctly ruled that such
provision constituted novation under Article 129370 of the Civil Code. When there is
a substitution of debtors, the creditor must consent to the same; otherwise, it shall not
in any way affect the creditor. In this case, it was established that Yu's consent was
not secured in the execution of the MOA. Thus, insofar as the respondent was
concerned, the debtor remained to be MADCI. And given that the assets and business
of MADCI have been transferred to the petitioners, then the latter shall be liable.
Interestingly, the same issue on novation was tackled in the Caltex case and the
Court resolved it in this wise:ChanRoblesvirtualLawlibrary
The Agreement, under Article 1291 of the Civil Code, is also a novation of
LUSTEVECO's obligations by substituting the person of the debtor. Under Article
1293 of the Civil Code, a novation which consists in substituting a new debtor in
place of the original debtor cannot be made without the consent of the creditor. Here,
since the Agreement novated the debt without the knowledge and consent of Caltex,
the Agreement cannot prejudice Caltex. Thus, the assets that LUSTEVECO

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transferred to PSTC in consideration, among others, of the novation, or the value of

such assets, remain even in the hands of PSTC subject to execution to satisfy the
judgment claim of Caltex.71cralawrednad
[Emphasis Supplied]

or whoever are the actual operators of their vehicles. In the case at bar, there is, in
fact, a provision in the lease contract between petitioner and SUGECO to the effect
that the latter shall indemnify and hold the former free and harmless from any
"liabilities, damages, suits, claims or judgments" arising from the latter's use of the
motor vehicle. Whether petitioner would act against SUGECO based on this
provision is its own option.

Free and Harmless Clause

The petitioners, however, are not left without recourse as they can invoke the free
and harmless clause under the MOA. In business-enterprise transfer, it is possible
that the transferor and the transferee may enter into a contractual stipulation stating
that the transferee shall not be liable for any or all debts arising from the business
which were contracted prior to the time of transfer. Such stipulations are valid, but
only as to the transferor and the transferee. These stipulations, though, are not
binding on the creditors of the business enterprise who can still go after the
transferee for the enforcement of the liabilities.72cralawrednad
An example of a free and harmless clause can be observed in the case of PCI Leasing
v. UCPB.73 In that case, a claim for damages was filed against the petitioner therein
as the registered owner of the vehicle, even though it was the latter's lessee that
committed an infraction. The Court granted the claim against the petitioner based on
the registered-owner rule. Even so, the Court stated therein
that:ChanRoblesvirtualLawlibrary
xxx the Court believes that petitioner and other companies so situated are not entirely
left without recourse. They may resort to third-party complaints against their lessees

In the present case, the MOA stated that Sangil undertook to redeem MADCI
proprietary shares sold to third persons or settle in full all their claims for refund of
payments. While this free and harmless clause cannot affect respondent as a creditor,
the petitioners may resort to this provision to recover damages in a third-party
complaint. Whether the petitioners would act against Sangil under this provision is
their own option.
WHEREFORE, the petition is DENIED. The January 30, 2012 Decision and the
April 29, 2013 Resolution of the Court of Appeals in CA-G.R. CV No. 96036 are
hereby AFFIRMED in toto.
SO ORDERED.chanrobles virtuallawlibrary
Sereno, C.J., Carpio, Leonardo-De Castro, Brion, Peralta, Bersamin, Del Castillo,
Villarama, Jr., Perez, Perlas-Bernabe, and Jardeleza, JJ.,
concur.ChanRoblesVirtualawlibrary
Velasco, Jr., J., please see concurring opinion.
Reyes, J., on leave.
Leonen, J., see separate concurring opinion.

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