more for the protection of its creditor and stockholders.

Debtors like the petitioners herein may not take advantage

of the failure of the corporation to transfer its assets to a
trustee, assuming it has any to transfer which petitioner
has failed to show, in the first place. To sustain petitioners
contention would be to allow them to enrich themselves at
the expense of another, which all enlighted legal systems
condemn.
Gelano vs. Hon. Court of Appeals
No. L-39050. February 24, 1981.*
CARLOS GELANO and GUILLERMINA MENDOZA DE
GELANO, petitioners, vs. THE HONORABLE COURT OF
APPEALS and INSULAR SAWMILL, INC., respondents.

Corporation Law; Attorneys; Trustee; A corporation with

a pending court action may still continue prosecuting or
defending the same for three years after its dissolution. Its
legal counsel may be considered its trustee for that case
only.However, a corporation that has a pending action
and which cannot be terminated within the three-year
period after its dissolution is authorized under Section 78 to
convey all its property to trustees to enable it to prosecute
and de fend suits by or against the corporation beyond the
three-year period. Although private respondent did not
appoint any trustee, yet the counsel who prosecuted and
defended the interest of the corporation in the instant case
and who in fact in behalf of the corporation may be
considered a trustee of the corporation at least with
respect to the matter in litigation only. Said counsel had
been handling the case when the same was pending before
the trial court until it was appealed before the Court of
Appeals and finally to this Court. We therefore hold that
there was a substantial compliance with Section 78 of the
Corporation Law and as such, private respondent Insular
Sawmill, Inc. could still continue prosecuting the present
case even beyond the period of three (3) years from the
time of its dissolution.
Same; Same; Same.The word trustee as used in
the corporation statute must be understood in its general
concept which could include the counsel to whom was
entrusted in the instant case, the prosecution of the suit
filed by the corporation. The purpose in the transfer of the
assets of the corporation to a trustee upon its dissolution is

Husband and Wife; Obligations; The conjugal

partnership is liable for debts contracted by the husband.
Petitioners contend that the obligations contracted by
petitioner Carlos Gelano from November 19, 1947 until
August 18, 1950 (before the effectivity of the New Civil
Code) and from December 26, 1950 until July 14, 1952
(during the effectivity of the New Civil Code) were his
personal obligations, hence, petitioners should not be held
jointly and severally liable. As regards the said issues,
suffice it to say that with the findings of the Court of
Appeals that the obligation contracted by petitionerhusband Carlos Gelano redounded to the benefit of the
family, the inevitable conclusion is that the conjugal
property is liable for his debt, pursuant to paragraph 1,
Article 1408, Civil Code of 1889 which provision incidentally
can still be found in paragraph 1, Article 161 of the New
Civil Code. Only the conjugal partnership is liable, not joint
and several as erroneously described by the Court of
Appeals, the conjugal partnership being only a single entity.
PETITION to review the judgment of the Court of
Appeals.
The facts are stated in the opinion of the Court.
DE CASTRO; J.:
Private respondent Insular Sawmill, Inc. is a corporation
organized on September 17, 1945 with a corporate life of
fifty (50) years, or up to September 17, 1995, with the
primary purpose of carrying on a general lumber and
sawmill business. To carry on this business, private
respondent leased the paraphernal property of petitionerwife Guillermina M. Gelano at the corner of Canonigo and
Otis, Paco, Manila for P1,200.00 a month. It was while
private respondent was leasing the aforesaid property that
its officers and directors had come to know petitionerhusband Carlos Gelano who received from the corporation

cash advances on account of rentals to be paid by the

corporation on the land.
Between November 19, 1947 to December 26, 1950
petitioner Carlos Gelano obtained from private respondent
cash advances of P25,950.00. The said sum was taken and
received by petitioner Carlos Gelano on the agreement that
private respondent could deduct the same from the
monthly rentals of the leased premises until said cash
advances are fully paid. Out of the aforementioned cash
advances in the total sum of P25,950.00, petitioner Carlos
Gelano was able to pay only P5,950.00 thereby leaving an
unpaid balance of P20,000.00 which he refused to pay
despite repeated demands by private respondent.
Petitioner Guillermina M. Gelano refused to pay on the
ground that said amount was for the personal account of
her husband asked for by, and given to him, without her
knowledge and consent and did not benefit the family.
On various occasions from May 4, 1948 to September 11,
1949 petitioners husband and wife also made credit
purchases of lumber materials from private respondent
with a total price of P1,120.46 in connection with the repair
and improvement of petitioners' residence. On November
9, 1949 partial payment was made by petitioners in the
amount of P91.00 and in view of the cash discount in favor
of petitioners in the amount of P83.00, the amount due
private respondent on account of credit purchases of
lumber materials is P946.46 which petitioners failed to pay.
On July 14, 1952, in order to accommodate and help
petitioners renew previous loans obtained by them from the
China Banking Corporation, private respondent, through
Joseph Tan Yoc Su, executed a joint and several promissory
note with Carlos Gelano in favor of said bank in the amount
of P8,000.00 payable in sixty (60) days. For failure of Carlos
Gelano to pay the promissory note upon maturity, the bank
collected from the respondent corporation the amount of
P9,106.00 including interests, by debiting it from the
corporation's current account with the bank. Petitioner
Carlos Gelano was able to pay private respondent the
amount of P5,000.00 but the balance of P4,106.00
remained unsettled. Guillermina M. Gelano refused to pay
on the ground that she had no knowledge about the
accommodation made by the corporation in favor of her
husband.

On May 29, 1959 the corporation, thru Atty. German Lee,

filed a complaint for collection against herein petitioners
before the Court of First Instance of Manila. Trial was held
and when the case was at the stage of submitting
memorandum, Atty. Lee retired from active law practice
and Atty. Eduardo F. Elizalde took over and prepared the
memorandum.
In the meantime, private respondent amended its Articles
of Incorporation to shorten its term of existence up to
December 31, 1960 only. The amended Articles of
Incorporation was filed with, and approved by the
Securities and Exchange Commission, but the trial court
was not notified of the amendment shortening the
corporate existence and no substitution of party was ever
made. On November 20, 1964 and almost four (4) years
after the dissolution of the corporation, the trial court
rendered a decision in favor of private respondent the
dispositive portion of which reads as follows:
WHEREFORE,
judgment
is
rendered,
ordering:
1. Defendant Carlos Gelano to pay plaintiff the sum of:
(a) P19,650.00 with interest thereon at the legal
rate from the date of the filing of the complaint on
May 29, 1959, until said sum is fully paid;
(b) P4,106.00, with interest thereon at the legal rate
from the date of the filing of the complaint until said
sum is fully paid;
2. Defendants Carlos Gelano and Guillermina Mendoza
to pay jointly and severally the sum of:
(a) P946.46, with interest thereon, at the agreed
rate of 12% per annum from October 6, 1946, until
said sum is fully paid;
(b) P550.00, with interest thereon at the legal rate
from the date of the filing of the complaint until the
said sum is fully paid;
(c) Costs of the suit; and
3. Defendant Carlos Gelano to pay the plaintiff the sum
of P2,000.00 attorney's fees.
The Countered of defendants are dismissed.
SO ORDERED. 1

Both parties appealed to the Court of Appeals, private

respondent also appealing because it insisted that both

Carlos Gelano and Guillermina Gelano should be held liable

for the substantial portion of the claim.

Hence, the present petition for review, petitioners assigning

the following errors:

On August 23, 1973, the Court of Appeals rendered a

decision modifying the judgment of the trial court by
holding petitioner spouses jointly and severally liable on
private respondent's claim and increasing the award of
P4,106.00. The dispositive portion of the decision reads as
follows:

I
THE "RESPONDENT COURT" ERRED IN DENYING
PETlTIONERS MOTION TO DISMISS THIS CASE
DESPITE THE CLEAR FINDING THAT "RESPONDENT"
HAD
ALREADY CEASED TO
EXIST AS A
CORPORATION SINCE DECEMBER 31, 1960 YET.
II
THE "RESPONDENT COURT" ERRED IN NOT
HOLDING THAT ACTIONS PENDING FOR OR
AGAINST A DEFUNCT CORPORATION ARE DEEMED
ABATED.
III
THE "RESPONDENT COURT" ERRED IN HOLDING
INSTEAD THAT EVEN IF THERE WAS NO
COMPLIANCE WITH SECTIONS 77 AND 78 OF THE
CORPORATION LAW FOR THE WINDING UP OF THE
AFFAIRS
OF
THE
CORPORATION
BY
THE
CONVEYANCE OF CORPORATE PROPERTY AND
PROPERTY RIGHTS TO AN ASSIGNEE, OR TRUSTEE
OR THE APPOINTMENT OF A RECEIVER WITHIN
THREE YEARS FROM THE DISSOLUTION OF SUCH
CORPORATION, ANY LITIGATION FILED BY OR
AGAINST
THE
DISSOLVED
CORPORATION,
INSTITUTED WITHIN THREE YEARS AFTER SUCH
DISSOLUTION BUT WHICH COULD NOT BE
TERMINATED WITHIN SAID PERIOD, MAY STILL BE
CONTINUED AS IT IS NOT DEEMED ABATED.
IV
THE "RESPONDENT COURT" ERRED IN THE
APPLICATION TO THIS CASE OF ITS RULING IN
PASAY CREDIT AND FINANCE CORPORATION,
VERSUS LAZARO, ET AL., 46 O.G. (11) 5528, AND IN
OVERLOOKING THE DISTINCTION LAID DOWN BY
THIS HONORABLE COURT IN NUMEROUS DECIDED
CASES THAT ONLY CASES FILED IN THE NAME OF
ASSIGNEES, TRUSTEES OR RECEIVERS (FOR A
DEFUNCT CORPORATION), AI)POINTED WITHIN
THREE YEARS FROM ITS DISSOLUTION, MAY BE
PROSECUTED BEYOND THE SAID THREE YEAR
PERIOD, AND THAT, ALL OTHERS ARE DEEMED
ABATED.
V

WHEREFORE, modified in the sense that the

amount of P4,160.00 under paragraph 1 (b)
is raised to P8,160.00 and the clarification
that the conjugal partnership of the spouses
is jointly and severally liable for the
obligations adjudged against defendant
Carlos Gelano, the judgment appealed from
is affirmed in all other respects. 2
After petitioners received a copy of the decision on August
24, 1973, they came to know that the Insular Sawmill Inc.
was dissolved way back on December 31, 1960. Hence,
petitioners filed a motion to dismiss the case and/or
reconsideration of the decision of the Court of Appeals on
grounds that the case was prosecuted even after
dissolution of private respondent as a corporation and that
a defunct corporation cannot maintain any suit for or
against it without first complying with the requirements of
the winding up of the affairs of the corporation and the
assignment of its property rights within the required period.
Incidentally, after receipt of petitioners' motion to dismiss
and/or reconsideration or on October 28, 1973, private
respondent thru its former directors filed a Petition for
Receivership before the Court of First Instance of Manila,
docketed as Special Proceedings No. 92303, 3 which
petition is still pending before said court.
On November 5, 1973, private respondent filed comment
on the motion to dismiss and or reconsideration and after
the parties have filed reply and rejoinder, the Court of
Appeals on July 5, 1974 issued a resolution 4 denying the
aforesaid motion.

THE "RESPONDENT COURT" ERRED IN HOLDING

THAT WITH THE FILING OF SPECIAL PROCEEDINGS
NO. 92303 IN THE COURT OF FIRST INSTANCE OF
MANILA BY FORMER DIRECTORS OF "PRIVATE
RESPONDENT"
ON
OCTOBER
23,1973,
OR,
THIRTEEN YEARS AFTER ITS DISSOLUTION, A
LEGAL, PERSONALITY WILL BE APPOINTED TO
REPRESENT THE CORPORATION.
VI
THE "RESPONDENT COURT" ERRED IN PRACTICALLY
RULING THAT THE THREE-YEAR PERIOD PROVIDED
FOR BY THE CORPORATION LAW WITHIN WHICH
ASSIGNEES, TRUSTEES FOR RECEIVERS MAY BE
APPOINTED MAY BE EXTENDED.
VII
THE "RESPONDENT COURT" ERRED IN NOT
HOLDING THAT THE FAILURE OF "PRIVATE
RESPONDENT" OR ITS AUTHORIZED COUNSEL TO
NOTIFY THE TRIAL COURT OF ITS DISSOLUTION OR
OF ITS "CIVIL DEATH" MAY BE CONSIDERED AS AN
ABANDONMENT OF ITS CAUSE OF ACTION
AMOUNTING TO A FAILURE TO PROSECUTE AND
RESULTING IN THE ABATEMENT OF THE SUIT.
VIII
THE
"RESPONDENT
COURT"
ERRED
IN
RECOGNIZING THE PERSONALITY OF COUNSEL
APPEARING FOR PRIVATE RESPONDENT' DESPITE
HIS ADMISSION THAT HE DOES NOT KNOW THE
"PRIVATE RESPONDENT" NOR HAS HE MET ANY OF
ITS DIRECTORS AND OFFICERS.
IX
THE "RESPONDENT COURT" ERRED IN AFFIRMING
THE DECISION OF THE TRIAL COURT HOLDING IN
FAVOR OF "PRIVATE RESPONDENT".
X
THE "RESPONDENT COURT" ERRED IN MODIFYING
THE TRIAL COURT'S DECISION AND HOLDING EVEN
THE CONJUGAL PARTNERSHIP OF PETITIONERS
JOINTLY AND SEVERALLY LIABLE FOR THE
OBLIGATION ADJUDGED AGAINST PETITIONERHUSBAND, CARLOS GELANO.

The main issue raised by petitioner is whether a

corporation, whose corporate life had ceased by the
expiration of its term of existence, could still

continue prosecuting and defending suits after its

dissolution and beyond the period of three years
provided for under Act No. 1459, otherwise known
as the Corporation law, to wind up its affairs,
without having undertaken any step to transfer its
assets to a trustee or assignee.
The complaint in this case was filed on May 29, 1959 when
private respondent Insular Sawmill, Inc. was still existing.
While the case was being tried, the stockholders amended
its Articles of Incorporation by shortening the term of its
existence from December 31, 1995 to December 31, 1960,
which was approved by the Securities and Exchange
Commission.
In American corporate law, upon which our Corporation Law
was patterned, it is well settled that, unless the statutes
otherwise provide, all pending suits and actions by and
against a corporation are abated by a dissolution of the
corporation. 5 Section 77 of the Corporation Law provides
that the corporation shall "be continued as a body
corporate for three (3) years after the time when it would
have been ... dissolved, for the purpose of prosecuting and
defending suits By or against it ...," so that, thereafter, it
shall no longer enjoy corporate existence for such purpose.
For this reason, Section 78 of the same law authorizes the
corporation, "at any time during said three years ... to
convey all of its property to trustees for the benefit of
members, Stockholders, creditors and other interested,"
evidently for the purpose, among others, of enabling said
trustees to prosecute and defend suits by or against the
corporation begun before the expiration of said period. 6
Commenting on said sections, Justice Fisher said:
It is to be noted that the time during which the
corporation, through its own officers, may conduct the
liquidation of its assets and sue and be sued as a
corporation is limited to three years from the time the
period of dissolution commences; but that there is no
time limited within which the trustees must complete
a liquidation placed in their hands. It is provided only
(Corp. Law, Sec. 78) that the conveyance to the
trustees must be made within the three-year period. It
may be found impossible to complete the work of
liquidation within the three-year period or to reduce
disputed claims to judgment. The authorities are to

the effect that suits by or against a corporation abate

when it ceased to be an entity capable of suing or
being sued (7 R.C.L. Corps., Par. 750); but trustees to
whom the corporate assets have been conveyed
pursuant to the authority of Section 78 may sue and
be sued as such in all matters connected with the
liquidation. By the terms of the statute the effect of
the conveyance is to make the trustees the legal
owners of the property conveyed, subject to the
beneficial
interest
therein
of
creditors
and
stockholders. 7
When Insular Sawmill, Inc. was dissolved on December 31,
1960, under Section 77 of the Corporation Law, it stin has
the right until December 31, 1963 to prosecute in its name
the present case. After the expiration of said period, the
corporation ceased to exist for all purposes and it can no
longer sue or be sued. 8
However, a corporation that has a pending action and
which cannot be terminated within the three-year period
after its dissolution is authorized under Section 78 to
convey all its property to trustees to enable it to prosecute
and defend suits by or against the corporation beyond the
Three-year period although private respondent (did not
appoint any trustee, yet the counsel who prosecuted and
defended the interest of the corporation in the instant case
and who in fact appeared in behalf of the corporation may
be considered a trustee of the corporation at least with
respect to the matter in litigation only. Said counsel had
been handling the case when the same was pending before
the trial court until it was appealed before the Court of
Appeals and finally to this Court. We therefore hold that
there was a substantial compliance with Section 78 of the
Corporation Law and as such, private respondent Insular
Sawmill, Inc. could still continue prosecuting the present
case even beyond the period of three (3) years from the
time of its dissolution.
From the above quoted commentary of Justice Fisher, the
trustee may commence a suit which can proceed to final
judgment even beyond the three-year period. No reason
can be conceived why a suit already commenced By the
corporation itself during its existence, not by a mere
trustee who, by fiction, merely continues the legal
personality of the dissolved corporation should not be

accorded similar treatment allowed to proceed to final

judgment and execution thereof.
The word "trustee" as sued in the corporation statute must
be understood in its general concept which could include
the counsel to whom was entrusted in the instant case, the
prosecution of the suit filed by the corporation. The
purpose in the transfer of the assets of the corporation to a
trustee upon its dissolution is more for the protection of its
creditor and stockholders. Debtors like the petitioners
herein may not take advantage of the failure of the
corporation to transfer its assets to a trustee, assuming it
has any to transfer which petitioner has failed to show, in
the first place. To sustain petitioners' contention would be
to allow them to enrich themselves at the expense of
another, which all enlightened legal systems condemn.
The observation of the Court of Appeals on the issue now
before Us that:
Under Section 77 of the Corporation Law, when the
corporate existence is terminated in any legal
manner, the corporation shall nevertheless continue
as a body corporate for three (3) years after the
time when it would have been dissolved, for the
purpose of prosecuting and defending suits by or
against it. According to authorities, the corporation
"becomes incapable of making contracts or
receiving a grant. It does not, however, cease to be
a body corporate for all purposes." In the case of
Pasay Credit and Finance Corp. vs. Isidro Lazaro and
others, 46 OG (11) 5528, this Court held that "a
corporation may continue a pending 'litigation even
after the lapse of the 3-year period granted by
Section 77 of Act 1459 to corporation subsequent to
their dissolution to continue its corporate existence
for the purpose of winding up their affairs and
settling all the claims by and against same." We
note that the plaintiff Insular Sawmill, Inc. ceased as
a corporation on December 30, 1960 but the case at
bar was instituted on May 29, 1959, during the time
when the corporation was still very much alive.
Accordingly, it is our view that "any litigation filed by
or against it instituted within the period, but which
could not be terminated, must necessarily prolong
that period until the final termination of said

litigation as otherwise corporations in liquidation

would lose what should justly belong to them or
would be exempt from the payment of just
obligations through a mere technicality, something
that courts should prevent" (Philippine Commercial
Laws by Martin, 1962 Ed., Vol. 2, p. 1716).
merits the approval of this Court.
The last two assigned errors refer to the disposition of the
main case. Petitioners contend that the obligations
contracted by petitioner Carlos Gelano from November 19,
1947 until August 18, 1950 (before the effectivity of the
New Civil Code) and from December 26, 1950 until July 14,
1952 (during the effectivity of the New Civil Code) were his
personal obligations, hence, petitioners should not be held
jointly and severally liable. As regards the said issues,
suffice it to say that with the findings of the Court of
Appeals that the obligation contracted by petitionerhusband Carlos Gelano redounded to the benefit of the
family, the inevitable conclusion is that the conjugal
property is liable for his debt pursuant to paragraph 1,
Article 1408, Civil Code of 1889 9 which provision
incidentally can still be found in paragraph 1, Article 161 of
the New Civil Code. 10 Only the conjugal partnership is
liable, not joint and several as erroneously described by the
Court of Appeals, the conjugal partnership being only a
single entity.
WHEREFORE, with the modification that only the conjugal
partnership is liable, the appealed decision is hereby
affirmed in all other respects. Without pronouncement as to
costs.
SO ORDERED.
Makasiar, Fernandez, and Guerrero, JJ., concur.
Teehankee, J., concur in the result.
Mr. Justice de Castro was designated to sit with the First
Division under Special Order No. 225.

6,000 cubic feet capacity (P. S. Case 107549). The

Commission, by order of September 12, 1957, set the
applications for hearing on October 9, 1957, requiring
applicant to publish them in two newspapers, and to serve
copy thereof to Iigo Daza and Camarines Sur Industry
Corporation (hereinafter called Camarines Corporation).
These owned ice plants in neighboring municipalities and
had been apparently selling ice to Sabang's inhabitants.

Buenaflor vs. Camarines Sur Industry Corp.

[Nos. L-14991-94. May 30, 1960]

JAIME T. BUENAFLOR, petitioner, vs. CAMARINES SUR
INDUSTRY CORPORATION, respondent.

CERTIFICATE OF PUBLIC CONVENIENCE; EXPIRATION OF

CORPORATE LIFE OF GRANTEE.A corporation-grantee of a
certificate of public convenience to operate ice plant can
not lawfully continue to sell ice after the expiration of its
corporate life. Neither can it apply for a new, certificate for
it is incapable of receiving a grant. It can only continue to
exist for three years for the purpose of winding up its
affairs.

After receiving copy of Buenaflor's applications, the

Camarines Corporation submitted to the Commission on
October 1, 1957, its own two applications: one for authority
to construct and manage a 5-ton ice plant, and another for
a cold storage and refrigeration system, both in Sabang too
(P. S. Cases 109874 and 109875). It likewise registered
opposition to Buenaflor's proposed ice business, on the
ground that it was the pioneer distributor of the commodity
in that particular locality.
When the petitions of Buenaflor were called for hearing on
October 9, 1957, the attorney for Camarines Corporation
voicing its application, invited attention to his client's
applications moved for postponement, and agreed to a
joint hearing of the four applications of both parties on
October 25, 1957.

Jaime T. Buenaflor has appealed the decision of the Public

Service Commission which rejected his application to install
and operate a 5-ton ice plant in Sabang (Calabanga,
Camarines Sur) even as it permitted Camarines Sur
Industry Corporation to build in that barrio, a factory with
the same output.

On the last mentioned date, Buenaflor's attorneys

presented a motion to dismiss the Camarines Corporation's
applications, challenging its personality, inasmuch as its
corporate life had expired in November 1953, in
accordance with its own articles of incorporation. Surprised
by the move, counsel of Camarines Corporation asked, and
was granted, time to answer. Immediately thereafter, the
corporators of Camarines Corporation got busy and
executed on October 30, 1957, and registered October 31,
1957, new articles of incorporation of Camarines Sur
Industry Corporation, and at the same time, notarized a
deed of conveyance assigning to the new corporation, all
the assets of the expired (old) corporation, together with its
existing certificates of public convenience to operate ice
factories in Naga and Magarao.

On June 25, 1957, Buenaflor filed his said application (P. S.

Case 107548) together with another application to
establish a cold storage and refrigeration service of about

Without loss of time, the corporators of the defunct (old)

corporation and the newly organized corporation petitioned
the Public Service Commission for the approval of the

PETITION for review by certiorari of a decision of the Public Service

Commission.
The facts are stated in the opinion of the Court.
Manuel O. Chan and Vicente Ampil for petitioner.
Evaristo R. Sandoval and Claro T. Almeda for respondent.

BENGZON, J.:

conveyance, and on November 7, 1957, the Commission

provisionally approved the transfer of assets, plus the
certificates of public convenience.
On November 8, 1957, the Camarines Corporation (new)
answered the motion to dismiss, by alleging to the
amazement of Buenaflor its recent incorporation, plus its
acquisition of the assets and certificates of the old
Camarines Corporation with the Commission's approval as
above described.
Reiterating his application, while resisting the Camarines
Corporation, Buenaflor argued: (a) he was first to apply; (b)
although the old Camarines Corporation had been
operating an ice plant in Magarao town, only six kilometers
away, it neglected to take trouble of applying until
Buenaflor had made his application; (c) the preference
which the new Camarines Corporation claims by virtue of
the old corporation's having distributed ice in Sabang for
the years previous to Buenaflor's application, should not be
granted, because since 1953 such old corporation had
ceased to be juridical entity, and could not lawfully
continue in business nor invoke any protection or
preference.
Evidence was presented in support of the applications and
oppositions.
The Commission, in its decision of December 12, 1958,
after settling forth the gist of the proofs submitted to it,
made the following considerations and conclusions.
There is a clear need for an ice plant and a cold storage
service in the barrio of Sabang and question to decide is
who of the applicant should be granted the necessary
authority inasmuch as we do not believe from the
evidence that we should authorize two ice plants of 5
tons each and two cold storage chambers with a total
capacity of 14,000 cubic feet. As to the ice plant
service, we find that Buenaflor filed his application
ahead of the Camarines Corporation but the evidence
and our records show that the Camarines Corporation is
really the pioneer ice plant in Magarao since 1945
which now has a capacity of 10 tons, and another ice
plant established that the Camarines Corporation has
been rendering ice service thru delivery in Sabang but

we doubt whether its service has been adequate

because there is satisfactory proof that ice also comes
from other places. The fact, however, is that the
Camarines Corporation cannot be said to have
neglected its duty to serve Sabang and we believe that
the shortage in its service has been due to the fact that
the produce of its Naga and Magarao plants are needed
for its other territories with not much to spare for
Sabang. We think that as the pioneer ice plant operator
in Naga and Magarao with authority to serve Sabang
the Camarines Corporation, which has not abandoned
its service in Sabang, is entitled to the protection of its
investments and to put up an ice plant in Sabang, and
that the Camarines Corporation has been rendering
service therein although in a limited manner. We
believe,
therefore,
that
applicant
Camarines
Corporation has a better right than Buenaflor to the
certificate for a 5-ton ice plant in Sabang. As to the cold
storage service, we think that Buenaflor has a better
right to the certificate.... By virtue of Buenaflor's right of
priority in the filing of his application and the fact that
he is as financially capable as the Camarines
Corporation to install the service, we believe that the
certificate for the cold storage service in Sabang should
be granted to Buenaflor, but insamuch as we take
notice of the fact that a cold storage operator also
needs ice for the preservation of fish and other
perishable
foodstuffs
when
these
cannot
be
immediately deposited in the refrigerating chambers
and also to provide its customers with ice they need
after the goods are removed from the chambers, we
believe that applicant Buenaflor may also be granted a
certificate for a one (1) ton ice plant in Sabang together
with a certificate of 5,000 cubic feet cold storage
service.
The Camarines Corporation did not appeal. Buenaflor
appealed in so far as he was denied authority to erect a 5ton ice plant.
Therefore, the question of cold storage service is not here
in issue, since Buenaflor got it, and Camarines Corporation
did not appeal.
As to the ice plant, Buenaflor insists he should be given
authority to establish a 5-ton ice plant not the new

Camarines Corporation. His line of argument centers

around the expiration of the old Corporation's charter in
1953; and we think he touches the vital spot.
It is admitted and the Commission found--that the needs
of Sabang Barrio will be conveniently served with the
establishment of a 5-ton ice plant. But it elected to deny
Buenaflor's application, even as it awarded the privilege to
the new Camarines Corporation on the ground that it (the
old corporation) had been serving ice in Sabang up to the
time of Buenaflor's application, and was, consequently, the
pioneer operator there.
The fact, however, is that since 1953, the old Corporation
had been illegally plying its business of selling ice in
Sabang because, under the Corporation Law, Sec. 77, after
November 1953, it could not lawfully continue the business
for which it had been established (operate ice plant, sell
ice, etc). After November 1953, it could only continue to
exist for three years for the purpose of prosecuting and
defending suits by or against it, and of enabling it gradually
to settle and close its affairs, to dispose and convey its
property and to divide its capital stock. It could not, without
violating the law, continue to sell ice. And yet, the
Commission awarded the certificate on the basis of such
serve and distribution of ice applying the "prior operator"
rule.1 In other words, the new Camarines Corporation is
rewarded, precisely because the old corporation, its
predecessor, had violated the law during that period (19531957). We can not, and should not countenance such
anomalous result.
On the other hand, when the old Camarines Corporation
docketed its application October 1, 1957, it had no juridical
personality, it had ceased to exist as a corporation and
could not sue2 nor apply for certificate, for it was incapable
of receiving a grant3 . It was not even a corporation de
facto4 . And then, there is no application subscribed by the
new Camarines Corporation. Far from being mere
technicality, these point support a conclusion which
appears to be just and equitable, not only for the reasons
already indicated, but also to compensate Buenaflor's
diligence and courage in exposing the irregular practice 5 of
a "ghost" corporation foisting its services upon the
unsuspecting public of Sabang and neighboring territory
enjoying a franchise without paying, perhaps, the corporate

income tax6 and other burdens attached to corporate

existence.
Remembering the Camarines Corporation's automatic
cessation in November 1956 (three years after November
1953) we must decline to regard the new Camarines
Corporation (formed October 30, 1957) as a continuation of
the old.7 At most, it is the transferee of the properties of the
old corporation (or more properly, the assets of the
stockholders) plus the certificate of public convenience to
operate the ice plant in Naga and Magarao. 8 And yet, as
stated, the new corporation has not filed any application for
certificate of public convenience in Sabang, and has not
published such application.
On these grounds, we think it was error to grant
preferential treatment to the new Camarines Corporation
over Jaime T. Buenaflor who, besides being qualified, in the
eyes of the Commission, had applied for the privilege
months in advance of the old Camarines Corporation, and
of the incorporation of the new Camarines Corporation.
Wherefore, revoking the appealed decision in so far as it
awarded the certificate to said Corporation, we hereby
approve Buenaflor's application for five tons, instead of one
ton, subject to the usual conditions imposed by the Public
Service Commission on ice plant establishments.
Costs against Camarines Corporation.
Paras, C. J., Montemayor, Bautista Angelo, Labrador,
Concepcion, Barrera, and Gutierrez David, JJ., concur.

Appeal by plaintiff National Abaca and other Fibers

Corporation, from two (2) orders of the Court of First
Instance of Leyte.
No. L-16779. August 16, 1961.
NATIONAL ABACA AND OTHER FIBERS
CORPORATION, plaintiff-appellant, vs. APOLONIA
PORE, defendant-appellee.

Corporations; Dissolution; Status of pending actions by

or against dissolved corporations.In the absence of
statutory provision to the contrary, pending actions by or
against a corporation are abated upon expiration of the
period allowed by law for the liquidation of its affairs.
Same; Absence of authority to continue in its corporate
name actions instituted by a dissolved corporation within
three years from dissolution.The Corporation Law
contains no provision authorizing a corporation, after three
years from the expiration of its lifetime, to continue in its
corporate name actions instituted by it within said period of
three years. In fact, section 77 of said law provides that the
corporation shall be continued as a body corporate for
three (3) years after the time when it would have been x x
x dissolved, for the purpose of prosecuting and defending
suits by or against it x x x, so that, thereafter, it shall no
longer enjoy corporate existence for such purpose. For this
reason, section 78 of the same law authorizes the
corporation, at any time during said three years x x x to
convey all of its property to trustees for the benefit of
members, stockholders, creditors and others in interest,
evidently for the purpose, among others, of enabling said
trustees to prosecute and defend suits by or against the
corporation begun before the expiration of said period.
APPEAL from the orders of the Court of First Instance of Leyte.
Moscoso, J.
The facts are stated in the opinion of the Court.
A. Llamas & Arsenio P. Roman for plaintiff-appellant.
Serafin Ramento for defendant-appellee.

CONCEPCION, J.:

On November 14, 1953, plaintiff filed with the

Municipal Court of Tacloban, Leyte, a complaint,
against defendant Apolonia Pore, for the recovery of
P1,213.34, allegedly advanced to her for the purchase
of hemp for the account of the former and for which
she had allegedly failed to account. In her answer,
defendant alleged that she had accounted for all cash
advances received by her for the aforementioned
purpose from the plaintiff. In due course, said court
rendering judgment on April 11, 1956, finding that the
defendant had not accounted for cash advances in
the sum of P272.49, which she was, accordingly,
sentenced to pay to the plaintiff, with legal interest
from November 18, 1953, in addition to the costs.
Said
court
having
subsequently
denied
a
reconsideration of this decision, as well a new trial
prayed for the plaintiff, the latter appealed to the
Court of First Instance of Leyte, in which defendant
moved to dismiss the complaint upon the ground that
plaintiff has no legal capacity to sue, it having
abolished by Executive Order No. 372 of the President
of the Philippines, dated November 24,1950. Plaintiff
objected thereto upon the ground that pursuant to
said executive order, plaintiff "shall nevertheless be
continued as a body corporate for a period of three
(3) years from the effective date" of said executive
order, which was November 30, 1950, "for the
purpose of prosecuting and defending suits by or
against it and of enabling the Board of Liquidators"
thereby created "gradually to settle and close its
affairs", . . . and that this case was begun on
November 14, 1953, or before the expiration of the
period aforementioned. After due hearing, the court of
first instance issued an order dated August 1, 1956,
directing plaintiff to amend the complaint, within ten
(10) days from notice, by including the Board of
Liquidators as co-party plaintiff, with the admonition
that otherwise the case would be dismissed.

On September 1, 1956, said court issued another

order dismissing the case, without pronouncement as
to costs, it appearing that the aforementioned
amended had not been made, despite the fact that
copy of said order of August 1, 1956 had been sent,
by registered mail, to plaintiff's counsel on August 6,
1956. Copy of the last order was delivered, on
September 13, 1956, to counsel for the plaintiff,
which filed, on September 21, 1956, a motion alleging
that, copy of the order of August 1, 1956 was received
by the plaintiff on August 17, 1956; that thereupon
said counsel prepared an amended complaint copy
of which was annexed to the motion as directed by
the court; that on August 24, 1956, said counsel
handed two copies of said amended complaint to Mrs.
Receda Vda. de Ocampo, the employee of the
aforesaid Board of Liquidators in charge of plaintiff's
incoming
and
outgoing
correspondence,
with
instructions to them mail said copies to the Court of
First Instance of Leyte and to counsel for defendant
herein; that on September 13, 1956, plaintiff's
counsel received copy of the order of September 1,
1956; that thereupon he inquired from plaintiff's
mailing clerk whether or not his instructions,
concerning the mailing of copies of said amended
complaint, had been complied with; that he then
found out that, although said copies of the amended
complaint were entered in the record book of
plaintiff's outgoing correspondence on August 24,
1956, only the copy addressed to defendant's counsel
had actually been mailed (as evidenced by registry
receipt No. 57209 dated August 25, 1956); that the
original copy of the amended complaint, addressed to
the clerk of court, could not be located, despite
diligent efforts made to find the same; that plaintiff's
failure to file in court the original of said amended
complaint is imputable to the excusable negligence of
the aforementioned Mrs. Ocampo, whose affidavit was
annexed, also, to the motion for reconsideration; and
that, plaintiff has a just and valid claim against the
defendant. Plaintiff prayed, therefore, that said order
of September 1, 1956 be reconsidered and set aside

and that its aforementioned amended complaint be

admitted.
Said motion for reconsideration was denied by an
order dated October 2, 1956, whereupon plaintiff
brought the case for review, by Record on Appeal, to
the Court of Appeals which, however, forwarded the
records to us, the issues raised in the appeal being
purely of law, namely;(1) whether an action,
commenced within three (3) years after the abolition
of plaintiff, as a corporation, may be continued by the
same after the expiration of said period; and (2)
whether, under the facts set forth above, the lower
court should have granted plaintiff's motion for
reconsideration of its order of September 1, 1956.
With respect to the first question, the rule appears to
be well settled that, in the absence of statutory
provision to the contrary, pending actions by or
against a corporation are abated upon expiration of
the period allowed by law for the liquidation of its
affairs.
It is generally held, that where a statute
continues the existence of a corporation for a
certain period after its dissolution for the
purpose of prosecuting and defending suits,
etc., the corporation becomes defunct upon the
expiration of such period, at least in the
absence of a provision to the contrary, so that
no action can afterwards be brought by or
against it, and must be dismissed. Actions
pending by or against the corporation when the
period allowed by the statute expires, ordinarily
abate.
. . . This time limit does not apply unless the
circumstances are such as to bring the
corporation within the provision of the statute.
However, the wording of the statutes, in some
jurisdictions authorize suits after the expiration
of the time limit, where the statute provides
that for the purpose of any suit brought by or

against the corporation shall continue beyond

such period for a further named period after
final judgment. (Fletcher's Cyclopedia on
Corporations, Vol. 16, pp. 892-893.).
Our Corporation Law contains no provision authorizing
a corporation, after three (3) years from the
expiration of its lifetime, to continue in its corporate
name actions instituted by it within said period of
three (3) years. in fact, section 77 of said law provides
that the corporation shall "be continued as a body
corporate for three (3) years after the time when it
would have been . . . dissolved, for the purposed of
prosecuting and defending suits by or against it . . .",
so that, thereafter, it shall no longer enjoy corporate
existence for such purpose. For this reason, section 78
of the same law authorizes the corporation, "at any
time during said three years . . . to convey all of its
property to trustees for the benefit of members,
stockholders, creditors and other interested",
evidently for the purpose, among others, of enabling
said trustees to prosecute and defend suits by or
against the corporation begun before the expiration of
said period. Hence, commenting on said sections,
Judge Fisher, in his work entitled Philippines Law on
Stock Corporations (1929 ed.), has the following to
say:
It is to be noted that the time during which the
corporation, through its own officers, may
conduct the liquidation of its assets and sue and
be sued as a corporation is limited to three years
from the time the period of dissolution
commences; but that there is no time limited
within the trustees must complete a liquidation
placed in their hands. It is provided only (Corp.
Law, Sec. 78) that the conveyance to the
trustees must be made within the three-year
period. It may be found impossible to complete
the work of liquidation within the three-year
period or to reduce disputed claims to judgment.
The authorities are to the effect that suits by or
against a corporation abate when it ceased to be

an entity capable of suing or being sued (7 R.C.L.

Corps., Par. 750); but trustees to whom the
corporate assets have been conveyed pursuant
to the authority of section 78 may used and be
sued as such in all matters connected with the
liquidation. By the terms of the statute the effect
of the conveyance is to make the trustees the
legal owners of the property conveyed, subject to
the beneficial interest therein of creditors and
stockholders. (pp. 389-390; see also Sumera v.
Valencia [67 Phil. 721, 726-727).
Obviously, the complete loss of plaintiff's corporate
existence after the expiration of the period of three
(3) years for the settlement of its affairs is what
impelled the President to create a Board of
Liquidators, to continue the management of such
matters as may then be pending. The first question
must, therefore, be answered in the negative.
With respect, however, to the second question, we
hold that the lower court erred in not granting
plaintiff's motion for reconsideration of September 21,
1956. To begin with, the judgment of the municipal
court of Tacloban against the defendant is a strong
indication of the validity and justice of plaintiff's claim
against her. Moreover, the record satisfactorily shows
that plaintiff had prepared an amended complaint, as
directed in the order of August 1, 1956, upon receipt
thereof; that copy of said amended complaint had
actually been sent by registered mail to defendant's
counsel; that plaintiff's counsel had given to its
mailing clerk the proper instructions for the filing of
the original of said amended complaint with the office
of the Court of First Instance of Leyte; that said
mailing clerk had endeavored to comply with the
aforementioned instructions, as evidenced by the
corresponding entry in the record book of plaintiff's
outgoing correspondence; and that the failure to file
in court said original of the amended complaint must
have been due, therefore, either to accident or to
excusable negligence on the part of said mailing
clerk.

WHEREFORE, the orders appealed from, dated

September 1 and October 3, 1956 are reversed,
plaintiff's amended complaint is hereby admitted, and
the record remanded to the lower court for further
proceedings, with the costs of this instance against
defendant-appellee, Apolonio Pore.
It is so ordered.

10 years after discovery of the falsity, fraud or omission of

the payment of the proper tax.

Same; Corporation; Assets of dissolved corporation.

The creditor of a dissolved corporation may follow its assets
once they passed into the hands of the stockholders.
Tan Tiong Bio vs. Commissioner of Internal
Revenue

No. L-15778. April 23, 1962.

TAN TIONG Bio, ET AL., petitioners, vs. COMMISSIONER OF
INTERNAL REVENUE, respondent.

Taxation; Sales tax; When buyer of surplus goods

considered importer.A person who buys surplus goods
from the foreign liquidation commission and who removes
the goods bought from the U.S. Military Bases in the
Philippines is considered an importer of such goods and is
subject to the sales tax or compensation tax as the case
may be.

Same; Same; Same; Case at bar.The Central

Syndicate as owner of the "Mystery Pile" before its removal
from Base K , a nd as the one w hich act uall y took d
elivery the reo moved the same from the U.S. Military Base,
is the importer within the meaning of Section 186 of the
Revenue Code, as it stood before the enactment of
Republic Act No. 594, and its sales of the surplus goods are
the original sales taxable under said section and not the
sale to it by Dee Hong Lue.

Same; Same; Taxpayer's failure to file returns; What

period to be reckoned; Assessment.Where a taxpayer
falls to file its return as required by Section 183 of the Tax
Code, the period to be reckoned with is that embodied in
Section 332 of the same Code which provides that in case
of failure to file the return the tax may be assessed within

Same; Same; Effect of dissolution on tax due; Right of

government to collect.That the hands of the government
can not, of course, collect taxes from a defunct corporation,
it loses thereby none of its rights to assess taxes which had
been due from the corporation, and to collect them from
persons who, by reason of transactions with the
corporation, hold property against which the tax can be
enforced and that the legal death of the corporation no
more prevents such action than would the physical death of
an individual prevent the government from assessing taxes
against him and collecting them, from his administrator
who holds the property which the decedent had formerly
possessed.
APPEAL from a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Sycip, Salazar & Associates for petitioners.
Solicitor General for respondent.

BAUTISTA ANGELO, J.:

On October 19, 1946, the Central Syndicate, a corporation
organized under the laws of the Philippines, thru its General
Manager, David Sycip, sent a letter to the Collector of
Internal Revenue advising the latter that it purchased from
Dee Hong Lue the entire stock of surplus properties which
the said Dee Hong Lue had bought from the Foreign
Liquidation Commission and that as it assumed Dee Hong
Lue's obligation to pay the 3-1/2% sales tax on said surplus
goods, it was remitting the sum of P43,750.00 in his behalf
as deposit to answer for the payment of said sales tax with
the understanding that it would later be adjusted after the
determination of the exact consideration of the sale.
On January 31, 1948, the syndicate again wrote the
Collector requesting the refund of P1,103.28 representing
alleged excess payment of sales tax due to the adjustment
and reduction of the purchase price in the amount of

P31,522.18. Said letter was referred to an agent for

verification and report. On September 18, 1951, after a
thorough investigation of the facts and circumstances
surrounding the transaction, the agent reported (1) that
Dee Hong Lue purchased the surplus goods as trustee for
the Central Syndicate which was in the process of
organization at the time of the bidding; (2) that it was the
representatives of the Central Syndicate that removed the
surplus goods from their base at Leyte on February 21,
1947; (3) that the syndicate must have realized a gross
profit of 18.8% from its sales thereof; and (4) that if the
sales tax were to be assessed on its gross sales it would
still be liable for the amount of P33,797.88 as deficiency
sales tax and surcharge in addition to the amount of
P43,750.00 which the corporation had deposited in the
name of Dee Hong Lue as estimated sales tax due from the
latter.
Based on the above findings of the agent in charge of the
investigation, the Collector decided that the Central
Syndicate was the importer and original seller of the
surplus goods in question and, therefore, the one liable to
pay the sales tax. Accordingly, on January 4, 1952, the
Collector assessed against the syndicate the amount of
P33,797.88 and P300.00 as deficiency sales tax, inclusive
of the 25% surcharge and compromise penalty,
respectively, and on the same date, in a separate letter, he
denied the request of the syndicate for the refund of the
sum of P1,103.28.
On September 8, 1954, the Central Syndicate elevated the
case to the Court of Tax Appeals questioning the ruling of
the Collector which denies its claim for refund as well as
the assessment made against it of the sum of P33,797.88,
plus the sum of P300.00 as compromise penalty, as stated
above. The Collector filed his answer thereto wherein he
reiterated his ruling and prayed that the Central Syndicate
be ordered to pay the deficiency sales tax and surcharge as
demanded in his letters dated January 4, 1952 and August
5, 1954. On October 28, 1954, the syndicate filed a motion
requesting that the issue of prescription it has raised
against the collection of the tax be first determined as a
preliminary question, but action thereon was deferred by
the Court of Tax Appeals until after the trial of the case on
the merits.

On November 5, 1954, the Collector filed a motion

requiring the syndicate to file a bond to guarantee the
payment of the tax assessed against it which motion was
denied by the Court of Tax Appeals on the ground that
cannot be legally done it appearing that the syndicate is
already a non-existing entity due to the expiration of its
corporate existence. In view of this development, the
Collector filed a motion to dismiss the appeal on the ground
of lack of personality on the part of the syndicate, which
met an opposition on the part of the latter, but on January
25, 1955, the Court of Tax Appeals issued a resolution
dismissing the appeal primarily on the ground that the
Central Syndicate has no personality to maintain the action
then pending before it. From this order the syndicate
appealed to the Supreme Court wherein it intimated that
the appeal should not be dismissed because it could be
substituted by its successors-in-interest, to wit: Tan Tiong
Bio, Yu Khe Thai, Alfonso Sycip, Dee Hong Lue, Lim Shui Ty,
Sy Seng Tong, Sy En, Co Giap and David Sycip. And taking
cue from this suggestion, this Court ruled against the
dismissal and held: "The resolution appealed from is set
aside and the respondent court is ordered to permit the
substitution of the officers and directors of the defunct
Central Syndicate as appellants, and to proceed with the
hearing of the appeal upon its merits." In permitting the
substitution, this Court labored under the premise that said
officers and directors "may be held personally liable for the
unpaid deficiency assessments made by the Collector of
Internal Revenue against the defunct syndicate."
After trial, the Court of Tax Appeals rendered decision the
dispositive part of which reads as follows:
WHEREFORE, in view of the foregoing considerations,
the decision of the Collector of Internal Revenue
appealed from is hereby affirmed, except with regard to
the imposition of the compromise penalty of P300.00
the collection of which is unauthorized and illegal in the
absence of a compromise agreement between the
parties. (Collector of Internal Revenue vs. University of
Sto. Tomas, G. R. No. L-11274, November 28, 1958;
Collector of Internal Revenue vs. Bautista & Tan, G.R.
No. L-12250, May 27, 1959.) .
The petitioners Tan Tiong Bio, Yu Khe Thai, Lim Shui Ty,
Alfonso Sycip, Sy En alias Sy Seng Sui, Dee Hong Lue,

and Sy Seng Tong, who appear in the Articles of

Incorporation of the Central Syndicate Annex A (pp. 6066, CTA rec.) as incorporators and directors of the
corporation, the second named being in addition its
President and the seventh its Treasurer, are hereby
ordered to pay jointly and severally, to the Collector of
Internal Revenue, the sum of P33,797.88 as deficiency
sales tax and surcharge on the surplus goods purchased
by them from the Foreign Liquidation Commission on
July 5, 1946, from which they realized an estimated
gross sales of P1,447,551.65, with costs. ..
Petitioners interposed the present appeal.
The important issues to be determined in this appeal are:
(1) whether the importer of the surplus goods in question
the sale of which is subject to the present tax liability is
Dee Hong Lue or the Central Syndicate who has been
substituted by the present petitioners; (2) whether the
deficiency sales tax which is now sought to be collected
has already prescribed; and (3) the Central Syndicate
having already been dissolved because of the expiration of
its corporate existence, whether the sales tax in question
can be enforced against its successors-in-interest who are
the present petitioners.
1. Petitioners contend that the Central Syndicate cannot be
held liable for the deficiency sales tax in question because
it is not the importer of the surplus goods purchased from
the Foreign Liquidation Commission for the reason that said
surplus goods were purchased by Dee Hong Lue as shown
by the contract executed between him and the Foreign
Liquidation Commission and the fact that the Central
Syndicate only purchased the same from Dee Hong Lue and
not from the Foreign Liquidation Commission as shown by
Exhibit 13.
This contention cannot be sustained. As correctly observed
by the Court of Tax Appeals, the overwhelming evidence
presented by the Collector points to the conclusion that
Dee Hong Lue purchased the surplus goods in question not
for himself but for the Central Syndicate which was then in
the process of incorporation such that the deed of sale
Exhibit 13 which purports to show that Dee Hong Lue sold
said goods to the syndicate for a consideration of
P1,250,000.00 (the same amount paid by Dee Hong Lue to

the Foreign Liquidation Commission) "is but a ruse to evade

payment of a greater amount of percentage tax." The
aforesaid conclusion of the lower court was arrived at after
a thorough analysis of the evidence on record, pertinent
portion of which we quote hereunder with approval:
Exhibit "38-A" for the respondent (p. 178, BIR rec.)
shows that as early as July 23, 1946, or before the
organization and incorporation of Central Syndicate, Mr.
David Sycip, who was subsequently appointed General
Manager of the corporation, together with Messrs. Sy En
alias Sy Seng Sui (one of the incorporators of Central
Syndicate), Serge Gordeof and Chin Siu Bun (an
employee of the same corporation), for and in the name
of Central Syndicate then in the process of organization,
went to Leyte to take over the surplus properties sold
by the FLC to Dee Hong Lue, which the latter held in
trust for the corporation. Exhibit 38-A, which is a
certificate issued by no less than David Sycip himself
who was subsequently appointed General Manager of
the corporation admits in express terms the following
"... the surplus property sold by the Foreign Liquidation
Commission to Dee Hong Lue (and held in trust by the
latter for the Syndicate ...." (Emphasis ours.) We give
full weight and credence to the adverse admissions
made by David Sycip against the petitioners as
appearing in his certificate Exhibit 38-A (p. 178, BIR
rec.) considering that at the time he made them, he
was a person jointly interested with the petitioners in
the transaction over which there was yet no controversy
over any sales tax liability. (Secs. 11 and 33, Rule 123,
Rules of Court; Clem vs. Forbeso, Tex. Cir App. 10 S.W.
2d 223; Street vs. Masterson, Tex. Cir. App. 277 S.W.
407.) .
Exhibit '39' for the respondent (pp. 184-187, BIR rec.)
which is a letter of Mr. Yu Khe Thai President, Director
and biggest stockholder of Central Syndicate (Exhibit A,
pp. 60-65, CTA rec.) dated September 17, 1946 and
addressed to the Commanding General AFWESPAC,
Manila, contains the following categorical admissions
which corroborate the admissions made by David Sycip;
that the so-called Leyte 'Mystery Pile' surplus properties
were owned by Central Syndicate by virtue of a
purchase from the FLC, effected in the name of Dee
Hong Lue on July 5, 1946, inasmuch as Central

Syndicate was then still in the process of organization;

that Dee Hong Lue held the said surplus properties in
trust until the mere formal turnover to the corporation
on August 20, 1946, when the corporation had already
been organized and incorporated under the laws of the
Philippines; and that on July 23, 1946 viz., twenty-two
(22) days before the incorporation of Central Syndicate
on August 15, 1946 'our General Manager, Mr. David
Sycip accompanied by one of our directors, Mr. Sy En,
arrived in Leyte to take over the properties.'
Before passing on to the rest of the evidence supporting
the finding of respondent, we would like to call attention
to this significant detail. It is stated in the letter, Exhibit
39 (pp. 184-187, BIR rec.) of Mr. Yu Khe Thai that 'on
July 23, 1946, our General Manager, Mr. David Sycip,
accompanied by one of our directors, Mr. Sy En, arrived
in Leyte to take over the properties,' We ask: Why was
there such a hurry on the part of the promoters of
Central Syndicate in taking over the surplus properties
when the formal agreement, Exhibit 13 (p. 66, BIR rec.),
purporting to be a contract of sale of the 'Mystery Pile'
between Dee Hong Lue as vendor, and the Central
Syndicate, as vendee, for the amount of P1,250,000.00,
was effected twenty-eight (28) days later viz., on
August 20, 1946? Is this not another clear and
unmistakable indication that from the very start, as is
the theory of the respondent, the real purchasers of the
'Mystery Pile' from the FLC and as such the 'importers'
of the goods, were the Central Syndicate and/or the
group of big financiers composing it before said
corporation was incorporated on August 15, 1946; and,
that Dee Hong Lue acted merely as agent of these
persons when he purchased the pile from the FLC? As a
general rule, one does not exercise all the acts of
ownership over a property especially if it involves a big
amount until after the documents evidencing such
ownership are fully accomplished.
Moreover, it appears that on October 3, 1946, Dee Hong
Lue was investigated by Major Primitivo San Agustin, Jr.,
G-2 of the Philippine Army, because of the discovery of
some gun parts found in his shipment of surplus
material from Palo, Leyte.

In his sworn statement, Exhibit 16 (pp. 133-139, BIR

rec.) before said officer, Dee Hong Lue admitted the
following: That he paid the FLC the amount of
P1,250,000.00 "with the checks of Yu Khe Thai, maybe
also Alfonso Sycip and my checks with many others";
that "at the beginning I was trying to buy the pile for
myself without telling other people and other friends of
mine." "Watkins came to me and he bid for me for
P600,000 or P700,000, but later on when the price went
up to P1,250,000, I talked to my friends who said I could
get money." "So, I bought it with their checks and mine"
(Exhibit 16-B, p. 138, BIR rec.) and, that after buying
the "Mystery Pile", he (Dee Hong Lue) never inspected
the same personally. (p. 141, BIR rec.)
In his affidavit, Exhibit 15 (p. 144, BIR rec.) Dee Hong
Lue admitted that of the amount of P1,250,000.00
which he paid in two installments sometime in July,
1946, to the FLC, P1,181,250.00 (should be
P1,181,000.00) of the amount came from the following:
Yu Khe Thai who advanced to him P250,000.00; Sy Seng
Tong P375,000.00; Alfonso Z. Sycip - P375,000.00;
Tan Tiong Bio - P125,000.00; Robert Dee Se Wee
P25,000.00; and, Jose S. Lim P31,000.00 that his
understanding with these persons was that should they
eventually join him in Central Syndicate, such advances
would be adjusted to constitute their investments; and,
that soon after the "Mystery Pile" was purchased from
the FLC, all the above-named persons with the
exception of Robert Dee Se Wee and Jose S. Lim, formed
the Central Syndicate and a re-allocation of shares was
made corresponding to the amounts advanced by
them.
Added to these, we have before us other documentary
evidence for the respondent consisting of Exhibits 18,
19, 20, 21, 23, 24, 25, 26, 27, 28 and 29 (pp. 85, 88,
92-96, 99-103, 117-128, 119-120, 121-128, BIR rec.) all
tending to prove the same thing - that the Central
Syndicate and/or the group of big financiers composing
it and not Dee Hong Lue was the real purchaser
(importer) of the "Mystery Pile" from the FLC; that in the
contract of sale between Dee Hong Lue and the FLC the
former acted principally as agent (Article 1930, New
Civil Code) of the petitioners Yu Khe Thai, Sy Seng Tong,
Alfonso Z. Sycip and Tan Tiong Bio who advanced the

purchased price of P1,125,000.00 out of the

P1,250,000.00 paid to the FLC, Dee Hong Lue being the
purchaser in his own right only with respect to the
amount of P69,000.00; and, that the deed, Exhibit 13
(p. 77, BIR rec.) purporting to show that Dee Hong Lue
sold the "Mystery Pile" to the Central Syndicate for
consideration of P1,250.000.00 is but a ruse to evade
payment of a greater amount of percentage tax.
1wph1.t
To our mind, the deed of sale, Exhibit 13 (p. 66, BIR
rec.) as well as the circumstances surrounding the
incorporation of the Central Syndicate, are shrouded
with as much mystery as the so-called "Mystery Pile"
subject of the transaction. But, as oil is to water, the
truth and underlying motives behind these transactions
have to surface in the end. Petitioners would want us to
believe that Dee Hong Lue bought in his own right and
for himself the surplus goods in question for
P1,250,000.00 from the FLC and then, by virtue of a
valid contract of sale, Exhibit 13 (p. 66, BIR rec.)
transferred and conveyed the same to the Central
Syndicate at cost. If this be so, what need was there for
Dee Hong Lue to agree in the immediate organization
and incorporation of the Central Syndicate with six
other capitalists when he could very well have disposed
of the surplus goods to the public in his individual
capacity and keep all the profits to himself without
sharing 9/10th of it to the other six incorporators and
stockholders of the newly incorporated Syndicate.
It appears that Dee Hong Lue "sold" the pile to the
Central Syndicate for exactly the same price barely
forty-six (46) days after acquiring it from FLC and
exactly five (5) days after the Syndicate was registered
with the Securities and Exchange Commission on
August 19, 1946. This is indeed most unusual for a
businessman like Dee Hong Lue who, it is to be
presumed, was out to make a killing when he acquired
the surplus goods from the FLC for the staggering
amount of P1,750,000.00 in cash.
Again, why did Dee Hong Lue waste all his time and
effort not to say his good connections with the FLC by
acquiring the goods from that agency only to sell it for
the same amount to the Central Syndicate? This would

have been understandable if Dee Hong Lue were the

biggest and controlling stockholder of the Syndicate. He
could perhaps reason out to himself, "the profits which I
am sacrificing now in this sale to the Syndicate, I will
get it anyway in the form of dividends from it after it
shall have disposed of all the "Mystery Pile" to the
public.' But then, how could this be possible when Dee
Hong Lue was the smallest subscriber to the capital
stock of the Syndicate? It appears from the Articles of
Incorporation that of the authorized capital stock of the
corporation in the amount of P500,000.00, Dee Hong
Lue subscribes to only P20,000.00 or 1/25th of the
capital stock authorized and of this amount only
P5,000.00 was paid by him at the time of incorporation.
So here is an experienced businessman like Dee Hong
Lue who, following the theory of petitioners' counsel,
bought the "'Mystery Pile" for himself for P1,250,000.00
in cash, and after a few days sold the same at cost to a
corporation wherein he owned only 1/25th of the
authorized capital stock and wherein he was not even
an officer, thus doling out to the other six incorporators
and stockholders net profits in the sum conservatively
estimated by the respondent to be P206,116.45 out of a
total of P229,073.83 which normally could all go to him.
We take judicial notice of the fact that as a result of our
immense losses in property throughout the archipelago
the during the Japanese occupation, either through
destruction or systematic commandering by the enemy
and our forces, surplus properties commanded a very
good price in the open market after the liberation and
that quite a number of surplus dealers made immense
fortunes out of it. We believe the respondent was quite
charitable if not more than fair to the Central Syndicate
in computing the profits realized by it in the resale of
the "Mystery Pile" to the public at only 18.8% of the
acquisition price.
Now, from the side of the Central Syndicate. This
corporation, as its articles of incorporation, Exhibit A
(pp. 60-66, CTA rec.) will show, was incorporated on
August 15, 1946 with an authorized capital stock of
P500,000.00 of which P200,000.00 worth was
subscribed by seven (7) persons and P50,000.00 paidup in cash at the time of incorporation. Five (5) days
after its incorporation, as the Deed of Sale, Exhibit 13
(p. 66, BIR rec.) purports to show, the said corporation

bought from Dee Hong Lue the "Mystery Pile" for

P1,250,000.00 in cash. This is indeed quite phenomenal
and fantastic not to say the utmost degree of finance
considering that the corporation had a subscribed
capital stock of only P200,000.00 of which only
P50,000.00 was paid-up at the time of incorporation
and with not the least proof showing that it never
borrowed money in its own name from outside source to
raise the enormous amount allegedly paid to Dee Hong
Lue nor evidence to show that it had by then in so short
a time is five (5) days accumulated a substantial
reserve to meet Dee Hong Lue's selling price.
Furthermore, at first blush it would seem quite difficult
to understand why the seven (7) incorporators and
stockholders of the Central Syndicate formed a
corporation with a subscribed capital stock of only
P200,000.00, and with cash on hand of only P50,000.00
knowing fully well that there was a transaction awaiting
the newly registered corporation involving an outlay of
P1,250,000.00 in cash. We believe this was done after
mature deliberation and for some ulterior motive. As we
see it, the only logical answer is that the incorporator
wanted to limit whatever civil liability that might arise in
favor of third persons, as the present tax liability has
now arisen, up to the amount of their subscriptions,
although the surplus deal they transacted and which we
believe was the only purpose in the incorporation of the
Central Syndicate, was very much over and above their
authorized capital. Moreover, by limiting its capital, the
corporation was also able to save on incidental
expenses, such as attorney's fee and the filing fee paid
to the Securities and Exchange Commission, which were
based on the amount of the authorized capital stock.
Another mystery worth unravelling is what happened to
the P1,181,240.00 (should be P1,181,000.00) which
Dee Hong Lue in his affidavit, Exhibit 15 (p. 144, BIR
rec.) claims to have received from Messrs. Uy Khe Thai,
Sy Seng Tong, Alfonso Z. Sycip, Tan Tiong Bio (all
incorporators of the Syndicate) and two others as
'advances' with which to pay the FLC. There is no
evidence on record to show that Dee Hong Lue ever
returned this amount to those six (6) persons after he
supposedly received P1,250,000.00 from the newly
incorporated Syndicate by virtue of the Deed of Sale,

Exhibit 13. This is the explanation that Dee Hong Lue

gave in this regard as appearing in his affidavit, Exhibit
15: "That soon after the above-mentioned property was
purchased, the above parties, with the exception of
Robert Dee Se Wee and Jose S. Lim decided to join the
proposed Central Syndicate and a re-allocation of
shares was made for the reason that some of the above
parties in turn had to get advances from third parties."
If this were true, why was it that Messrs. Yu Khe Thai, Sy
Seng Tong, Alfonso Z. Sycip and Tan Tiong Bio who
advanced P250,000.00; P375,000.00 and P125,000.00
to Dee Hong Lue were made to appear in the Articles of
incorporation of the Central Syndicate as having
subscribed
to
shares
worth
only
P40,000.00;
P30,000.00; P30,000.00 and P20,000.00 and of having
paid only P10,000.00, P7,500.00, P7,500.00, and
P5,000.00 on their subscriptions, respectively? Would it
not be more in keeping with corporate practice,
following the explanation of Dee Hong Lue, to just credit
those four (4) persons in the corporation with shares
worth the amount advanced by them to Dee Hong Lue?
On the basis of the above figures, the re-allocation of
shares in favor of the four (4) incorporators who
advanced enormous sums for the Syndicate seems at
first glance to be totally disproportionate and unfair to
them. However, in the final analysis it is not so as we
will now show. Immediately after the incorporation of
the Syndicate, as the evidence shows, Dee Hong Lue
was made to execute a deed of transfer under the guise
of a contract of sale, conveying full and complete
ownership of the "Mystery Pile" to the newly organized
corporation. So we have, on the face of the Articles of
Incorporation and Exhibit 13, a corporation with assets
worth only P50,000.00 cash owning properties worth
over a million pesos. Obviously, the incorporators of the
Syndicate, particularly those four who advanced
enormous sums to Dee Hong Lue, are not ordinary
businessmen who could easily be taken for a ride. With
the precipitated execution of the "Deed of Sale" by Dee
Hong Lue in favor of the Syndicate, transferring and
conveying ownership over the entire pile to the latter,
the recoupment of their advances from the newly
acquired assets of the corporation was sufficiently
secured, and at the same time, by making the
document appear to be a deed of sale instead of a deed

of transfer as it should be under Article 1891 of the New

Civil Code, they have reduced (at least attempted to)
their sales tax liability with the argument that Dee Hong
Lue was the original "purchaser" or "importer" of the
goods and therefore the taxable sale was that one
made by him to the Syndicate and not the sales made
by the latter to the public. After going over the Articles
of Incorporation of the Central Syndicate and the other
circumstances of this case, we draw the conclusion that
it was organized just for this particular transaction that
its life span was expressly limited to two (2) years from
and after the date of incorporation just to give it time to
dispose of the "Mystery Pile" to the public and then
liquidate all its assets among the seven incorporatorsstockholders as in fact it was done on August 15, 1948;
that from the very start, the seven (7) incorporators had
intended it to be a closed corporation without the least
intention of ever selling to other persons the remaining
authorized
capital
stock
of
P300,000.00
still
unsubscribed; and, that upon its liquidation, the seven
(7) incorporators composing it got much more than
their investments including those who advanced
P1,181,000.00 to the FLC for the corporation.
Petitioners would dispute the finding that Dee Hong Lue
merely acted as a trustee of the Central Syndicate when he
purchased the surplus goods in question from the Foreign
Liquidation Commission on July 5, 1946 considering that on
that date the syndicate has not yet been incorporated on the
theory that no legal relation may exist between parties one of
whom has yet no legal existence. Technically this may be true,
but the fact remains that it cannot be denied that Dee Hong
Lue purchased the goods on behalf of those who advanced the
money for the purchase thereof who later became the
incorporators and only stockholders of the syndicate with the
understanding that the amounts they had respectively
advanced would be their investment and would represent their
interest in the corporation. And this is further evidenced by the
fact that this purchase made by Dee Hong Lue was later
approved and adopted as the act of the Central Syndicate
itself as can be gleaned from the certificate executed by David
Sycip, general manager of said syndicate, on September 16,
1946, wherein he emphasized that the persons named therein
(from whom Dee Hong Lue obtained the money) merely acted
on behalf of the syndicate and in fact were the ones who went
to Leyte to take over the aforesaid surplus goods. In any

event, even if Dee Hong Lue may be deemed as the purchaser

of the surplus goods in his own right, nevertheless, the
corporation still may be regarded as the importer of the same
goods for the reason that Dee Hong Lue transferred to it all his
rights and interests in the contract with the Foreign Liquidation
Commission, and it was said corporation that took delivery
thereof from the place where they were stored in Leyte as may
be seen from the letter of Dee Hong Lue to the Foreign
Liquidation Commission dated September 2, 1946 and the
letter of the Central Syndicate to the said Commission bearing
the same date. Under these facts, it is clear that the Central
Syndicate is the importer of the surplus goods as correctly
observed by Judge Umali in his concurring opinion, from which
we quote: .
It is now well settled that a person who bought surplus
goods from the Foreign Liquidation Commission and who
removed the goods bought from the U.S. military bases in
the Philippines is considered an importer of such goods
and is subject to the sales tax or compensating tax, as the
case may be. (Go Cheng Tee v. Meer, 47 O.G. 269; Saura
Import and Export v. Meer, G.R. No. L-2927, Jan. 26, 1951;
P.M.P. Navigation v. Meer, G.R. No. L-4621, March 24, 1953;
Soriano y Cia v. Coll. of Int. Rev., 51 O.G. 4548.) In this
case it appearing that the Central Syndicate was the owner
of the 'Mystery Pile' before its removal from Base K and
that it was the one which actually took delivery thereof
and removed the same from the U.S. military base, it is the
importer within the meaning of Section 186 of the Revenue
Code, as it stood before the enactment of Republic Act No.
594, and its sales of the surplus goods are the original
sales taxable under said section and not the sale to it by
Dee Hong Lue.
2. Since the Central Syndicate, as we have already pointed
out, was the importer of the surplus goods in question, it was
its duty under Section 183 of the Internal Revenue Code to file
a return of its gross sales within 20 days after the end of each
quarter in order that the office of the internal revenue may
assess the sales tax that may be due thereon, but, as the
record shows, the Central Syndicate failed to file any return of
its quarterly sales on the pretext that it was Dee Hong Lue
who imported the surplus goods and it merely purchased them
from said importer. This is in fact what the syndicate intended
to impress upon the Collector when it wrote to him its letter of
October 19, 1946 informing him that it purchased from Dee

Hong Lue the entire stock of the surplus goods which the latter
had bought from the Foreign Liquidation Commission and was
therefore depositing in his name the sum of P43,750.00 to
answer for his sales tax liability, but this letter certainly cannot
be considered as a return that may set in operation the
application of the prescriptive period provided for in Section
331 of the Tax Code, for, evidently, said letter if at all could
only be considered as such in behalf of Dee Hong Lue and not
in behalf of the Central Syndicate because such is the only
nature and import of the letter. Besides, how can such letter
be considered as a return of the sales of the Central Syndicate
when it was only on February 21, 1947 when it removed the
surplus goods in question from their base at Leyte? How can
such return inure to the benefit of the syndicate when the
same surplus goods which were removed on said date could
not have been sold by the corporation earlier than the
aforesaid date? It is obvious that the letter of October 19,
1946 cannot possibly be considered as a return filed by the
syndicate and so cannot serve as basis for the computation of
the prescriptive period of five years prescribed by law.
Nor can the fact that the Collector did not include in the
assessment a surcharge of 50% serve as an argument that a
return had already been filed, for such failure can only mean
that an oversight had been committed in the non-inclusion of
said surcharge. The syndicate having failed to file its quarterly
returns as required by Section 183 of the Tax Code, the period
that has to be reckoned with is that embodied in Section 332
of the same Code which provides that in case of failure to file
the return the tax may be assessed within 10 years after
discovery of the falsity, fraud or omission of the payment of
the proper tax. Since it appears that the Collector discovered
the failure of the syndicate to file the return only on
September 12, 1951 he has therefore up to September 18,
1961 within which to assess or collect the deficiency tax in
question. Consequently the assessment made on January 4,
1952 was made within the prescribed period.
3. Petitioners argue (1) that the Court of Tax Appeals acted in
excess of its jurisdiction in holding them liable as officers or
directors of the defunct Central Syndicate for the tax liability
of the latter; (2) that petitioners cannot be held liable for said
tax liability there being no statutory provision in this
jurisdiction authorizing the government to proceed against the
stockholders of a defunct corporation as transferees of the
corporate assets upon liquidation; (3) that assuming that the

stockholders can be held so liable, they are only liable to the

extent of the benefits derived by them from the corporation
and there is no evidence showing that petitioners had been
the beneficiaries of the defunct syndicate; (4) that considering
that the Collector instituted the present action on September
23, 1954 when he filed his answer to the appeal of petitioners,
said action was already barred by prescription pursuant to
Sections 77 and 78 of the Corporation Law which allows
corporations to continue as a body corporate only for three
years from its dissolution; and (5) that assuming that
petitioners are liable to pay the tax, their liability is not
solidary, but only limited to the benefits derived by them from
the corporation.
It should be stated at the outset that it was petitioners
themselves who caused their substitution as parties in the
present case, being the successors-in-interest of the defunct
syndicate, when they appealed this case to the Supreme Court
for which reason the latter Court declared that "the
respondent Court of Tax Appeals should have allowed the
substitution of its former officers and directors is partiesappellants, since they are proper parties in interest insofar as
they may be (and in fact are) held personally liable for the
unpaid deficiency assessments made by the Collector of
Internal Revenue against the defunct Syndicate." In fact,
because of this directive their substitution was effected. They
cannot, therefore, be now heard to complain if they are made
responsible for the tax liability of the defunct syndicate whose
representation they assumed and whose assets were
distributed among them.
In the second place, there is good authority to the effect that
the creditor of a dissolved corporation may follow its assets
once they passed into the hands of the stockholders. Thus,
recognized are the following rules in American jurisprudence:
The dissolution of a corporation does not extinguish the debts
due or owing to it (Bacon v. Robertson, 18 How. 480, 15 L. Ed.,
406; Curron v. State, 16 How. 304, 14 L. Ed., 705). A creditor of
a dissolve corporation may follow its assets, as in the nature of
a trust fund, into the hands of its stockholders (MacWilliams v.
Excelsier Coal Co. [1924] 298 Fed. 384). An indebtedness of a
corporation to the federal government for income and excess
profit taxes is not extinguished by the dissolution of the
corporation (Quinn v. McLeudon, 152 Ark. 271, 238 S.W., 32).
And it has been stated, with reference to the effect of
dissolution upon taxes due from a corporation, "that the hands

of the government cannot, of course, collect taxes from a

defunct corporation, it loses thereby none of its rights to
assess taxes which had been due from the corporation, and to
collect them from persons, who by reason of transactions with
the corporation, hold property against which the tax can be
enforced and that the legal death of the corporation no more
prevents such action than would the physical death of an
individual prevent the government from assessing taxes
against him and collecting them from his administrator, who
holds the property which the decedent had formerly
possessed" (Wonder Bakeries Co. v. U.S. [1934] Ct. Cl. 6 F.
Supp. 288). Bearing in mind that our corporation law is of
American origin, the foregoing authorities have persuasive
effect in considering similar cases in this jurisdiction. This must
have been taken into account when in G.R. No. L-8800 this
Court said that petitioners could be held personally liable for
the taxes in question as successors-in-interest of the defunct
corporation.
Considering that the Central Syndicate realized from the sale
of the surplus goods a net profit of P229,073.83, and that the
sale of said goods was the only transaction undertaken by said
syndicate, there being no evidence to the contrary, the
conclusion is that said net profit remained intact and was
distributed among the stockholders when the corporation
liquidated and distributed its assets on August 15, 1948,
immediately after the sale of the said surplus goods.
Petitioners are therefore the beneficiaries of the defunct
corporation and as such should be held liable to pay the taxes
in question. However, there being no express provision
requiring the stockholders of the corporation to be solidarily
liable for its debts which liability must be express and cannot
be presumed, petitioners should be held to be liable for the
tax in question only in proportion to their shares in the
distribution of the assets of the defunct corporation. The
decision of the trial court should be modified accordingly.
WHEREFORE, with the above modification, we hereby affirm
the decision appealed from, with costs against petitioners.

control of the assets of the corporation upon dissolution in

winding up its affairs. The normal method of procedure is
for the directors and executive officers to have charge of
the winding up operations, though there is the alternative
method of assigning the property of the corporation to
trustees for the benefit of its creditors and shareholders.
China Banking v. Michelin
[No. 36930. June 30, 1933]
In the matter of the Voluntary Dissolution of George,
O'Farrell & Cie., Inc. CHINA BANKING CORPORATION and
LEOPOLDO KAHN, claimants and appellants, vs. M.
MICHELIN & CIE., claimant and appellee.
1. CORPORATIONS; RECEIVERSHIP; PROCEDURE BY
COURT IN APPROVING CLAIMS.Claims against a
corporation in the hands of a receiver should not be
approved and paid without some formal and regular
proceeding whereby their justice and correctness may be
inquired into after a reasonable opportunity has been given
to all the parties in interest to present objections and
submit evidence in support of such objections. (Whalen vs.
Pasig Iron Works, 13 Phil., 417.)
2. ID. ; VOLUNTARY DISSOLUTION ; APPOINTMENT OF
RECEIVER.Section 176 of the Code of Civil Procedure
dealing with the appointment of receiver upon decree of
dissolution of a corporation provides that the court "may * *
* appoint a receiver to take charge" of the estate and
effects of the corporation, "and to pay the outstanding
debts thereof, and to divide the money and other
properties that shall remain over among the stockholders
or members," and consistent with said provision section 66
of the Corporation Law provides with respect to decrees of
dissolution rendered upon voluntary application that the
court "may appoint receivers to collect and take charge of
the assets of the corporation." Such language found in both
statutes on the subject is permissive rather than
mandatory and tends to recognize that in cases of
voluntary dissolution there is no occasion for the
appointment of a receiver except under special
circumstances and upon proper showing. There can be no
doubt that when enacting the Corporation Law the
Legislature intended to let the shareholders have the

3. ID.; ID.; ID.Statutes authorizing voluntary

dissolutions are generally held to apply only to a dissolution
brought about by the stockholders themselves, and while
the appointment of a receiver rests within the sound
judicial discretion of the court, such discretion must,
however, always be exercised with caution and governed
by legal and equitable principles, the violation of which will
amount to its abuse, and in making such appointment the
court should take into consideration all the facts and weigh
the relative advantages and disadvantages of appointing a
receiver to wind up the corporate business. The court
should only act on facts which have been proved by
competent legal evidence. (8 Thompson on Corp. [2d ed.],
pages 693, 701, 727, and 738.)

4. ID. ; ID. ; WHEN CLAIMS CAN BE REVIEWED BY

COURTS.The decree of dissolution in the case at bar
having been entered on August 22, 1930, and the motion of
the appellant, China Banking Corporation, appearing to
have been filed on September 30, 1931, or about thirteen
months later, it follows that the motion was filed on time to
have the appellee's claim reviewed by the court under the
provisions of the Corporation Law, and the trial court,
therefore, erred in finding that the order of November 8,
1930, allowing appellee's claim was final and unappealable
under the provisions of section 113 of the Code of Civil
Procedure.
APPEAL from an order of the Court of First Instance of Manila. Vickers, J.
The facts are stated in the opinion of the court.
Feria & La, O and Felipe Canillas for appellants.
Gutierrez Repide & Monzon and Ramon L. Sunico for appellee.

OSTRAND, J.:

This is a joint appeal of the China Banking Corporation and

Leopoldo Kahn from the order of the Court of First Instance
of Manila dated November 7, 1931, denying the appellant

banks motion for reconsideration of the order of the said

court of November 8, 1930, allowing the claim of the
appellee, M. Michelin & Cie., as a preferred claim against
the corporation in dissolution, George, OFarrell & Cie., Inc.,
to which reference will be made as the "corporation."
The appellant, China Banking Corporation, is a claimant
against the corporation as the holder of a note for P8,5000
signed jointly and severally by the corporation and the
other appellant, Leopoldo Kahn, who has joined the appeal
to protect his interest.
George OFarrell & Cie., Inc., is a domestic corporation
organized in 1925 and registered in the same year in the
mercantile register of the Bureau of Commerce and
Industry, one of its purposes being that of acting as the
agent and representative of foreign firms for the sale and
distribution of their products in the Philippines.
For a number of years prior to its dissolution the
corporation had been acting as the representative of the
appellee, M. Michelin & Cie., in the Philippine Islands for the
sale and distribution of the rubber tires for motor cars
produced by the appellee and broadly known as "Michelin
tires." These business relations between the appellee
decided to discontinue them, and upon settlement of
accounts between both concerns it was found that the
corporation failed to account for the sum of P23,268.83, the
sale price of a number of rubber tires sold by the
corporation. This amount according to appellees claim and
taking appellees own words "was disposed of by the
corporation for its own use and benefit and without the
authority or consent" of the appellee. A few days later,
however, the corporation, Gaston OFarrell, personally, and
one Rosario Sanchez, represented by Gaston OFarrell as
her attorney-in-fact, executed a mortgage in favor of the
appellee of a house belonging to Gaston OFarrell and of a
number of shares of stock of the corporation owned by
OFarrell and Rosario Sanchez to guarantee payment of the
said amount to the appellee in five monthly installments,
the first one to be made on June 1, 1930, and prior to the
filing of the petition for dissolution the corporation made a
partial payment of P1,300 leaving an unpaid balance of
P21,968.83, which is the amount claimed by the appellee
and allowed by the court below as a preferred claim.
(Record of Appeal, pages 16, 17, 18, 73-79.)
On July 9, 1930, the board of directors filed the petition for

its dissolution and for the appointment of its president and

general manager, Gaston OFarrell, as receiver and
liquidator to wind up the affairs of the corporation which,
according to the petition, had a balance of P57,601.24 over
and above its just debts and liabilities, and upon
publication of the notices required by law and hearing of
the petition the trial court decreed the dissolution of the
corporation on August 22, 1930, and appointed the said
Gaston OFarrell as receiver and liquidator to wind up the
affairs of the corporation, pay all its liabilities, collect all
debts and obligations and dispose of all the remaining
assets and property of the corporation subject to the order
of the court and as the law may permit and justice may
require.
The appellee, M. Michelin & Cie., is a foreign "sociedad
annima" organized under the laws of France and domiciled
in said country, and on November 4, 1930, filed its claim
against the corporation for the aforesaid balance of
P21,968.83 with a prayer that the claim be allowed as a
preferred one against the corporation on the ground that
the said amount represented the proceeds from the sale of
a number of rubber tires which were on deposit with and
sold by the corporation. The attorney for the corporation,
Jesus O. Serrano, gave his conformity to the petition by
signing at the foot thereof under the words "estoy
conforme en que la presente reclamacin sea considerada
como credito preferente." Notice setting the hearing of the
claim for Saturday, November 8, 1930, was likewise served
on said Jesus O. Serrano as attorney for the corporation. No
notice appears to have been given to anybody else neither
of the claim nor of the hearing thereof, and on the same
date set for the hearing, that is, November 8, 1930, the
court rendered a judgment allowing the claim as a
preferred claim against the corporation and directing the
receiver to pay the amount thereof out of any funds in his
possession. Nobody except the claimant and the attorney
for the receiver was notified of such order. Under date of
November 26, 1930, was likewise served on said Jesus O.
Serrano as attorney for the corporation. No notice appears
to have been given to anybody else neither of the claim nor
of the hearing thereof, and on the same date set for the
hearing, that is, November 8, 1930, the court rendered a
judgment allowing the claim as a preferred claim against
the corporation and directing the receiver to pay the
amount thereof out of any funds in his possession. Nobody
except the claimant and the attorney for the receiver was
notified of such order. Under date of November 26, 1930,

the appellee filed an "ex parte petition", praying for an

order directing the liquidator, Gaston OFarrell, to pay
appellees claim within three days, and acting on said
petition the court granted the same and directed the
liquidator to pay the claim within three days with
preference to all other claims. Again nobody was served
with notice of this order, and pursuant thereto, the receiver
paid the appellee on December 9, 1930, the sum of P5,000
on account which was receipted for by appellees attorney.
(Record of Appeal, pages 16-21; Main Record, pages 233,
569, 576, 572, and 579.)
On September 30, 1931, the appellant, China Banking
Corporation, filed a motion praying that the orders of
November 8 and November 26, 1930, be set aside as null
and void, that appellees claim be allowed as an ordinary
claim and that the sum of P5,000 paid by the receiver to
the appellee on account of the latters claim be refunded to
the funds of the corporation in liquidation for the benefit of
the rest of the creditors. In support of said motion and with
the permission of the court the appellant, Leopoldo Kahn,
submitted a memorandum, arguing on the nullity of the
said orders on the ground of want of notice and on the
proposition that under the provisions of the Insolvency Law
appellees claim could not and should not have been
allowed as a preferred claim under the allegations
contained therein. Upon consideration of the motion, the
memorandum, appellees opposition and the arguments of
counsel, the trial court denied the motion under order of
November 7, 1931, as far as it referred to the order of
November 8, 1930, on the ground that said order, "whether
erroneous or not", had become final and unappealable and
ordered that the order of November 26, 1930, be given no
effect as being manifestly contrary to law. (Record of
Appeal, pages 27-32; page 1266 of the second "Pieza" of
the main record.)
The assignment of error made by the appellants contends
that the lower court erred in not finding that the order of
November 8, 1930, is null and void ab initio for lack of
jurisdiction on the part of the court when the said order was
issued and in not finding the said order just as contrary to
the law as the court found the order of November 26, 1930,
to be, and arguing on this point, they raise the question as
to whether appellees claim can legally be allowed on its
face as a preferred claim.
The appellee, on the other hand, argues at length on the

theory that the appellants have had sufficient constructive

notice of the claim and of its allowance by the court and
that under the provisions of section 113 of the Code of Civil
Procedure appellants motion for reconsideration is
untenable.
In so far as the service of notice is concerned, we adhere to
the rule laid down in Whalen v. Pasig Iron Works (13 Phil.,
417), where this court held that." . . claims against a
corporation in the hands of a receiver should not be
approved and paid without some formal and regular
proceeding whereby their justice and correctness may be
inquired into after a reasonable opportunity has been given
to all the parties in interest to present objections and
submit evidence in support of such objections." The said
case is a parallel of the case at bar in that the receiver in
that case, together with the claimant, appeared in open
court and without previous notice to any of the other
parties in interest, the claim was submitted upon the
favorable recommendation of the receiver and allowed by
the court, and upon appeal to this court it was held that the
trial court erred in rendering judgment in such a summary
manner.
After a careful consideration of the arguments of the
attorney for the appellee to show that under the provisions
of section 113 of the Code of Civil Procedure appellants
motion for reconsideration cannot be favorably considered
and upon due consideration having been given also to the
peculiar circumstances surrounding this case, we have
reached the conclusion that the issue should be governed
by the provisions of the Corporation Law or Act No. 1459.
A close examination of the record in this case fails to
disclose the reasons which led the corporation to resort to
the court for a decree of voluntary dissolution. If the
corporation was under such a financial condition as alleged
in its petition for dissolution and did not desire to continue
doing business because of failing conditions or of any other
reason, we are unable to understand the necessity of its
seeking judicial intervention in the winding up of its affairs
coupled with the appointment for a receiver to deal with its
creditors as though they were the creditors of an insolvent
corporation.
Section 176 of the Code of Civil Procedure dealing with the
appointment of receiver upon decree of dissolution of a

corporation provides that the court "may . . . appoint a

receiver to take charge" of the estate and effects of the
corporation, "and to pay the outstanding debts thereof, and
to divide the money and other properties that shall remain
over among the stockholders or members", and consistent
with said provision section 66 of the Corporation Law
provides with respect to decrees of dissolution rendered
upon voluntary application that the court "may appoint
receivers to collect and take charge of the assets of the
corporation." Such language found in both statutes on the
subject is permissive rather than mandatory and tends to
recognize that in cases of voluntary dissolution there is no
occasion for the appointment of a receiver except under
special circumstances and upon proper showing. There can
be no doubt that when enacting the Corporation Law the
Legislature intended to let the shareholders have the
control of the assets of the corporation upon dissolution in
winding up its affairs. The normal method of procedure is
for the directors and executive officers to have charge of
the winding up operations, though there is the alternative
method of assigning the property of the corporation to
trustees for the benefit of its creditors and shareholders.
Section 77 and 78 of the Corporation Law make the general
purpose of the law manifest. Section 77 provides that every
corporation whose charter expires by its own limitation or
whose corporate existence terminates in "any other
manner", shall nevertheless be continued as a body
corporate for three years "after the time when it would
have been so dissolved" for winding up operations; and
section 78 provides that "said corporations at any time
during the three years term may convey its property to
trustees for the benefit of creditors, stockholders and
others concerned."
Statutes authorizing voluntary dissolutions are generally
held to apply only to a dissolution brought about by the
stockholders themselves, and while the appointment of a
receiver rests within the sound judicial discretion of the
court, such discretion must, however, always be exercised
with caution and governed by legal and equitable
principles, the violation of which will amount to its abuse,
and in making such appointment the court should take into
consideration all the facts and weigh the relative
advantages and disadvantages of appointing a receiver to
wind up the corporate business. The court should only act
on facts which have been proved by competent legal

evidence. (8 Thompson on Corp. [2d ed. ], pages 693, 701,

727, and 738.)
The appointment of a receiver by the court to wind up the
affairs of the corporation upon petition of voluntary
dissolution does not empower the court to hear and pass
on the claims of the creditors of the corporation at first
hand. In such cases the receiver does not act as a receiver
of an insolvent corporation. Since "liquidation" as applied to
the settlement of the affairs of a corporation consists of
adjusting the debts and claims, that is, of collecting all that
is due the corporation, the settlement and adjustment of
claims against it and the payment of its just debts, all
claims must be presented for allowance to the receiver or
trustee or other proper persons during the winding up
proceedings which in this jurisdiction would be within the
three years provided by sections 77 and 78 of the
Corporation Law as the term for the corporate existence of
the corporation, and if a claim is disputed or unliquidated
so that the receiver cannot safely allow the same, it should
be transferred to the proper court for trial and allowance,
and the amount so allowed then presented to the receiver
or trustee for payment. The rulings of the receiver on the
validity of claims submitted are subject to review by the
court appointing such receiver though no appeal is taken to
the latters ruling (8 Thompson on Corp., 718), and during
the winding up proceedings after dissolution, no creditor
will be permitted by legal process or otherwise to acquire
priority, or to enforce his claim against the property held
for distribution as against the rights of other creditors. (5
Thompson on Corp. [2d ed. ], pages 1389, 1391, 1402, and
1403.)
The decree of dissolution in the case at bar having been
entered on August 22, 1930, and the motion of the
appellant, China Banking Corporation, appearing to have
been filed on September 30, 1931, or about thirteen
months later, it follows that the motion was filed on time to
have the appellees claim reviewed by the court under the
provisions of the said sections of the Corporation Law, and
the trial court, therefore, erred in finding that the order of
November 8, 1930, allowing appellees claim was final and
unappealable under the provisions of section 113 of the
Code of Civil Procedure.
The record in this case shows that Gaston OFarrell, the

receiver herein, besides being the principal promoter of the

corporation and the holder of the largest number of shares
was elected president and general manager and that he
held the said offices ever since the organization of the
corporation and his conduct in executing a mortgage on his
own house and giving a pledge on his shares of stock and
on those of Rosario Sanchez represented by him as
attorney in fact, in favor of the appellee to guarantee the
latters claim, lends itself to a serious suspicion. The facts
appearing of record leave no room for doubt that his
administration of the business of the corporation left much
to be desired and that he alone ought to be blamed for the
shortage claimed by the appellee, but to save himself from
personal liability he made the corporation shoulder the
burden of the obligation in exchange for a simulated
conveyance of his house to the corporation. No sooner had
the corporation become delinquent in the payment of the
obligation under the terms of the written agreement than
he resorted to a judicial proceeding of voluntary dissolution
in an attempt to settle appellees claim and to free himself
from all harm, but fearing that the alleged preference of
appellees claim might be defeated, in collusion with the
appellee they had the claim allowed summarily as a
preferred claim ignoring the rest of the world.
Appellants contention that appellees claim cannot be
allowed as a preferred claim is well taken for even
admitting for the sake of argument that the merchandise
which sale price is the subject of appellees claim was
shipped to the corporation under a commission agreement
or any other agreement carrying the obligation to return
either the goods or its price, the fact is that the
merchandise in the case at bar was no longer in the
corporations possession nor could the appellee trace the
proceeds from its sale, and this is made manifest by the
very fact of the written agreement entered into between
the appellee and the corporation whereby the appellee
accepted payment of the obligation by installments duly
secured with a mortgage of property to guarantee its
payment. But such is not the case, however, for the very
agreement of May 31, 1930, mentioned in paragraph 5 of
appellees claim, shows that the rubber tires consigned to
the corporation were to be sold by the latter "por orden,
cuenta y riesgo de los Sres. M. Michelin & Cie." and that the
customers accounts were opened "por orden, cuenta y
riesgo de M. Michelin & Cie.", and so much is this true that
the uncollected accounts were turned over to and received
by the appellee, M. Michelin & Cie. Under such

circumstances the amount of appellees claim appears to

be in the nature of a balance of a current account between
the two firms more than anything else. (Record of Appeal,
page 68, together with the 4th and 5th paragraphs of the
agreement.)
The order appealed from is reversed, and the appellees
claim is hereby declared to be an ordinary claim. The
appellee is ordered to refund to the corporation the sum of
P5,000 erroneously paid by the receiver, with costs against
the appellee. So ordered.

ten years after the discovery of the falsity, fraud or

omission.

Republic v. Marsman
No. L-18956. April 27, 1972.
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee, vs.
MARSMAN DEVELOPMENT COMPANY and/or F. H.
BURGESS, in his capacity as Liquidator of the Marsman
Development Company, defendants-appellants.

Taxation; Tax Assessment; Motion for reconsideration

thereof not suspend running of period for collection of
tax; Assessment considered final and executory.The
appellant corporation, by its own omission, made it
impossible for the Bureau of Internal Revenue to act on
its motion for reconsideration. It has been held that the
mere filing of such a motion does not suspend the
running of the period for the collection of the tax and
this implies that any assessment made by the Bureau is
supposed to be final and executory, insofar as the
taxpayer is concerned, unless revised by the Bureau in
accordance with law and regulations, but it is to be
emphasized that a taxpayer cannot delay the collection
of taxes by the simple expedient of barely asking for
clarification or reconsideration, very often unnecessary
and unwarranted, without doing anything to comply with
the statutory and reglementary requirements for the
reconsideration of the assessment made against him.
Same; Same; Prescription; Where taxpayer failed to
file return.Section 231 of the Revenue Code requires
the Collector of Internal Revenue to assess the tax within
the period of five years. Section 231 is not applicable
inasmuch as defendant corporation did not file returns
for the taxes in question. The pertinent provision
applicable is section 332 (a) which provides that in case
of a false or fraudulent return or of a failure to file a
return, the tax may be assessed . . . at any time within

Same; Same; Filing of complete returns.In order

that the filing of a return may serve as the starting point
of the period for the making of an assessment, the
return must be as substantially complete as to include
the needed details on which the full assessment may be
made.
Pleading and practice; Amendments; Admission
retroacts to date of actual filing.An amended
complaint must be considered as filed, for the purposes
of such a substantive matter as prescription, on the date
it is actually filed with the court, regardless of when it is
ultimately formally admitted by the court.
Corporation Law; Corporate for three years after its
dissolution; Where action for tax collection filed after
expiration of three years.While section 77 of the
Corporation Law provides for a three year period for the
continuation of the corporate existence of the
corporation for purposes of liquidation, there is nothing
in said provision which bars an action for the recovery of
the debts of the corporation against the liquidator
thereof, after the lapse of the said three-year period.

Same; Same; Same; Case at bar.It is immaterial

that the present action was filed after the expiration of
three years after the extra-judicial dissolution of the
corporation, for at the very least, and assuming that
judicial enforcement of taxes may not be initiated after
said three years despite the fact that the actual
liquidation has not been terminated and the one in
charge thereof is still holding the assets of the
corporation, obviously for the benefit of all the creditors
thereof, the assessment, made within the three years,
definitely established the Government as a creditor of
the corporation for whom the liquidator is supposed to
hold assets of the corporation.
APPEAL from a decision of the Court of First Instance
of Manila. Vasquez, J.
The facts are stated in the opinion of the Court.

BARREDO, J.:
Appeal from the decision of the Court of First Instance of
Manila, the Honorable Conrado, M. Vasquez, presiding,
sentencing defendants-appellants to pay the amounts of
P44,134.35, P6,603.20 and P456.12, plus legal interest
from August 26, 1959, on the first item, and, from
September 5, 1958, on the later two, representing sales
taxes and forest charges, together with surcharges and
penalties.
As found by His Honor, the factual setting of the decision
is as follows:
Defendant corporation was a timber licensee
holding Timber Licensee Agreement No. 37-A, with
concessions in the Municipality of Basud and
Mondazo, Camarines Norte. Sometime before
October 15, 1953 an investigation was conducted on
the business operation and activities of the
corporation leading to the discovery that certain
taxes were due (from) it on logs produced from its
concession. On October 15, 1953, the Deputy
Collector of Internal Revenue demanded the
payment of P13,136.00 representing forest charges
due from May 18, 1950 to September 30, 1953, and
a surcharge of 25% (Exh. M). On September 13,
1954,
after
further
investigation
another
assessment was sent to the defendant corporation
by the Bureau of Internal Revenue demanding from
it the total sum of P45,541.66 representing
deficiency sales tax, forest charges, surcharges and
penalties (Exh. A). On November 8, 1954 another
assessment was addressed to the defendant
corporation for the payment of P456.12 as 25%
surcharge for discharging lumber without permit
(Exh. P). The three assessments totalling P59,133.78
are the subject matter of the instant case for
collection.
xxx xxx xxx
The-contention
of
the
defendant
that
the
assessment in question have not yet become final
and executory is not borne out by the record. The

Bureau of Internal Revenue made its first demand

for the payment of P13,136.00 as forest charges and
surcharges in the letter dated October 15, 1953
(Exh. M). After further investigation, a second
assessment in the total amount of P45,541.66 was
demanded
from
the
defendant
corporation
representing sales tax and surcharges, and is
contained in the letter dated September 13, 1954
(Exh. A). The third assessment for the payment of
P456.12 representing 25% surcharge for discharging
lumber without permit was made on November 8,
1954 (Exh. B).
The first acknowledgment by the defendant
corporation of its receipt of assessment contained in
the letter of September 13, 1954, Exh. A, was the
letter of the defendant corporation under the
signature of its counsel, Atty. Pedro L. Moya dated
December 28, 1954, wherein it is requested that
said defendant be furnished with an itemized
statement of the said taxes and wherein notice is
served of its intention to question the validity and
the legality of the assessments and to appear before
the Conference Staff of the Bureau of Internal
Revenue in connection with the said tax (Exhibit B).
In reply to the letter, Exhibit B, the Bureau of
Internal Revenue wrote Atty. Moya a letter dated
February 11, 1955 informing him that before the
case may be acted upon by the Conference Staff, it
was necessary that the defendant corporation
comply within 10 days from date of said letter, with
the provisions of Dept. Order No. 213 dated
November 2, 1954 which required, among others,
that requests for reinvestigation or reexamination of
tax assessments shall be made in writing under oath
of the taxpayer concerned, specifying the ground or
grounds relied upon for the revision of the
assessment and accompanied by such documents
and other documents relied upon in support of the
request; and that, as a general rule, the revision will
be granted only upon payment of one-half of the
total assessments and upon filing of a bond to
guarantee the payment of the balance of the tax
(Exhibit C). Acknowledgment of Exhibit C was made
by Atty. Moya in the latter's letter of February 23,

1955 wherein, for the reasons therein stated, he

requested exemption from the requirements
contained in the letter Exhibit C (Exhibit D). In Reply
to Exhibit D, the Collector of Internal Revenue wrote
Atty. Moya on May 3, 1955 informing him that his
request to exempt his client from the requirements
contained in the letter dated February 11, 1955,
cannot be favorably considered and that in order
that the Conference Staff may be directed to hear
the case on the merits, the said requirements must
be complied with within five days from receipt of
said letter; otherwise, the "assessment will be
considered final" (Exhibit E). A follow-up letter dated
June 4, 1955, was addressed to Atty. Moya after
discovering that the requirements mentioned in the
letters dated February 11, 1955 and March 3, 1955
have not been complied with inspite of the
considerable length of time that had already
elapsed (Exhibit F). In the last paragraph of the said
letter, Exhibit F, the defendant corporation was
warned
that
unless
the
aforementioned
requirements are complied with within five (5) days
from receipt, the "case will be considered
abandoned and appropriate action will be taken in
accordance with law". Again on November 14, 1955,
after discovering that the letters dated February 11,
1955, March 3, 1955 and June 4, 1955 have
remained unheeded by the defendant corporation,
the latter was given another chance of complying
with the requirements mentioned within five days
from receipt of said letter otherwise, the Bureau of
Internal Revenue "will be constrained to enforce the
immediate collection of the deficiency percentage
tax and forest charges due" (Exhibit G).
On April 27, 1956, the Bureau of Internal Revenue
issued "final tax notices" to the defendant
corporation. Although the letters containing the
"final tax notices" were not presented in evidence,
the defendants admit having received the same, as
shown by the contents of defendant corporation's
letters dated May 10, 1956, Exhibit H, and August 7,
1956, Exhibit J. In said Exhibit H defendant
corporation again protested the assessment of
P45,541.66
and
reiterated
its
request
for

specification of the items disputing the assessment

in question. It further requests for a period of 30
days from the receipt of the specifications within
which to consider its tax liability, further reserving
its right to contest the legality or validity of the
assessment or any particular items thereof within
the said period of 30 days. Defendant corporation
also protested the sending of final notices and
requested that they be countermanded or withheld.
Finding no merit in the protests of the defendant
corporation, a warrant of distraint and levy was
issued against it by the Bureau of Internal Revenue
on July 3, 1956 (Exhibit O).
On August 3, 1956, defendant corporation again
wrote
the
Collector
of
Internal
Revenue
acknowledging the receipt of the warrant of distraint
and levy served upon it and reiterating its request
for a specification of the different items of the
assessment, subject to the right to contest the
legality and validity of the same within 30 days after
receipt of said specifications (Exh. J). The record
does not show what action was taken on the request
contained in said letter on August 3, 1956. The next
communication appearing in the record is that of the
Commissioner of Internal Revenue dated July 30,
1959, addressed to the defendant corporation
demanding on the letter the payment of the
assessment of P45,541.66 which has remained
unpaid, and informing the said corporation that if
they do not settle said tax obligation within five
days from receipt thereof, the Bureau of Internal
Revenue will be constrained to file an action in Court
for the collection thereof without further notice
(Exhibit I). Defendant corporation replied to Exhibit I
in a letter dated August 17, 1959 stating that it
needed more time to go over the records and
vouchers, and requesting for an extension of 10
days (Exhibit E). In another letter of same date, the
defendant corporation reiterated its exception to the
validity and legality of the assessment against it in
the sum of P45,541.66 and its request for a detailed
statement of the transactions involved (Exhibit L).
[Record on Appeal pp. 188-189, 190-195.]

According to the Record on Appeal, and as additionally

stated also by the trial court, the original complaint filed
on September 5, 1958 prayed for the payment of only
P13,695.96, and it was only in an amended complaint
filed on August 26, 1959 and admitted on September 23,
1959 that, for the first time, the amount of P59,133.78
was judicially demanded to be paid.
Upon these facts, appellants now complain that
I
THE LOWER COURT ERRED IN DECLARING
THAT
THE
NOTICES
OF
THE
COMMISSIONER OF INTERNAL REVENUE
DATED APRIL 27, 1956 WERE THE
"ASSESSMENTS" THAT BECAME FINAL AND
EXECUTORY.
II
THE LOWER COURT ERRED IN DECLARING
THAT THE GOVERNMENT'S RIGHT TO
ASSESS AND COLLECT THE TAXES FOR THE
YEARS 1947 TO SEPTEMBER 23, 1949 HAS
NOT PRESCRIBED.
III
THE LOWER COURT LIKEWISE ERRED IN
DECLARING THAT THE GOVERNMENT'S
RIGHT TO COLLECT THE SUM OF
P45,541.66 HAS NOT PRESCRIBED.
IV
THE LOWER COURT FURTHER ERRED IN
NOT DECLARING THAT SUIT AGAINST F.H.
BURGESS IN HIS CAPACITY AS LIQUIDATOR
OF MARSMAN DEVELOPMENT COMPANY
HAS PRESCRIBED AND IN ORDERING HIM
TO PAY THE SUMS CONTAINED IN ITS
DECISION.
The Court does not agree.
Anent the first assignment of error, it may be stated that
regardless of what might have been alleged in appellee's
pleadings and memoranda, the facts proven by
evidence, which are not alleged to have been objected
to
as
varying
supposed
judicial
admissions,
unmistakably show that when Atty. Pedro L. Moya
acknowledged receipt on December 28, 1954, on behalf

of appellant corporation, of the Bureau of Internal

Revenue's assessments of September 13, 1954 and
November 8, 1954, requesting at the same time for a
reinvestigation before the Conference Staff, he was
informed that his request for investigation would not be
given due course unless his client priorly complied
within ten (10) days from Februaxy 11, 1955, the date of
the letter of the Bureau, with the provisions of
Department Order No. 213, dated November 2, 1954,
which
required
inter
alia,
that
requests
for
reinvestigation or reexamination of tax assessments
should be made in writing and under oath of the
taxpayer concerned, specifying the ground or grounds
relied upon for the requested revision and accompanied
by the documents relied upon, in support of the request,
as well as by the payment of one-half of the total
assessments, plus a bond to guarantee payment of the
balance, but appellants failed to comply with said
conditions: that in reply to Atty. Moya's request for
exemption from the Department order, on March 3, 1955
(not May), the attorney was advised that his request was
denied and that if the corporation failed to comply
therewith within five (5) days from receipt of the letter,
"the assessment (would) be considered final"; that on
June 4, 1955, said Atty. Moya was reminded in writing
that the previous demands had not been properly
attended to, with the warning that should appellants
further fail to comply with the requirements in the letter
of February 11, 1955, within five (5) days from receipt
thereof, the "case (would) be considered abandoned and
appropriate action (would) be taken in accordance with
law"; that even as late as November 14, 1955, the
corporation was again advised to comply with the earlier
communications of February 11, 1955, March 3, 1955
and June 4, 1955, within five days, otherwise, the
Bureau of Internal Revenue would "be constrained to
enforce immediate collection of the deficiency
percentage tax and forest charges due"; that as nothing
was done by it to comply with this last letter, the Bureau
of Internal Revenue issued, on April 27, 1956, "final tax
notices" to it, and all that the latter did after receipt
thereof was to reiterate, by its letters of May 19, 1956
and August 7, 1956, its request for specification of the
items involved in the assessment and for another period
of 30 days within which to consider its tax liabilities,

reserving once more its right to contest the legality or

validity of the assessment and to protest the issuance of
the "final tax notices"; that evidently tired of awaiting
compliance by the said appellant, the Bureau of Internal
Revenue issued on July 3, 1956 a warrant of distraint
and levy against it, which it acknowledged on August 3,
1956, only to reiterate again its position previously
stated of asking for specification and reserving its right
to contest the validity of the assessment; that, finally, on
July 30, 1959, after three years, the Commissioner of
Internal Revenue made extrajudicial demand for
payment of the amounts in question within five (5) days,
and since no payment came, and instead, defendants
asked for more time to go over the records and, under
separate cover, questioned for the nth time, the validity
of the assessment, the present action was filed.
Under these circumstances, it is plain that His Honor
committed no error in holding that the period to
question the tax assessments herein involved had
already expired when the Commissioner of Internal
Revenue initiated this suit against defendants.
Defendant corporation aknowledged receipt of the said
assessments way back on December 28, 1954, and, in
fact, it requested for a reinvestigation before the
Conference Staff, but when the Bureau demanded
compliance with the prerequisites aforementioned of
such reinvestigation, the corporation failed to comply.
The corporation did ask for exemption, but when this
request was denied, again there was no compliance. In
view of such non-compliance, in its letter of March 3,
1955, the Bureau unequivocally warned the corporation
that should it fail further to comply, within five days from
receipt thereof, the "assessments (would) be considered
final". still no compliance came. Subsequent follow-up
letters brought no better results.
As it appears, therefore, appellant corporation, by its
own omission, made it impossible for the Bureau of
Internal
Revenue
to
act
on
its
motion
for
reconsideration. Not that it would have otherwise
mattered, for it has been held that the mere filing of
such a motion does not suspend the running of the
period for the collection of the tax, 1 which implies that
any assessment made by the Bureau is supposed to be

final and executory, insofar as the taxpayer is

concerned, unless revised by the Bureau in accordance
with law and regulations, but it is to be emphasized that
a taxpayer cannot delay the collection of taxes by the
simple expedient of barely asking for clarification or
reconsideration,
very
often
unnecessary
and
unwarranted, without doing anything to comply with the
statutory and reglementary requirements for the
reconsideration of the assessment made against him. In
any event, since appellant corporation did nothing from
December, 1954 when it acknowledged receipt of the
assessment now impugned to appeal the same, if such
an appeal was possible, to the Court of Tax Appeals,
even after it was warned by the Bureau of Internal
Revenue that its failure to comply with the requirements
for reconsideration within five (5) days would result in its
being "considered" final, We find no merit in appellants'
posture that the assessments here in question has not
yet become final and executory. Consequently,
overruling of appellants' first assignment of error is
clearly in order.
In their second assignment of error, appellants raise the
issue of prescription. They point out that the Collector of
Internal Revenue had only five years within which to
assess the percentage and forest charges herein
involved. Since it does not appear, however, that
appellant corporation had filed any return in relation to
the taxes herein involved, and it was incumbent upon
appellants to show that such a return had been
submitted, 2 We find the following holding of His Honor to
be fully in accordance with law:
Defendants' contention that the right to assess the
percentage and forest charges for the period from
1947 to September 23, 1949 had already
prescribed is based on the provision of Section 231
of the Revenue Code which requires the Collector
of Internal Revenue to assess the tax within the
period of five years. The Court agrees with the
plaintiff that said Section 231 is not applicable in
this case inasmuch as defendant corporation did
not file returns for the taxes in question. The
pertinent provision applicable herein is Section
332 (a) which provides that "in case of a false or

fraudulent return or of a failure to file a return, the

tax may be assessed ... at anytime within ten
years after the discovery of the falsity, fraud or
omission." The assessments made on October 15,
1953, September 13, 1954, and November 3, 1954
were all within the aforecited 10-year period for
the assessment of the tax.
Even if the Court were to consider, as appellants
suggest, the fact brought out in their brief but not found
by the trial court that what are being sought to be
collected are deficiency taxes, thereby implying a return
must have been filed, nothing can he gained by
appellants, for in order that the filing of a return may
serve as the starting point of the period for the making
of an assessment, the return must be as substantive
complete as to include the needed details on which the
full assessment may be made, and appellants have not
shown that such was the nature of the return they would
infer had been filed by the corporation. 3
Appellants' third assignment of error does not require
any extended discussion. The argument thereunder that
the judicial action for the recovery of the bigger amount
of P45,541.66 was not filed within five (5) years from
September 13, 1954, the date of the earliest
assessment, has neither factual nor legal basis. As aptly
explained by his Honor, such argument proceeds from
the erroneous premises that because the amended
complaint in which the said amount was first alleged and
demanded was formally admitted by the court only on
September 23, 1959 and that the filing of said amended
complaint on August 26, 1959 is immaterial. While in the
procedural sense, especially in relation to the possible
necessity of and time for the filing of responsive and
other corresponding pleadings, an amended complaint is
deemed filed only as of the date of its admission,
nothing in Breslin v. Luzon, 84 Phil. 625, relied upon by
appellant, was intended to modify the self-evident
proposition that for practical reasons and to avoid the
complications that may rise from undue delays in the
admission thereof, such an amended complaint must be
considered as filed, for the purposes of such a
substantive matter as prescription, on the date it is
actually filed with the court, regardless of when it is

ultimately formally admitted by the court. After all, the

only purpose of requiring leave of and formal admission
by the court of an amended pleading after issues have
already been joined as to the original ones is to prevent
the injection of other issues which might either to be
considered as barred already or made the subject of
another proceeding, if they are not anyway
indispensable for the resolution of the original ones and
no unnecessary multiplicity of suits would result; so,
when the court ultimately admits the amendment, the
legal effect, for substantive purposes, of such admission
retroacts as a rule to the date of its actual filing.
Appellants' last assignment of error was disposed of by
the trial court this wise:
The defendants further contend that the present
action is already barred under section 77 of the
Corporation Law, Act No. 1459, as amended, which
allows the corporate existence of a corporation to
continue only for three years after its dissolution, for
the purpose of presenting or defending suits by or
against it, and to settle and close its affairs. They
point out that inasmuch as the Marsman Development
Co. was extra-judicially dissolved on April 23, 1954, a
fact admitted in the amended complaint, the filing of
both the original complaint on September 8, 1958 and
the amended complaint on August 26, 1956 was beyond
the aforesaid three-year period.
The record shows that the filing of the amended
complaint was intended, among others, to include
as a party defendant, in an alternative capacity, Mr.
F.H. Burgess, who is the liquidator of the Marsman
Development Co. Although it is an admitted fact
that the defendant corporation was extrajudicially
dissolved on April 23, 1954, there is no claim that
the affairs of said corporation had already been
finally liquidated or settled. Evidently, Mr. F.H.
Burgess is still continuing in his aforesaid capacity
as liquidator of the Marsman Development Co. While
section 77 of the Corporation Law provides for a
three-year period for the continuation of the
corporate existence of the corporation for purposes
of liquidation, there is nothing in said provision

which bars an action for the recovery of the debts of

the corporation against the liquidator thereof, after
the lapse of the said three-year period.
We agree with His Honor. The stress given by appellants to
the extinction of the corporate and juridical personality as
such of appellant corporation by virtue of its extra-judicial
dissolution which admittedly took place on April 23, 1954 is
misdirected. While Section 77 of the Corporation Law does
provide that:
Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is
terminated in any other manner, shall nevertheless be
continued as a body corporate for three years after the
time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or
against it and of enabling it gradually to settle and
close its affairs, to dispose of and convey its property
and to divide its capital stock, but not for the purpose
of continuing the business for which it was established.
the next provision, Section 78, adds for clarification:
At any time during said three years said corporation is
authorized and empowered to convey all of its property to
trustees for the benefit of members, stock-holders,
creditors, and others interested. From and after any such
conveyance by the corporation of its property in trust for
the benefit of its members, stockholders, creditors, and
others in interest, all interest which the corporation had in
the property terminates, the legal interest vests in the
trustee, and the beneficial interest in the members,
stockholders, creditors, or other persons in interest.
It is to be recalled that the assessments against appellant
corporation for deficiency taxes due for its operations since
1947 were made by the Bureau of Internal Revenue on
October 15, 1953, September 13, 1954 and November 8,
1954, such that the first was before its dissolution and the
last two not later than six months after such dissolution.
Thus, in whatever way the matter may be viewed, the
Government became the creditor of the corporation before
the completion of its dissolution by the liquidation of its
assets. Appellant F.H. Burgess, whom it chose as liquidator,

became in law the trustee of all its assets for the benefit of
all persons enumerated in Section 78, including its
creditors, among whom is the Government, for the taxes
herein involved. To assume otherwise would render the
extra-judicial dissolution illegal and void, since, according
to Section 62 of the Corporation Law, such kind of
dissolution is permitted only when it "does not affect the
rights of any creditor having a claim against the
corporation." It is immaterial that the present action was
filed after the expiration of three years after April 23, 1954,
for at the very least, and assuming that judicial
enforcement of taxes may not be initiated after said three
years despite the fact that the actual liquidation has not
been terminated and the one in charge thereof is still
holding the assets of the corporation, obviously for the
benefit of all the creditors thereof, the assessment
aforementioned, made within the three years, definitely
established the Government as a creditor of the corporation
for whom the liquidator is supposed to hold assets of the
corporation. And since the suit at bar is only for the
collection of taxes finally assessed against the corporation
within the three years invoked by appellants, their fourth
assignment of error cannot be sustained. As to the
allegation that appellant Burgess has not in fact received
any property or asset of the corporation, that is a matter
that can well be taken care of in the execution of the
judgment which may be rendered herein, albeit it seems
some kind of fraud would be perceptible, if the corporation
had been dissolved without leaving any assets whatsoever
with the liquidator.
ACCORDINGLY, the judgment of the trial court is affirmed
with costs against the appellants.
Reyes, J.B.L., Makalintal, Zaldivar, Castro,
Teehankee, Makasiar and Antonio, JJ., concur.
Concepcion,C.J., is on leave.

Fernando,

Avon Insurance PLC v. Court of Appeals

G.R. No. 97642. August 29, 1997.*
AVON INSURANCE PLC, BRITISH RESERVE INSURANCE
CO., LTD., CORNHILL INSURANCE PLC, IMPERIO
REINSURANCE CO., (UK) LTD., INSTITUTE DE RESERGURROS
DO BRAZIL, INSURANCE CORPORATION OF IRELAND PLC,
LEGAL AND GENERAL ASSURANCE SOCIETY LTD.,
PROVINCIAL INSURANCE PLC, QBL INSURANCE (UK) LTD.,
ROYAL INSURANCE CO., LTD., TRINITY INSURANCE CO., LTD.,
GENERAL ACCIDENT FIRE AND LIFE ASSURANCE CORP. LTD.,
COOPERATIVE INSURANCE SOCIETY AND PEARL ASSURANCE
CO., LTD., petitioners, vs. COURT OF APPEALS, REGIONAL
TRIAL COURT OF MANILA, BRANCH 51, YUPANGCO COTTON
MILLS, WORLDWIDE SURETY & INSURANCE CO., INC.,
respondents.
Remedial Law; Courts; Jurisdiction; A single act or
transaction made in the Philippines could qualify a foreign
corporation to be doing business in the Philippines, if such
singular act is not merely incidental or casual, but indicates
the foreign corporations intention to do business in the
Philippines.The term ordinarily implies a continuity of
commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the
exercise of the functions normally incident to and in
progressive prosecution of the purpose and object of its
organization. A single act or transaction made in the
Philippines, however, could qualify a foreign corporation to
be doing business in the Philippines, if such singular act is
not merely incidental or casual, but indicates the foreign
corporations intention to do business in the Philippines.
Same; Same; Same; There is authority to the effect
that a reinsurance company is not doing business in a
certain state merely because the property or lives which
are insured by the original insurer company are located in
that state.As it is, private respondent has made no

allegation or demonstration of the existence of petitioners

domestic agent, but avers simply that they are doing
business not only abroad but in the Philippines as well. It
does not appear at all that the petitioners had performed
any act which would give the general public the impression
that it had been engaging, or intends to engage in its
ordinary and usual business undertakings in the country.
The reinsurance treaties between the petitioners and
Worldwide Surety and Insurance were made through an
international insurance broker, and not through any entity
or means remotely connected with the Philippines.
Moreover, there is authority to the effect that a reinsurance
company is not doing business in a certain state merely
because the property or lives which are insured by the
original insurer company are located in that state. The
reason for this is that a contract of reinsurance is generally
a separate and distinct arrangement from the original
contract of insurance, whose contracted risk is insured in
the reinsurance agreement. Hence, the original insured has
generally no interest in the contract of reinsurance.
Same; Same; Same; There is no showing that
petitioners had performed any act in the country that would
place it within the sphere of the courts jurisdiction.As we
have found, there is no showing that petitioners had
performed any act in the country that would place it within
the sphere of the courts jurisdiction. A general allegation
standing alone, that a party is doing business in the
Philippines does not make it so. A conclusion of fact or law
cannot be derived from the unsubstantiated assertions of
parties, notwithstanding the demands of convenience or
dispatch in legal actions, otherwise, the Court would be
guilty of sorcery; extracting substance out of nothingness.
In addition, the assertion that a resident of the Philippines
will be inconvenienced by an out-of-town suit against a
foreign entity, is irrelevant and unavailing to sustain the
continuance of a local action, for jurisdiction is not
dependent upon the convenience or inconvenience of a
party.
Same; Same; Same; Summons; Jurisdiction over the
person of the defendant in civil cases is acquired either by
his voluntary appearance in court and his submission to its
authority or by service of summons.In civil cases,
jurisdiction over the person of the defendant is acquired
either by his voluntary appearance in court and his
submission to its authority or by service of summons.

Same; Same; Same; Same; The service of summons

upon the defendant becomes an important element in the
operation of a courts jurisdiction upon a party to a suit, as
service of summons upon the defendant is the means by
which the court acquires jurisdiction over his person.
Fundamentally, the service of summons is intended to give
official notice to the defendant or respondent that an action
has been commenced against it. The defendant or
respondent is thus put on guard as to the demands of the
plaintiff as stated in the complaint. The service of summons
upon the defendant becomes an important element in the
operation of a courts jurisdiction upon a party to a suit, as
service of summons upon the defendant is the means by
which the court acquires jurisdiction over his person.
Without service of summons, or when summons are
improperly made, both the trial and the judgment, being in
violation of due process, are null and void, unless the
defendant waives the service of summons by voluntarily
appearing and answering the suit.
Same; Same; Same; The action of a court in refusing to
rule or deferring its ruling on a motion to dismiss for lack or
excess of jurisdiction is correctable by a writ of prohibition
or certiorari sued out in the appellate court even before
trial on the merits is had.When a defendant voluntarily
appears, he is deemed to have submitted himself to the
jurisdiction of the court. This is not, however, always the
case. Admittedly, and without subjecting himself to the
courts jurisdiction, the defendant in an action can, by
special appearance object to the courts assumption on the
ground of lack of jurisdiction. If he so wishes to assert this
defense, he must do so seasonably by motion for the
purpose of objecting to the jurisdiction of the court,
otherwise, he shall be deemed to have submitted himself
to that jurisdiction. In the case of foreign corporations, it
has been held that they may seek relief against the
wrongful assumption of jurisdiction by local courts. In Time,
Inc. vs. Reyes, it was held that the action of a court in
refusing to rule or deferring its ruling on a motion to
dismiss for lack or excess of jurisdiction is correctable by a
writ of prohibition or certiorari sued out in the appellate
court even before trial on the merits is had. The same
remedy is available should the motion to dismiss be
denied, and the court, over the foreign corporations
objections, threatens to impose its jurisdiction upon the
same.

Same; Same; Same; If besides his objection to the

jurisdiction of the court defendant alleges in his motion to
dismiss any other ground for dismissing the action or seeks
an affirmative relief in the motion, he is deemed to have
submitted himself to the jurisdiction of the court.If the
defendant, besides setting up in a motion to dismiss his
objection to the jurisdiction of the court, alleges at the
same time any other ground for dismissing the action, or
seeks an affirmative relief in the motion, he is deemed to
have submitted himself to the jurisdiction of the court.
Same; Same; Same; If the appearance of a party in a
suit is precisely to question the jurisdiction of the said
tribunal over the person of the defendant, then this
appearance is not equivalent to service of summons, nor
does it constitute an acquiescence to the courts
jurisdiction.As we have consistently held, if the
appearance of a party in a suit is precisely to question the
jurisdiction of the said tribunal over the person of the
defendant, then this appearance is not equivalent to
service of summons, nor does it constitute an acquiescence
to the courts jurisdiction. Thus, it cannot be argued that
the petitioners had abandoned their objections to the
jurisdiction of the court, as their motions to dismiss in the
trial court, and all their subsequent posturings, were all in
protest of the private respondents insistence on holding
them to answer a charge in a forum where they believe
they are not subject to. Clearly, to continue the
proceedings in a case such as those before Us would just
be useless and a waste of time.

PETITION for review on certiorari of a decision of the

Court of Appeals.
The facts are stated in the opinion of the Court.
Syquia Law Offices for petitioners.
O.F. Santos & P.C. Nolasco for Yupangco Cotton Mills,
Inc.
Ricardo E. Reyes for Worldwide Insurance & Surety
Co., Inc.
TORRES, JR., J.:

Just how far can our courts assert jurisdiction over the
persons of foreign entities being charged with contractual
liabilities by residents of the Philippines?
Appealing from the Court of Appeals' October 11, 1990
Decision 1 in CA-G.R. No. 22005, petitioners claim that the
trial court's jurisdiction does not extend to them, since they
are foreign reinsurance companies that are not doing
business in the Philippines. Having entered into reinsurance
contracts abroad, petitioners are beyond the jurisdictional
ambit of our courts and cannot be served summons
through extraterritorial service, as under Section 17, Rule
14 of the Rules of Court, nor through the Insurance
Commissioner, under Section 14. Private respondent
Yupangco Cotton Mills contend on the other hand that
petitioners are within our courts' cognitive powers, having
submitted voluntarily to their jurisdiction by filing motions
to dismiss 2 the private respondent's suit below.
The antecedent facts, as found by the appellate court, are
as follows:
Respondent Yupangco Cotton Mills filed a complaint
against several foreign reinsurance companies
(among which are petitioners) to collect their
alleged percentage liability under contract treaties
between the foreign insurance companies and the
international insurance broker C.J. Boatright, acting
as agent for respondent Worldwide Surety and
Insurance Company. Inasmuch as petitioners are not
engaged in business in the Philippines with no
offices, places of business or agents in the
Philippines, the reinsurance treaties having been
entered abroad, service of summons upon motion of
respondent Yupangco, was made upon petitioners
through the Office of the Insurance Commissioner.
Petitioners, by counsel on special appearance,
seasonably filed motions to dismiss disputing the
jurisdiction of respondent Court and the extraterritorial
service
of
summons.
Respondent
Yupangco filed its opposition to the motions to
dismiss, petitioners filed their reply, and respondent
Yupangco filed its rejoinder. In an Order dated April
30, 1990, respondent Court denied the motions to
dismiss and directed petitioners to file their answer.
On May 29, 1990, petitioners filed their notice of

appeal. In an order dated June 4, 1990, respondent

court denied due course to the appeal. 3
To this day, trial on the merits of the collection suit has not
proceeded as in the present petition, petitioners continue
vigorously to dispute the trial court's assumption of
jurisdiction over them.
It will be remembered that in the plaintiff's complaint, 4 it
was contended that on July 6, 1979 and on October 1,
1980. Yupangco Cotton Mills engaged to secure with
Worldwide Security and Insurance Co. Inc., several of its
properties for the periods July 6, 1979 to July 6, 1980 as
under Policy No. 20719 for a coverage of P100,000,000.00
and from October 1, 1980 to October 1, 1981, under Policy
No. 25896, also for P100,000,000.00. Both contracts were
covered by reinsurance treaties between Worldwide Surety
and Insurance and several foreign reinsurance companies,
including the petitioners. The reinsurance arrangements
had been made through international broker C.J. Boatwright
and Co. Ltd., acting as agent of Worldwide Surety and
Insurance.
As fate would have it, on December 16, 1979 and May 2,
1981, within the respective effectivity periods of Policies
20719 and 25896, the properties therein insured were
razed by fire, thereby giving rise to the obligation of the
insurer to indemnify the Yupangco Cotton Mills. Partial
payments were made by Worldwide Surety and Insurance
and some of the reinsurance companies.
On May 2, 1983, Worldwide Surety and Insurance, in a
Deed of Assignment, acknowledged a remaining balance of
P19,444,447.75 still due Yupangco Cotton Mills, and
assigned to the latter all reinsurance proceeds still
collectible from all the foreign reinsurance companies.
Thus, in its interest as assignee and original insured,
Yupangco Cotton Mills instituted this collection suit against
the petitioners.
Service of summons upon the petitioners was made by
notification to the Insurance Commissioner, pursuant to
Section
14,
Rule
14
of
the
Rules
of
Court. 5

In a Petition for Certiorari filed with the Court of Appeals,

petitioners submitted that respondent Court has no
jurisdiction over them, being all foreign corporations not
doing business in the Philippines with no office, place of
business or agents in the Philippines. The remedy of
Certiorari was resorted to by the petitioners on the premise
that if petitioners had filed an answer to the complaint as
ordered by the respondent court, they would risk,
abandoning the issue of jurisdiction. Moreover, extraterritorial service of summons on petitioners is null and
void because the complaint for collection is not one
affecting plaintiffs status and not relating to property within
the Philippines.

that among the local domestic insurance corporations of

this country, it is only in favor of Worldwide Surety and
Insurance that they have ever reinsured any risk arising
from any reinsurance within the territory.

The Court of Appeals found the petition devoid of merit,

stating that:

Petitioners, being foreign corporations, as found by the

trial court, not doing business in the Philippines with no
office, place of business or agents in the Philippines, are
not subject to the jurisdiction of Philippine courts.

1. Petitioners were properly served with summons and

whatever defect, if any, in the service of summons were
cured by their voluntary appearance in court, via motion to
dismiss.
2. Even assuming that petitioners have not yet voluntarily
appeared as co-defendants in the case below even after
having filed the motions to dismiss adverted to, still the
situation does not deserve dismissal of the complaint as far
as they are concerned, since as held by this Court in
Lingner Fisher GMBH vs. IAC, 125 SCRA 523;
A case should not be dismissed simply because an
original summons was wrongfully served. It should
be difficult to conceive for example, that when a
defendant personally appears before a court
complaining that he had not been validly
summoned, that the case filed against him should
be dismissed. An alias summons can be actually
served on said defendant.
3. Being reinsurers of respondent Worldwide Surety and
Insurance of the risk which the latter assumed when it
issued the fire insurance policies in dispute in favor of
respondent Yupangco, petitioners cannot now validly argue
that they do not do business in this country. At the very
least, petitioners must be deemed to have engaged in
business in the Philippines no matter how isolated or
singular such business might be, even on the assumption

4. The issue of whether or not petitioners are doing

business in the country is a matter best referred to a trial
on the merits of the case, and so should be addressed
there.
Maintaining its submission that they are beyond the
jurisdiction of Philippine Courts, petitioners are now before
us, stating:

The complaint for sum of money being a personal action

not
affecting
status
or
relating
to
property,
extraterritorial service of summons on petitioners all
not doing business in the Philippines is null and void.
The appearance of counsel for petitioners being
explicitly "by special appearance without waiving
objections to the jurisdiction over their persons or the
subject matter" and the motions to dismiss having
excluded non-jurisdictional grounds, there is no
voluntary submission to the jurisdiction of the trial court.
6

For its part, private respondent Yupangco counter-submits:

1. Foreign corporations, such as petitioners, not
doing business in the Philippines, can be sued in
Philippine Courts, not withstanding petitioners' claim
to the contrary.
2. While the complaint before the Honorable Trial
Court is for a sum of money, not affecting status or
relating to property, petitioners (then defendants)
can submit themselves voluntarily to the jurisdiction
of Philippine Courts, even if there is no extrajudicial
(sic) service of summons upon them.

3. The voluntary appearance of the petitioners (then

defendants) before the Honorable Trial Court
amounted, in effect, to voluntary submission to its
jurisdiction over their persons. 7
In the decisions of the courts below, there is much left to
speculation and conjecture as to whether or not the
petitioners were determined to be "doing business in the
Philippines" or not.
To qualify the petitioners' business of reinsurance within the
Philippine forum, resort must be made to the established
principles in determining what is meant by "doing business
in the Philippines." In Communication Materials and Design,
Inc. et. al. vs. Court of Appeals, 8 it was observed that.
There is no exact rule or governing principle as to
what constitutes doing or engaging in or transacting
business. Indeed, such case must be judged in the
light of its peculiar circumstances, upon its peculiar
facts and upon the language of the statute
applicable. The true test, however, seems to be
whether the foreign corporation is continuing the
body or substance of the business or enterprise for
which it was organized.
Article 44 of the Omnibus Investments Code of 1987
defines the phrase to include:
soliciting orders, purchases, service contracts,
opening offices, whether called "liaison" offices
or branches; appointing representatives or
distributors who are domiciled in the Philippines
or who in any calendar year stay in the
Philippines for a period or periods totaling one
hundred eighty (180) days or more; participating
in the management, supervision or control of
any domestic business firm, entity or corporation
in the Philippines, and any other act or acts that
imply a continuity or commercial dealings or
arrangements and contemplate to that extent
the performance of acts or works, or the exercise
of some of the functions normally incident to,
and in progressive prosecution of, commercial
gain or of the purpose and object of the business
organization.

The term ordinarily implies a continuity of commercial

dealings and arrangements, and contemplates, to that
extent, the performance of acts or works or the exercise of
the functions normally incident to and in progressive
prosecution of the purpose and object of its organization. 9
A single act or transaction made in the Philippines,
however, could qualify a foreign corporation to be doing
business in the Philippines, if such singular act is not
merely incidental or casual, but indicates the foreign
corporation's intention to do business in the Philippines. 10
There is no sufficient basis in the records which would merit
the institution of this collection suit in the Philippines. More
specifically, there is nothing to substantiate the private
respondent's submission that the petitioners had engaged
in business activities in this country. This is not an instance
where the erroneous service of summons upon the
defendant can be cured by the issuance and service of alias
summons, as in the absence of showing that petitioners
had been doing business in the country, they cannot be
summoned to answer for the charges leveled against them.
The Court is cognizant of the doctrine in Signetics Corp. vs.
Court of Appeals 11 that for the purpose of acquiring
jurisdiction by way of summons on a defendant foreign
corporation, there is no need to prove first the fact that
defendant is doing business in the Philippines. The plaintiff
only has to allege in the complaint that the defendant has
an agent in the Philippines for summons to be validly
served thereto, even without prior evidence advancing
such factual allegation.
As it is, private respondent has made no allegation or
demonstration of the existence of petitioners' domestic
agent, but avers simply that they are doing business not
only abroad but in the Philippines as well. It does not
appear at all that the petitioners had performed any act
which would give the general public the impression that it
had been engaging, or intends to engage in its ordinary
and usual business undertakings in the country. The
reinsurance treaties between the petitioners and Worldwide
Surety and Insurance were made through an international
insurance broker, and not through any entity or means
remotely connected with the Philippines. Moreover, there is
authority to the effect that a reinsurance company is not

doing business in a certain state merely because the

property or lives which are insured by the original insurer
company are located in that state. 12 The reason for this is
that a contract of reinsurance is generally a separate and
distinct arrangement from the original contract of
insurance, whose contracted risk is insured in the
reinsurance agreement. 13 Hence, the original insured has
generally no interest in the contract of reinsurance. 14
A foreign corporation, is one which owes its existence to
the laws of another state, 15 and generally, has no legal
existence within the state in which it is foreign. In Marshall
Wells Co. vs. Elser, 16 it was held that corporations have no
legal status beyond the bounds of the sovereignty by which
they are created. Nevertheless, it is widely accepted that
foreign corporations are, by reason of state comity, allowed
to transact business in other states and to sue in the courts
of such fora. In the Philippines foreign corporations are
allowed such privileges, subject to certain restrictions,
arising from the state's sovereign right of regulation.
Before a foreign corporation can transact business in the
country, it must first obtain a license to transact business
here 17 and secure the proper authorizations under existing
law.
If a foreign corporation engages in business activities
without the necessary requirements, it opens itself to court
actions against it, but it shall not be allowed to maintain or
intervene in an action, suit or proceeding for its own
account in any court or tribunal or agency in the
Philippines. 18
The purpose of the law in requiring that foreign
corporations doing business in the country be licensed to
do so, is to subject the foreign corporations doing business
in the Philippines to the jurisdiction of the courts, 19
otherwise, a foreign corporation illegally doing business
here because of its refusal or neglect to obtain the required
license and authority to do business may successfully
though unfairly plead such neglect or illegal act so as to
avoid service and thereby impugn the jurisdiction of the
local courts.
The same danger does not exist among foreign
corporations that are indubitably not doing business in the

Philippines. Indeed, if a foreign corporation does not do

business here, there would be no reason for it to be subject
to the State's regulation. As we observed, in so far as the
State is concerned, such foreign corporation has no legal
existence. Therefore, to subject such corporation to the
courts' jurisdiction would violate the essence of
sovereignty.
In the alternative, private respondent submits that foreign
corporations not doing business in the Philippines are not
exempt from suits leveled against them in courts, citing the
case of Facilities Management Corporation vs. Leonardo
Dela Osa, et. al. 20 where we ruled "that indeed, if a foreign
corporation, not engaged in business in the Philippines, is
not barred from seeking redress from Courts in the
Philippines, a fortiori, that same corporation cannot claim
exemption from being sued in Philippine Courts for acts
done against a person or persons in the Philippines."
We are not persuaded by the position taken by the private
respondent. In Facilities Management case, the principal
issue presented was whether the petitioner had been doing
business in the Philippines, so that service of summons
upon its agent as under Section 14, Rule 14 of the Rules of
Court can be made in order that the Court of First Instance
could assume jurisdiction over it. The Court ruled that the
petitioner was doing business in the Philippines, and that
by serving summons upon its resident agent, the trial court
had effectively acquired jurisdiction. In that case, the court
made no prescription as the absolute suability of foreign
corporations not doing business in the country, but merely
discounts the absolute exemption of such foreign
corporations from liabilities particularly arising from acts
done against a person or persons in the Philippines.
As we have found, there is no showing that petitioners had
performed any act in the country that would place it within
the sphere of the court's jurisdiction. A general allegation
standing alone, that a party is doing business in the
Philippines does not make it so. A conclusion of fact or law
cannot be derived from the unsubstantiated assertions of
parties, notwithstanding the demands of convenience or
dispatch in legal actions, otherwise, the Court would be
guilty of sorcery; extracting substance out of nothingness.
In addition, the assertion that a resident of the Philippines
will be inconvenienced by an out-of-town suit against a

foreign entity, is irrelevant and unavailing to sustain the

continuance of a local action, for jurisdiction is not
dependent upon the convenience or inconvenience of a
party. 21
It is also argued that having filed a motion to dismiss in the
proceedings before the trial court, petitioners have thus
acquiesced to the court's jurisdiction, and they cannot
maintain the contrary at this juncture.
This argument is at the most, flimsy.
In civil cases, jurisdiction over the person of the defendant
is acquired either by his voluntary appearance in court and
his submission to its authority or by service of summons. 22
Fundamentally, the service of summons is intended to give
official notice to the defendant or respondent that an action
has been commenced against it. The defendant or
respondent is thus put on guard as to the demands of the
plaintiff as stated in the complaint. 23 The service of
summons upon the defendant becomes an important
element in the operation of a court's jurisdiction upon a
party to a suit, as service of summons upon the defendant
is the means by which the court acquires jurisdiction over
his person. 24 Without service of summons, or when
summons are improperly made, both the trial and the
judgment, being in violation of due process, are null and
void, 25 unless the defendant waives the service of
summons by voluntarily appearing and answering the suit.
26

When a defendant voluntarily appears, he is deemed to

have submitted himself to the jurisdiction of the court. 27
This is not, however, always the case. Admittedly, and
without subjecting himself to the court's jurisdiction, the
defendant in an action can, by special appearance object to
the court's assumption on the ground of lack of jurisdiction.
If he so wishes to assert this defense, he must do so
seasonably by motion for the purpose of objecting to the
jurisdiction of the court, otherwise, he shall be deemed to
have submitted himself to that jurisdiction. 28 In the case of
foreign corporations, it has been held that they may seek
relief against the wrongful assumption of jurisdiction by
local courts. In Time, Inc. vs. Reyes, 29 it was held that the
action of a court in refusing to rule or deferring its ruling on

a motion to dismiss for lack or excess of jurisdiction is

correctable by a writ of prohibition or certiorari sued out in
the appellate court even before trial on the merits is had.
The same remedy is available should the motion to dismiss
be denied, and the court, over the foreign corporation's
objections, threatens to impose its jurisdiction upon the
same.
If the defendant, besides setting up in a motion to dismiss
his objection to the jurisdiction of the court, alleges at the
same time any other ground for dismissing the action, or
seeks an affirmative relief in the motion, 30 he is deemed to
have submitted himself to the jurisdiction of the court.
In this instance, however, the petitioners from the time
they filed their motions to dismiss, their submissions have
been consistently and unfailingly to object to the trial
court's assumption of jurisdiction, anchored on the fact that
they are all foreign corporations not doing business in the
Philippines.
As we have consistently held, if the appearance of a party
in a suit is precisely to question the jurisdiction of the said
tribunal over the person of the defendant, then this
appearance is not equivalent to service of summons, nor
does it constitute an acquiescence to the court's
jurisdiction. 31 Thus, it cannot be argued that the petitioners
had abandoned their objections to the jurisdiction of the
court, as their motions to dismiss in the trial court, and all
their subsequent posturings, were all in protest of the
private respondent's insistence on holding them to answer
a charge in a forum where they believe they are not subject
to. Clearly, to continue the proceedings in a case such as
those before Us would just "be useless and a waste of
time." 32
ACCORDINGLY, the decision appealed from dated October
11, 1990, is SET ASIDE and the instant petition is hereby
GRANTED. The respondent Regional Trial Court of Manila,
Branch 51 is declared without jurisdiction to take
cognizance of Civil Case No. 86-37932, and all its orders
and issuances in connection therewith are hereby
ANNULLED and SET ASIDE. The respondent court is hereby
ORDERED to DESIST from maintaining further proceeding in
the case aforestated.

SO ORDERED.

Same; Same; No general rule or governing principles

can be laid down as to what constitutes doing or
engaging in or transacting business.No general rule
or governing principles can be laid down as to what
constitutes doing or engaging in or transacting
business. Each case must be judged in the light of its own
G.R. No. 110318 August 28,1996.*
COLUMBIA PICTURES, INC., ORION PICTURES
CORPORATION, PARAMOUNT PICTURES CORPORATION,
TWENTIETH CENTURY FOX FILM CORPORATION, UNITED
ARTISTS CORPORATION, UNIVERSAL CITY STUDIOS, INC.,
THE WALT DISNEY COMPANY, and WARNER BROTHERS,
INC., petitioners, vs. COURT OF APPEALS, SUNSHINE HOME
VIDEO, INC. and DANILO A. PELINDARIO, respondents.

Corporation Law; Actions; It is not the absence of the

prescribed license but doing business in the Philippines
without such license which debars the foreign corporation
from access to our courts.The obtainment of a license
prescribed by Section 125 of the Corporation Code is not a
condition precedent to the maintenance of any kind of
action in Philippine courts by a foreign corporation,
However, under the aforequoted provision, no foreign
corporation shall be permitted to transact business in the
Philippines, as this phrase is understood under the
Corporation Code, unless it shall have the license required
by law, and until it complies with the law in transacting
business here, it shall not be permitted to maintain any suit
in local courts. As thus interpreted, any foreign corporation
not doing business in the Philippines may maintain an
action in our courts upon any cause of action, provided that
the subject matter and the defendant are within the
jurisdiction of the court. It is not the absence of the
prescribed license but doing business in the Philippines
without such license which debars the foreign corporation
from access to our courts. In other words, although a
foreign corporation is without license to transact business
in the Philippines, it does not follow that it has no capacity
to bring an action. Such license is not necessary if it is not
engaged in business in the Philippines.

_______________

* EN BANC.

145

VOL. 261, AUGUST 28, 1996

145

Columbia Pictures, Inc. vs. Court of Appeals

peculiar environmental circumstances. The true tests,

however, seem to be whether the foreign corporation is
continuing the body or substance of the business or
enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.

Same; Same; Jurisprudence has, however, held that the

term implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the
functions normally incident to or in progressive prosecution
of the purpose and subject of its organization.The
Corporation Code does not itself define or categorize what
acts constitute doing or transacting business in the
Philippines. Jurisprudence has, however, held that the term
implies a continuity of commercial dealings and

arrangements, and contemplates, to that extent, the

performance of acts or works or the exercise of some of the
functions normally incident to or in progressive prosecution
of the purpose and subject of its organization.

Same; Same; There is no showing that, under our

statutory or case law, petitioners are doing, transacting,
engaging in or carrying on business in the Philippines as
would require obtention of a license before they can seek
redress from our courts.Based on Article 133 of the
Corporation Code and gauged by such statutory standards,
petitioners are not barred from maintaining the present
action. There is no showing that, under our statutory or
case law, petitioners are doing, transacting, engaging in or
carrying on business in the Philippines as would require
obtention of a license before they can seek redress from
our courts. No evidence has been offered to show that
petitioners have performed any of the enumerated acts or
any other specific act indicative of an intention to conduct
or transact business in the Philippines.

Same; Same; A foreign corporation will not be regarded

as doing business in the State simply because it enters into
contracts with residents of the State, where such contracts
are consummated outside the State.As a general rule, a
foreign corporation will not be regarded as doing business
in the State simply because it enters into contracts with
residents of the State, where such contracts are
consummated outside the State. In fact, a view is taken
that a foreign corporation is not doing business in the State
merely because sales of its product are made there or
other business furthering its inter-

146

146

SUPREME COURT REPORTS ANNOTATED

Columbia Pictures, Inc. vs. Court of Appeals

ests is transacted there by an alleged agent, whether a

corporation or a natural person where such activities are
not under the direction and control of the foreign
corporation but are engaged in by the alleged agent as an
independent business.

Same; Same; Sales made to customers in the State by

an independent dealer who has purchased and obtained
title from the corporation to the products sold are not a
doing of business by the corporation.It is generally held
that sales made to customers in the State by an
independent dealer who has purchased and obtained title
from the corporation to the products sold are not a doing of
business by the corporation. Likewise, a foreign corporation
which sells its products to persons styled distributing
agents in the State, for distribution by them, is not doing
business in the State so as to render it subject to service of
process therein, where the contract with these purchasers
is that they shall buy exclusively from the foreign
corporation such goods as it manufactures and shall sell
them at trade prices established by it.

Same; Same; The act of a foreign corporation in

engaging an attorney to represent it in a Federal court
sitting in a particular State is not doing business within the
scope of the minimum contract test.It has moreover been
held that the act of a foreign corporation in engaging an
attorney to represent it in a Federal court sitting in a
particular State is not doing business within the scope of
the minimum contact test. With much more reason should
this doctrine apply to the mere retainer of Atty. Domingo for
legal protection against contingent acts of intellectual
piracy.

Same; Same; The mere institution and prosecution or

defense of a suit, do not amount to the doing of business in
the State.In accordance with the rule that doing
business imports only acts in furtherance of the purposes

for which a foreign corporation organized, it is held that the

mere institution and prosecution or defense of a suit,
particularly if the transaction which is the basis of the suit
took place out of the State, do not amount to the doing of
business in the State. The institution of a suit or the
removal thereof is neither the making of a contract nor the
doing of business within a constitutional provision placing
foreign corporations licensed to do business in the State
under the same regulations, limitations and liabilities with
respect to such acts as domestic corporations. Merely
engaging in litigation has been considered as not a
sufficient minimum contact to warrant the exercise of
jurisdiction over a foreign corporation.

147

VOL. 261, AUGUST 28, 1996

147

Columbia Pictures, Inc. vs. Court of Appeals

Same; Same; Remedial Law; Among the grounds for a

motion to dismiss under the Rules of Court are lack of legal
capacity to sue and that the complaint states no cause of
action.Among the grounds for a motion to dismiss under
the Rules of Court are lack of legal capacity to sue and that
the complaint states no cause of action. Lack of legal
capacity to sue means that the plaintiff is not in the
exercise of his civil rights, or does not have the necessary
qualification to appear in the case, or does not have the
character or representation he claims. On the other hand, a
case is dismissible for lack of personality to sue upon proof
that the plaintiff is not the real party in interest, hence
grounded on failure to state a cause of action.

Same; Same; Same; Lack of capacity to sue should

not be confused with the term lack of personality to

sue."The term lack of capacity to sue should not be

confused with the term lack of personality to sue. While
the former refers to a plaintiffs general disability to sue,
such as on account of minority, insanity, incompetence,
lack of juridical personality or any other general
disqualifications of a party, the latter refers to the fact that
the plaintiff is not the real party in interest.
Correspondingly, the first can be a ground for a motion to
dismiss based on the ground of lack of legal capacity to
sue; whereas the second can be used as a ground for a
motion to dismiss based on the fact that the complaint, on
the face thereof, evidently states no cause of action.

Same; Same; Same; The ground available for barring

recourse to our courts by an unlicensed foreign corporation
doing or transacting business in the Philippines should
properly be lack of capacity to sue, not lack of
personality to sue."Applying the above discussion to the
instant petition, the ground available for barring recourse
to our courts by an unlicensed foreign corporation doing or
transacting business in the Philippines should properly be
lack of capacity to sue, not lack of personality to sue.
Certainly, a corporation whose legal rights have been
violated is undeniably such, if not the only, real party in
interest to bring suit thereon although, for failure to comply
with the licensing requirement, it is not capacitated to
maintain any suit before our courts.

Constitutional Law; Search Warrant; The 20th Century

Fox ruling cannot be retroactively applied to the instant
case to justify the quashal of Search Warrant No. 87053.
Mindful as we are of the ramifications of the doctrine of
stare decisis and the rudiments of

148

148

SUPREME COURT REPORTS ANNOTATED

Columbia Pictures, Inc. vs. Court of Appeals

fair play, it is our considered view that the 20th

Century Fox ruling cannot be retroactively applied to the
instant case to justify the quashal of Search Warrant No.
87053. Herein petitioners consistent position that the
order of the lower court of September 5, 1988 denying
therein defendants motion to lift the order of search
warrant was properly issued, there having been satisfactory
compliance with the then prevailing standards under the
law for determination of probable cause, is indeed well
taken. The lower court could not possibly have expected
more evidence from petitioners in their application for a
search warrant other than what the law and jurisprudence,
then existing and judicially accepted, required with respect
to the finding of probable cause.

Same; Same; Same; Judicial decisions, though not laws,

are nonetheless evidence of what the laws mean, and it is
for this reason that they are part of the legal system of the
Philippines.Jurisprudence, in our system of government,
cannot be considered as an independent source of law; it
cannot create law. While it is true that judicial decisions
which apply or interpret the Constitution or the laws are
part of the legal system of the Philippines, still they are not
laws. Judicial decisions, though not laws, are nonetheless
evidence of what the laws mean, and it is for this reason
that they are part of the legal system of the Philippines.
Judicial decisions of the Supreme Court assume the same
authority as the statute itself.

Same; Same; Same; The principle of prospectivity

applies not only to original or amendatory statutes and
administrative rulings and circulars, but also, and properly
so to judicial decisions.Interpreting the aforequoted
correlated provisions of the Civil Code and in light of the
above disquisition, this Court emphatically declared in Co
vs. Court of Appeals, et al. that the principle of
prospectivity applies not only to original or amendatory
statutes and administrative rulings and circulars, but also,
and properly so, to judicial decisions.

Same; Same; Same; A search warrant not based on

probable cause is a nullity, or is void, and the issuance
thereof is, in legal contemplation, arbitrary.The
constitutional and statutory provisions of various
jurisdictions requiring a showing of probable cause before a
search warrant can be issued are mandatory and must be
complied with, and such a showing has been held to be an
unqualified condition precedent to the issuance of a
warrant. A search warrant not

149

VOL. 261, AUGUST 28, 1996

149

Columbia Pictures, Inc. us. Court of Appeals

based on probable cause is a nullity, or is void, and the

issuance thereof is, in legal contemplation, arbitrary.

Same; Same; Same; As to what acts constitute

probable cause seem incapable of definition.Although the
term probable cause has been said to have a well-defined
meaning in the law, the term is exceedingly difficult to
define, in this case, with any degree of precision; indeed,
no definition of it which would justify the issuance of a
search warrant can be formulated which would cover every
state of facts which might arise, and no formula or
standard, or hard and fast rule, may be laid down which
may be applied to the facts of every situation. As to what
acts constitute probable cause seem incapable of
definition. There is, of necessity, no exact test.

Criminal Law; Infringement; To constitute infringement,

it is not necessary that the whole or even a large portion of
the work shall have been copied.In determining the
question of infringement, the amount of matter copied from
the copyrighted work is an important consideration. To
constitute infringement, it is not necessary that the whole
or even a large portion of the work shall have been copied.
If so much is taken that the value of the original is sensibly
diminished, or the labors of the original author are
substantially and to an injurious extent appropriated by
another, that is sufficient in point of law to constitute a
piracy.

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

Siguion Reyna, Montecillo & Ongkiko for petitioners.

Rodriguez & Verano Law Offices for private

respondents.

Cesar G. David collaborating counsel for private

respondents.

REGALADO, J.:
Before us is a petition for review on certiorari of the
decision of the Court of Appeals 1 promulgated on July 22,
1992 and its resolution 2 of May 10, 1993 denying
petitioners' motion for reconsideration, both of which
sustained the order 3 of the Regional Trial Court, Branch
133, Makati, Metro Manila, dated November 22, 1988 for
the quashal of Search Warrant No. 87-053 earlier issued per
its own order 4 on September 5, 1988 for violation of
Section 56 of Presidential Decree No. 49, as amended,
otherwise known as the "Decree on the Protection of
Intellectual Property."

The material facts found by respondent appellate court are

as follows:
Complainants thru counsel lodged a formal
complaint with the National Bureau of Investigation
for violation of PD No. 49, as amended, and sought
its assistance in their anti-film piracy drive. Agents
of the NBI and private researchers made discreet
surveillance on various video establishments in
Metro Manila including Sunshine Home Video Inc.
(Sunshine for brevity), owned and operated by
Danilo A. Pelindario with address at No. 6 Mayfair
Center, Magallanes, Makati, Metro Manila.
On November 14, 1987, NBI Senior Agent Lauro C.
Reyes applied for a search warrant with the court a
quo against Sunshine seeking the seizure, among
others, of pirated video tapes of copyrighted films
all of which were enumerated in a list attached to
the application; and, television sets, video cassettes
and/or laser disc recordings equipment and other
machines and paraphernalia used or intended to be
used
in
the
unlawful
exhibition,
showing,
reproduction,
sale,
lease
or disposition of
videograms tapes in the premises above described.
In the hearing of the application, NBI Senior Agent
Lauro C. Reyes, upon questions by the court a quo,
reiterated in substance his averments in his
affidavit. His testimony was corroborated by another
witness, Mr. Rene C. Baltazar. Atty. Rico V.
Domingo's deposition was also taken. On the basis
of the affidavits and depositions of NBI Senior Agent
Lauro C. Reyes, Rene C. Baltazar and Atty. Rico V.
Domingo, Search Warrant No. 87-053 for violation of
Section 56 of PD No. 49, as amended, was issued by
the court a quo.
The search warrant was served at about 1:45 p.m.
on December 14, 1987 to Sunshine and/or their
representatives. In the course of the search of the
premises indicated in the search warrant, the NBI
Agents found and seized various video tapes of duly
copyrighted motion pictures/films owned or
exclusively distributed by private complainants, and
machines,
equipment,
television
sets,
paraphernalia, materials, accessories all of which

were included in the receipt for properties

accomplished by the raiding team. Copy of the
receipt was furnished and/or tendered to Mr. Danilo
A. Pelindario, registered owner-proprietor of
Sunshine Home Video.
On December 16, 1987, a "Return of Search
Warrant" was filed with the Court.
A "Motion To Lift the Order of Search Warrant" was
filed but was later denied for lack of merit (p. 280,
Records).
A Motion for reconsideration of the Order of denial
was filed. The court a quo granted the said motion
for reconsideration and justified it in this manner:
It is undisputed that the master tapes
of the copyrighted films from which
the pirated films were allegedly
copies (sic), were never presented in
the proceedings for the issuance of
the search warrants in question. The
orders of the Court granting the
search warrants and denying the
urgent motion to lift order of search
warrants were, therefore, issued in
error. Consequently, they must be set
aside. (p. 13, Appellant's Brief) 5
Petitioners thereafter appealed the order of the trial court
granting private respondents' motion for reconsideration,
thus lifting the search warrant which it had theretofore
issued, to the Court of Appeals. As stated at the outset,
said appeal was dismissed and the motion for
reconsideration thereof was denied. Hence, this petition
was brought to this Court particularly challenging the
validity of respondent court's retroactive application of the
ruling in 20th Century Fox Film Corporation vs. Court of
Appeals, et al., 6 in dismissing petitioners' appeal and
upholding the quashal of the search warrant by the trial
court.
I

Inceptively, we shall settle the procedural considerations on

the matter of and the challenge to petitioners' legal
standing in our courts, they being foreign corporations not
licensed to do business in the Philippines.
Private respondents aver that being foreign corporations,
petitioners should have such license to be able to maintain
an action in Philippine courts. In so challenging petitioners'
personality to sue, private respondents point to the fact
that petitioners are the copyright owners or owners of
exclusive rights of distribution in the Philippines of
copyrighted motion pictures or films, and also to the
appointment of Atty. Rico V. Domingo as their attorney-infact, as being constitutive of "doing business in the
Philippines" under Section 1 (f)(1) and (2), Rule 1 of the
Rules of the Board of Investments. As foreign corporations
doing business in the Philippines, Section 133 of Batas
Pambansa Blg. 68, or the Corporation Code of the
Philippines, denies them the right to maintain a suit in
Philippine courts in the absence of a license to do business.
Consequently, they have no right to ask for the issuance of
a search warrant. 7
In refutation, petitioners flatly deny that they are doing
business in the Philippines, 8 and contend that private
respondents have not adduced evidence to prove that
petitioners are doing such business here, as would require
them to be licensed by the Securities and Exchange
Commission, other than averments in the quoted portions
of petitioners' "Opposition to Urgent Motion to Lift Order of
Search Warrant" dated April 28, 1988 and Atty. Rico V.
Domingo's affidavit of December 14, 1987. Moreover, an
exclusive right to distribute a product or the ownership of
such exclusive right does not conclusively prove the act of
doing business nor establish the presumption of doing
business. 9
The Corporation Code provides:
Sec. 133. Doing business without a license. No
foreign corporation transacting business in the
Philippines without a license, or its successors or
assigns, shall be permitted to maintain or intervene
in any action, suit or proceeding in any court or
administrative agency of the Philippines; but such
corporation may be sued or proceeded against

before Philippine courts or administrative tribunals

on any valid cause of action recognized under
Philippine laws.
The obtainment of a license prescribed by Section 125 of
the Corporation Code is not a condition precedent to the
maintenance of any kind of action in Philippine courts by a
foreign corporation. However, under the aforequoted
provision, no foreign corporation shall be permitted to
transact business in the Philippines, as this phrase is
understood under the Corporation Code, unless it shall
have the license required by law, and until it complies with
the law intransacting business here, it shall not be
permitted to maintain any suit in local courts. 10 As thus
interpreted, any foreign corporation not doing business in
the Philippines may maintain an action in our courts upon
any cause of action, provided that the subject matter and
the defendant are within the jurisdiction of the court. It is
not the absence of the prescribed license but "doing
business" in the Philippines without such license which
debars the foreign corporation from access to our courts. In
other words, although a foreign corporation is without
license to transact business in the Philippines, it does not
follow that it has no capacity to bring an action. Such
license is not necessary if it is not engaged in business in
the Philippines. 11
Statutory provisions in many jurisdictions are determinative
of what constitutes "doing business" or "transacting
business" within that forum, in which case said provisions
are controlling there. In others where no such definition or
qualification is laid down regarding acts or transactions
failing within its purview, the question rests primarily on
facts and intent. It is thus held that all the combined acts of
a foreign corporation in the State must be considered, and
every circumstance is material which indicates a purpose
on the part of the corporation to engage in some part of its
regular business in the State. 12
No general rule or governing principles can be laid down as
to what constitutes "doing" or "engaging in" or
"transacting" business. Each case must be judged in the
light of its own peculiar environmental circumstances. 13
The true tests, however, seem to be whether the foreign
corporation is continuing the body or substance of the
business or enterprise for which it was organized or

whether it has substantially retired from it and turned it

over to another. 14
As a general proposition upon which many authorities
agree in principle, subject to such modifications as may be
necessary in view of the particular issue or of the terms of
the statute involved, it is recognized that a foreign
corporation is "doing," "transacting," "engaging in," or
"carrying on" business in the State when, and ordinarily
only when, it has entered the State by its agents and is
there engaged in carrying on and transacting through them
some substantial part of its ordinary or customary business,
usually continuous in the sense that it may be
distinguished from merely casual, sporadic, or occasional
transactions and isolated acts. 15
The Corporation Code does not itself define or categorize
what acts constitute doing or transacting business in the
Philippines. Jurisprudence has, however, held that the term
implies a continuity of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of some of the
functions normally incident to or in progressive prosecution
of the purpose and subject of its organization. 16
This traditional case law definition has evolved into a
statutory definition, having been adopted with some
qualifications in various pieces of legislation in our
jurisdiction.
For instance, Republic Act No. 5455 17 provides:
Sec. 1. Definitions and scope of this Act. (1) . . . ;
and the phrase "doing business" shall include
soliciting orders, purchases, service contracts,
opening offices, whether called "liaison" offices or
branches; appointing representatives or distributors
who are domiciled in the Philippines or who in any
calendar year stay in the Philippines for a period or
periods totalling one hundred eighty days or more;
participating in the management, supervision or
control of any domestic business firm, entity or
corporation in the Philippines; and any other act or
acts that imply a continuity of commercial dealings
or arrangements, and contemplate to that extent
the performance of acts or works, or the exercise of

some of the functions normally incident to, and in

progressive prosecution of, commercial gain or of
the purpose and object of the business organization.
Presidential Decree No. 1789, 18 in Article 65 thereof,
defines "doing business" to include soliciting orders,
purchases, service contracts, opening offices, whether
called
"liaison"
offices
or
branches;
appointing
representatives or distributors who are domiciled in the
Philippines or who in any calendar year stay in the
Philippines for a period or periods totalling one hundred
eighty days or more; participating in the management,
supervision or control of any domestic business firm, entity
or corporation in the Philippines, and any other act or acts
that imply a continuity of commercial dealings or
arrangements and contemplate to that extent the
performance of acts or works, or the exercise of some of
the functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose and
object of the business organization.
The implementing rules and regulations of said presidential
decree conclude the enumeration of acts constituting
"doing business" with a catch-all definition, thus:
Sec. 1(g). "Doing Business" shall be any act or
combination of acts enumerated in Article 65 of the
Code. In particular "doing business" includes:
xxx xxx xxx
(10) Any other act or acts which imply a continuity
of commercial dealings or arrangements, and
contemplate to that extent the performance of acts
or works, or the exercise of some of the functions
normally incident to, or in the progressive
prosecution of, commercial gain or of the purpose
and object of the business organization.
Finally, Republic Act No. 7042
this wise:

19

embodies such concept in

Sec. 3. Definitions. As used in this Act:

xxx xxx xxx

(d) the phrase "doing business shall include

soliciting orders, service contracts, opening offices,
whether called "liaison" offices or branches;
appointing representatives or distributors domiciled
in the Philippines or who in any calendar year stay
in the country for a period or periods totalling one
hundred eight(y) (180) days or more; participating
in the management, supervision or control of any
domestic business, firm, entity or corporation in the
Philippines; and any other act or acts that imply a
continuity of commercial dealings or arrangements,
and contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in progressive
prosecution of, commercial gain or of the purpose
and object of the business organization: Provided,
however, That the phrase "doing business" shall not
be deemed to include mere investment as a
shareholder by a foreign entity in domestic
corporations duly registered to do business, and/or
the exercise of rights as such investor; nor having a
nominee director or officer to represent its interests
in such corporation; nor appointing a representative
or distributor domiciled in the Philippines which
transacts business in its own name and for its own
account.
Based on Article 133 of the Corporation Code and gauged
by such statutory standards, petitioners are not barred
from maintaining the present action. There is no showing
that, under our statutory or case law, petitioners are doing,
transacting, engaging in or carrying on business in the
Philippines as would require obtention of a license before
they can seek redress from our courts. No evidence has
been offered to show that petitioners have performed any
of the enumerated acts or any other specific act indicative
of an intention to conduct or transact business in the
Philippines.
Accordingly, the certification issued by the Securities and
Exchange Commission 20 stating that its records do not
show the registration of petitioner film companies either as
corporations or partnerships or that they have been
licensed to transact business in the Philippines, while
undeniably true, is of no consequence to petitioners' right
to bring action in the Philippines. Verily, no record of such

registration by petitioners can be expected to be found for,

as aforestated, said foreign film corporations do not
transact or do business in the Philippines and, therefore, do
not need to be licensed in order to take recourse to our
courts.
Although Section 1(g) of the Implementing Rules and
Regulations of the Omnibus Investments Code lists, among
others
(1) Soliciting orders, purchases (sales) or service
contracts. Concrete and specific solicitations by a
foreign firm, or by an agent of such foreign firm, not
acting independently of the foreign firm amounting
to negotiations or fixing of the terms and conditions
of sales or service contracts, regardless of where the
contracts are actually reduced to writing, shall
constitute doing business even if the enterprise has
no office or fixed place of business in the
Philippines. The arrangements agreed upon as to
manner, time and terms of delivery of the goods or
the transfer of title thereto is immaterial. A foreign
firm which does business through the middlemen
acting in their own names, such as indentors,
commercial brokers or commission merchants, shall
not be deemed doing business in the Philippines.
But such indentors, commercial brokers or
commission merchants shall be the ones deemed to
be doing business in the Philippines.
(2) Appointing a representative or distributor who is
domiciled
in
the
Philippines,
unless
said
representative or distributor has an independent
status, i.e., it transacts business in its name and for
its own account, and not in the name or for the
account of a principal. Thus, where a foreign firm is
represented in the Philippines by a person or local
company which does not act in its name but in the
name of the foreign firm, the latter is doing business
in the Philippines.
as acts constitutive of "doing business," the fact that
petitioners are admittedly copyright owners or owners of
exclusive distribution rights in the Philippines of motion
pictures or films does not convert such ownership into an
indicium of doing business which would require them to

obtain a license before they can sue upon a cause of action

in local courts.
Neither is the appointment of Atty. Rico V. Domingo as
attorney-in-fact of petitioners, with express authority
pursuant to a special power of attorney, inter alia
To lay criminal complaints with the appropriate
authorities and to provide evidence in support of
both civil and criminal proceedings against any
person or persons involved in the criminal
infringement of copyright or concerning the
unauthorized importation, duplication, exhibition or
distribution of any cinematographic work(s) films
or video cassettes of which . . . is the owner of
copyright or the owner of exclusive rights of
distribution in the Philippines pursuant to any
agreement(s) between . . . and the respective
owners of copyright in such cinematographic
work(s), to initiate and prosecute on behalf of . . .
criminal or civil actions in the Philippines against
any person or persons unlawfully distributing,
exhibiting, selling or offering for sale any films or
video cassettes of which . . . is the owner of
copyright or the owner of exclusive rights of
distribution in the Philippines pursuant to any
agreement(s) between . . . and the respective
owners of copyright in such works. 21
tantamount to doing business in the Philippines. We fail to
see how exercising one's legal and property rights and
taking steps for the vigilant protection of said rights,
particularly the appointment of an attorney-in-fact, can be
deemed by and of themselves to be doing business here.
As a general rule, a foreign corporation will not be regarded
as doing business in the State simply because it enters into
contracts with residents of the State, where such contracts
are consummated outside the State. 22 In fact, a view is
taken that a foreign corporation is not doing business in the
State merely because sales of its product are made there or
other business furthering its interests is transacted there
by an alleged agent, whether a corporation or a natural
person, where such activities are not under the direction
and control of the foreign corporation but are engaged in
by the alleged agent as an independent business. 23

It is generally held that sales made to customers in the

State by an independent dealer who has purchased and
obtained title from the corporation to the products sold are
not a doing of business by the corporation. 24 Likewise, a
foreign corporation which sells its products to persons
styled "distributing agents" in the State, for distribution by
them, is not doing business in the State so as to render it
subject to service of process therein, where the contract
with these purchasers is that they shall buy exclusively
from the foreign corporation such goods as it manufactures
and shall sell them at trade prices established by it. 25
It has moreover been held that the act of a foreign
corporation in engaging an attorney to represent it in a
Federal court sitting in a particular State is not doing
business within the scope of the minimum contact test. 26
With much more reason should this doctrine apply to the
mere retainer of Atty. Domingo for legal protection against
contingent acts of intellectual piracy.
In accordance with the rule that "doing business" imports
only acts in furtherance of the purposes for which a foreign
corporation was organized, it is held that the mere
institution and prosecution or defense of a suit, particularly
if the transaction which is the basis of the suit took place
out of the State, do not amount to the doing of business in
the State. The institution of a suit or the removal thereof is
neither the making of a contract nor the doing of business
within
a
constitutional
provision
placing
foreign
corporations licensed to do business in the State under the
same regulations, limitations and liabilities with respect to
such acts as domestic corporations. Merely engaging in
litigation has been considered as not a sufficient minimum
contact to warrant the exercise of jurisdiction over a foreign
corporation. 27
As a consideration aside, we have perforce to comment on
private respondents' basis for arguing that petitioners are
barred from maintaining suit in the Philippines. For
allegedly being foreign corporations doing business in the
Philippines without a license, private respondents
repeatedly maintain in all their pleadings that petitioners
have thereby no legal personality to bring an action before
Philippine Courts. 28

Among the grounds for a motion to dismiss under the Rules

of
Court
are lack of legal capacity to sue 29 and that the complaint
states no cause of action. 30 Lack of legal capacity to sue
means that the plaintiff is not in the exercise of his civil
rights, or does not have the necessary qualification to
appear in the case, or does not have the character or
representation he claims. 31 On the other hand, a case is
dismissible for lack of personality to sue upon proof that
the plaintiff is not the real party in interest, hence grounded
on failure to state a cause of action. 32 The term "lack of
capacity to sue" should not be confused with the term "lack
of personality to sue." While the former refers to a
plaintiff's general disability to sue, such as on account of
minority, insanity, incompetence, lack of juridical
personality or any other general disqualifications of a party,
the latter refers to the fact that the plaintiff is not the real
party in interest. Correspondingly, the first can be a ground
for a motion to dismiss based on the ground of lack of legal
capacity to sue; 33 whereas the second can be used as a
ground for a motion to dismiss based on the fact that the
complaint, on the face thereof, evidently states no cause of
action. 34
Applying the above discussion to the instant petition, the
ground available for barring recourse to our courts by an
unlicensed foreign corporation doing or transacting
business in the Philippines should properly be "lack of
capacity to sue," not "lack of personality to sue." Certainly,
a corporation whose legal rights have been violated is
undeniably such, if not the only, real party in interest to
bring suit thereon although, for failure to comply with the
licensing requirement, it is not capacitated to maintain any
suit before our courts.
Lastly, on this point, we reiterate this Court's rejection of
the common procedural tactics of erring local companies
which, when sued by unlicensed foreign corporations not
engaged in business in the Philippines, invoke the latter's
supposed lack of capacity to sue. The doctrine of lack of
capacity to sue based on failure to first acquire a local
license is based on considerations of public policy. It was
never intended to favor nor insulate from suit unscrupulous
establishments or nationals in case of breach of valid
obligations or violation of legal rights of unsuspecting

foreign firms or entities simply because they are not

licensed to do business in the country. 35
II
We now proceed to the main issue of the retroactive
application to the present controversy of the ruling in 20th
Century Fox Film Corporation vs. Court of Appeals, et al.,
promulgated on August 19, 1988, 36 that for the
determination of probable cause to support the issuance of
a search warrant in copyright infringement cases involving
videograms, the production of the master tape for
comparison with the allegedly pirate copies is necessary.
Petitioners assert that the issuance of a search warrant is
addressed to the discretion of the court subject to the
determination of probable cause in accordance with the
procedure prescribed therefore under Sections 3 and 4 of
Rule 126. As of the time of the application for the search
warrant in question, the controlling criterion for the finding
of probable cause was that enunciated in Burgos vs. Chief
of Staff 37 stating that:
Probable cause for a search warrant is defined as
such facts and circumstances which would lead a
reasonably discreet and prudent man to believe that
an offense has been committed and that the objects
sought in connection with the offense are in the
place sought to be searched.
According to petitioners, after complying with what the law
then required, the lower court determined that there was
probable cause for the issuance of a search warrant, and
which determination in fact led to the issuance and service
on December 14, 1987 of Search Warrant No. 87-053. It is
further argued that any search warrant so issued in
accordance with all applicable legal requirements is valid,
for the lower court could not possibly have been expected
to apply, as the basis for a finding of probable cause for the
issuance of a search warrant in copyright infringement
cases involving videograms, a pronouncement which was
not existent at the time of such determination, on
December 14, 1987, that is, the doctrine in the 20th
Century Fox case that was promulgated only on August 19,
1988, or over eight months later.

Private respondents predictably argue in support of the

ruling of the Court of Appeals sustaining the quashal of the
search warrant by the lower court on the strength of that
20th Century Fox ruling which, they claim, goes into the
very essence of probable cause. At the time of the issuance
of the search warrant involved here, although the 20th
Century Fox case had not yet been decided, Section 2,
Article III of the Constitution and Section 3, Rule 126 of the
1985 Rules on Criminal Procedure embodied the prevailing
and governing law on the matter. The ruling in 20th
Century Fox was merely an application of the law on
probable cause. Hence, they posit that there was no law
that was retrospectively applied, since the law had been
there all along. To refrain from applying the 20th Century
Fox ruling, which had supervened as a doctrine
promulgated at the time of the resolution of private
respondents' motion for reconsideration seeking the
quashal of the search warrant for failure of the trial court to
require presentation of the master tapes prior to the
issuance of the search warrant, would have constituted
grave abuse of discretion. 38
Respondent court upheld the retroactive application of the
20th Century Fox ruling by the trial court in resolving
petitioners' motion for reconsideration in favor of the
quashal of the search warrant, on this renovated thesis:
And
whether
this
doctrine
should
apply
retroactively, it must be noted that in the 20th
Century Fox case, the lower court quashed the
earlier search warrant it issued. On certiorari, the
Supreme Court affirmed the quashal on the ground
among others that the master tapes or copyrighted
films were not presented for comparison with the
purchased evidence of the video tapes to determine
whether the latter is an unauthorized reproduction
of the former.
If the lower court in the Century Fox case did not
quash the warrant, it is Our view that the Supreme
Court would have invalidated the warrant just the
same considering the very strict requirement set by
the Supreme Court for the determination of
"probable cause" in copyright infringement cases as
enunciated in this 20th Century Fox case. This is so
because, as was stated by the Supreme Court in the

said case, the master tapes and the pirated tapes

must be presented for comparison to satisfy the
requirement of "probable cause." So it goes back to
the
very
existence
of
probable
cause. . . . 39
Mindful as we are of the ramifications of the doctrine of
stare decisis and the rudiments of fair play, it is our
considered view that the 20th Century Fox ruling cannot be
retroactively applied to the instant case to justify the
quashal of Search Warrant No. 87-053. Herein petitioners'
consistent position that the order of the lower court of
September 5, 1988 denying therein defendants' motion to
lift the order of search warrant was properly issued, there
having been satisfactory compliance with the then
prevailing standards under the law for determination of
probable cause, is indeed well taken. The lower court could
not possibly have expected more evidence from petitioners
in their application for a search warrant other than what the
law and jurisprudence, then existing and judicially
accepted, required with respect to the finding of probable
cause.
Article 4 of the Civil Code provides that "(l)aws shall have
no retroactive effect, unless the contrary is provided.
Correlatively, Article 8 of the same Code declares that
"(j)udicial decisions applying the laws or the Constitution
shall form part of the legal system of the Philippines."
Jurisprudence, in our system of government, cannot be
considered as an independent source of law; it cannot
create law. 40 While it is true that judicial decisions which
apply or interpret the Constitution or the laws are part of
the legal system of the Philippines, still they are not laws.
Judicial decisions, though not laws, are nonetheless
evidence of what the laws mean, and it is for this reason
that they are part of the legal system of the Philippines. 41
Judicial decisions of the Supreme Court assume the same
authority
as
the
statute
itself. 42
Interpreting the aforequoted correlated provisions of the
Civil Code and in light of the above disquisition, this Court
emphatically declared in Co vs. Court of Appeals, et al. 43
that the principle of prospectivity applies not only to
original or amendatory statutes and administrative rulings

and circulars, but also, and properly so, to judicial

decisions. Our holding in the earlier case of People vs.
Jabinal 44 echoes the rationale for this judicial declaration,
viz.:
Decisions of this Court, although in themselves not
laws, are nevertheless evidence of what the laws
mean, and this is the reason why under Article 8 of
the New Civil Code, "Judicial decisions applying or
interpreting the laws or the Constitution shall form
part of the legal system." The interpretation upon a
law by this Court constitutes, in a way, a part of the
law as of the date that the law was originally
passed, since this Court's construction merely
establishes the contemporaneous legislative intent
that the law thus construed intends to effectuate.
The settled rule supported by numerous authorities
is a restatement of the legal maxim "legis
interpretatio legis vim obtinet" the interpretation
placed upon the written law by a competent court
has the force of law. . . . , but when a doctrine of this
Court is overruled and a different view is adopted,
the new doctrine should be applied prospectively,
and should not apply to parties who had relied on
the old doctrine and acted on the faith thereof . . . .
(Emphasis supplied).
This was forcefully reiterated in Spouses Benzonan vs.
Court of Appeals, et al., 45 where the Court expounded:
. . . . But while our decisions form part of the law of
the land, they are also subject to Article 4 of the
Civil Code which provides that "laws shall have no
retroactive effect unless the contrary is provided."
This is expressed in the familiar legal maxim lex
prospicit, non respicit, the law looks forward not
backward. The rationale against retroactivity is easy
to perceive. The retroactive application of a law
usually divests rights that have already become
vested or impairs the obligations of contract and
hence, is unconstitutional (Francisco v. Certeza, 3
SCRA 565 [1961]). The same consideration underlies
our rulings giving only prospective effect to
decisions enunciating new doctrines. . . . .

The reasoning behind Senarillos vs. Hermosisima 46 that

judicial interpretation of a statute constitutes part of the
law as of the date it was originally passed, since the Court's
construction merely establishes the contemporaneous
legislative intent that the interpreted law carried into
effect, is all too familiar. Such judicial doctrine does not
amount to the passage of a new law but consists merely of
a construction or interpretation of a pre-existing one, and
that is precisely the situation obtaining in this case.
It is consequently clear that a judicial interpretation
becomes a part of the law as of the date that law was
originally passed, subject only to the qualification that
when a doctrine of this Court is overruled and a different
view is adopted, and more so when there is a reversal
thereof, the new doctrine should be applied prospectively
and should not apply to parties who relied on the old
doctrine and acted in good faith. 47 To hold otherwise would
be to deprive the law of its quality of fairness and justice
then, if there is no recognition of what had transpired prior
to such adjudication. 48
There is merit in petitioners' impassioned and well-founded
argumentation:
The case of 20th Century Fox Film Corporation vs.
Court of Appeals, et al., 164 SCRA 655 (August 19,
1988) (hereinafter 20th Century Fox) was inexistent
in December of 1987 when Search Warrant 87-053
was issued by the lower court. Hence, it boggles the
imagination how the lower court could be expected
to apply the formulation of 20th Century Fox in
finding probable cause when the formulation was
yet non-existent.

did it fail to comply with any legal requirement for

the valid issuance of search warrant.
. . . (W)e believe that the lower court should be
considered as having followed the requirements of
the law in issuing Search Warrant No. 87-053. The
search warrant is therefore valid and binding. It
must be noted that nowhere is it found in the
allegations of the Respondents that the lower court
failed to apply the law as then interpreted in 1987.
Hence, we find it absurd that it is (sic) should be
seen otherwise, because it is simply impossible to
have required the lower court to apply a formulation
which will only be defined six months later.
Furthermore, it is unjust and unfair to require
compliance with legal and/or doctrinal requirements
which are inexistent at the time they were supposed
to have been complied with.
xxx xxx xxx
. . . If the lower court's reversal will be sustained,
what encouragement can be given to courts and
litigants to respect the law and rules if they can
expect with reasonable certainty that upon the
passage of a new rule, their conduct can still be
open to question? This certainly breeds instability in
our system of dispensing justice. For Petitioners who
took special effort to redress their grievances and to
protect their property rights by resorting to the
remedies provided by the law, it is most unfair that
fealty to the rules and procedures then obtaining
would
bear
but
fruits
of
injustice. 49

xxx xxx xxx

In short, the lower court was convinced at that time
after conducting searching examination questions of
the applicant and his witnesses that "an offense had
been committed and that the objects sought in
connection with the offense (were) in the place
sought to be searched" (Burgos v. Chief of Staff, et
al., 133 SCRA 800). It is indisputable, therefore, that
at the time of the application, or on December 14,
1987, the lower court did not commit any error nor

Withal, even the proposition that the prospectivity of

judicial decisions imports application thereof not only to
future cases but also to cases still ongoing or not yet final
when the decision was promulgated, should not be
countenanced in the jural sphere on account of its
inevitably unsettling repercussions. More to the point, it is
felt that the reasonableness of the added requirement in
20th Century Fox calling for the production of the master
tapes of the copyrighted films for determination of probable

cause in copyright infringement cases needs revisiting and

clarification.

of the copyrighted films cannot serve as basis for

the issuance of a search warrant.

It will be recalled that the 20th Century Fox case arose from
search warrant proceedings in anticipation of the filing of a
case for the unauthorized sale or renting out of copyrighted
films in videotape format in violation of Presidential Decree
No. 49. It revolved around the meaning of probable cause
within the context of the constitutional provision against
illegal searches and seizures, as applied to copyright
infringement cases involving videotapes.

For a closer and more perspicuous appreciation of the

factual antecedents of 20th Century Fox, the pertinent
portions of the decision therein are quoted hereunder, to
wit:

Therein it was ruled that

The presentation of master tapes of the copyrighted
films from which the pirated films were allegedly
copied, was necessary for the validity of search
warrants against those who have in their possession
the pirated films. The petitioner's argument to the
effect that the presentation of the master tapes at
the time of application may not be necessary as
these would be merely evidentiary in nature and not
determinative of whether or not a probable cause
exists to justify the issuance of the search warrants
is not meritorious. The court cannot presume that
duplicate or copied tapes were necessarily
reproduced from master tapes that it owns.
The application for search warrants was directed
against video tape outlets which allegedly were
engaged in the unauthorized sale and renting out of
copyrighted films belonging to the petitioner
pursuant to P.D. 49.
The essence of a copyright infringement is the
similarity or at least substantial similarity of the
purported pirated works to the copyrighted work.
Hence, the applicant must present to the court the
copyrighted films to compare them with the
purchased evidence of the video tapes allegedly
pirated to determine whether the latter is an
unauthorized reproduction of the former. This
linkage of the copyrighted films to the pirated films
must be established to satisfy the requirements of
probable cause. Mere allegations as to the existence

In the instant case, the lower court lifted the three

questioned search warrants against the private
respondents on the ground that it acted on the
application for the issuance of the said search
warrants and granted it on the misrepresentations
of applicant NBI and its witnesses that infringement
of copyright or a piracy of a particular film have
been committed. Thus the lower court stated in its
questioned order dated January 2, 1986:
According to the movant, all three
witnesses during the proceedings in
the application for the three search
warrants testified of their own
personal knowledge. Yet, Atty. Albino
Reyes of the NBI stated that the
counsel or representative of the
Twentieth Century Fox Corporation will
testify on the video cassettes that
were pirated, so that he did not have
personal knowledge of the alleged
piracy. The witness Bacani also said
that the video cassettes were pirated
without stating the manner it was
pirated and that it was Atty. Domingo
that has knowledge of that fact.
On the part of Atty. Domingo, he said
that the re-taping of the allegedly
pirated tapes was from master tapes
allegedly belonging to the Twentieth
Century Fox, because, according to
him it is of his personal knowledge.
At the hearing of the Motion for
Reconsideration, Senior NBI Agent
Atty. Albino Reyes testified that when
the complaint for infringement was

brought to the NBI, the master tapes

of the allegedly pirated tapes were
shown to him and he made
comparisons of the tapes with those
purchased by their man Bacani. Why
the master tapes or at least the film
reels of the allegedly pirated tapes
were not shown to the Court during
the application gives some misgivings
as to the truth of that bare statement
of the NBI agent on the witness stand.

So that lacking in persuasive effect,

the allegation that master tapes were
viewed by the NBI and were
compared to the purchased and
seized
video
tapes
from
the
respondents'
establishments,
it
should be dismissed as not supported
by competent evidence and for that
matter the probable cause hovers in
that grey debatable twilight zone
between black and white resolvable in
favor of respondents herein.

Again as the application and search

proceedings is a prelude to the filing
of criminal cases under PD 49, the
copyright infringement law, and
although what is required for the
issuance thereof is merely the
presence of probable cause, that
probable cause must be satisfactory
to the Court, for it is a time-honored
precept that proceedings to put a
man to task as an offender under our
laws
should
be
interpreted
in
strictissimi
juris
against
the
government and liberally in favor of
the alleged offender.

But the glaring fact is that "Cocoon,"

the first video tape mentioned in the
search warrant, was not even duly
registered or copyrighted in the
Philippines. (Annex C of Opposition p.
152 record.) So, that lacking in the
requisite presentation to the Court of
an alleged master tape for purposes
of comparison with the purchased
evidence of the video tapes allegedly
pirated and those seized from
respondents, there was no way to
determine whether there really was
piracy, or copying of the film of the
complainant Twentieth Century Fox.

xxx xxx xxx

xxx xxx xxx
This
doctrine
has
never
been
overturned, and as a matter of fact it
had been enshrined in the Bill of
Rights in our 1973 Constitution.

The lower court, therefore, lifted the three (3)

questioned search warrants in the absence of
probable cause that the private respondents
violated P.D. 49. As found out by the court, the NBI
agents who acted as witnesses did not have
personal knowledge of the subject matter of their
testimony which was the alleged commission of the
offense by the private respondents. Only the
petitioner's counsel who was also a witness during
the application for the issuance of the search
warrants stated that he had personal knowledge
that the confiscated tapes owned by the private
respondents were pirated tapes taken from master
tapes belonging to the petitioner. However, the
lower court did not give much credence to his

testimony in view of the fact that the master tapes

of the allegedly pirated tapes were not shown to the
court during the application (Emphasis ours).
The italicized passages readily expose the reason why the
trial court therein required the presentation of the master
tapes of the allegedly pirated films in order to convince
itself of the existence of probable cause under the factual
milieu peculiar to that case. In the case at bar, respondent
appellate court itself observed:
We feel that the rationale behind the aforequoted
doctrine is that the pirated copies as well as the
master tapes, unlike the other types of personal
properties which may be seized, were available for
presentation to the court at the time of the
application for a search warrant to determine the
existence of the linkage of the copyrighted films
with the pirated ones. Thus, there is no reason not
the present them (Emphasis supplied ). 50
In fine, the supposed pronunciamento in said case
regarding the necessity for the presentation of the master
tapes of the copyrighted films for the validity of search
warrants should at most be understood to merely serve as
a guidepost in determining the existence of probable cause
in copyright infringement cases where there is doubt as to
the true nexus between the master tape and the pirated
copies. An objective and careful reading of the decision in
said case could lead to no other conclusion than that said
directive was hardly intended to be a sweeping and
inflexible requirement in all or similar copyright
infringement cases. Judicial dicta should always be
construed within the factual matrix of their parturition,
otherwise a careless interpretation thereof could unfairly
fault the writer with the vice of overstatement and the
reader with the fallacy of undue generalization.
In the case at bar, NBI Senior Agent Lauro C. Reyes who
filed the application for search warrant with the lower court
following a formal complaint lodged by petitioners, judging
from his affidavit 51 and his deposition, 52 did testify on
matters within his personal knowledge based on said
complaint of petitioners as well as his own investigation
and surveillance of the private respondents' video rental
shop. Likewise, Atty. Rico V. Domingo, in his capacity as

attorney-in-fact, stated in his affidavit 53 and further

expounded in his deposition 54 that he personally knew of
the fact that private respondents had never been
authorized by his clients to reproduce, lease and possess
for the purpose of selling any of the copyrighted films.
Both testimonies of Agent Reyes and Atty. Domingo were
corroborated by Rene C. Baltazar, a private researcher
retained by Motion Pictures Association of America, Inc.
(MPAA, Inc.), who was likewise presented as a witness
during the search warrant proceedings. 55 The records
clearly reflect that the testimonies of the abovenamed
witnesses were straightforward and stemmed from matters
within their personal knowledge. They displayed none of
the ambivalence and uncertainty that the witnesses in the
20th Century Fox case exhibited. This categorical
forthrightness in their statements, among others, was what
initially and correctly convinced the trial court to make a
finding of the existence of probable cause.
There is no originality in the argument of private
respondents against the validity of the search warrant,
obviously borrowed from 20th Century Fox, that petitioners'
witnesses NBI Agent Lauro C. Reyes, Atty. Rico V.
Domingo and Rene C. Baltazar did not have personal
knowledge of the subject matter of their respective
testimonies and that said witnesses' claim that the video
tapes were pirated, without stating the manner by which
these were pirated, is a conclusion of fact without basis. 56
The difference, it must be pointed out, is that the records in
the present case reveal that (1) there is no allegation of
misrepresentation, much less a finding thereof by the lower
court, on the part of petitioners' witnesses; (2) there is no
denial on the part of private respondents that the tapes
seized were illegitimate copies of the copyrighted ones not
have they shown that they were given any authority by
petitioners to copy, sell, lease, distribute or circulate, or at
least, to offer for sale, lease, distribution or circulation the
said video tapes; and (3) a discreet but extensive
surveillance of the suspected area was undertaken by
petitioners' witnesses sufficient to enable them to execute
trustworthy affidavits and depositions regarding matters
discovered in the course thereof and of which they have
personal knowledge.

It is evidently incorrect to suggest, as the ruling in 20th

Century Fox may appear to do, that in copyright
infringement cases, the presentation of master tapes of the
copyrighted films is always necessary to meet the
requirement of probable cause and that, in the absence
thereof, there can be no finding of probable cause for the
issuance of a search warrant. It is true that such master
tapes are object evidence, with the merit that in this class
of evidence the ascertainment of the controverted fact is
made through demonstrations involving the direct use of
the senses of the presiding magistrate. 57 Such auxiliary
procedure, however, does not rule out the use of
testimonial or documentary evidence, depositions,
admissions or other classes of evidence tending to prove
the factum probandum, 58 especially where the production
in court of object evidence would result in delay,
inconvenience or expenses out of proportion to its
evidentiary value. 59
Of course, as a general rule, constitutional and statutory
provisions relating to search warrants prohibit their
issuance except on a showing of probable cause, supported
by oath or affirmation. These provisions prevent the
issuance of warrants on loose, vague, or doubtful bases of
fact, and emphasize the purpose to protect against all
general searches. 60 Indeed, Article III of our Constitution
mandates in Sec. 2 thereof that no search warrant shall
issue except upon probable cause to be determined
personally by the judge after examination under oath or
affirmation of the complainant and the witnesses he may
produce, and particularly describing the place to be
searched and the things to be seized; and Sec. 3 thereof
provides that any evidence obtained in violation of the
preceding section shall be inadmissible for any purpose in
any proceeding.
These constitutional strictures are implemented by the
following provisions of Rule 126 of the Rules of Court:

Sec. 3. Requisites for issuing search warrant. A

search warrant shall not issue but upon probable
cause in connection with one specific offense to be
determined
personally
by
the
judge
after
examination under oath or affirmation of the
complainant and the witnesses he may produce,
and particularly describing the place to be searched
and the things to be seized.
Sec. 4. Examination of complainant; record. The
judge must, before issuing the warrant, personally
examine in the form of searching questions and
answers, in writing and under oath the complainant
and any witnesses he may produce on facts
personally known to them and attach to the record
their sworn statements together with any affidavits
submitted.
Sec. 5. Issuance and form of search warrant. If
the judge is thereupon satisfied of the existence of
facts upon which the application is based, or that
there is probable cause to believe that they exist, he
must issue the warrant, which must be substantially
in the form prescribed by these Rules.
The constitutional and statutory provisions of various
jurisdictions requiring a showing of probable cause before a
search warrant can be issued are mandatory and must be
complied with, and such a showing has been held to be an
unqualified condition precedent to the issuance of a
warrant. A search warrant not based on probable cause is a
nullity, or is void, and the issuance thereof is, in legal
contemplation, arbitrary. 61 It behooves us, then, to review
the concept of probable cause, firstly, from representative
holdings in the American jurisdiction from which we
patterned our doctrines on the matter.
Although the term "probable cause" has been said to have
a well-defined meaning in the law, the term is exceedingly
difficult to define, in this case, with any degree of precision;
indeed, no definition of it which would justify the issuance
of a search warrant can be formulated which would cover
every state of facts which might arise, and no formula or
standard, or hard and fast rule, may be laid down which
may be applied to the facts of every situation. 62 As to what

acts constitute probable cause seem incapable

definition. 63 There is, of necessity, no exact test. 64

of

At best, the term "probable cause" has been understood to

mean a reasonable ground of suspicion, supported by
circumstances sufficiently strong in themselves to warrant
a cautious man in the belief that the person accused is
guilty of the offense with which he is charged; 65 or the
existence of such facts and circumstances as would excite
an honest belief in a reasonable mind acting on all the facts
and circumstances within the knowledge of the magistrate
that the charge made by the applicant for the warrant is
true. 66
Probable cause does not mean actual and positive cause,
nor does it import absolute certainty. The determination of
the existence of probable cause is not concerned with the
question of whether the offense charged has been or is
being committed in fact, or whether the accused is guilty or
innocent, but only whether the affiant has reasonable
grounds for his belief. 67 The requirement is less than
certainty or proof , but more than suspicion or possibility. 68
In Philippine jurisprudence, probable cause has been
uniformly defined as such facts and circumstances which
would lead a reasonable, discreet and prudent man to
believe that an offense has been committed, and that the
objects sought in connection with the offense are in the
place sought to be searched. 69 It being the duty of the
issuing officer to issue, or refuse to issue, the warrant as
soon as practicable after the application therefor is filed, 70
the facts warranting the conclusion of probable cause must
be assessed at the time of such judicial determination by
necessarily using legal standards then set forth in law and
jurisprudence, and not those that have yet to be crafted
thereafter.
As already stated, the definition of probable cause
enunciated in Burgos, Sr. vs. Chief of Staff, et al., supra,
vis-a-vis the provisions of Sections 3 and 4 of Rule 126,
were the prevailing and controlling legal standards, as they
continue to be, by which a finding of probable cause is
tested. Since the propriety of the issuance of a search
warrant is to be determined at the time of the application
therefor, which in turn must not be too remote in time from
the occurrence of the offense alleged to have been

committed, the issuing judge, in determining the existence

of probable cause, can and should logically look to the
touchstones in the laws theretofore enacted and the
decisions already promulgated at the time, and not to
those which had not yet even been conceived or
formulated.
It is worth noting that neither the Constitution nor the Rules
of Court attempt to define probable cause, obviously for the
purpose of leaving such matter to the court's discretion
within the particular facts of each case. Although the
Constitution prohibits the issuance of a search warrant in
the absence of probable cause, such constitutional
inhibition does not command the legislature to establish a
definition or formula for determining what shall constitute
probable cause. 71 Thus, Congress, despite its broad
authority to fashion standards of reasonableness for
searches and seizures, 72 does not venture to make such a
definition or standard formulation of probable cause, nor
categorize what facts and circumstances make up the
same, much less limit the determination thereof to and
within the circumscription of a particular class of evidence,
all in deference to judicial discretion and probity. 73
Accordingly, to restrict the exercise of discretion by a judge
by adding a particular requirement (the presentation of
master tapes, as intimated by 20th Century Fox) not
provided nor implied in the law for a finding of probable
cause is beyond the realm of judicial competence or
statesmanship. It serves no purpose but to stultify and
constrict the judicious exercise of a court's prerogatives
and to denigrate the judicial duty of determining the
existence of probable cause to a mere ministerial or
mechanical function. There is, to repeat, no law or rule
which requires that the existence of probable cause is or
should be determined solely by a specific kind of evidence.
Surely, this could not have been contemplated by the
framers of the Constitution, and we do not believe that the
Court intended the statement in 20th Century Fox
regarding master tapes as the dictum for all seasons and
reasons in infringement cases.
Turning now to the case at bar, it can be gleaned from the
records that the lower court followed the prescribed
procedure for the issuance of a search warrant: (1) the
examination under oath or affirmation of the complainant

and his witnesses, with them particularly describing the

place to be searched and the things to be seized; (2) an
examination personally conducted by the judge in the form
of searching questions and answers, in writing and under
oath of the complainant and witnesses on facts personally
known to them; and, (3) the taking of sworn statements,
together with the affidavits submitted, which were duly
attached to the records.
Thereafter, the court a quo made the following factual
findings leading to the issuance of the search warrant now
subject of this controversy:
In the instant case, the following facts have been
established: (1) copyrighted video tapes bearing
titles enumerated in Search Warrant No. 87-053
were being sold, leased, distributed or circulated, or
offered for sale, lease, distribution, or transferred or
caused to be transferred by defendants at their
video outlets, without the written consent of the
private complainants or their assignee; (2)
recovered
or
confiscated
from
defendants'
possession were video tapes containing copyrighted
motion picture films without the authority of the
complainant; (3) the video tapes originated from
spurious or unauthorized persons; and (4) said video
tapes were exact reproductions of the films listed in
the search warrant whose copyrights or distribution
rights were owned by complainants.
The basis of these facts are the affidavits and
depositions of NBI Senior Agent Lauro C. Reyes, Atty.
Rico V. Domingo, and Rene C. Baltazar. Motion
Pictures Association of America, Inc. (MPAA) thru
their counsel, Atty. Rico V. Domingo, filed a
complaint with the National Bureau of Investigation
against certain video establishments one of which is
defendant, for violation of PD No. 49 as amended by
PD No. 1988. Atty. Lauro C. Reyes led a team to
conduct discreet surveillance operations on said
video establishments. Per information earlier
gathered by Atty. Domingo, defendants were
engaged in the illegal sale, rental, distribution,
circulation or public exhibition of copyrighted films
of MPAA without its written authority or its
members. Knowing that defendant Sunshine Home

Video and its proprietor, Mr. Danilo Pelindario, were

not authorized by MPAA to reproduce, lease, and
possess for the purpose of selling any of its
copyrighted
motion
pictures,
instructed
his
researcher, Mr. Rene Baltazar to rent two video
cassettes from said defendants on October 21,
1987. Rene C. Baltazar proceeded to Sunshine
Home Video and rented tapes containing Little Shop
of Horror. He was issued rental slip No. 26362 dated
October 21, 1987 for P10.00 with a deposit of
P100.00. Again, on December 11, 1987, the
returned to Sunshine Home Video and rented
Robocop with rental slip No. 25271 also for P10.00:
On the basis of the complaint of MPAA thru counsel,
Atty. Lauro C. Reyes personally went to Sunshine
Home Video at No. 6 Mayfair Center, Magallanes
Commercial Center, Makati. His last visit was on
December 7, 1987. There, he found the video outlet
renting, leasing, distributing video cassette tapes
whose titles were copyrighted and without the
authority of MPAA.
Given these facts, a probable cause exists. . . . 74
The lower court subsequently executed a volte-face,
despite its prior detailed and substantiated findings, by
stating in its order of November 22, 1988 denying
petitioners' motion for reconsideration and quashing the
search warrant that
. . . The two (2) cases have a common factual
milieu; both involve alleged pirated copyrighted
films of private complainants which were found in
the possession or control of the defendants. Hence,
the necessity of the presentation of the master
tapes from which the pirated films were allegedly
copied is necessary in the instant case, to establish
the existence of probable cause. 75
Being based solely on an unjustifiable and improper
retroactive application of the master tape requirement
generated by 20th Century Fox upon a factual situation
completely different from that in the case at bar, and
without anything more, this later order clearly defies
elemental fair play and is a gross reversible error. In fact,
this observation of the Court in La Chemise Lacoste, S.A.

vs. Fernandez, et al., supra, may just as easily apply to the

present case:
A review of the grounds invoked . . . in his motion to
quash the search warrants reveals the fact that they
are not appropriate for quashing a warrant. They are
matters of defense which should be ventilated
during the trial on the merits of the case. . . .
As correctly pointed out by petitioners, a blind espousal of
the requisite of presentation of the master tapes in
copyright infringement cases, as the prime determinant of
probable cause, is too exacting and impracticable a
requirement to be complied with in a search warrant
application which, it must not be overlooked, is only an
ancillary proceeding. Further, on realistic considerations, a
strict application of said requirement militates against the
elements of secrecy and speed which underlie covert
investigative and surveillance operations in police
enforcement campaigns against all forms of criminality,
considering that the master tapes of a motion picture
required to be presented before the court consists of
several reels contained in circular steel casings which,
because of their bulk, will definitely draw attention, unlike
diminutive objects like video tapes which can be easily
concealed. 76 With hundreds of titles being pirated, this
onerous and tedious imposition would be multiplied a
hundredfold by judicial fiat, discouraging and preventing
legal recourses in foreign jurisdictions.
Given the present international awareness and furor over
violations in large scale of intellectual property rights,
calling for transnational sanctions, it bears calling to mind
the Court's admonition also in La Chemise Lacoste, supra,
that
. . . . Judges all over the country are well advised to
remember that court processes should not be used
as instruments to, unwittingly or otherwise, aid
counterfeiters and intellectual pirates, tie the hands
of the law as it seeks to protect the Filipino
consuming public and frustrate executive and
administrative
implementation
of
solemn
commitments pursuant to international conventions
and treaties.

III
The amendment to Section 56 of Presidential Decree No. 49
by Presidential Decree No. 1987, 77 which should here be
publicized judicially, brought about the revision of its
penalty structure and enumerated additional acts
considered violative of said decree on intellectual property,
namely, (1) directly or indirectly transferring or causing to
be transferred any sound recording or motion picture or
other audio-visual works so recorded with intent to sell,
lease, publicly exhibit or cause to be sold, leased or
publicly exhibited, or to use or cause to be used for profit
such articles on which sounds, motion pictures, or other
audio-visual works are so transferred without the written
consent of the owner or his assignee; (2) selling, leasing,
distributing, circulating, publicly exhibiting, or offering for
sale, lease, distribution, or possessing for the purpose of
sale, lease, distribution, circulation or public exhibition any
of the abovementioned articles, without the written
consent of the owner or his assignee; and, (3) directly or
indirectly offering or making available for a fee, rental, or
any other form of compensation any equipment,
machinery, paraphernalia or any material with the
knowledge that such equipment, machinery, paraphernalia
or material will be used by another to reproduce, without
the consent of the owner, any phonograph record, disc,
wire, tape, film or other article on which sounds, motion
pictures or other audio-visual recordings may be
transferred, and which provide distinct bases for criminal
prosecution, being crimes independently punishable under
Presidential Decree No. 49, as amended, aside from the act
of infringing or aiding or abetting such infringement under
Section 29.
The trial court's finding that private respondents committed
acts in blatant transgression of Presidential Decree No. 49
all the more bolsters its findings of probable cause, which
determination can be reached even in the absence of
master tapes by the judge in the exercise of sound
discretion. The executive concern and resolve expressed in
the foregoing amendments to the decree for the protection
of intellectual property rights should be matched by
corresponding judicial vigilance and activism, instead of the
apathy of submitting to technicalities in the face of ample
evidence of guilt.

The essence of intellectual piracy should be essayed in

conceptual terms in order to underscore its gravity by an
appropriate understanding thereof. Infringement of a
copyright is a trespass on a private domain owned and
occupied by the owner of the copyright, and, therefore,
protected by law, and infringement of copyright, or piracy,
which is a synonymous term in this connection, consists in
the doing by any person, without the consent of the owner
of the copyright, of anything the sole right to do which is
conferred by statute on the owner of the copyright. 78
A copy of a piracy is an infringement of the original, and it
is no defense that the pirate, in such cases, did not know
what works he was indirectly copying, or did not know
whether or not he was infringing any copyright; he at least
knew that what he was copying was not his, and he copied
at his peril. In determining the question of infringement,
the amount of matter copied from the copyrighted work is
an important consideration. To constitute infringement, it is
not necessary that the whole or even a large portion of the
work shall have been copied. If so much is taken that the
value of the original is sensibly diminished, or the labors of
the original author are substantially and to an injurious
extent appropriated by another, that is sufficient in point of
law
to
constitute
a
piracy. 79 The question of whether there has been an
actionable infringement of a literary, musical, or artistic
work in motion pictures, radio or television being one of
fact, 80 it should properly be determined during the trial.
That is the stage calling for conclusive or preponderating
evidence, and not the summary proceeding for the
issuance of a search warrant wherein both lower courts
erroneously require the master tapes.
In disregarding private respondent's argument that Search
Warrant No. 87-053 is a general warrant, the lower court
observed that "it was worded in a manner that the
enumerated seizable items bear direct relation to the
offense of violation of Sec. 56 of PD 49 as amended. It
authorized only the seizur(e) of articles used or intended to
be used in the unlawful sale, lease and other unconcerted
acts in violation of PD 49 as amended. . . . 81
On this point, Bache and Co., (Phil.), Inc., et al. vs. Ruiz, et
al., 82 instructs and enlightens:

A search warrant may be said to particularly

describe the things to be seized when the
description therein is as specific as the
circumstances will ordinarily allow (People vs. Rubio,
57 Phil. 384); or when the description expresses a
conclusion of fact not of law by which the
warrant officer may be guided in making the search
and seizure (idem., dissent of Abad Santos, J.,); or
when the things described are limited to those
which bear direct relation to the offense for which
the warrant is being issued (Sec 2, Rule 126,
Revised Rules of Court). . . . If the articles desired to
be seized have any direct relation to an offense
committed, the applicant must necessarily have
some evidence, other than those articles, to prove
the said offense; and the articles subject of search
and seizure should come in handy merely to
strengthen such evidence. . . .
On private respondents' averment that the search warrant
was made applicable to more than one specific offense on
the ground that there are as many offenses of infringement
as there are rights protected and, therefore, to issue one
search warrant for all the movie titles allegedly pirated
violates the rule that a search warrant must be issued only
in connection with one specific offense, the lower court
said:
. . . . As the face of the search warrant itself
indicates, it was issued for violation of Section 56,
PD 49 as amended only. The specifications therein
(in Annex A) merely refer to the titles of the
copyrighted motion pictures/films belonging to
private complainants which defendants were in
control/possession for sale, lease, distribution or
public exhibition in contravention of Sec. 56, PD 49
as amended. 83
That there were several counts of the offense of copyright
infringement and the search warrant uncovered several
contraband items in the form of pirated video tapes is not
to be confused with the number of offenses charged. The
search warrant herein issued does not violate the onespecific-offense rule.

It is pointless for private respondents to insist on

compliance with the registration and deposit requirements
under Presidential Decree No. 49 as prerequisites for
invoking the court's protective mantle in copyright
infringement cases. As explained by the court below:
Defendants-movants contend that PD 49 as
amended covers only producers who have complied
with the requirements of deposit and notice (in
other words registration) under Sections 49 and 50
thereof. Absent such registration, as in this case,
there was no right created, hence, no infringement
under PD 49 as amended. This is not well-taken.
As correctly pointed out by private complainantsoppositors, the Department of Justice has resolved
this legal question as far back as December 12,
1978 in its Opinion No. 191 of the then Secretary of
Justice Vicente Abad Santos which stated that
Sections 26 and 50 do not apply to cinematographic
works and PD No. 49 "had done away with the
registration and deposit of cinematographic works"
and that "even without prior registration and deposit
of a work which may be entitled to protection under
the Decree, the creator can file action for
infringement of its rights". He cannot demand,
however, payment of damages arising from
infringement. The same opinion stressed that "the
requirements of registration and deposit are thus
retained under the Decree, not as conditions for the
acquisition of copyright and other rights, but as
prerequisites to a suit for damages". The statutory
interpretation of the Executive Branch being correct,
is entitled (to) weight and respect.
xxx xxx xxx

Defendants-movants maintain that complainant and

his witnesses led the Court to believe that a crime
existed when in fact there was none. This is wrong.
As earlier discussed, PD 49 as amended, does not
require registration and deposit for a creator to be
able to file an action for infringement of his rights.
These conditions are merely pre-requisites to an
action for damages. So, as long as the proscribed
acts are shown to exist, an action for infringement
may be initiated. 84
Accordingly, the certifications 85 from the Copyright Section
of the National Library, presented as evidence by private
respondents to show non-registration of some of the films
of petitioners, assume no evidentiary weight or significance
whatsoever.
Furthermore, a closer review of Presidential Decree No. 49
reveals that even with respect to works which are required
under Section 26 thereof to be registered and with copies
to deposited with the National Library, such as books,
including composite and cyclopedic works, manuscripts,
directories and gazetteers; and periodicals, including
pamphlets and newspapers; lectures, sermons, addresses,
dissertations prepared for oral delivery; and letters, the
failure to comply with said requirements does not deprive
the copyright owner of the right to sue for infringement.
Such non-compliance merely limits the remedies available
to him and subjects him to the corresponding sanction.
The reason for this is expressed in Section 2 of the decree
which prefaces its enumeration of copyrightable works with
the explicit statement that "the rights granted under this
Decree shall, from the moment of creation, subsist with
respect to any of the following classes of works." This
means that under the present state of the law, the
copyright for a work is acquired by an intellectual creator
from the moment of creation even in the absence of
registration and deposit. As has been authoritatively
clarified:
The registration and deposit of two complete copies
or reproductions of the work with the National
Library within three weeks after the first public
dissemination or performance of the work, as
provided for in Section 26 (P.D. No. 49, as

amended), is not for the purpose of securing a

copyright of the work, but rather to avoid the
penalty for non-compliance of the deposit of said
two copies and in order to recover damages in an
infringement suit. 86
One distressing observation. This case has been fought on
the basis of, and its resolution long delayed by resort to,
technicalities to a virtually abusive extent by private
respondents, without so much as an attempt to adduce any
credible evidence showing that they conduct their business
legitimately and fairly. The fact that private respondents
could not show proof of their authority or that there was
consent from the copyright owners for them to sell, lease,
distribute or circulate petitioners' copyrighted films
immeasurably bolsters the lower court's initial finding of
probable cause. That private respondents are licensed by
the Videogram Regulatory Board does not insulate them
from criminal and civil liability for their unlawful business
practices. What is more deplorable is that the reprehensible
acts of some unscrupulous characters have stigmatized the
Philippines with an unsavory reputation as a hub for
intellectual piracy in this part of the globe, formerly in the
records of the General Agreement on Tariffs and Trade and,
now, of the World Trade Organization. Such acts must not
be glossed over but should be denounced and repressed
lest the Philippines become an international pariah in the
global intellectual community.
WHEREFORE, the assailed judgment and resolution of
respondent Court of Appeals, and necessarily inclusive of
the order of the lower court dated November 22, 1988, are
hereby REVERSED and SET ASIDE. The order of the court a
quo of September 5, 1988 upholding the validity of Search
Warrant No. 87-053 is hereby REINSTATED, and said court is
DIRECTED to take and expeditiously proceed with such
appropriate proceedings as may be called for in this case.
Treble costs are further assessed against private
respondents.
SO ORDERED.

G.R. No. 79986. September 14, 1990.*

GRANGER ASSOCIATES, petitioner, vs. MICROWAVE
SYSTEMS, INC., LORETO F. STEWARD, MENARDO R. JIMENEZ
and JOHN PALMER, respondents.

not merely incidental or casual but indicates the foreign

corporations intention to do other business in the
Philippines, said single act or

_______________
Corporations; Foreign Corporations; The term doing
business implies a continuity of commercial dealings and
arrangements and the performance of acts or works or the
exercise of some of the functions normally incident to the
purpose and object of its organization.This Court
interpreted the same phrase in the old case of
Mentholatum v. Mangaliman as follows: The true test,
however, seems to be whether the foreign corporation is
continuing the body or substance of the business or
enterprise for which it was organized or whether it has
substantially retired from it and turned it over to another.
(Traction Cos. v. Collectors of Int. Revenue [C.C.A. Ohio],
223 F. 984, 987.) The term implies a continuity of
commercial dealings and arrangements, and contemplates,
to that extent, the performance of acts or works or the
exercise of some of the functions normally incident to, and
in progressive prosecution of, the purpose and object of its
organization.

Same; Same; A single actor transaction, if not merely

incidental or casual but indicates the foreign corporations
intention to do other business in the Philippines, also
constitutes doing business in the Philippines.We have
amplified on that discussion in subsequent cases, among
them Top-Weld Manufacturing, Inc. v. ECED, S.A., where we
said: There is no general rule or governing principle laid
down as to what constitutes doing or engaging in or
transacting business in the Philippines. Each case must
be judged in the light of its peculiar circumstances. Thus, a
foreign corporation with a settling agent in the Philippines
which issued twelve marine policies covering different
shipments to the Philippines and a foreign corporation
which had been collecting premiums on outstanding
policies were regarded as doing business here. The acts of
these corporations should be distinguished from a single or
isolated business transaction or occasional, incidental and
casual transactions which do not come within the meaning
of the law. Where a single act or transaction, however, is

* FIRST DIVISION.

632

632

SUPREME COURT REPORTS ANNOTATED

Granger Associates vs. Microwave Systems, Inc.

transaction constitutes doing or engaging in or

transacting business in the Philippines.

Same; Same; Same; A foreign corporation operating in

the Philippines without submitting to our laws, should not
be allowed to invoke the minour courts when it should need
them for its own protection.The purpose of the rule
requiring foreign corporations to secure a license to do
business in the Philippines is to enable us to exercise
jurisdiction over them for the regulation of their activities in
this country. If a foreign corporation operates in the
Philippines without submitting to our laws, it is only just
that it not be allowed to invoke them in our courts when it
should need them later for its own protection. While foreign
investors are always welcome in this land to collaborate
with us for our mutual benefit, they must be prepared as an
indispensable condition to respect and be bound by
Philippine law in proper cases, as in the one at bar.

PETITION to review the decision of the Court of

Appeals. Purisima,J.

The facts are stated in the opinion of the Court.

Castillo, Laman, Tan & Pantaleon for petitioner.

Fernando Ma. Alberto for respondents.

CRUZ, J.:
The Court is once again asked to interpret the phrase
"doing business in the Philippines" as applied to an
unlicensed foreign corporation that has filed a complaint
against a domestic corporation.
The foreign corporation is Granger Associates, the herein
petitioner, which was organized in the United States and
has no license to do business in this country. The domestic
corporation is Microwave Systems, Inc., one of the herein
private respondents, which has been sued for recovery of a
sum equivalent to US$900,633.30 allegedly due from it to
the petitioner.
The claim arose from a series of agreements concluded
between the two parties, principally the contract dated
March 28, 1977, under which Granger licensed MSI to
manufacture and sell its products in the Philippines and
extended to the latter certain loans, equipment and parts;
the contract dated May 17, 1979, for the sale by Granger of
its Model 7100/7200 Multiplex Equipment to MSI and the
Supplemental and Amendatory Agreement concluded in
December 1979.
Payment of these contracts not having been made as
agreed upon, Granger filed a complaint against MSI and the
other private respondents on June 29, 1984, in the Regional
Trial Court of Pasay City. This was docketed as Civil Case
No. 1982-P. In its answer, MSI alleged the affirmative

defense that the plaintiff had no capacity to sue, being an

unlicensed foreign corporation, and moved to dismiss.
The law invoked by the defendants was Section 133 of the
Corporation Code reading as follows:
No foreign corporation transacting business in the
Philippines without a license, or its successors or assigns,
shall be permitted to maintain or intervene in any action,
suit or proceeding in any court or administrative agency of
the Philippines; ...
The trial court, after considering the evidence of the parties
in light of their respective memoranda, sustained the
defendants and granted the motion to dismiss. 1 On appeal,
the order of dismissal was affirmed by the respondent court
2
prompting the present petition under Rule 45 of the Rules
of Court.
In this petition, Granger seeks the reversal of the
respondent court on the ground that MSI has failed to prove
its affirmative allegation that Granger was transacting
business in the Philippines. It insists that it has dealt only
with MSI and not the general public and contends that
dealing with the public itself is an indispensable ingredient
of transacting business. It also argues that its agreements
with MSI covered only one isolated transaction for which it
did not have to secure a license to be able to file its
complaint.
According to Section 1 of Rep. Act No. 5455
...the phrase "doing business" shall include soliciting
orders, purchases, service contracts, opening offices
whether called "liaison" offices or branches; appointing
representatives or distributors domiciled in the Philippines
or who in any calendar year stay in the Philippines for a
period or periods totalling one hundred eighty days or
more; participating in the management, supervision or
control of any domestic business firm, entity or corporation
in the Philippines; any other act or acts that imply a
continuity of commercial dealings or arrangements and
contemplates to that extent the performance of acts or
works, or the exercise of some of these functions normally
incident to, and in progressive prosecution of, commercial

gain or of the purpose and object of the business

organization.
This Court interpreted the same phrase in the old case of
Mentholatum v. Mangaliman 3 as follows:
The true test, however, seems to be whether
the foreign corporation is continuing the
body or substance of the business or
enterprise for which it was organized or
whether it has substantially retired from it
and turned it over to another. (Traction Cos.
v. Collectors of Int. Revenue [C.C.A. Ohio],
223 F. 984,987.) The term implies a
continuity of commercial dealings and
arrangements, and contemplates, to that
extent, the performance of acts or works or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of, the purpose and object of its
organization. (Griffin v. Implement Dealers'
Mut. Fire Ins. Co., 241 N.W. 75, 77, Pauline Oil
& Gas Go. v. Mutual Tank Line Co., 246 p.
851, 852,118 Okl. 111; Automotive Material
CO. v. American Standard Metal Products
Corp., 158 N.E. 698, 703, 327, I11. 367.)
We have amplified one that discussion in subsequent
cases, among them Top-Weld Manufacturing, Inc. v. ECED,
S.A., 4 where we said:
There is no general rule or governing
principle laid down as to what constitutes
"doing" or "engaging in" or ""transacting"
business in the Philippines. Each case must
be judged in the light of its peculiar
circumstance Thus, a foreign corporation
with a settling agent in the Philippines which
issued twelve marine policies covering
different shipments to the Philippines and a
foreign
corporation
which
had
been
collecting premiums on outstanding policies
were regarded as doing business here. The
acts of these corporations should be
distinguished from a single or isolated
business transaction or occasional, incidental

and casual transactions which do not come

within the meaning of the law. Where a single
act or transaction, however, is not merely
incidental or casual but indicates the foreign
corporation's intention to do other business
in the Philippines, said single act or
transaction constitutes "doing" or "engaging
in" or "transacting" business in the
Philippines.
The petitioner contends that its various transactions with
the private respondent were mere facets of the basic
agreement licensing MSI to manufacture and sell Granger's
products in the Philippines. All subsequent agreements
were merely auxiliary to that first contract and should not
be considered separate transactions coming 'within the
concept of "doing business in the Philippines."
The Supplemental and Amendatory Agreement concluded
by Granger and MSI in December 1979 enumerates the
various agreements between them thus:
1. Agreement dated March 28, 1977,under
which MSI acquired from GRANGER the right
to manufacture, assemble, test, rent and sell,
or otherwise deal in certain electronic
communications equipment designed and
manufactured by GRANGER;
2. Agreement to Purchase Shares dated
March 28, 1977 under which GRANGER was
granted the option to purchase thirty (30%)
percent equity of MSI;
3. Amendatory Agreement dated May l2,
1978, adopting certain amendments to the
Agreement dated March 28, 1977 for the
purpose of complying with the requirements
imposed by the Board of Investments and
the Central Bank of the Philippines;
4. Exclusive Distributorship and Marketing
Agreement dated May 16,1978, appointing
MSI to handle sale, distribution and

promotion of products of GRANGER outside of

the Republic of the Philippines;
5. Sales Agency Agreement, dated May 16,
1978, under which MSI was appointed by
GRANGER as the latter's exclusive sales
representative outside the Philippines to
market GRANGER products;
6. Agreement for Purchase of Shares dated
May 17,1978, manifesting the intention of
GRANGER to exercise its option to purchase
thirty (30%) percent of the issued and
outstanding shares of stock of MSI equivalent
to a total of 9,000 issued shares of MSI;
7. Model 7l00/7200 Multiplex Agreement
dated May l7, 1979, prescribing the terms
and conditions for the sale by GRANGER of
Model 7100/7200 Multiplex Equipment to
MSI;
8. Technology Transfer Agreement dated May
17, 1979, transferring to and/or providing
MSI by virtue of the Model 7100/7200
Multiplex Agreement, the necessary technical
services, assistance, manuals, catalogues,
sales, literature, etc. for the operation of the
Model 7100/7200 Multiplex Equipment;
9. Deed of Assignment of Receivables dated
October 20, 1979, under which MSI assigned
to GRANGER a certain percentage of its
receivables from the Philippine Electronics,
Inc. in favor of GRANGER to secure payment
and performance of MSI's obligations to
GRANGER under previous agreements.
In the Model 7100/7200 Multiplex Equipment Agreement
entered into on May 17, 1979, the following stipulations
appear:
4. GRANGER shall assign in favor of MSI all
orders for the Model 7100/7200 Multiplex
Equipment, which have not been filled by

GRANGER at the date of the ratification of

this Agreement as per paragraph 9 hereof, as
described in a list hereto attached and made
a part hereof as Annex "C". All proceeds
under said orders shall be assigned to and
received by MSI and MSI shall take over and
assume all obligations which GRANGER may
have pursuant to the orders of equipment
within a reasonable time following receipt of
the shipment of the Products by MSI but not
to exceed one hundred eighty (180) days
from date of said receipt. Any orders
GRANGER may receive following the date on
which this Agreement becomes effective as
provided herein will be forwarded to MSI by
GRANGER.
xxx xxx xxx
6. As an additional consideration for the
purchase of the products, MSI binds itself to
render all equipment support service and
maintain reasonable amount of spares
inventory for the equipment in the field
previously having been sold by GRANGER or
by RCA Corporation to their customers for a
period of ten (10) years from the date the
last sale of GRANGER is recorded. Any
amount earned in providing such equipment
support shall be billed and received by MSI.
Additionally, MSI binds itself to assume the
warranty obligations and advance the
necessary funds to perform such obligations
associated with Model 7l00/7200 Multiplex
Equipment already sold by GRANGER.
However, GRANGER shall reimburse MSI the
out-of-pocket cost for the services rendered
by MSI in connection with the warranty for
the equipment assumed from GRANGER but
only to the extent authorized in advance by
GRANGER.
A study of the enumeration does support the contention
that many of the agreements concluded by the petitioner
and the private respondent were intended merely to
supplement the basic contract dated March 28, 1977.

However, this is not true of the Multiplex agreement dated

May 17, 1979, which dealt with a different subject matter
and had a different consideration to be paid under a
different method from that specified in the first agreement
of the parties in 1977. It is also noted that in the
supplemental and Amendatory Agreement, Granger sold to
MSI certain materials/parts for 80 radios and granted it the
right to exploit the designs of Model 6015, Series of radio
equipment (1.5 Ghz.) and the Plug-In Order Wire, and the
6002 Series and Power Amplifiers. The subject matter of
this transaction is also different from those covered by the
previous agreements.
Even if it be assumed for the sake of argument that the
subject matter of the first contract is of the same kind as
that of the subsequent agreements, that fact alone would
not necessarily signify that all such agreements are merely
auxiliary to the first. As long as it can be shown that the
parties entered into a series of agreements, as in
successive sales of the foreign company's regular products,
that company shall be deemed as doing business in the
Philippines.
The quoted stipulations show that Granger had extended
its personality in the Philippines and would receive orders
for its products and discharge its warranty obligations
through the agency of MSI It would even appear that
Granger intended to transact business in the Philippines
through the instrumentality of MSI not only for the sale and
warranty of its products in this country. The 'agent, was
expected to extend also in mainland China and other
ASEAN countries, where MSI was to act as its
representative in the development of possible markets for
Granger products. Thus it was provided in the Agreement:
6. OFF-SHORE MANUFACTURING.
GRANGER undertakes to utilize MSI's
manufacturing facilities in the Philippines in
preference to any other manufacturer for
offshore manufacture, assembly, fabrication
and testing of equipment, sub-assemblies,
printed circuit boards and related or allied
activities, subject to MSI's demonstrated
technical capability and its capacity to
comply with normal quality and delivery

requirement for such components and as

long as such off-shore manufacturing would
be to GRANGER's economic advantage.
7. MAINLAND CHINA AND ASEAN
Toward maximizing exploitation of export
opportunities
for
the
sale
of
MSI
manufactured equipment under license from
GRANGER, MSI undertakes to do or perform
the following:
a) MSI, independently or in concert with
GRANGER shall develop a marketing strategy
towards Mainland China market at its cost or
on the basis of shared expense arrangement
with GRANGER, agreed between both parties
in advance, and shall pursue sales
opportunities in that market as it deems
warranted. This includes establishing local
sales office to manage and monitor direct
sales effort as well as appointments of nonexclusive
manufacturer's
Sales
Representatives or non-exclusive Distributors
as the case may be;
b) MSI, always in close cooperation with
GRANGER, shall develop and pursue direct
sales opportunities in the ASEAN market for
its own account, always reaching agreement
with GRANGER in advance on a case-to-case
basis as to the extent of reimbursing
GRANGER for its direct or indirect expenses
that it might be incurring while acting as an
Exclusive Distributor or a Manufacturer's
Representative for the licensed equipment in
the ASEAN market.
We also note that in the Supplemented and Amendatory
Agreement of December 1979, Granger saw to it that it was
assured of at least one seat in the board of directors of MSI;
without prejudice to the right of Granger to request
additional seats as its interest may require". Granger
actually purchased 9,000 shares of MSI, representing 30%
of the latter's issued and outstanding shares of stock. 5 The
fact that it was directly involved in the business of MSI was

also
manifestation
stipulation
where
Granger
"acknowledged and confirmed" the transfer of a block of
stocks from one shareholder to another group of investors.
Such approval is not normally given except by a
stockholder enjoying substantial participation in the
management of the business of the company. The said
stipulations read as follows.
4. BOARD OF DIRECTORS.
GRANGER shall be entitled to one (1) seat in
the Board of Directors, with the option to fill
said seat at its discretion and instance.
GRANGER further interposes no objection to
MSI's increasing the number of its Board of
Directors
without
a
corresponding
entitlement to an additional seat, without
prejudice however to the right of GRANGER
to request additional seat as its interest may
require.
xxx xxx xxx
8. CONFIRMATION OF SALE OF SHARES OF
STOCK.
The parties hereto take cognizance of the
sale of shares of stock in MSI owned by
Vicente C. Sayaon, in his personal capacity
and as controlling stockholder of authorized
representative
of
Cosmopolitan
Realty
Corporation
and
Visayas
Realty
and
Investment Corporation, in favor of a new
group of Filipino entrepreneurs represented
in the transaction by Mrs. Remedios Porcuna.
The Deed of Sale covering this transaction is
incorporated hereto by reference and made
an integral part of this Agreement.
Pursuant to the provision embodied in the
said Deed of Sale, GRANGER hereby
acknowledges and confirms this transaction.
The petitioner cites the regulations of the Board of
Investments stating that mere investment in a local

company by a foreign corporation should not be construed

as doing business in the Philippines. 6 It cannot be denied,
however, that the investment of Granger in MSI is quite
substantial, enabling it to participate in the actual
management and control of MSI In fact, it appointed a
representative in the board of directors to protect its
interests, and this director was so influential that, at his
request, the regular board meeting was converted into an
annual stockholder's meeting to take advantage of his
presence. 7
At any rate, the administrative regulation, which is
intended only to supplement the law, cannot prevail
against the law itself as the Court has interpreted it. It is
axiomatic that the delegate, in exercising the power to
promulgate implementing regulations, cannot contradict
the law from which the regulations derive their very
existence. The courts, for their part, interpret the
administrative regulations in harmony with the law that
authorized them in the first place and avoid as much as
possible any construction that would annul them as an
invalid exercise of legislative power.
On the question of whether the foreign corporation must be
shown to have dealt with the public in general to be
considered as transacting business in the Philippines, the
following observations are instructive:
On the other hand, if a corporation performs
acts for which it was created or exercises
some of the functions for which it was
organized, the amount or volume of the
business is immaterial and a single act of
that
character
may
constitute
doing
business. Thus, an engineering consulting
firm that had entered into a single contract
with a Philippine government agency for the
purpose of rendering services for a period of
three years as a technical consultant in
engineering will be required to obtain a
license to do business. Similarly, a foreign
company invited to bid for IBRD and ADB
international projects in the Philippines will
be considered as doing business in the
Philippines for which a license is required. In
this regard, it is the performance by a foreign

corporation of the acts for which it was

created, regardless of volume of business,
that
determines
whether
a
foreign
corporation needs a license or not.
(Emphasis supplied.) 8
Finally, this case must be distinguished from Antam
Consolidated, Inc. v. Court of Appeals, 9 where this Court
declared:
In the case at bar, the transactions entered
into by the respondent with the petitioners
are not a series of commercial dealings
which signify an intent on the part of the
respondent to do business in the Philippines
but constitute an isolated one which does not
fall under the category of "doing business".
The records show that the only reason why
the respondent entered into the second and
third transactions with the petitioners was
because it wanted to recover the loss it
sustained from the failure of the petitioners
to deliver the crude coconut oil under the
first transaction and in order to give the
latter a chance to make good on their
obligation. Instead of making an outright
demand on the petitioners, the respondent
opted to try to push through with the
transactions to recover the amount of
US$103,600.00 it lost. This explains why in
the second transaction, the petitioners were
supposed to buy back the crude coconut oil
they should have delivered to the respondent
in an amount which will earn the latter a
profit of US$103,600.00. When this failed the
third transaction was entered into by the
parties whereby the petitioners were
supposed to sell crude coconut oil to the
respondent at a discounted rate, the total
amount
of
such
discount
being
US$103,600.00.
Unfortunately,
the
petitioners failed to deliver again, prompting
the respondent to file the suit below.
From these facts alone, it can be deduced
that in reality, there was only one agreement

between the petitioners and the respondent

and that was the delivery by the former of
500 long tons of crude coconut oil to the
latter, who in turn, must pay the
corresponding price for the same. The three
seemingly
different
transactions
were
entered into by the parties only in an effort
to fulfill the basic agreement and in no way
indicate an intent on the part of the
respondent to engage in a continuity of
transactions with petitioners which will
categorize it as a foreign corporation doing
business in the Philippines.
We are convinced from an examination of the terms and
conditions of the contracts and agreements entered into
between petitioner and private respondents indicate that
they established within our country a continuous business,
and not merely one of a temporary character. Such
agreements did not constitute only one isolated
transaction, as the petitioner contends, but a succession of
acts signifying the intent of Granger to extend its
operations in the Philippines.
In any event, it is now settled that even one single
transaction may be construed as transacting business in
the Philippines under certain circumstances, as we
observed in Far East International Import and Export
Corporation v. Nankai Kogyo Co., Ltd., 10 thus:
The rule stated in the preceding section that the doing of a
single act does not constitute business within the meaning
of statutes prescribing the conditions to be complied with
by foreign corporations must be qualified to this extent,
that a single act may bring the corporation within the
purview of the statute where it is an act of the ordinary
business of the corporation. In such a case, the single act
or transaction is not merely incidental or casual, but is of
such character as distinctly to indicate a purpose on the
part of the foreign corporation to do other business in the
state, and to make the state a base of operations for the
conduct of a part of the corporations' ordinary business.
(17 Fletchers Cyc. of Corporations, sec. 8470, pp. 572, 573,
and authorities cited therein.)

The petitioner stresses that whoever makes affirmative

averments has the obligation to prove such averments and
points out that the private respondent has not established
its allegation that the petitioner is doing business in the
Philippines. On the other hand, it is also the rule that the
factual findings of the lower court are binding on this Court
in the absence of any of those exceptional circumstances
we have enumerated in many cases that warrant a
different conclusion. Having assailed the finding of the
respondent court that the petitioner is doing business in
the Philippines, the petitioner had the burden of showing
that such finding fell under the exception rather than the
rule and so should be reviewed and reversed. The
petitioner has not done this.
The purpose of the rule requiring foreign corporations to
secure a license to do business in the Philippines is to
enable us to exercise jurisdiction over them for the
regulation of their activities in this country, If a foreign
corporation operates in the Philippines without submitting
to our laws, it is only just that it not be allowed to invoke
them in our courts when it should need them later for its
own protection. While foreign investors are always welcome
in this land to collaborate with us for our mutual benefit,
they must be prepared as an indispensable condition to
respect and be bound by Philippine law in proper cases, as
in the one at bar.
WHEREFORE the petition is DENIED, with costs against the
petitioner. It is ordered.
Narvasa ( Chairman),
Medialdea, JJ., concur.

Gancayco,

Grio-Aquino

and

Marubeni Nederland B.V. vs. Tensuan

G.R. No. 61950. September 28, 1990.*

MARUBENI NEDERLAND B.V., petitioner, vs. THE
HONORABLE JUDGE RICARDO P. TENSUAN, Presiding Judge
of the Court of First Instance of Rizal, Branch IV, Quezon
City and ARTEMIO GATCHALIAN, respondents.

Jurisdiction; Corporations; Actions; Solicitation of

business contracts constitutes doing business in the
Philippines.Even assuming for the sake of argument that
Marubeni Nederland B. V. is a different and separate
business entity from Marubeni Japan and its Manila branch,
in this particular transaction, at least, Marubeni Nederland
B. V. through the foregoing acts, had effectively solicited
"orders, purchases (sales) or service contracts" as well as
constituted Marubeni Corporation, Tokyo, Japan and its
Manila Branch as its representative in the Philippines to
transact business for its account as principal. These
circumstances, taken singly or in combination, constitute
"doing business in the Philippines" within the contemplation
of the law.

Same; Same; Same; Lack of license not excuse for

invoking nonsuability of foreign corporation.At this
juncture it must be emphasized that a foreign corporation
doing business in the Philippines with or without license is
subject to process and jurisdiction of the local courts. If
such corporation is properly licensed, well and good. But it
shall not be allowed, under any circumstances, to invoke its
lack of license to impugn the jurisdiction of our courts.

Motions; Due Process; Dismissal of Actions; A court

need not conduct a hearing where a motion to dismiss is
denied.In the case at bar, assuming there was no formal
hearing on the motion to dismiss prior to its rejection, such
did not unduly prejudice the rights of petitioner.
Respondent court still had to conduct trial on the merits
during which time it could grant the motion after sufficient
evidence has been presented showing without any question

the want of jurisdiction over the person of the movant. It

would have been different had respondent court sustained
petitioner's motion to dismiss without the required hearing
in which case, the corrective writ of certiorari would have
issued against said court. In the absence of a hearing, the
appellate court, in an appeal from an order of dismissal,
would have had no means of determining or resolving the
legality of the proceedings and the sufficiency of the proofs
on which the order was based.
PETITION to review the decision of the then Court of
First Instance of Rizal, Br. 4. Tensuan, J.

The facts are stated in the opinion of the Court.

Siquion Reyna, Montecillo & Ongsiako for petitioner.

Maximo Belmonte for private respondent.

FERNAN, C.J.;
On October 23, 1976, in Tokyo, Japan, petitioner Marubeni
Nederland B.V. and D.B. Teodoro Development Corporation
(DBT for short) entered into a contract whereby petitioner
agreed to supply all the necessary equipment, machinery,
materials, technical know-how and the general design of
the construction of DBT's lime plant at the Guimaras
Islands in Iloilo for a total contract price of
US$5,400,000.00
on
a
deferred
payment
basis.
Simultaneously with the supply contract, the parties
entered into two financing contracts, namely a construction
loan agreement in the amount of US$1,600,000.00 and a
cash loan agreement for US$1,500,000.00. The obligation
of DBT to pay the loan amortizations on their due dates
under the three (3) contracts were absolutely and
unconditionally guaranteed by the National Investment and
Development Corporation (NIDC).
Pursuant to the terms of the financing contracts, the loan
amortizations of DBT fell due on January 7, 1980, July 7,
1980 and January 7, 1981. But before the first installment
became due, DBT wrote a letter to the NIDC interposing

certain claims against the petitioner and at the same time

requesting NIDC for a revision of the repayment schedule
and of the amounts due under the contracts on account of
petitioner's delay in the performance of its contractual
commitments. 1 In due time, the problems regarding the
lime plant were ironed out and the parties signed a
"Settlement Agreement" on July 2, 1981. 2
However, on May 14, 1982, DBT through counsel, informed
petitioner that it was rejecting the lime plant on the ground
that it has not been constructed in accordance with their
agreement. DBT made a formal demand for indemnification
in the total amount of P95,150,000. 3 In its letter dated June
1, 1982, petitioner refused to accept DBT's unilateral
rejection of the plant and reasoned that the alleged
operation and technical problems were "totally unrelated to
the guaranteed capacity and specifications of the plant and
definitely are not attributable to any fault or omission on
the part of Marubeni." 4
Before the first installment under the "Settlement
Agreement" could be paid, private respondent Artemio
Gatchalian, a stockholder of DBT sued petitioner Marubeni
for contractual breach before the then Court of First
Instance of Rizal, Branch 4, Quezon City. 5 In his complaint
filed on June 22, 1982, Gatchalian impleaded DBT as an
"unwilling plaintiff . . . for whose primary benefit th(e)
action (wa)s being prosecuted" together with NIDC which,
as pledgee of the voting shares in DBT has controlling
interest in that corporation. 6 Gatchalian sought
indemnification in the amount of P95,150,000.00 and
further prayed for a writ of preliminary injunction to enjoin
DBT and NIDC from making directly or indirectly any
payment to Marubeni in connection with the contracts they
had entered into. On June 25, 1982, respondent judge
issued a temporary restraining order directed against DBT
and NIDC and set the injunction for hearing. 7
On July 5, 1982, petitioner Marubeni entered a limited and
special appearance and sought the dismissal of the
complaint on the ground that the court a quo had no
jurisdiction over the person of petitioner since it is a foreign
corporation neither doing nor licensed to do business in the
Philippines. Private respondent opposed that motion. On
September 22, 1982, the lower court denied petitioner's
motion to dismiss for lack of merit and gave it ten (10) days

within which to file an answer. Petitioner opted to elevate

the jurisdictional issue directly to the High Court. 8 Hence,
this petition for certiorari and prohibition with prayer for a
temporary restraining order. On October 6, 1982, we issued
the restraining order and subsequently required the parties
to file simultaneous memoranda.
The pivotal issue in this case is whether or not petitioner
Marubeni Nederland B.V. can be considered as "doing
business" in the Philippines and therefore subject to the
jurisdiction of our courts.
Petitioner claims that it is a foreign corporation not doing
business in the country and as an entity with its own
capitalization, it is separate and distinct from Marubeni
Corporation, Japan which is doing business in the
Philippines through its Manila branch; that the three (3)
contracts entered into with DBT were perfected and
consummated in Tokyo, Japan; that the sale and purchase
of the machineries and equipment for the Guimaras lime
plant were isolated contracts and in no way indicated a
purpose to engage in business; and that the services
performed by petitioner in the Philippines were merely
auxillary to the aforesaid isolated transactions entered into
and perfected outside the Philippines.
On the other hand, private respondent Gatchalian contends
that petitioner can be sued in Philippine courts on liabilities
arising from even a single transaction because in reality, it
is already engaging in business in the country through
Marubeni Corporation, Manila branch and that they,
together with Nihon Cement Company, Ltd. of Japan are but
"alter egos, adjuncts, conduits instruments or branch
affiliates of Marubeni Corporation of Japan", the parent
company. 9
In resolving the issue at hand, we reiterate that there is no
general rule or principle that can be laid down to determine
what constitutes doing or engaging in business. Each case
must be judged in the light of its peculiar factual milieu and
upon the language of the statute applicable. 10
Contrary to petitioner's allegations, we hold that petitioner
can be sued in the regular courts because it is doing
business in the Philippines. The applicable law is Republic
Act No. 5455 as implemented by the following rules and

regulations of the Board of Investments which took effect

on February 3, 1969. Thus:
xxx xxx xxx
(f) the performance within the Philippines of
any act or combination of acts enumerated in
Section 1 (1) of the Act shall constitute
"doing business" therein. In particular, "doing
business" includes:
1) Soliciting orders, purchases (sales) or
service contracts. Concrete and specific
solicitations by a foreign firm amounting to
negotiation or fixing of the terms and
conditions of sales or service contracts,
regardless of whether the contracts are
actually reduced to writing, shall constitute
doing business even if the enterprise has no
office or fixed place of business in the
Philippines. . . .
2) Appointing a representative or distributor
who is domiciled in the Philippines, unless
said representative or distributor has an
independent status, i.e., it transacts business
in its name and for its own account, and not
in the name or for the account of the
principal.
xxx xxx xxx
4) Opening offices whether called "liaison"
offices, agencies or branches, unless proved
otherwise.
xxx xxx xxx
10) Any other act or acts that imply a
continuity of commercial dealings or
arrangements, and contemplate to that
extent the performance of acts or works, or
the exercise of some of the functions
normally incident to, or in the progressive
prosecution of, commercial gain or of the

purpose and objective

organization. 11

of

the

business

It cannot be denied that petitioner had solicited the lime

plant business from DBT through the Marubeni Manila
branch. Records show that the "turn-key proposal for
the . . . 300 T/D Lime Plant" was initiated by the Manila
office through its Mr. T. Hojo. In a follow-up letter dated
August 3, 1976, Hojo committed the firm to a price
reduction of $200,000.00 and submitted the proposed
contract forms. As reflected in the letterhead used, it was
Marubeni Corporation, Tokyo, Japan which assumed an
active role in the initial stages of the negotiation. Petitioner
Marubeni Nederland B.V. had no visible participation until
the actual signing of the October 28, 1976 agreement in
Tokyo and even there, in the space reserved for petitioner,
it was the signature. of "S. Adachi as General Manager of
Marubeni Corporation, Tokyo on behalf of Marubeni
Nederland B.V." which appeared. 12
Even assuming for the sake of argument that Marubeni
Nederland B.V. is a different and separate business entity
from Marubeni Japan and its Manila branch, in this
particular transaction, at least, Marubeni Nederland B.V.
through the foregoing acts, had effectively solicited
"orders, purchases (sales) or service contracts" as well as
constituted Marubeni Corporation, Tokyo, Japan and its
Manila Branch as its representative in the Philippines to
transact business for its account as principal. These
circumstances, taken singly or in combination, constitute
"doing business in the Philippines" within the contemplation
of the law.
At this juncture it must be emphasized that a foreign
corporation doing business in the Philippines with or
without license is subject to process and jurisdiction of the
local courts. If such corporation is properly licensed, well
and good. But it shall not be allowed, under any
circumstances, to invoke its lack of license to impugn the
jurisdiction of our courts. 13
Finally, petitioner contends that it was denied due process
when respondent Judge Tensuan peremptorily denied its
motion to dismiss without giving petitioner any opportunity
to present evidence at a hearing set for this purpose. 14

The alleged denial of due process is more apparent than

real. Under Section 13, Rule 16 of the Revised Rules of
Court, the court, when confronted with a motion to dismiss,
is given two courses of action, to wit: (1) to deny or grant
the motion or allow amendment of the pleading or (2) to
defer the hearing and determination of the motion until the
trial on the merits, if the ground alleged therein does not
appear to be indubitable.
In the case at bar, assuming there was no formal hearing
on the motion to dismiss prior to its rejection, such did not
unduly prejudice the rights of petitioner. Respondent court
still had to conduct trial on the merits during which time it
could grant the motion after sufficient evidence has been
presented showing without any question the want of
jurisdiction over the person of the movant. It would have
been different had respondent court sustained petitioner's
motion to dismiss without the required hearing in which
case, the corrective writ of certiorari would have issued
against said court. In the absence of a hearing, the
appellate court, in an appeal from an order of dismissal,
would have had no means of determining or resolving the
legality of the proceedings and the sufficiency of the proofs
on which the order was based.
WHEREFORE, the petition is DISMISSED for lack of merit.
Respondent Court is hereby directed to proceed with the
hearing of Civil Case No. Q-35534 with dispatch. This
decision is immediately executory. Costs against the
petitioner.
SO ORDERED.