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Corporation Law

Republic of the Philippines

SUPREME COURT 1. That prior to the presentation of the petition the petitioners had been associated together
Manila as partners, which partnership was known as "mercantil regular colectiva, under the style and
EN BANC firm name of "Siuliong y Cia.;"

G.R. No. L-15429 December 1, 1919
UY SIULIONG, MARIANO LIMJAP, GACU UNG JIENG, EDILBERTO CALIXTO and UY CHO
YEE, petitioners,
vs.
THE DIRECTOR OF COMMERCE AND INDUSTRY, respondent.
MANDAMUS TO REQUIRE THE DIRECTOR OF COMMERCE AND INDUSTRY TO FILE AND
REGISTER ARTICLES OF INCORPORATION UPON PAYMENT OF THE LAWFUL FEES.Held: That
under the laws of the Philippine Islands, a corporation may be organized for "mercantile
purposes" and to engage in such incidental business as may be necessary and advisable to
give effect to, and aid in, the successful operation and conduct of the principal business; that
all of the power and authority included in the articles of incorporation of Siuliong & Co., Inc.,
were only incidental to the' principal purpose of its proposed incorporation, to wit:
"mercantile business."
ORIGINAL ACTION in the Supreme Court. Mandamus.
The facts are stated in the opinion of the court.
Kincaid and Perkins for petitioners.
Attorney-General Paredes for respondent.
2. That the petitioners herein, who had theretofore been members of said partnership of
"Siuliong y Cia.," desired to dissolve said partnership and to form a corporation composed of
the same persons as incorporators, to be known as "Siulong y Compaia, Incorporada;"
3. That the purpose of said corporation, "Siuliong y Cia., Inc.," is (a) to acquire the business of
the partnership theretofore known as Siuliong & Co., and (b) to continue said business with
some of its objects or purposes;
4. That an examination of the articles of incorporation of the said "Siuliong y Compaia,
Incorporada" (Exhibit A) shows that it is to be organized for the following purposes:
(a) The purchase and sale, importation and exportation, of the products of the
country as well as of foreign countries;
(b) To discount promissory notes, bills of exchange, and other negotiable
instruments;
(c) The purchase and sale of bills of exchange, bonds, stocks, or "participaciones de
sociedades mercantiles e industriales [joint account of mercantile and industrial
associations]," and of all classes of mercantile documents; "comisiones
[commissions];" "consignaciones [consignments];"

JOHNSON, J.: (d) To act as agents for life, marine and fire insurance companies;

The purpose of this action is to obtain the writ of mandamus to require the
respondent to file and register, upon the payment of the lawful fee, articles of incorporation,
and to issue to the petitioners as the incorporators of a certain corporation to be known as
"Siuliong y Compaia, Inc.," a certificate under the seal of the office of said respondent,
certifying that the articles of incorporation have been duly filed and registered in his office in
accordance with the law.
To the petition the respondent demurred and the cause was finally submitted upon
the petition and demurrer.
The important facts necessary for the solution of the question presented, which are
found in the petition, may be stated as follows:
(e) To purchase and sell boats of all classes "y fletamento de los mismos [and
charterage of same];" and
(f) To purchase and sell industrial and mercantile establishments.
While the articles of incorporation of "Siuliong y Cia., Inc." states that its purpose is to
acquire and continue the business, with some of its objects or purposes, of Siuliong & Co., it
will be found upon an examination of the purposes enumerated in the proposed articles of
incorporation of "Siuliong y Cia., Inc.," that some of the purposes of the original partnership
of "Siuliong y Cia." have been omitted. For example, the articles of partnership of "Siuliong y
Cia." gave said company the authority to purchase and sell all classes "de fincas rusticas y
urbanas [of rural and city real estate]" as well as the right to act as agents for the

1

establishment of any other business which it might esteem convenient for the interests of "la
compaia [the company]." (Exhibit C).
The respondent in his argument in support of the demurrer contends (a) that the
proposed articles of incorporation presented for file and registry permitted the petitioners to
engage in a business which had for its end more than one purpose; (b) that it permitted the
petitioners to engage in the banking business, and (c) to deal in real estate, in violation of the
Act of Congress of July 1, 1902.
The petitioners, in reply to said argument of the respondent, while insisting that said
proposed articles of incorporation do not permit it to enter into the banking business nor to
engage in the purchase and sale of real estate in violation of said Act of Congress, expressly
renounced in open court their right to engage in such business under their articles of
incorporation, even though said articles might be interpreted in a way to authorize them to so
to do. That renouncement on the part of the petitioners eliminates from the purposes of said
proposed corporation (of "Siuliong y Cia., Inc.") any right to engage in the banking business as
such, or in the purchase and sale of real estate.
We come now to the consideration of the principal question raised by the
respondent, to wit: that the proposed articles of incorporation of "Siuliong y Cia., Inc.,"
permits it to engage in a business with more than one purpose.
If upon an examination of the articles of incorporation we find that its purpose is to
engage in a business with but one principal purpose, then that contention of the respondent
will have been answered and it will be unnecessary to discuss at length the question whether
or not a corporation organized for commercial purposes in the Philippine Islands can be
organized for more than one purpose.
The attorney for the respondent, at the time of the argument, admitted in open court
that corporations in the Philippine Islands might be organized for both the "importation and
exportation" of merchandise and that there might be no relation between the kind of
merchandise imported with the class of merchandise exported.
Referring again to be proposed articles of incorporation, a copy of which is united
with the original petition and marked Exhibit A, it will be seen that the only purpose of said
corporation are those enumerated in subparagraphs (a), (b), (c), (d), (e) and ( f ) of paragraph
4 above. While said articles of incorporation are somewhat loosely drawn, it is clear from a
reading of the same that the principal purpose of said corporation is to engage in a mercantile
business, with the power to do and perform the particular acts enumerated in said
subparagraphs above referred to.
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Corporation Law
Without discussing or deciding at this time whether a corporation organized under
the laws of the Philippine Islands may be organized for more than one purpose, we are of the
opinion and so decide that a corporation may be organized under the laws of the Philippine
Islands for mercantile purposes, and to engage in such incidental business as may be
necessary and advisable to give effect to, and aid in, the successful operation and conduct of the
principal business.
In the present case we are fully persuaded that all of the power and authority included
in the articles of incorporation of "Siuliong y Cia., Inc.," enumerated above in paragraph 4
(Exhibit A) are only incidental to the principal purpose of said proposed incorporation, to
wit: "mercantile business." The purchase and sale, importation and exportation of the
products of the country, as well as of foreign countries, might make it necessary to purchase
and discount promissory notes, bills of exchange, bonds, negotiable instruments, stock, and
interest in other mercantile and industrial associations. It might also become important and
advisable for the successful operation of the corporation to act as agent for insurance
companies as well as to buy, sell and equip boats and to buy and sell other establishments,
and industrial and mercantile businesses.
While we have arrived at the conclusion that the proposed articles of incorporation
do not authorize the petitioners to engage in a business with more than one purpose, we do
not mean to be understood as having decided that corporations under the laws of the
Philippine Islands may not engage in a business with more than one purpose. Such an
interpretation might work a great injustice to corporations organized under the Philippine
laws. Such an interpretation would give foreign corporations, which are permitted to be
registered under the laws here and which may be organized for more than one purpose, a
great advantage over domestic corporations. We do not believe that it was the intention of
the legislature to give foreign corporations such an advantage over domestic corporations.
Considering the particular purposes and objects of the proposed articles of
incorporation which are specially enumerated above, we are of the opinion that it contains
nothing which violates in the slightest degree any of the provisions of the laws of the
Philippine Islands, and the petitioners are, therefore, entitled to have such articles of
incorporation filed and registered as prayed for by them and to have issued to them
a certificate under the seal of the office of the respondent, setting forth that such articles of
incorporation have been duly filed in his office. (Sec. 11, Act No. 1459.)
Therefore, the petition prayed for is hereby granted, and without any finding as to
costs, it is so ordered.
Arellano, C.J., Torres and Avancea, JJ., concur.
2

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-23606 July 29, 1968
ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner,
vs.
SECURITIES & EXCHANGE COMMISSION, respondent.
Corporation law; Term of existence; Amendment of articles of incorporation after
expiration of its corporate life.A corporation cannot extend its life by amendment of its
articles of incorporation effected during the three-year statutory period for liquidation when
its original term of existence had already expired.
Since the privilege of extension is purely statutory, all of the statutory conditions
precedent must be complied with in order that the extension may be effectuated. And,
generally, these conditions must be complied with, and the steps necessary to effect the
extension must be taken, during the life of the corporation, and before the expiration of its
term of existence as originally fixed by its charter or the general law, since, as a rule, the
corporation is ipso facto dissolved as soon as that time expires (8 Fletcher, Cyclopedia of
Corporations, Perm. ed., 1931, pp. 559-560).
REVIEW of a ruling of the Securities and Exchange Commission.
The facts are stated in the opinion of the Court
Gamboa and Gamboa for petitioner.
Office of the Solicitor General for respondent.
SANCHEZ, J.:
To the question May a corporation extend its life by amendment of its articles of
incorporation effected during the three-year statutory period for liquidation when its original
term of existence had already expired? the answer of the Securities and Exchange
Commissioner was in the negative. Offshoot is this appeal.
That problem emerged out of the following controlling facts:
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Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter
referred to simply as Alhambra) was duly incorporated under Philippine laws on January 15,
1912. By its corporate articles it was to exist for fifty (50) years from incorporation. Its term of
existence expired on January 15, 1962. On that date, it ceased transacting business, entered
into a state of liquidation.
Thereafter, a new corporation. Alhambra Industries, Inc. was formed to carry
on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa
trustee to take charge of its liquidation.
On June 20, 1963 within Alhambra's three-year statutory period for liquidation -
Republic Act 3531 was enacted into law. It amended Section 18 of the Corporation Law; it
empowered domestic private corporations to extend their corporate life beyond the period
fixed by the articles of incorporation for a term not to exceed fifty years in any one instance.
Previous to Republic Act 3531, the maximum non-extendible term of such corporations was
fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to
amend paragraph "Fourth" of its articles of incorporation to extend its corporate life for an
additional fifty years, or a total of 100 years from its incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of
its subscribed capital stock, voted to approve the foregoing resolution. The "Fourth"
paragraph of Alhambra's articles of incorporation was thus altered to read:
FOURTH. That the term for which said corporation is to exist is fifty (50) years from
and after the date of incorporation, and for an additional period of fifty (50) years
thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so amended certified
correct by its president and secretary and a majority of its board of directors, were filed with
respondent Securities and Exchange Commission (SEC).
On November 18, 1963, SEC, however, returned said amended articles of
incorporation to Alhambra's counsel with the ruling that Republic Act 3531 "which took effect
only on June 20, 1963, cannot be availed of by the said corporation, for the reason that its
term of existence had already expired when the said law took effect in short, said law has no
retroactive effect."
3

On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling
aforesaid, refiled the amended articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order denying the
reconsideration sought.
Alhambra now invokes the jurisdiction of this Court to overturn the conclusion
below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation
Law. Well it is to take note of the old and the new statutes as they are framed. Section 18,
prior to and after its modification by Republic Act 3531, covers the subject of amendment of
the articles of incorporation of private corporations. A provision thereof which remains
unaltered is that a corporation may amend its articles of incorporation "by a majority vote of
its board of directors or trustees and ... by the vote or written assent of the stockholders
representing at least two-thirds of the subscribed capital stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed in
Section 18, thus:
... Provided, however, That the life of said corporation shall not be extended by said
amendment beyond the time fixed in the original articles: ...
This was displaced by Republic Act 3531 which enfranchises all private corporations to
extend their corporate existence. Thus incorporated into the structure of Section 18 are the
following:
... Provided, however, That should the amendment consist in extending the corporate
life, the extension shall not exceed fifty years in any one instance: Provided, further,
That the original articles, and amended articles together shall contain all provisions
required by law to be set out in the articles of incorporation: ...
As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963,
when Alhambra made its attempt to extend its corporate existence, its original term of fifty
years had already expired (January 15, 1962); it was in the midst of the three-year grace period
statutorily fixed in Section 77 of the Corporation Law, thus:
SEC. 77. 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
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Corporation Law
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.2
Plain from the language of the provision is its meaning: continuance of a "dissolved"
corporation as a body corporate for three years has for its purpose the final closure of its
affairs, and no other; the corporation is specifically enjoined from "continuing the business for
which it was established". The liquidation of the corporation's affairs set forth in Section 77
became necessary precisely because its life had ended. For this reason alone, the corporate
existence and juridical personality of that corporation to do business may no longer be
extended.
Worth bearing in mind, at this juncture, is the basic development of corporation law.
The common law rule, at the beginning, was rigid and inflexible in that upon its
dissolution, a corporation became legally dead for all purposes. Statutory authorizations had
to be provided for its continuance after dissolution "for limited and specified purposes
incident to complete liquidation of its affairs".3 Thus, the moment a corporation's right to
exist as an "artificial person" ceases, its corporate powers are terminated "just as the powers
of a natural person to take part in mundane affairs cease to exist upon his death". 4 There is
nothing left but to conduct, as it were, the settlement of the estate of a deceased juridical
person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true,
as to when such act of extension may be made. But even with a superficial knowledge of
corporate principles, it does not take much effort to reach a correct conclusion. For, implicit in
Section 77 heretofore quoted is that the privilege given to prolong corporate life under the
amendment must be exercised before the expiry of the term fixed in the articles of
incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not really necessary.
The authority to prolong corporate life was inserted by Republic Act 3531 into a section of the
law that deals with the power of a corporation to amend its articles of incorporation. (For, the
manner of prolongation is through an amendment of the articles.) And it should be clearly
evident that under Section 77 no corporation in a state of liquidation can act in any way, much
less amend its articles, "for the purpose of continuing the business for which it was
established".
All these dilute Alhambra's position that it could revivify its corporate life simply
because when it attempted to do so, Alhambra was still in the process of liquidation. It is
surely impermissible for us to stretch the law that merely empowers a corporation to act in
liquidation to inject therein the power to extend its corporate existence.
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3. Not that we are alone in this view. Fletcher has written: "Since the privilege of
extension is purely statutory, all of the statutory conditions precedent must be complied with
in order that the extension may be effectuated. And, generally these conditions must be
complied with, and the steps necessary to effect the extension must be taken, during the life
of the corporation, and before the expiration of the term of existence as original fixed by its
charter or the general law, since, as a rule, the corporation is ipso facto dissolved as soon as that
time expires. So where the extension is by amendment of the articles of incorporation, the
amendment must be adopted before that time. And, similarly, the filing and recording of a
certificate of extension after that time cannot relate back to the date of the passage of a
resolution by the stockholders in favor of the extension so as to save the life of the
corporation. The contrary is true, however, and the doctrine of relation will apply, where the
delay is due to the neglect of the officer with whom the certificate is required to be filed, or to
a wrongful refusal on his part to receive it. And statutes in some states specifically provide
that a renewal may be had within a specified time before or after the time fixed for the
termination of the corporate existence".5
The logic of this position is well expressed in a foursquare case decided by the Court
of Appeals of Kentucky.6There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation expires by the
terms of its articles of incorporation, it may be thereafter continued to act for the
purpose of closing up its business, but for no other purpose. The corporate life of the
Home Building Association expired on May 3, 1905. After that date, by the mandate
of the statute, it could continue to act for the purpose of closing up its business, but
for no other purpose. The proposed amendment was not made until January 16,
1908, or nearly three years after the corporation expired by the terms of the articles
of incorporation. When the corporate life of the corporation was ended, there was
nothing to extend. Here it was proposed nearly three years after the corporate life of
the association had expired to revivify the dead body, and to make that relate back
some two years and eight months. In other words, the association for two years and
eight months had only existed for the purpose of winding up its business, and, after
this length of time, it was proposed to revivify it and make it a live corporation for the
two years and eight months daring which it had not been such.
The law gives a certain length of time for the filing of records in this court,
and provides that the time may be extended by the court, but under this provision it
has uniformly been held that when the time was expired, there is nothing to extend,
and that the appeal must be dismissed... So, when the articles of a corporation have
expired, it is too late to adopt an amendment extending the life of a corporation; for,
the corporation having expired, this is in effect to create a new corporation ..."7
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Corporation Law
True it is, that the Alabama Supreme Court has stated in one case. 8 that a corporation
empowered by statute to renew its corporate existence may do so even after the expiration
of its corporate life, provided renewal is taken advantage of within the extended statutory
period for purposes of liquidation. That ruling, however, is inherently weak as persuasive
authority for the situation at bar for at least two reasons: First. That case was a suit for
mandamus to compel a former corporate officer to turn over books and records that came
into his possession and control by virtue of his office. It was there held that such officer was
obliged to surrender his books and records even if the corporation had already expired. The
holding on the continued existence of the corporation was a mere dictum. Second. Alabama's
law is different. Corporations in that state were authorized not only to extend but also
to renew their corporate existence.That very case defined the word "renew" as follows; "To
make new again; to restore to freshness; to make new spiritually; to regenerate; to begin
again; to recommence; to resume; to restore to existence, to revive; to re-establish; to
recreate; to replace; to grant or obtain an extension of Webster's New International Dict.; 34
Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379. Sec".9
On this point, we again draw from Fletcher: "There is a broad distinction between the
extension of a charter and the grant of a new one. To renew a charter is to revive a charter
which has expired, or, in other words, "to give a new existence to one which has been
forfeited, or which has lost its vitality by lapse of time". To "extend" a charter is "to increase
the time for the existence of one which would otherwise reach its limit at an earlier
period".10Nowhere in our statute Section 18, Corporation Law, as amended by Republic Act
3531 do we find the word "renew" in reference to the authority given to corporations to
protract their lives. Our law limits itself to extension of corporate existence. And, as so
understood, extension may be made only before the term provided in the corporate charter
expires.
Alhambra draws attention to another case11 which declares that until the end of the
extended period for liquidation, a dissolved corporation "does not become an extinguished
entity". But this statement was obviously lifted out of context. That case dissected the
question whether or not suits can be commenced by or against a corporation within its
liquidation period. Which was answered in the affirmative. For, the corporation still exists for
the settlement of its affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although
the corporation amended its articles to extend its existence at a time when it had no legal
authority yet, it adopted the amended articles later on when it had the power to extend
its life and during its original term when it could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the contention that its case is
arguably within the purview of the law. It says that before cessation of its corporate life, it
5

could not have extended the same, for the simple reason that Republic Act 3531 had not then
become law. It must be remembered that Republic Act 3531 took effect on June 20, 1963,
while the original term of Alhambra's existence expired before that date on January 15,
1962. The mischief that flows from this theory is at once apparent. It would certainly open the
gates for all defunct corporations whose charters have expired even long before Republic
Act 3531 came into being to resuscitate their corporate existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the
Insurance Act, now reading as follows:
SEC. 196. Any provision of law to the contrary notwithstanding, every domestic life
insurance corporation, formed for a limited period under the provisions of its articles
of incorporation, may extend its corporate existence for a period not exceeding fifty
years in any one instance by amendment to its articles of incorporation on or before
the expiration of the term so fixed in said articles ...
To be observed is that the foregoing statute unlike Republic Act 3531 expressly
authorizes domestic insurance corporations to extend their corporate existence "on or
before the expiration of the term" fixed in their articles of incorporation. Republic Act 1932
was approved on June 22, 1957, long before the passage of Republic Act 3531 in 1963.
Congress, Alhambra points out, must have been aware of Republic Act 1932 when it passed
Republic Act 3531. Since the phrase "on or before", etc., was omitted in Republic Act 3531,
which contains no similar limitation, it follows, according to Alhambra, that it is not necessary
to extend corporate existence on or before the expiration of its original term.
That Republic Act 3531 stands mute as to when extention of corporate existence may
be made, assumes no relevance. We have already said, in the face of a familiar precept, that a
defunct corporation is bereft of any legal faculty not otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 now
in dispute. Its first paragraph states that "Republic Act No. 1932 allows the automatic
extension of the corporate existence of domestic life insurance corporations upon
amendment of their articles of incorporation on or before the expiration of the terms fixed by
said articles". The succeeding lines are decisive: "This is a good law, a sane and sound
one. There appears to be no valid reason why it should not be made to apply to other private
corporations.13
The situation here presented is not one where the law under consideration is
ambiguous, where courts have to put in harness extrinsic aids such as a look at another
statute to disentangle doubts. It is an elementary rule in legal hermeneutics that where the
terms of the law are clear, no statutory construction may be permitted. Upon the basic
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Corporation Law
conceptual scheme under which corporations operate, and with Section 77 of the Corporation
Law particularly in mind, we find no vagueness in Section 18, as amended by Republic Act
3531. As we view it, by directing attention to Republic Act 1932, Alhambra would seek to
create obscurity in the law; and, with that, ask of us a ruling that such obscurity be explained.
This, we dare say, cannot be done.
The pari materia rule of statutory construction, in fact, commands that statutes must
be harmonized with each other.14 So harmonizing, the conclusion is clear that Section 18 of
the Corporation Law, as amended by Republic Act 3531 in reference to extensions of
corporate existence, is to be read in the same light as Republic Act 1932. Which means that
domestic corporations in general, as with domestic insurance companies, can extend
corporate existence only on or before the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one which brushes
technicalities aside. Bases for this posture are that Republic Act 3531 is a remedial statute, and
that extension of corporate life is beneficial to the economy.
Alhambra's stance does not induce assent. Expansive construction is possible only
when there is something to expand. At the time of the passage of Republic Act 3531,
Alhambra's corporate life had already expired. It had overstepped the limits of its limited
existence. No life there is to prolong.
Besides, a new corporation Alhambra Industries, Inc., with but slight change in
stockholdings15 has already been established. Its purpose is to carry on, and it actually does
carry on,16 the business of the dissolved entity. The beneficial-effects argument is off the
mark.
The way the whole case shapes up then, the only possible drawbacks of Alhambra
might be that, instead of the new corporation (Alhambra Industries, Inc.) being written off,
the old one (Alhambra Cigar & Cigarette Manufacturing Company, Inc.) has to be wound up;
and that the old corporate name cannot be retained fully in its exact form. 17 What is important
though is that the word Alhambra, the name that counts [it has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of
November 18, 1963, and its order of September 8, 1964, both here under review, are hereby
affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So
ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Angeles and Fernando, JJ.,
concur.
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 MATABABE FILES
Corporation Law

Republic of the Philippines

SUPREME COURT This is an appeal from an order of the Court of First Instance of Misamis Oriental
Manila dismissing the petition of the Clavecilla Radio System to prohibit the City Judge of Cagayan de
EN BANC Oro from taking cognizance of Civil Case No. 1048 for damages.

G.R. No. L-22238 February 18, 1967
CLAVECILLIA RADIO SYSTEM, petitioner-appellant,
vs.
HON. AGUSTIN ANTILLON, as City Judge of the Municipal Court of Cagayan de Oro City
and NEW CAGAYAN GROCERY, respondents-appellees.
Corporation Law; Domicile of a corporation.The residence of a corporation is the
place where its principal office is established. It can be sued in that place, not in the place
where its branch office is located.
Actions; Venue; Venue of a tort action against a, corporation in inferior court.Where
the action filed against a corporation in the inferior court is based on tort, it should be filed in
the place where the corporation has its principal office, not in the place where it has its
branch office. To allow an action against a corporation to be instituted in any place where a
corporate entity has its branch offices would create confusion and work untold inconvenience
to the corporation.
Same; When provision, may be served with summons, applies.The phrase may
be served with summons in section 1, Rule 4 of the Revised Rules of Court does not apply
when the defendant resides in the Philippines, for, in such a case, he may be sued only in the
municipality of his residence, regardless of the place where he may be found and served with
summons.
Same; Plaintiff may not choose venue of action.The laying of the venue of an action
is not left to plaintiffs caprice because the matter is regulated by the Rules of Court.
APPEAL from an order of dismissal rendered by the Court of First Instance of Misamis
Oriental.
The facts are stated in the opinion of the Court
B. C. Padua for petitioner and appellant.
Pablo S. Reyes for respondents and appellees.
REGALA, J.:
It appears that on June 22, 1963, the New Cagayan Grocery filed a complaint against
the Clavecilla Radio System alleging, in effect, that on March 12, 1963, the following message,
addressed to the former, was filed at the latter's Bacolod Branch Office for transmittal thru its
branch office at Cagayan de Oro:
NECAGRO CAGAYAN DE ORO (CLAVECILLA)
REURTEL WASHED NOT AVAILABLE REFINED TWENTY FIFTY IF AGREEABLE SHALL
SHIP LATER REPLY POHANG
The Cagayan de Oro branch office having received the said message omitted,
in delivering the same to the New Cagayan Grocery, the word "NOT" between the
words "WASHED" and "AVAILABLE," thus changing entirely the contents and purport
of the same and causing the said addressee to suffer damages. After service of
summons, the Clavecilla Radio System filed a motion to dismiss the complaint on the
grounds that it states no cause of action and that the venue is improperly laid. The
New Cagayan Grocery interposed an opposition to which the Clavecilla Radio System
filed its rejoinder. Thereafter, the City Judge, on September 18, 1963, denied the
motion to dismiss for lack of merit and set the case for hearing.
Hence, the Clavecilla Radio System filed a petition for prohibition with preliminary
injunction with the Court of First Instance praying that the City Judge, Honorable Agustin
Antillon, be enjoined from further proceeding with the case on the ground of improper venue.
The respondents filed a motion to dismiss the petition but this was opposed by the petitioner.
Later, the motion was submitted for resolution on the pleadings.
In dismissing the case, the lower court held that the Clavecilla Radio System may be
sued either in Manila where it has its principal office or in Cagayan de Oro City where it may be
served, as in fact it was served, with summons through the Manager of its branch office in
said city. In other words, the court upheld the authority of the city court to take cognizance of
the case.
In appealing, the Clavecilla Radio System contends that the suit against it should be
filed in Manila where it holds its principal office.
It is clear that the case for damages filed with the city court is based upon tort and
not upon a written contract. Section 1 of Rule 4 of the New Rules of Court, governing venue

7
 MATABABE FILES
Corporation Law

of actions in inferior courts, provides in its paragraph (b) (3) that when "the action is not upon
a written contract, then in the municipality where the defendant or any of the defendants
resides or may be served with summons." (Emphasis supplied)

Settled is the principle in corporation law that the residence of a corporation is the
place where its principal office is established. Since it is not disputed that the Clavecilla Radio
System has its principal office in Manila, it follows that the suit against it may properly be filed
in the City of Manila.

The appellee maintain, however, that with the filing of the action in Cagayan de Oro
City, venue was properly laid on the principle that the appellant may also be served with
summons in that city where it maintains a branch office. This Court has already held in the
case of Cohen vs. Benguet Commercial Co., Ltd., 34 Phil. 526; that the term "may be served with
summons" does not apply when the defendant resides in the Philippines for, in such case, he
may be sued only in the municipality of his residence, regardless of the place where he may be
found and served with summons. As any other corporation, the Clavecilla Radio System
maintains a residence which is Manila in this case, and a person can have only one residence
at a time (See Alcantara vs. Secretary of the Interior, 61 Phil. 459; Evangelists vs. Santos, 86
Phil. 387). The fact that it maintains branch offices in some parts of the country does not
mean that it can be sued in any of these places. To allow an action to be instituted in any place
where a corporate entity has its branch offices would create confusion and work untold
inconvenience to the corporation.

It is important to remember, as was stated by this Court in Evangelista vs. Santos, et

al., supra, that the laying of the venue of an action is not left to plaintiff's caprice because the
matter is regulated by the Rules of Court. Applying the provision of the Rules of Court, the
venue in this case was improperly laid.

The order appealed from is therefore reversed, but without prejudice to the filing of
the action in Which the venue shall be laid properly. With costs against the respondents-
appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Bengzon, J.P., Zaldivar, Sanchez and
Castro, JJ., concur.

8

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 104175 June 25, 1993
YOUNG AUTO SUPPLY CO. AND NEMESIO GARCIA, petitioners,
vs.
THE HONORABLE COURT OF APPEALS (THIRTEENTH DIVISION) AND GEORGE CHIONG
ROXAS, respondents.
Remedial Law; Actions; Venue; A corporation is in a metaphysical sense a resident of
the place where its principal office is located as stated in the articles of incorporation.A
corporation has no residence in the same sense in which this term is applied to a natural
person. But for practical purposes, a corporation is in a metaphysical sense a resident of the
place where its principal office is located as stated in the articles of incorporation (Cohen v.
Benguet Commercial Co., Ltd., 34 Phil. 526 [1916] Clavecilla Radio System v. Antillon, 19 SCRA
379 [1967]). The Corporation Code precisely requires each corporation to specify in its articles
of incorporation the place where the principal office of the corporation is to be located
which must be within the Philippines (Sec. 14 [3]). The purpose of this requirement is to fix
the residence of a corporation in a definite place, instead of allowing it to be ambulatory.
Same; Same; Same; A corporation cannot be allowed to file personal actions in a place
other than its principal place of business unless such a place is also the residence of a co-
plaintiff or a defendant.In Clavecilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this
Court explained why actions cannot be filed against a corporation in any place where the
corporation maintains its branch offices. The Court ruled that to allow an action to be
instituted in any place where the corporation has branch offices, would create confusion and
work untold inconvenience to said entity. By the same token, a corporation cannot be
allowed to file personal actions in a place other than its principal place of business unless such
a place is also the residence of a co-plaintiff or a defendant.
PETITION for review of the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Angara, Abello, Concepcion, Regala & Cruz for petitioners.
Antonio Nuyles for private respondent.
QUIASON, J.:
MATABABE FILES
Corporation Law
Petitioners seek to set aside the decision of respondent Court of Appeals in CA-G.R.
SP No. 25237, which reversed the Order dated February 8, 1991 issued by the Regional Trial
Court, Branch 11, Cebu City in Civil Case No. CEB 6967. The order of the trial court denied the
motion to dismiss filed by respondent George C. Roxas of the complaint for collection filed by
petitioners.
It appears that sometime on October 28, 1987, Young Auto Supply Co. Inc. (YASCO)
represented by Nemesio Garcia, its president, Nelson Garcia and Vicente Sy, sold all of their
shares of stock in Consolidated Marketing & Development Corporation (CMDC) to Roxas. The
purchase price was P8,000,000.00 payable as follows: a downpayment of P4,000,000.00 and
the balance of P4,000,000.00 in four post dated checks of P1,000,000.00 each.
Immediately after the execution of the agreement, Roxas took full control of the four
markets of CMDC. However, the vendors held on to the stock certificates of CMDC as security
pending full payment of the balance of the purchase price.
The first check of P4,000,000.00, representing the down-payment, was honored by
the drawee bank but the four other checks representing the balance of P4,000,000.00 were
dishonored. In the meantime, Roxas sold one of the markets to a third party. Out of the
proceeds of the sale, YASCO received P600,000.00, leaving a balance of P3,400,000.00 (Rollo,
p. 176).
Subsequently, Nelson Garcia and Vicente Sy assigned all their rights and title to the
proceeds of the sale of the CMDC shares to Nemesio Garcia.
On June 10, 1988, petitioners filed a complaint against Roxas in the Regional Trial
Court, Branch 11, Cebu City, praying that Roxas be ordered to pay petitioners the sum of
P3,400,00.00 or that full control of the three markets be turned over to YASCO and Garcia.
The complaint also prayed for the forfeiture of the partial payment of P4,600,000.00 and the
payment of attorney's fees and costs (Rollo, p. 290).
Roxas filed two motions for extension of time to submit his answer. But despite said
motion, he failed to do so causing petitioners to file a motion to have him declared in default.
Roxas then filed, through a new counsel, a third motion for extension of time to submit a
responsive pleading.
On August 19, 1988, the trial court declared Roxas in default. The order of default
was, however, lifted upon motion of Roxas.
On August 22, 1988, Roxas filed a motion to dismiss on the grounds that:
9

1. The complaint did not state a cause of action due to non-joinder of
indispensable parties;
2. The claim or demand set forth in the complaint had been waived,
abandoned or otherwise extinguished; and
3. The venue was improperly laid (Rollo, p. 299).
After a hearing, wherein testimonial and documentary evidence were presented by
both parties, the trial court in an Order dated February 8, 1991 denied Roxas' motion to
dismiss. After receiving said order, Roxas filed another motion for extension of time to submit
his answer. He also filed a motion for reconsideration, which the trial court denied in its Order
dated April 10, 1991 for being pro-forma (Rollo, p. 17). Roxas was again declared in default, on
the ground that his motion for reconsideration did not toll the running of the period to file his
answer.
On May 3, 1991, Roxas filed an unverified Motion to Lift the Order of Default which
was not accompanied with the required affidavit or merit. But without waiting for the
resolution of the motion, he filed a petition for certiorari with the Court of Appeals.
The Court of Appeals sustained the findings of the trial court with regard to the first
two grounds raised in the motion to dismiss but ordered the dismissal of the complaint on the
ground of improper venue (Rollo, p. 49).
A subsequent motion for reconsideration by petitioner was to no avail.
Petitioners now come before us, alleging that the Court of Appeals
erred in:
1. holding the venue should be in Pasay City, and not in Cebu City (where
both petitioners/plaintiffs are residents;
2. not finding that Roxas is estopped from questioning the choice of venue
(Rollo, p. 19).
The petition is meritorious.
In holding that the venue was improperly laid in Cebu City, the Court of Appeals relied
on the address of YASCO, as appearing in the Deed of Sale dated October 28, 1987, which is
"No. 1708 Dominga Street, Pasay City." This was the same address written in YASCO's letters
and several commercial documents in the possession of Roxas (Decision, p. 12; Rollo, p. 48).
In the case of Garcia, the Court of Appeals said that he gave Pasay City as his address
in three letters which he sent to Roxas' brothers and sisters (Decision, p. 12; Rollo, p. 47). The
appellate court held that Roxas was led by petitioners to believe that their residence is in
Pasay City and that he had relied upon those representations (Decision, p. 12, Rollo, p. 47).
The Court of Appeals erred in holding that the venue was improperly laid in Cebu City.
MATABABE FILES
Corporation Law
In the Regional Trial Courts, all personal actions are commenced and tried in the
province or city where the defendant or any of the defendants resides or may be found, or
where the plaintiff or any of the plaintiffs resides, at the election of the plaintiff [Sec. 2(b)
Rule 4, Revised Rules of Court].
There are two plaintiffs in the case at bench: a natural person and a domestic corporation.
Both plaintiffs aver in their complaint that they are residents of Cebu City, thus:
1.1. Plaintiff Young Auto Supply Co., Inc., ("YASCO") is a domestic
corporation duly organized and existing under Philippine laws with principal
place of business at M. J. Cuenco Avenue, Cebu City. It also has a branch
office at 1708 Dominga Street, Pasay City, Metro Manila.
Plaintiff Nemesio Garcia is of legal age, married, Filipino citizen and with
business address at Young Auto Supply Co., Inc., M. J. Cuenco Avenue, Cebu
City. . . . (Complaint, p. 1; Rollo, p. 81).
The Article of Incorporation of YASCO (SEC Reg. No. 22083) states:
THIRD That the place where the principal office of the corporation is to be
established or located is at Cebu City, Philippines (as amended on December
20, 1980 and further amended on December 20, 1984) (Rollo, p. 273).
A corporation has no residence in the same sense in which this term is applied to a
natural person. But for practical purposes, a corporation is in a metaphysical sense a resident
of the place where its principal office is located as stated in the articles of incorporation
(Cohen v. Benguet Commercial Co., Ltd., 34 Phil. 256 [1916] Clavecilla Radio System v. Antillon,
19 SCRA 379 [1967]). The Corporation Code precisely requires each corporation to specify in
its articles of incorporation the "place where the principal office of the corporation is to be
located which must be within the Philippines" (Sec. 14 [3]). The purpose of this requirement is
to fix the residence of a corporation in a definite place, instead of allowing it to be
ambulatory.
In Clavencilla Radio System v. Antillon, 19 SCRA 379 ([1967]), this Court explained why
actions cannot be filed against a corporation in any place where the corporation maintains its
branch offices. The Court ruled that to allow an action to be instituted in any place where the
corporation has branch offices, would create confusion and work untold inconvenience to
said entity. By the same token, a corporation cannot be allowed to file personal actions in a
place other than its principal place of business unless such a place is also the residence of a co-
plaintiff or a defendant.
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 MATABABE FILES
Corporation Law

If it was Roxas who sued YASCO in Pasay City and the latter questioned the venue on
the ground that its principal place of business was in Cebu City, Roxas could argue that YASCO
was in estoppel because it misled Roxas to believe that Pasay City was its principal place of
business. But this is not the case before us.

With the finding that the residence of YASCO for purposes of venue is in Cebu City,
where its principal place of business is located, it becomes unnecessary to decide whether
Garcia is also a resident of Cebu City and whether Roxas was in estoppel from questioning the
choice of Cebu City as the venue.

WHEREFORE, the petition is GRANTED. The decision of the Court of Appeals

appealed from is SET ASIDE and the Order dated February 8, 1991 of the Regional Trial Court is
REINSTATED.

SO ORDERED.

Cruz, Grio-Aquino and Bellosillo, JJ., concur.

11

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 9321 September 24, 1914
NORBERTO ASUNCION, ET AL., petitioners-appellants,
vs.
MANUEL DE YRIARTE, respondent-appellee.
1. CORPORATION LAW; POWERS AND DUTIES OF CHIEF OF DlVISION OF ARCHIVES,
EXECUTIVE BUREAU.The chief of the division of archives, for and on behalf of the division,
has authority under the Corporation Law (Act No. 1459) to determine the sufficiency of the
form of articles of incorporation offered for registration with the division.
2. ID.; ID.The chief of the division of archives, on behalf of the division, has also the
power and duty to determine from the articles of incorporation presented for registration the
lawfulness of the purposes of the proposed corporation and whether or not those purposes
bring the proposed corporation within the purview of the law authorizing corporations for
given purposes.
3. ID.; ID.; MANDAMUS TO COMPEL HIM TO PERFORM DUTIES.The duties of the
chief of the division of archives, so f ar as relates to the registration of articles of
incorporation, are purely ministerial and not discretional; and mandamus will lie to compel
him to perform his duties under the Corporation Law if, in violation of law, he refuse to
perform them.
4. ID.; MUNICIPALITIES; ORGANIZATION OF BARRIO INTO SEPARATE CORPORATION.
When articles of incorporation presented for registration show that the object of
incorporators is to organize a pueblo or barrio of a given municipality into a separate
corporation for the purpose of taking possession and having control of all municipal property
within the pueblo or barrio so incorporated, and administer it exclusively for the benefit of
the residents of that pueblo or barrio, said articles of incorporation show upon their face that
the object of the incorporation is unlawful in that it seeks to deprive the municipality in which
the pueblo or barrio is situated of its property and its citizens of the right of enjoying the
same and would, if permitted, disrupt and destroy the government of the municipalities of
the Islands and abrogate the laws relating- to the formation and government of
municipalities.
APPEAL from a judgment of the Court of First Instance of Manila. Crossfield, J.
MATABABE FILES
Corporation Law
The facts are stated in the opinion of the court
Modesto Reyes for appellants.
Attorney-General Villamor for appellee.
MORELAND, J.:
This is an action to obtain a writ of mandamus to compel the chief of the division of
achieves of the Executive Bureau to file a certain articles of incorporation.
The chief of the division of archives, the respondent, refused to file the articles of
incorporation, hereinafter referred to, upon the ground that the object of the corporation, as
stated in the articles, was not lawful and that, in pursuance of section 6 of Act No. 1459, they
were not registerable.
The proposed incorporators began an action in the Court of First Instance of the city
of Manila to compel the chief of the division of archives to receive and register said articles of
incorporation and to do any and all acts necessary for the complete incorporation of the
persons named in the articles. The court below found in favor of the defendant and refused to
order the registration of the articles mentioned, maintaining ad holding that the defendant,
under the Corporation Law, had authority to determine both the sufficiency of the form of
the articles and the legality of the object of the proposed corporation. This appeal is taken
from that judgment.
The first question that arises is whether or not the chief of the division of archives has
authority, under the Corporation for registration, to decide not only as to the sufficiency of
the form of the articles, but also as to the lawfulness of the purpose of the proposed
corporation.
It is strongly urged on the part of the appellants that the duties of the defendant are
purely ministerial and that he has no authority to pass upon the lawfulness of the object for
which the incorporators propose to organize. No authorities are cited to support this
proposition and we are of the opinion that it is not sound.
Section 6 of the Corporation Law reads in part as follows:
Five or more persons, not exceeding fifteen, a majority of whom are
residents of the Philippine Islands, may form a private corporation for any lawful
purpose by filing with the division of archives, patents, copyrights, and trademarks if
the Executive Bureau articles of incorporation duly executed and acknowledged
before a notary public, . . . .
12

Simply because the duties of an official happens to be ministerial, it does not
necessarily follow that he may not, in the administration of his office, determine questions of
law. We are of the opinion that it is the duty of the division of archives, when articles of
incorporation are presented for registration, to determine whether the objects of the
corporation as expressed in the articles are lawful. We do not believe that, simply because
articles of incorporation presented foe registration are perfect in form, the division of
archives must accept and register them and issue the corresponding certificate of
incorporation no matter what the purpose of the corporation may be as expressed in the
articles. We do not believe it was intended that the division of archives should issue a
certificate of incorporation to, and thereby put the seal of approval of the Government upon,
a corporation which was organized for base of immoral purposes. That such corporation
might later, if it sought to carry out such purposes, be dissolved, or its officials imprisoned or
itself heavily fined furnished no reason why it should have been created in the first instance. It
seems to us to be not only the right but the duty of the divisions of archives to determine the
lawfulness of the objects and purposes of the corporation before it issues a certificate of
incorporation.
It having determined that the division of archives, through its officials, has authority
to determine not only the sufficiency as to form of the articles of incorporation offered for
registration, but also the lawfulness of the purposes of leads us to the determination of the
question whether or not the chief of the division of archives, who is the representative
thereof and clothed by it with authority to deal subject to mandamus in the performance of
his duties.
We are of the opinion that he may be mandamused if he act in violation of law or if he
refuses, unduly, to comply with the law. While we have held that defendant has power to
pass upon the lawfulness of the purposes of the proposed corporation and that he may, in
the fulfillment of his duties, determine the question of law whether or not those purposes are
lawful and embraced within that class concerning which the law permits corporations to be
formed, that does not necessarily mean, as we have already intimated, that his duties are not
ministerial. On the contrary, there is no incompatibility in holding, as we do hold, that his
duties are ministerial and that he has no authority to exercise discretion in receiving and
registering articles of incorporation. He may exercise judgment that is, the judicial function
in the determination of the question of law referred to, but he may not use discretion. The
question whether or not the objects of a proposed corporation are lawful is one that can be
decided one way only. If he err in the determination of that question and refuse to file articles
which should be filed under the law, the decision is subject to review and correction and,
upon proper showing, he will be ordered to file the articles. This is the same kind of
determination which a court makes when it decides a case upon the merits, the court makes
when it decides a case upon the merits. When a case is presented to a court upon the merits,
MATABABE FILES
Corporation Law
the court can decide only one way and be right. As a matter of law, there is only one way and
be right. As a matter of law, there is only one course to pursue. In a case where the court or
other official has discretion in the resolution of a question, then, within certain limitations, he
may decide the question either way and still be right. Discretion, it may be said generally, is a
faculty conferred upon a court or other official by which he may decide a question either way
and still be right. The power conferred upon the division of archives with respect to the
registration of articles of incorporation is not of that character. It is of the same character as
the determination of a lawsuit by a court upon the merits. It can be decided only one way
correctly.
If, therefore, the defendant erred in determining the question presented when the
articles were offered for registration, then that error will be corrected by this court in this
action and he will be compelled to register the articles as offered. If, however, he did not
commit an error, but decided that question correctly, then, of course, his action will be
affirmed to the extent that we will deny the relief prayed for.
The next question leads us to the determination of whether or not the purposes of
the corporation as stated in the articles of incorporation are lawful within the meaning of the
Corporation Law.
The purpose of the incorporation as stated in the articles is: "That the object of the
corporation is (a) to organize and regulate the management, disposition, administration and
control which the barrio of Pulo or San Miguel or its inhabitants or residents have over the
common property of said residents or inhabitants or property belonging to the whole barrio
as such; and (b) to use the natural products of the said property for institutions, foundations,
and charitable works of common utility and advantage to the barrio or its inhabitants."
The municipality of Pasig as recognized by law contains within its limits several
barrios or small settlements, like Pulo or San Miguel, which have no local government of their
own but are governed by the municipality of Pasig through its municipal president and
council. The president and members of the municipal council are elected by a general vote of
the municipality, the qualified electors of all the barrios having the right to participate.
The municipality of Pasig is a municipal corporation organized by law. It has the
control of all property of the municipality. The various barrios of the municipality have no
right to own or hold property, they not being recognized as legal entities by any law. The
residents of the barrios participate in the advantages which accrue to the municipality from
public property and receive all the benefits incident to residence in a municipality organized
by law. If there is any public property situated in the barrio of Pulo or San Miguel not
belonging to the general government or the province, it belongs to the municipality of Pasig
and the sole authority to manage and administer the same resides in that municipality. Until
13
 MATABABE FILES
Corporation Law

the present laws upon the subject are charged no other entity can be the owner of such
property or control or administer it.

The object of the proposed corporation, as appears from the articles offered for
registration, is to make of the barrio of Pulo or San Miguel a corporation which will become
the owner of and have the right to control and administer any property belonging to the
municipality of Pasig found within the limits of that barrio. This clearly cannot be permitted.
Otherwise municipalities as now established by law could be deprived of the property which
they now own and administer. Each barrio of the municipality would become under the
scheme proposed, a separate corporation, would take over the ownership, administration,
and control of that portion of the municipal territory within its limits. This would disrupt, in a
sense, the municipalities of the Islands by dividing them into a series of smaller municipalities
entirely independent of the original municipality.

What the law does not permit cannot be obtained by indirection. The object of the
proposed corporation is clearly repugnant to the provisions of the Municipal Code and the
governments of municipalities as they have been organized thereunder. (Act No. 82,
Philippine Commission.)

The judgment appealed from is affirmed, with costs against appellants.

Arellano, C.J., Torres, Johnson, Carson and Araullo, JJ., concur.

14

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-45911 April 11, 1979
JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M. SORIANO,
ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B. CONDE, MIGUEL
ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION, EMIGDIO TANJUATCO, SR., and
EDUARDO R. VISAYA, respondents.
Supreme Court; Judgments; Securities and Exchange Commission; Corporation Law;
Supreme Court always strives to settle a legal controversy in a single proceeding.xxx In the
case at bar, there are facts which cannot be denied, viz.: that the amended by-laws were
adopted by the Board of Directors of the San Miguel Corporation in the exercise of the power
delegated by the stockholders ostensibly pursuant to section 22 of the Corporation Law; that
in a special meeting on February 10, 1977 held specially for that purpose, the amended by-laws
were ratified by more than 80% of the stockholders of record; that the foreign investment in
the Hongkong Brewery and Distillery, a beer manufacturing company in Hongkong, was made
by the San Miguel Corporation in 1948; and that in the stockholders annual meeting held in
1972 and 1977, all foreign investments and operations of San Miguel Corporation were ratified
by the stockholders.
Corporation Law; While reasonableness of a by-law is a legal question, where
reasonableness of a by-law provision is one in which reasonable minds may differ a court will
not be justified in subsisting its judgment for those authorized to make the by-laws.The
validity or reasonableness of a by-law of a corporation is purely a question of law. Whether
the by-law is in conflict with the law of the land, or with the charter of the corporation, or is in
a legal sense unreasonable and therefore unlawful is a question of law. This rule is subject,
however, to the limitation that where the reasonableness of a by-law is a mere matter of
judgment, and one upon which reasonable minds must necessarily differ, a court would not
be warranted in substituting its judgment instead of the judgment of those who are
authorized to make by-laws and who have exercised their authority.
Same; Under the Corporation Law a corporation is authorized to prescribe the
qualification of its directors.In this jurisdiction, under Section 21 of the Corporation Law, a
corporation may prescribed in its by-laws the qualifications, duties and compensation of
directors, officers and employees ***. This must necessarily refer to a qualification in
MATABABE FILES
Corporation Law
addition to that specified by section 30 of the Corporation Law, which provides that every
director must own in his right at least one share of the capital stock of the stock corporation
of which he is a director * * *.
Same; Stockholder has no vested right to be elected as stockholder.Any person
who buys stock in a corporation does so with the knowledge that its affairs are dominated
by a majority of the stockholders and that he implied contracts that the will of the majority
shall govern in all matters within the limits of the act of incorporation and lawfully enacted by-
laws and not forbidden by law. To this extent, therefore, the stockholder may be considered
to have parted with his personal right or privilege to regulate the disposition of his property
which he has invested in the capital stock of the corporation and surrendered it to the will of
the majority or his fellow incorporators. **** It can not therefore be justly said that the
contract, express or implied, between the corporation and the stockholders is infringed ***
by any act of the former which is authorized by a majority, ***.
Same; A director stands in a fiduciary relation to the competition and its stockholders.
The disqualification of a competition from being elected to the board of directors is a
reasonable exercise of corporate authority. Although in the strict and technical sense,
directors of a private corporation are not regarded as trustees, there cannot be any doubt
that their character is that of a fiduciary insofar as the corporation for the collective benefit of
the stockholders, they occupy a fiduciary relation, and in these sense the relation is one of
trust.
Same; Same.It is obviously to prevent the creation of an opportunity for an officer
or director of San Miguel Corporation, who is also the officer or owner of competing
corporation, from taking advantage of the information which he acquires as director to
promote his individual or corporate interests to the prejudice of San Miguel Corporation and
its stockholders, that the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his loyalty to
both corporations and place the performance of his corporate duties above his personal
concerns.
Same; Same.Sound principles of corporate management counsel against sharing
sensitive information with a director whose fiduciary duty to loyalty may well require that he
disclose this information to a competitive rival. These dangers are enhanced considerably
where the common director such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations, the director has an
economic incentive to appropriate for the benefit of his own corporation the corporate plans
and policies of the corporation where he sits as director.
15

Same; Another reason for upholding a by-law provision that forbids a competitor to be
elected as corporate director are the laws prohibiting cartels.There is another important
consideration in determining whether or not the amended by-laws are reasonable. The
Constitution and the law prohibit combinations in restraint of trade or unfair competition.
Thus, Section 2 of Article XIV of the Constitution provides: That State shall regulate or
prohibit private monopolies when the public interest so requires. No combinations in restraint
of trade or unfair competition shall be allowed.
Same; Same.Basically, these anti-trust laws or laws against monopolies or
combinations in restraint of trade are aimed at raising levels of competition by improving the
consumers effectiveness as the final arbiter in free markets. These laws are designed to
preserve free and unfettered competition as the rule of trade. It rests on the premise that
the unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest quality ***. They operate to forestall
concentration of economic power. The law against monopolies and combinations in restraint
of trade is aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly
obstructing the course of trade.
Same; Election of petitioner as San Miguel Corporation Director may run counter to
the prohibition contained in Section 13(5) of Corporation Law on investments in corporations
engaged in agriculture.Finally, considering that both Robina and SMC are, to a certain
extent, engaged in agriculture, then the election of petitioner to the Board of SMC may
constitute a violation of the prohibition contained in Section 13(5) of the Corporation Law.
Said section provides in part that any stockholder of more than one corporation organized
for the purpose of engaging in agriculture may hold his stock in such corporations solely for
investment and not for the purpose of bringing about or attempting to bring about a
combination to exercise control of such corporations. ***.
Same; The by-law amendment of SMC applies equally to all and does not discriminate
against petitioner only.However, the by-law, by its terms, applies to all stockholders. The
equal protection clause of the Constitution requires only that the by-laws operate equally
upon all persons of a class. Besides, before petitioner can be declared ineligible to run for
director, there must be hearing and evidence must be submitted to bring his case within the
ambit of the disqualification. Sound principles of public policy and management, therefore,
support the view that a by-law which disqualifies a competitor from election to the Board of
Directors of another corporation is valid and reasonable.
Same; Petitioner is not ipso facto disqualified to run on SMC director. He must be given
full opportunity by the SEC to show that he is not covered by the disqualification.While We
here sustain the validity of the amended by-laws, it does not follow as a necessary
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consequence that petitioner is ipso facto disqualified. Consonant with the requirement of
due process, there must be due hearing at which the petitioner must be given the fullest
opportunity to show that he is not covered by the disqualification. As trustees of the
corporation and of the stockholders, it is the responsibility of directors to act with fairness to
the stockholders. Pursuant to this obligation and to remove any suspicion that this power
may be utilized by the incumbent members of the Board to perpetuate themselves in power,
any decision of the Board to disqualify a candidate for the Board of Directors should be
reviewed by the Securities and Exchange Commission en banc and its decision shall be final
unless reversed by this Court on certiorari.
Same; Every stockholder has the right to inspect corporate books and records.The
stockholders right of inspection of the corporations books and records is based upon their
ownership of the assets and property of the corporation. It is, therefore, an incident of
ownership of the corporate property, whether this ownership or interest be termed an
equitable ownership, a beneficial ownership, or a quasi-ownership. This right is predicated
upon the necessity of selfprotection. It is generally held by majority of the courts that where
the right is granted by statute to the stockholder, it is given to him as such and must be
exercised by him with respect to his interest as a stockholder and for some purpose germane
thereto or in the interest of the corporation. In other words, the inspection has to germane to
the petitioners interest as a stockholder, and has to be proper and lawful in character and not
inimical to the interest of the corporation.
Same; The right of stockholder to inspect corporate books extends to a wholly-owned
subsidiary.In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be more in
accord with equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly owned subsidiary which are in respondent corporations possession
and control.
Same; Purely ultra vires corporate acts of corporate officers to invest corporate funds
in another business or corporation, i.e., acts not contrary to law, morals, public order as public
policy, may be ratified by the stockholders holding 2/3 of the voting power.Assuming
arguendo that the Board of Directors of San Miguel Corporation had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized acts of its officers or other agents.
This is true because the questioned investment is neither contrary to law, morals, public order
or public policy. It is a corporate transaction or contract which is within the corporate powers,
but which is defective from a purported failure to observe in its execution the requirement of
the law that the investment must be authorized by the affirmative vote of the stockholders
holding twothirds of the voting power. This requirement is for the benefit of the
stockholders. The stockholders for whose benefit the requirement was enacted may,
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therefore, ratify the investment and its ratification by said stockholders obliterates any defect
which it may have had at the outset. Mere ultra vires acts, said this Court in Pirovano, or
those which are not illegal and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.
Corporation Law; Judgment; The doctrine of the law of the case.We hold on our
part that the doctrine of the law of the case invoked by Mr. Justice Barredo has no
applicability for the following reasons: a) Our jurisprudence is quite clear that this doctrine
may be invoked only where there has been a final and conclusive determination of an issue in
the first case later invoked as the law of the case.
Same; Same; When doctrine of the law of the case not applicable.The doctrine of
the law of the case, therefore, has no applicability whatsoever herein insofar as the question
of the validity or invalidity of the amended by-laws is concerned. The Courts judgment of
April 11, 1979 clearly shows that the voting on this question inconclusive with six against four
Justices and two other Justices (the Chief Justice and Mr. Justice Fernando) expressly
reserving their votes thereon, and Mr. Justice Aquino while taking no part in effect likewise
expressly reserved his vote thereon. No final aad conclusive determination could be reached
on the issue and pursuant to the provisions of Rule 56, section 11, since this special civil action
originally commenced in this Court, the action was simply dismissed with the result that no
law of the case was laid down insofar as the issue of the validity or invalidity of the questioned
by-laws is concerned, and the relief sought herein by petitioner that this Court bypass the SEC
which has yet to hear and determine the same issue pending before it below and that this
Court itself directly resolve the said issue stands denied.
Same; Same; Constitutional Law; Due Process; When procedural due process was not
observed.The entire Court, therefore, recognized that petitioner had not been given
procedural due process by the SMC board on the matter of his disqualification and that he
was entitled to a new and proper hearing. It stands to reason that in such hearing,
petitioner could raise not only questions of fact but questions of law, particularly questions
of law affecting the investing public and their right to representation on the board as
provided by lawnot to mention that as borne out by the fact that no restriction whatsoever
appears in the Courts decision, it was never contemplated that petitioner was to be limited
questions of fact and could not raise the fundamental question of law bearing on the
invalidity of the questioned amended by-laws at such hearing before the SMC board.
Furthermore, it was expressly provided unanimously in the Courts decision that the SMC
boards decision on the disqualification of petitioner (assuming the board of directors of San
Miguel Corporation should, after the proper hearing, disqualify him as qualified in Mr. Justice
Barredos own separate opinion, at page 2) shall be appealable to respondent Securities and
Exchange Commission deliberating and acting en banc and ultimately to this Court.
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Same; Same; Reservation of the vote of the Chief Justice.As expressly stated in the
Chief Justices reservation of his vote, the matter of the question of the applicability of the
said section 13(5) to petitioner would be heard by this Court at the appropriate time after the
proceedings below (and necessarily the question of the validity of the amended by-laws
would be taken up anew and the Court would at that time be able to reach a final and
conclusive vote).
Same; Same; Validity of the amended by-laws.The six votes cast by Justices
Makasiar, Antonio, Santos, Abad Santos, De Castro and this writer in favor of validity of the
amended by-laws in question, with only four members of this Court, namely, Justices
Teehankee, Concepcion Jr., Fernandez and Guerrero opining otherwise, and with Chief Justice
Castro and Justice Fernando reserving their votes thereon and Justice Aquino and Melencio
Herrera not voting, thereby resulting in the dismissal of the petition insofar as it assails the
validity of the amended by-laws . . . . for lack of necessary votes, has no other legal
consequence than that it is the law of the case far as the parties herein are concerned, albeit
the majority opinion of six against four Justices is not doctrinal in the sense that it cannot be
cited as necessarily a precedent for subsequent cases. This means that petitioner Gokongwei
and the respondents, including the Securities and Exchange Commission, are bound by the
foregoing result, namely, that the Court en banc has not found merit in the claim that the
amended by-laws in question are invalid. Indeed, it is one thing to say that dismissal of the
case is not doctrinal and entirely another thing to maintain that such dismissal leaves the issue
unsettled.
Same; Same; Where petitioner can no longer revive the issue validity of the amended
by-laws.I reiterate, therefore, that as between the parties herein, the issue of validity of the
challenged bylaws is already settled. From which it follows that the same are already
enforceable insofar as they are concerned. Petitioner Gokongwei may not hereafter act on
the assumption that he can revive the issue of validity whether in the Securities Exchange
Commission, in this Court or in any other forum, unless he proceeds on the basis of a factual
milieu different from the setting of this case. Not even the Securities and Exchange
Commission may pass on such question anymore at the instance of herein petitioner or
anyone acting in his stead or on his behalf. The vote of four justices to remand the case
thereto cannot alter the situation.
Same; Same; Where Court has not found merit in the claim that the amended by-laws
in question are valid.I concur in Justice Barredos statement that the dismissal (for lack of
necessary votes) of the petition to the extent that it assails the validity of the amended by-
laws, is the law of the case at bar, which means in effect that as far and only in so far as the
parties and the Securities and Exchange Commission are concerned, the Court has not found
merit in the claim that the amended by-laws in question are valid.
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Same; Same; Term and meaning of farming.This is my view, even as I am for a
restrictive interpretation of Section 13(5) of the Philippine Corporation Law, under which I
would limit the scope of the provision to corporations engaged in agriculture, but only as the
word agriculture refers to its more limited meaning as distinguished from its general and
broad connotation. The term would then mean farming or raising the natural products of
the soil, such as by cultivation, in the acquisition of agricultural land such as by homestead,
before the patent may be issued.
Same; Same; Poultry raising or piggery is included in the term agriculture.It is my
opinion that under the public land statute, the development of a certain portion of the land
applied for a specified in the law as a condition precedent before the applicant may obtain a
patent, is cultivation, not let us say, poultry raising or piggery, which may be included in the
term Agriculture in its broad sense. For under Section 13(5) of the Philippine Corporation
Law, construed not in the strict way as I believe it should because the provision is in
derogation of property rights, the petitioner in this case would be disqualified from becoming
an officer of either the San Miguel Corporation or his own supposedly agricultural
corporations.
ORIGINAL ACTION in the Supreme Court. Certiorari, mandamus and injunction.
The facts are stated in the opinion of the Court. Gokongwei, Jr. vs. Securities and Exchange
Commission, 89 SCRA 336, No. L-45911 April 11, 1979
De Santos, Balgos & Perez for petitioner.
Angara, Abello, Concepcion, Regala, Cruz Law Offices for respondents Sorianos
Siguion Reyna, Montecillo & Ongsiako for respondent San Miguel Corporation.
R. T Capulong for respondent Eduardo R. Visaya.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance
of writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel
Corporation, filed with the Securities and Exchange Commission (SEC) a petition for
"declaration of nullity of amended by-laws, cancellation of certificate of filing of amended by-
laws, injunction and damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as an unwilling petitioner.
The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M. Soriano, Enrique
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Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel Ortigas, Antonio Prieto
and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961, when the outstanding capital stock
of respondent corporation was only P70,139.740.00, divided into 5,513,974 common shares at
P10.00 per share and 150,000 preferred shares at P100.00 per share. At the time of the
amendment, the outstanding and paid up shares totalled 30,127,047 with a total par value of
P301,270,430.00. It was contended that according to section 22 of the Corporation Law and
Article VIII of the by-laws of the corporation, the power to amend, modify, repeal or adopt
new by-laws may be delegated to the Board of Directors only by the affirmative vote of
stockholders representing not less than 2/3 of the subscribed and paid up capital stock of the
corporation, which 2/3 should have been computed on the basis of the capitalization at the
time of the amendment. Since the amendment was based on the 1961 authorization,
petitioner contended that the Board acted without authority and in usurpation of the power
of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had
already been exercised in 1962 and 1963, after which the authority of the Board ceased to
exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new directors.
As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights inherent
in stock ownership, such as the rights to vote and to be voted upon in the election of
directors; and that in amending the by-laws, respondents purposely provided for petitioner's
disqualification and deprived him of his vested right as afore-mentioned hence the amended
by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent
power to disqualify a stockholder from being elected as a director and, therefore, the
questioned act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a management contract)
with respondent corporation, which was allowed because the questioned amendment gave
the Board itself the prerogative of determining whether they or other persons are engaged in
competitive or antagonistic business; that the portion of the amended bylaws which states
that in determining whether or not a person is engaged in competitive business, the Board
may consider such factors as business and family relationship, is unreasonable and oppressive
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and, therefore, void; and that the portion of the amended by-laws which requires that "all
nominations for election of directors ... shall be submitted in writing to the Board of Directors
at least five (5) working days before the date of the Annual Meeting" is likewise unreasonable
and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the
Securities and Exchange Commission an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent corporation refused to allow him to
inspect its records despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been attempting to
suppress information from its stockholders despite a negative reply by the SEC to its query
regarding their authority to do so. Among the documents requested to be copied were (a)
minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the management
contract between San Miguel Corporation and A. Soriano Corporation (ANSCOR); (c) latest
balance sheet of San Miguel International, Inc.; (d) authority of the stockholders to invest the
funds of respondent corporation in San Miguel International, Inc.; and (e) lists of salaries,
allowances, bonuses, and other compensation, if any, received by Andres M. Soriano, Jr.
and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the demand is
not based on good faith; that the motion is premature since the materiality or relevance of
the evidence sought cannot be determined until the issues are joined, that it fails to show
good cause and constitutes continued harrasment, and that some of the information sought
are not part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel
Corporation, Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the
petition, denying the substantial allegations therein and stating, by way of affirmative
defenses that "the action taken by the Board of Directors on September 18, 1976 resulting in
the ... amendments is valid and legal because the power to "amend, modify, repeal or adopt
new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has never
been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a valid
delegation of the power to amend, repeal or adopt new by-laws is determined in relation to
the total subscribed capital stock at the time the delegation of said power is made, not when
the Board opts to exercise said delegated power"; that petitioner has not availed of his intra-
corporate remedy for the nullification of the amendment, which is to secure its repeal by vote
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of the stockholders representing a majority of the subscribed capital stock at any regular or
special meeting, as provided in Article VIII, section I of the by-laws and section 22 of the
Corporation law, hence the, petition is premature; that petitioner is estopped from
questioning the amendments on the ground of lack of authority of the Board. since he failed,
to object to other amendments made on the basis of the same 1961 authorization: that the
power of the corporation to amend its by-laws is broad, subject only to the condition that the
by-laws adopted should not be respondent corporation inconsistent with any existing law;
that respondent corporation should not be precluded from adopting protective measures to
minimize or eliminate situations where its directors might be tempted to put their personal
interests over t I hat of the corporation; that the questioned amended by-laws is a matter of
internal policy and the judgment of the board should not be interfered with: That the by-laws,
as amended, are valid and binding and are intended to prevent the possibility of violation of
criminal and civil laws prohibiting combinations in restraint of trade; and that the petition
states no cause of action. It was, therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to respondents. The application for
writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation
engaged in business competitive to that of respondent corporation, began acquiring shares
therein. until September 1976 when its total holding amounted to 622,987 shares: that in
October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring shares in
respondent (corporation. until its total holdings amounted to P543,959.00 in September 1976;
that on January 12, 1976, petitioner, who is president and controlling shareholder of Robina
and CFC (both closed corporations) purchased 5,000 shares of stock of respondent
corporation, and thereafter, in behalf of himself, CFC and Robina, "conducted malevolent and
malicious publicity campaign against SMC" to generate support from the stockholder "in his
effort to secure for himself and in representation of Robina and CFC interests, a seat in the
Board of Directors of SMC", that in the stockholders' meeting of March 18, 1976, petitioner
was rejected by the stockholders in his bid to secure a seat in the Board of Directors on the
basic issue that petitioner was engaged in a competitive business and his securing a seat
would have subjected respondent corporation to grave disadvantages; that "petitioner
nevertheless vowed to secure a seat in the Board of Directors at the next annual meeting;
that thereafter the Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of
litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for
production and inspection of documents was filed by all the respondents. This was duly
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opposed by petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R.
Visaya were allowed to intervene as oppositors and they accordingly filed their oppositions-
intervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating, in
part as follows:
Considering the evidence submitted before the Commission by the
petitioner and respondents in the above-entitled case, it is hereby ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John Gokongwei,
Jr., of the minutes of the stockholders' meeting of the respondent San
Miguel Corporation held on March 13, 1961, which are in the possession,
custody and control of the said corporation, it appearing that the same is
material and relevant to the issues involved in the main case. Accordingly,
the respondents should allow petitioner-movant entry in the principal office
of the respondent Corporation, San Miguel Corporation on January 14, 1977,
at 9:30 o'clock in the morning for purposes of enforcing the rights herein
granted; it being understood that the inspection, copying and
photographing of the said documents shall be undertaken under the direct
and strict supervision of this Commission. Provided, however, that other
documents and/or papers not heretofore included are not covered by this
Order and any inspection thereof shall require the prior permission of this
Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as the list
of salaries, allowances, bonuses, compensation and/or remuneration
received by respondent Jose M. Soriano, Jr. and Andres Soriano from San
Miguel International, Inc. and/or its successors-in- interest, the Petition to
produce and inspect the same is hereby DENIED, as petitioner-movant is not
a stockholder of San Miguel International, Inc. and has, therefore, no
inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29,
1976, withdrawing his request to copy and inspect the management contract
between San Miguel Corporation and A. Soriano Corporation and the
renewal and amendments thereof for the reason that he had already
obtained the same, the Commission takes note thereof; and
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4. Finally, the Commission holds in abeyance the resolution on the matter of
production and inspection of the authority of the stockholders of San Miguel
Corporation to invest the funds of respondent corporation in San Miguel
International, Inc., until after the hearing on the merits of the principal issues
in the above-entitled case.
This Order is immediately executory upon its approval. 2
Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard,
respondent corporation issued a notice of special stockholders' meeting for the purpose of
"ratification and confirmation of the amendment to the By-laws", setting such meeting for
February 10, 1977. This prompted petitioner to ask respondent Commission for a summary
judgment insofar as the first cause of action is concerned, for the alleged reason that by
calling a special stockholders' meeting for the aforesaid purpose, private respondents
admitted the invalidity of the amendments of September 18, 1976. The motion for summary
judgment was opposed by private respondents. Pending action on the motion, petitioner filed
an "Urgent Motion for the Issuance of a Temporary Restraining Order", praying that pending
the determination of petitioner's application for the issuance of a preliminary injunction
and/or petitioner's motion for summary judgment, a temporary restraining order be issued,
restraining respondents from holding the special stockholder's meeting as scheduled. This
motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial, respondents
conducted the special stockholders' meeting wherein the amendments to the by-laws were
ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt and for
nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977. Petitioner
alleges that up to the time of the filing of the instant petition, the said motion had not yet
been scheduled for hearing. Likewise, the motion for reconsideration of the order granting in
part and denying in part petitioner's motion for production of record had not yet been
resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation
had been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent Commission,
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submitting a Resolution of the Board of Directors of respondent corporation disqualifying and
precluding petitioner from being a candidate for director unless he could submit evidence on
May 3, 1977 that he does not come within the disqualifications specified in the amendment to
the by-laws, subject matter of SEC Case No. 1375. By reason thereof, petitioner filed a
manifestation and motion to resolve pending incidents in the case and to issue a writ of
injunction, alleging that private respondents were seeking to nullify and render ineffectual the
exercise of jurisdiction by the respondent Commission, to petitioner's irreparable damage and
prejudice, Allegedly despite a subsequent Manifestation to prod respondent Commission to
act, petitioner was not heard prior to the date of the stockholders' meeting.
Petitioner alleges that there appears a deliberate and concerted inability on the part
of the SEC to act hence petitioner came to this Court.
SEC. CASE NO. 1423
Petitioner likewise alleges that, having discovered that respondent corporation has
been investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition seeking to have private
respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent
corporation declared guilty of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a
consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said
motions were filed as early as February 4, 1977, the commission acted thereon only on April
25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days within
which to file their answer, and set the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the
Agenda thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the
stockholders at the meeting on March 20, 1972 to invest corporate funds in
other companies or businesses or for purposes other than the main purpose
for which the Corporation has been organized, and ratification of the
investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private respondents
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from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that the
same be set for hearing on May 3, 1977, the date set for the second hearing of the case on the
merits. Respondent Commission, however, cancelled the dates of hearing originally scheduled
and reset the same to May 16 and 17, 1977, or after the scheduled annual stockholders'
meeting. For the purpose of urging the Commission to act, petitioner filed an urgent
manifestation on May 3, 1977, but this notwithstanding, no action has been taken up to the
date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before
this Court that respondent Commission gravely abused its discretion when it failed to act with
deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent corporation, and that
respondent are acting oppressively against petitioner, in gross derogation of petitioner's
rights to property and due process. He prayed that this Court direct respondent SEC to act on
collateral incidents pending before it.
On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being voted as
director of respondent corporation and from submitting for ratification or confirmation or
from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of
respondent corporation, until further orders from this Court or until the Securities and Ex-
change Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a
restraining order had been issued by this Court, or on May 9, 1977, the respondent
Commission served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration of
the order denying the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to declare respondents in
contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if elected, until
such time that the Commission has decided the validity of the bylaws in dispute, and denying
deferment of Item 6 of the Agenda for the annual stockholders' meeting; and
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(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent
Commission acted with indecent haste and without circumspection in issuing the aforesaid
orders to petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and
in violation of petitioner's right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing petitioner
thereon despite petitioner's request to have the same calendared for hearing , and (3) that
the respondents acted oppressively against the petitioner in violation of his rights as a
stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be
declared null and void and that respondent Commission be ordered to allow petitioner to
undertake discovery proceedings relative to San Miguel International. Inc. and thereafter to
decide SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed
their comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive
and antagonistic to that of respondent San Miguel Corporation, it appearing that the owns
and controls a greater portion of his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in business directly and
substantially competing with the allied businesses of respondent SMC and of corporations in
which SMC has substantial investments. Further, when CFC and Robina had accumulated
investments. Further, when CFC and Robina had accumulated shares in SMC, the Board of
Directors of SMC realized the clear and present danger that competitors or antagonistic
parties may be elected directors and thereby have easy and direct access to SMC's business
and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC
from the clear and present danger that business competitors, if allowed to become directors,
will illegally and unfairly utilize their direct access to its business secrets and plans for their
own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a competitor in the Board of
Directors is a blatant disregard of no less that the Constitution and pertinent laws against
combinations in restraint of trade;
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(3) that by laws are valid and binding since a corporation has the inherent right and
duty to preserve and protect itself by excluding competitors and antogonistic parties, under
the law of self-preservation, and it should be allowed a wide latitude in the selection of means
to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423
was due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized that it
was only on April 29, 1977 that petitioner calendared the aforesaid petition for suspension
(preliminary injunction) for hearing on May 3, 1977. The instant petition being dated May 4,
1977, it is apparent that respondent Commission was not given a chance to act "with
deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot
and academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging
that the petition has become moot and academic for the reason, among others that the acts
of private respondent sought to be enjoined have reference to the annual meeting of the
stockholders of respondent San Miguel Corporation, which was held on may 10, 1977; that in
said meeting, in compliance with the order of respondent Commission, petitioner was
allowed to run and be voted for as director; and that in the same meeting, Item 6 of the
Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the
questions and issues raised by petitioner are pending in the Securities and Exchange
Commission which has acquired jurisdiction over the case, and no hearing on the merits has
been had; hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is not
rendered academic by the act of a majority of stockholders, such that the discussion,
ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting of
May 10, 1977 did not render the case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since it deprives him of his vested
rights.
Respondent Commission, thru the Solicitor General, filed a separate comment,
alleging that after receiving a copy of the restraining order issued by this Court and noting
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that the restraining order did not foreclose action by it, the Commission en banc issued Orders
Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which
denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of respondent
corporation, took into consideration an urgent manifestation filed with the Commission by
petitioner on May 3, 1977 which prayed, among others, that the discussion of Item 6 of the
Agenda be deferred. The reason given for denial of deferment was that "such action is within
the authority of the corporation as well as falling within the sphere of stockholders' right to
know, deliberate upon and/or to express their wishes regarding disposition of corporate
funds considering that their investments are the ones directly affected." It was alleged that
the main petition has, therefore, become moot and academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer
for preliminary injunction, alleging that the actuations of respondent SEC tended to deprive
him of his right to due process, and "that all possible questions on the facts now pending
before the respondent Commission are now before this Honorable Court which has the
authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid and
reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977, and
the ratification of the investment in a foreign corporation of the corporate funds, allegedly in
violation of section 17-1/2 of the Corporation Law.
I precedent where this Court, in similar situations resolved to decide the cases on the merits,
Whether or not amended by-laws are valid is purely a legal question which public interest
requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to respondent
SEC for an appropriate ruling on the intrinsic validity of the amended by-laws in compliance
with the principle of exhaustion of administrative remedies", considering that: first: "whether
or not the provisions of the amended by-laws are intrinsically valid ... is purely a legal question.
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There is no factual dispute as to what the provisions are and evidence is not necessary to
determine whether such amended by-laws are valid as framed and approved ... "; second: "it
is for the interest and guidance of the public that an immediate and final ruling on the
question be made ... "; third: "petitioner was denied due process by SEC" when
"Commissioner de Guzman had openly shown prejudice against petitioner ... ", and
"Commissioner Sulit ... approved the amended by-laws ex-parte and obviously found the same
intrinsically valid; and finally: "to remand the case to SEC would only entail delay rather than
serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation", citing Gayong v.
Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve on
the merits the validity of its amended by laws and the rights and obligations of the parties
thereunder, otherwise "the time spent and effort exerted by the parties concerned and, more
importantly, by this Honorable Court, would have been for naught because the main question
will come back to this Honorable Court for final resolution." Respondent Eduardo R. Visaya
submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the
SEC for hearing and decision of the issues involved, invoking the latter's primary jurisdiction to
hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to
settle the entire controversy in a single proceeding, leaving nor root or branch to bear the
seeds of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide
the case on the merits instead of remanding it to the trial court for further proceedings since
the ends of justice would not be subserved by the remand of the case. In Republic v. Security
Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue is one of law,
resolved to decide the case on the merits "because public interest demands an early
disposition of the case", and in Republic v. Central Surety and Insurance Company, 7 this Court
denied remand of the third-party complaint to the trial court for further proceedings, citing
instead of remanding them to the trial court where (a) the ends of justice would not be
subserved by the remand of the case; or (b) where public interest demand an early disposition
of the case; or (c) where the trial court had already received all the evidence presented by
both parties and the Supreme Court is now in a position, based upon said evidence, to decide
the case on its merits. 8 It is settled that the doctrine of primary jurisdiction has no application
where only a question of law is involved. 8a Because uniformity may be secured through
review by a single Supreme Court, questions of law may appropriately be determined in the
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first instance by courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that
the amended by-laws were adopted by the Board of Directors of the San Miguel Corporation
in the exercise of the power delegated by the stockholders ostensibly pursuant to section 22
of the Corporation Law; that in a special meeting on February 10, 1977 held specially for that
purpose, the amended by-laws were ratified by more than 80% of the stockholders of record;
that the foreign investment in the Hongkong Brewery and Distellery, a beer manufacturing
company in Hongkong, was made by the San Miguel Corporation in 1948; and that in the
stockholders' annual meeting held in 1972 and 1977, all foreign investments and operations of
San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from
nomination or election to the Board of Directors of SMC are valid and reasonable
The validity or reasonableness of a by-law of a corporation in purely a question of
law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law. 10 This rule is subject, however, to the limitation that where the reasonableness of a by-
law is a mere matter of judgment, and one upon which reasonable minds must necessarily
differ, a court would not be warranted in substituting its judgment instead of the judgment of
those who are authorized to make by-laws and who have exercised their authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because
they were tailored to suppress the minority and prevent them from having representation in
the Board", at the same time depriving petitioner of his "vested right" to be voted for and to
vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San
Miguel Corporation content that ex. conclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor, petitioner cannot devote an
unselfish and undivided Loyalty to the corporation; that it is essentially a preventive measure
to assure stockholders of San Miguel Corporation of reasonable protective from the
unrestrained self-interest of those charged with the promotion of the corporate enterprise;
that access to confidential information by a competitor may result either in the promotion of
the interest of the competitor at the expense of the San Miguel Corporation, or the
promotion of both the interests of petitioner and respondent San Miguel Corporation, which
may, therefore, result in a combination or agreement in violation of Article 186 of the Revised
Penal Code by destroying free competition to the detriment of the consuming public. It is
further argued that there is not vested right of any stockholder under Philippine Law to be
voted as director of a corporation. It is alleged that petitioner, as of May 6, 1978, has
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exercised, personally or thru two corporations owned or controlled by him, control over the
following shareholdings in San Miguel Corporation, vis.: (a) John Gokongwei, Jr. 6,325
shares; (b) Universal Robina Corporation 738,647 shares; (c) CFC Corporation 658,313
shares, or a total of 1,403,285 shares. Since the outstanding capital stock of San Miguel
Corporation, as of the present date, is represented by 33,139,749 shares with a par value of
P10.00, the total shares owned or controlled by petitioner represents 4.2344% of the total
outstanding capital stock of San Miguel Corporation. It is also contended that petitioner is the
president and substantial stockholder of Universal Robina Corporation and CFC Corporation,
both of which are allegedly controlled by petitioner and members of his family. It is also
claimed that both the Universal Robina Corporation and the CFC Corporation are engaged in
businesses directly and substantially competing with the alleged businesses of San Miguel
Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN MIGUEL
CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are enumerated
in its Board the areas of competition are enumerated in its Board Resolution dated April 28,
1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC
Table Eggs 0.6% 10.0% 10.6%
Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total product
sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina in layer
pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and woven fabrics
would result in a position of such dominance as to affect the prevailing market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478 million. In
addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary of
SMC, which product line represented sales for SMC amounting to more than P275 million. The
CFC-Robina group (Robitex, excluding Litton Mills recently acquired by petitioner) is
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purportedly also in direct competition with Ramie Textile, Inc., subsidiary of SMC, in product
sales amounting to more than P95 million. The areas of competition between SMC and CFC-
Robina in 1977 represented, therefore, for SMC, product sales of more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18,
1976, 9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more
than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the Board
of Directors because they "realized the grave dangers to the corporation in the event a
competitor gets a board seat in SMC." On September 18, 1978, the Board of Directors of SMC,
by "virtue of powers delegated to it by the stockholders," approved the amendment to ' he
by-laws in question. At the meeting of February 10, 1977, these amendments were confirmed
and ratified by 5,716 shareholders owning 24,283,945 shares, or more than 80% of the total
outstanding shares. Only 12 shareholders, representing 7,005 shares, opposed the
confirmation and ratification. At the Annual Stockholders' Meeting of May 10, 1977, 11,349
shareholders, owning 27,257.014 shares, or more than 90% of the outstanding shares, rejected
petitioner's candidacy, while 946 stockholders, representing 1,648,801 shares voted for him.
On the May 9, 1978 Annual Stockholders' Meeting, 12,480 shareholders, owning more than 30
million shares, or more than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS
EXPRESSLY CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by
the Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the election of a business competitor to
the Board may cause upon the corporation and the other stockholders inseparable prejudice.
Submitted for resolution, therefore, is the issue whether or not respondent San Miguel
Corporation could, as a measure of self- protection, disqualify a competitor from nomination
and election to its Board of Directors.
It is recognized by an authorities that 'every corporation has the inherent power to
adopt by-laws 'for its internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was "that the power to make and adopt
by-laws was inherent in every corporation as one of its necessary and inseparable legal
incidents. And it is settled throughout the United States that in the absence of positive
legislative provisions limiting it, every private corporation has this inherent power as one of its
necessary and inseparable legal incidents, independent of any specific enabling provision in its
charter or in general law, such power of self-government being essential to enable the
corporation to accomplish the purposes of its creation. 13
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In this jurisdiction, under section 21 of the Corporation Law, a corporation may
prescribe in its by-laws "the qualifications, duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in addition to that specified by
section 30 of the Corporation Law, which provides that "every director must own in his right
at least one share of the capital stock of the stock corporation of which he is a director ... "
In Government v. El Hogar, 14 the Court sustained the validity of a provision in the corporate by-
law requiring that persons elected to the Board of Directors must be holders of shares of the
paid up value of P5,000.00, which shall be held as security for their action, on the ground that
section 21 of the Corporation Law expressly gives the power to the corporation to provide in
its by-laws for the qualifications of directors and is "highly prudent and in conformity with
good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its
affairs are dominated by a majority of the stockholders and that he impliedly contracts that the
will of the majority shall govern in all matters within the limits of the act of incorporation and
lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to regulate
the disposition of his property which he has invested in the capital stock of the corporation,
and surrendered it to the will of the majority of his fellow incorporators. ... It cannot therefore
be justly said that the contract, express or implied, between the corporation and the
stockholders is infringed ... by any act of the former which is authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles
of incorporation by a vote or written assent of the stockholders representing at least two-thirds
of the subscribed capital stock of the corporation If the amendment changes, diminishes or
restricts the rights of the existing shareholders then the disenting minority has only one right,
viz.: "to object thereto in writing and demand payment for his share." Under section 22 of the
same law, the owners of the majority of the subscribed capital stock may amend or repeal any
by-law or adopt new by-laws. It cannot be said, therefore, that petitioner has a vested right to
be elected director, in the face of the fact that the law at the time such right as stockholder
was acquired contained the prescription that the corporate charter and the by-law shall be
subject to amendment, alteration and modification. 17
It being settled that the corporation has the power to provide for the qualifications
of its directors, the next question that must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a reasonable exercise of corporate
authority.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS
SHAREHOLDERS
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Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As agents entrusted
with the management of the corporation for the collective benefit of the stockholders, "they
occupy a fiduciary relation, and in this sense the relation is one of trust." 18 "The ordinary trust
relationship of directors of a corporation and stockholders", according to Ashaman v.
Miller, 19 "is not a matter of statutory or technical law. It springs from the fact that directors
have the control and guidance of corporate affairs and property and hence of the property
interests of the stockholders. Equity recognizes that stockholders are the proprietors of the
corporate interests and are ultimately the only beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary
obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He
who is in such fiduciary position cannot serve himself first and his cestuis
second. ... He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. He cannot
by the intervention of a corporate entity violate the ancient precept against
serving two masters ... He cannot utilize his inside information and strategic
position for his own preferment. He cannot violate rules of fair play by doing
indirectly through the corporation what he could not do so directly. He
cannot violate rules of fair play by doing indirectly though the corporation
what he could not do so directly. He cannot use his power for his personal
advantage and to the detriment of the stockholders and creditors no matter
how absolute in terms that power may be and no matter how meticulous he
is to satisfy technical requirements. For that power is at all times subject to
the equitable limitation that it may not be exercised for the aggrandizement,
preference or advantage of the fiduciary to the exclusion or detriment of the
cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co., 21 it was said:
... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is too weak -
for this. Take whatever statute provision you please giving power to
stockholders to choose directors, and in none will you find any express
prohibition against a discretion to select directors having the company's
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interest at heart, and it would simply be going far to deny by mere
implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on account of the supposed interest of
the wife in her husband's affairs, and his suppose influence over her. It is perhaps true that
such stockholders ought not to be condemned as selfish and dangerous to the best interest
of the corporation until tried and tested. So it is also true that we cannot condemn as selfish
and dangerous and unreasonable the action of the board in passing the by-law. The strife over
the matter of control in this corporation as in many others is perhaps carried on not
altogether in the spirit of brotherly love and affection. The only test that we can apply is as to
whether or not the action of the Board is authorized and sanctioned by law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE BUSINESS
IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations
have the power to make by-laws declaring a person employed in the service of a rival
company to be ineligible for the corporation's Board of Directors. ... (A)n amendment which
renders ineligible, or if elected, subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is antagonistic to the other corporation
is valid." 24 This is based upon the principle that where the director is so employed in the
service of a rival company, he cannot serve both, but must betray one or the other. Such an
amendment "advances the benefit of the corporation and is good." An exception exists in
New Jersey, where the Supreme Court held that the Corporation Law in New Jersey
prescribed the only qualification, and therefore the corporation was not empowered to add
additional qualifications. 25 This is the exact opposite of the situation in the Philippines
because as stated heretofore, section 21 of the Corporation Law expressly provides that a
corporation may make by-laws for the qualifications of directors. Thus, it has been held that
an officer of a corporation cannot engage in a business in direct competition with that of the
corporation where he is a director by utilizing information he has received as such officer,
under "the established law that a director or officer of a corporation may not enter into a
competing enterprise which cripples or injures the business of the corporation of which he is
an officer or director. 26
It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests." 27 In a case where directors
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of a corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that equity
would regard the new contract as an offshoot of the old contract and, therefore, for the
benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his misconduct
to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts
that the fiduciary standards could not be upheld where the fiduciary was acting for two
entities with competing interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of an opportunity for his
own personal profit when the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such as: (a) marketing
strategies and pricing structure; (b) budget for expansion and diversification; (c) research and
development; and (d) sources of funding, availability of personnel, proposals of mergers or
tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of
San Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his individual or
corporate interests to the prejudice of San Miguel Corporation and its stockholders, that the
questioned amendment of the by-laws was made. Certainly, where two corporations are
competitive in a substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his loyalty to both corporations
and place the performance of his corporation duties above his personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as
valid and reasonable an amendment to the by-laws of a bank, requiring that its directors
should not be directors, officers, employees, agents, nominees or attorneys of any other
banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained
the reasons of the court, thus:
... A bank director has access to a great deal of information concerning the
business and plans of a bank which would likely be injurious to the bank if
known to another bank, and it was reasonable and prudent to enlarge this
minimum disqualification to include any director, officer, employee, agent,
nominee, or attorney of any other bank in California. The Ashkins case, supra,
specifically recognizes protection against rivals and others who might
acquire information which might be used against the interests of the
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corporation as a legitimate object of by-law protection. With respect to
attorneys or persons associated with a firm which is attorney for another
bank, in addition to the direct conflict or potential conflict of interest, there
is also the danger of inadvertent leakage of confidential information through
casual office discussions or accessibility of files. Defendant's directors
determined that its welfare was best protected if this opportunity for
conflicting loyalties and potential misuse and leakage of confidential
information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a stockholder in
any other firm, company, or association which competes with the subject
corporation.
(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes with
the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or trustee in
any other firm, company, or association which compete with the subject
corporation.
(4) A director shall be of good moral character as an essential qualification to
holding office.
(5) No person who is an attorney against the corporation in a law suit is
eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a
person cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed, would not detract from the
validity and reasonableness of the by-laws here involved. Apart from the impractical results
that would ensue from such arrangement, it would be inconsistent with petitioner's primary
motive in running for board membership which is to protect his investments in San Miguel
Corporation. More important, such a proposed norm of conduct would be against all
accepted principles underlying a director's duty of fidelity to the corporation, for the policy of
the law is to encourage and enforce responsible corporate management. As explained by
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Oleck: 31 "The law win not tolerate the passive attitude of directors ... without active and
conscientious participation in the managerial functions of the company. As directors, it is their
duty to control and supervise the day to day business activities of the company or to
promulgate definite policies and rules of guidance with a vigilant eye toward seeing to it that
these policies are carried out. It is only then that directors may be said to have fulfilled their
duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive
information with a director whose fiduciary duty of loyalty may well require that he disclose
this information to a competitive arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the competing
corporations. It would seem manifest that in such situations, the director has an economic
incentive to appropriate for the benefit of his own corporation the corporate plans and
policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing
strategies and pricing policies of San Miguel Corporation would subject the latter to a
competitive disadvantage and unjustly enrich the competitor, for advance knowledge by the
competitor of the strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the
amended by-laws are reasonable. The Constitution and the law prohibit combinations in
restraint of trade or unfair competition. Thus, section 2 of Article XIV of the Constitution
provides: "The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."
Article 186 of the Revised Penal Code also provides:
Art. 186. Monopolies and combinations in restraint of trade. The penalty of
prision correccional in its minimum period or a fine ranging from two
hundred to six thousand pesos, or both, shall be imposed upon:
1. Any person who shall enter into any contract or agreement or shall take
part in any conspiracy or combination in the form of a trust or otherwise, in
restraint of trade or commerce or to prevent by artificial means free
competition in the market.
2. Any person who shag monopolize any merchandise or object of trade or
commerce, or shall combine with any other person or persons to
monopolize said merchandise or object in order to alter the price thereof by
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spreading false rumors or making use of any other artifice to restrain free
competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise or
object of commerce from any foreign country, either as principal or agent,
wholesale or retailer, shall combine, conspire or agree in any manner with
any person likewise engaged in the manufacture, production, processing,
assembling or importation of such merchandise or object of commerce or
with any other persons not so similarly engaged for the purpose of making
transactions prejudicial to lawful commerce, or of increasing the market
price in any part of the Philippines, or any such merchandise or object of
commerce manufactured, produced, processed, assembled in or imported
into the Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object of
commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and
combinations in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in
restraint of trade are aimed at raising levels of competition by improving the consumers'
effectiveness as the final arbiter in free markets. These laws are designed to preserve free and
unfettered competition as the rule of trade. "It rests on the premise that the unrestrained
interaction of competitive forces will yield the best allocation of our economic resources, the
lowest prices and the highest quality ... ." 34 they operate to forestall concentration of
economic power. 35 The law against monopolies and combinations in restraint of trade is
aimed at contracts and combinations that, by reason of the inherent nature of the
contemplated acts, prejudice the public interest by unduly restraining competition or unduly
obstructing the course of trade. 36
The terms "monopoly", "combination in restraint of trade" and "unfair competition"
appear to have a well defined meaning in other jurisdictions. A "monopoly" embraces any
combination the tendency of which is to prevent competition in the broad and general sense,
or to control prices to the detriment of the public. 37 In short, it is the concentration of
business in the hands of a few. The material consideration in determining its existence is not
that prices are raised and competition actually excluded, but that power exists to raise prices
or exclude competition when desired. 38Further, it must be considered that the Idea of
monopoly is now understood to include a condition produced by the mere act of individuals.
Its dominant thought is the notion of exclusiveness or unity, or the suppression of
28

competition by the qualification of interest or management, or it may be thru agreement and
concert of action. It is, in brief, unified tactics with regard to prices. 39
From the foregoing definitions, it is apparent that the contentions of petitioner are
not in accord with reality. The election of petitioner to the Board of respondent Corporation
can bring about an illegal situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the same
time as a director in any two or more corporations, if such corporations are, by virtue of their
business and location of operation, competitors so that the elimination of competition
between them would constitute violation of any provision of the anti-trust laws. 42 There is
here a statutory recognition of the anti-competitive dangers which may arise when an
individual simultaneously acts as a director of two or more competing corporations. A
common director of two or more competing corporations would have access to confidential
sales, pricing and marketing information and would be in a position to coordinate policies or
to aid one corporation at the expense of another, thereby stifling competition. This situation
has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing
even one director is that the interlock permits the coordination of policies
between nominally independent firms to an extent that competition between
them may be completely eliminated. Indeed, if a director, for example, is to
be faithful to both corporations, some accommodation must result. Suppose
X is a director of both Corporation A and Corporation B. X could hardly vote
for a policy by A that would injure B without violating his duty of loyalty to B
at the same time he could hardly abstain from voting without depriving A of
his best judgment. If the firms really do compete in the sense of vying for
economic advantage at the expense of the other there can hardly be any
reason for an interlock between competitors other than the suppression of
competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on
section 9 of the Clayton Act, it was established that: "By means of the interlocking
directorates one man or group of men have been able to dominate and control a great
number of corporations ... to the detriment of the small ones dependent upon them and to
the injury of the public. 44
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Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to control of
production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be frustrated, The
competitor could so manipulate the prices of his products or vary its marketing strategies by
region or by brand in order to get the most out of the consumers. Where the two competing
firms control a substantial segment of the market this could lead to collusion and combination
in restraint of trade. Reason and experience point to the inevitable conclusion that the
inherent tendency of interlocking directorates between companies that are related to each
other as competitors is to blunt the edge of rivalry between the corporations, to seek out
ways of compromising opposing interests, and thus eliminate competition. As respondent
SMC aptly observes, knowledge by CFC-Robina of SMC's costs in various industries and
regions in the country win enable the former to practice price discrimination. CFC-Robina can
segment the entire consuming population by geographical areas or income groups and
change varying prices in order to maximize profits from every market segment. CFC-Robina
could determine the most profitable volume at which it could produce for every product line
in which it competes with SMC. Access to SMC pricing policy by CFC-Robina would in effect
destroy free competition and deprive the consuming public of opportunity to buy goods of
the highest possible quality at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a violation of
the prohibition contained in section 13(5) of the Corporation Law. Said section provides in
part that "any stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely for investment and not
for the purpose of bringing about or attempting to bring about a combination to exercise
control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the case
of one stockholder but waived in the case of another, then it could be reasonably claimed that
the by-law was being applied in a discriminatory manner. However, the by law, by its terms,
applies to all stockholders. The equal protection clause of the Constitution requires only that
the by-law operate equally upon all persons of a class. Besides, before petitioner can be
declared ineligible to run for director, there must be hearing and evidence must be submitted
to bring his case within the ambit of the disqualification. Sound principles of public policy and
management, therefore, support the view that a by-law which disqualifies a competition from
election to the Board of Directors of another corporation is valid and reasonable.
29

In the absence of any legal prohibition or overriding public policy, wide latitude may
be accorded to the corporation in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and
upon which reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to make by-
laws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board
powers to perpetua themselves in power such fears appear to be misplaced. This power, but
is very nature, is subject to certain well established limitations. One of these is inherent in the
very convert and definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each possessing, in
substantially similar if not Identical degree, certain characteristics essential to the business
sought. It means an independent endeavor of two or more persons to obtain the business
patronage of a third by offering more advantageous terms as an inducement to secure
trade. 46 The test must be whether the business does in fact compete, not whether it is
capable of an indirect and highly unsubstantial duplication of an isolated or non-
characteristics activity. 47 It is, therefore, obvious that not every person or entity engaged in
business of the same kind is a competitor. Such factors as quantum and place of business,
Identity of products and area of competition should be taken into consideration. It is,
therefore, necessary to show that petitioner's business covers a substantial portion of the
same markets for similar products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process, there must be due hearing
at which the petitioner must be given the fullest opportunity to show that he is not covered
by the disqualification. As trustees of the corporation and of the stockholders, it is the
responsibility of directors to act with fairness to the stockholders. 48 Pursuant to this
obligation and to remove any suspicion that this power may be utilized by the incumbent
members of the Board to perpetuate themselves in power, any decision of the Board to
disqualify a candidate for the Board of Directors should be reviewed by the Securities behind
Exchange Commission en banc and its decision shall be final unless reversed by this Court on
certiorari. 49 Indeed, it is a settled principle that where the action of a Board of Directors is an
abuse of discretion, or forbidden by statute, or is against public policy, or is ultra vires, or is a
fraud upon minority stockholders or creditors, or will result in waste, dissipation or
misapplication of the corporation assets, a court of equity has the power to grant appropriate
relief. 50
III
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Whether or not respondent SEC gravely abused its discretion in denying petitioner's request for
an examination of the records of San Miguel International Inc., a fully owned subsidiary of San
Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's
claim that he was denied inspection rights as stockholder of SMC "was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the annual
stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the stockholders' meeting
of March 18,1976; (4) a breakdown of SMC's P186.6 million investment in associated
companies and other companies as of December 31, 1975; (5) a listing of the salaries,
allowances, bonuses and other compensation or remunerations received by the directors and
corporate officers of SMC; (6) a copy of the US $100 million Euro-Dollar Loan Agreement of
SMC; and (7) copies of the minutes of all meetings of the Board of Directors from January
1975 to May 1976, with deletions of sensitive data, which deletions were not objected to by
petitioner.
Further, it was averred that upon request, petitioner was informed in writing on September
18, 1976; (1) that SMC's foreign investments are handled by San Miguel International, Inc.,
incorporated in Bermuda and wholly owned by SMC; this was SMC's first venture abroad,
having started in 1948 with an initial outlay of ?500,000.00, augmented by a loan of Hongkong
$6 million from a foreign bank under the personal guaranty of SMC's former President, the
late Col. Andres Soriano; (2) that as of December 31, 1975, the estimated value of SMI would
amount to almost P400 million (3) that the total cash dividends received by SMC from SMI
since 1953 has amount to US $ 9.4 million; and (4) that from 1972-1975, SMI did not declare
cash or stock dividends, all earnings having been used in line with a program for the setting
up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record
of all business transactions of the corporation and minutes of any meeting shall be open to
the inspection of any director, member or stockholder of the corporation at reasonable
hours."
The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership. 52 This right is
predicated upon the necessity of self-protection. It is generally held by majority of the courts
30

that where the right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as a stockholder and for some purpose
germane thereto or in the interest of the corporation. 53 In other words, the inspection has to
be germane to the petitioner's interest as a stockholder, and has to be proper and lawful in
character and not inimical to the interest of the corporation. 54 In Grey v. Insular Lumber, 55 this
Court held that "the right to examine the books of the corporation must be exercised in good
faith, for specific and honest purpose, and not to gratify curiosity, or for specific and honest
purpose, and not to gratify curiosity, or for speculative or vexatious purposes. The weight of
judicial opinion appears to be, that on application for mandamus to enforce the right, it is
proper for the court to inquire into and consider the stockholder's good faith and his purpose
and motives in seeking inspection. 56 Thus, it was held that "the right given by statute is not
absolute and may be refused when the information is not sought in good faith or is used to
the detriment of the corporation." 57 But the "impropriety of purpose such as will defeat
enforcement must be set up the corporation defensively if the Court is to take cognizance of
it as a qualification. In other words, the specific provisions take from the stockholder the
burden of showing propriety of purpose and place upon the corporation the burden of
showing impropriety of purpose or motive. 58 It appears to be the general rule that
stockholders are entitled to full information as to the management of the corporation and the
manner of expenditure of its funds, and to inspection to obtain such information, especially
where it appears that the company is being mismanaged or that it is being managed for the
personal benefit of officers or directors or certain of the stockholders to the exclusion of
others." 59
While the right of a stockholder to examine the books and records of a corporation
for a lawful purpose is a matter of law, the right of such stockholder to examine the books
and records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do not.
Thus, it has been held that where a corporation owns approximately no property except the
shares of stock of subsidiary corporations which are merely agents or instrumentalities of the
holding company, the legal fiction of distinct corporate entities may be disregarded and the
books, papers and documents of all the corporations may be required to be produced for
examination, 60 and that a writ of mandamus, may be granted, as the records of the subsidiary
were, to all incontents and purposes, the records of the parent even though subsidiary was
not named as a party. 61 mandamus was likewise held proper to inspect both the subsidiary's
and the parent corporation's books upon proof of sufficient control or dominion by the
parent showing the relation of principal or agent or something similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its books and
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records in another jurisdiction, and is not legally subject to the control of the parent company,
although it owned a vast majority of the stock of the subsidiary. 63 Likewise, inspection of the
books of an allied corporation by stockholder of the parent company which owns all the stock
of the subsidiary has been refused on the ground that the stockholder was not within the
class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of
former stockholders to inspect books and records of the corporation included the right to
inspect corporation's subsidiaries' books and records which were in corporation's possession
and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the
records of a controlled subsidiary corporation which used the same offices and had Identical
officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before
respondent SEC, petitioner contended that respondent corporation "had been attempting to
suppress information for the stockholders" and that petitioner, "as stockholder of
respondent corporation, is entitled to copies of some documents which for some reason or
another, respondent corporation is very reluctant in revealing to the petitioner
notwithstanding the fact that no harm would be caused thereby to the corporation." 67 There
is no question that stockholders are entitled to inspect the books and records of a
corporation in order to investigate the conduct of the management, determine the financial
condition of the corporation, and generally take an account of the stewardship of the officers
and directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would be more in
accord with equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly subsidiary which are in respondent corporation's possession and
control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders of
respondent corporation to ratify the investment of corporate funds in a foreign corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have
31

investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for which it
was organized" provided that its Board of Directors has been so authorized by the affirmative
vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power. If the investment is made in pursuance of the corporate purpose, it does not
need the approval of the stockholders. It is only when the purchase of shares is done solely
for investment and not to accomplish the purpose of its incorporation that the vote of
approval of the stockholders holding shares entitling them to exercise at least two-thirds of
the voting power is necessary. 69
As stated by respondent corporation, the purchase of beer manufacturing facilities
by SMC was an investment in the same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased a
beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture and
marketing of San Miguel beer thereat. Restructuring of the investment was made in 1970-1971
thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment made
by Manao Sugar Central Co., Inc., without prior resolution approved by the affirmative vote of
2/3 of the stockholders' voting power, in the Philippine Fiber Processing Co., Inc., a company
engaged in the manufacture of sugar bags. The lower court said that "there is more logic in
the stand that if the investment is made in a corporation whose business is important to the
investing corporation and would aid it in its purpose, to require authority of the stockholders
would be to unduly curtail the power of the Board of Directors." This Court affirmed the ruling
of the court a quo on the matter and, quoting Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private
corporation, in order to accomplish is purpose as stated in its articles of
incorporation, and subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or dispose of shares,
bonds, securities, and other evidence of indebtedness of any domestic or
foreign corporation. Such an act, if done in pursuance of the corporate
purpose, does not need the approval of stockholders; but when the purchase
of shares of another corporation is done solely for investment and not to
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accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or
securities must be subject to the limitations established by the Corporations
law; namely, (a) that no agricultural or mining corporation shall be restricted
to own not more than 15% of the voting stock of nay agricultural or mining
corporation; and (c) that such holdings shall be solely for investment and not
for the purpose of bringing about a monopoly in any line of commerce of
combination in restraint of trade." The Philippine Corporation Law by
Sulpicio S. Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the power
to invest its corporate funds "in any other corporation or business, or for any
purpose other than the main purpose for which it was organized, provide
that 'its board of directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation entitling
them to exercise at least two-thirds of the voting power on such a propose
at a stockholders' meeting called for that purpose,' and provided further,
that no agricultural or mining corporation shall in anywise be interested in
any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in its articles of
incorporation the approval of the stockholders is not necessary."" (Id., p. 108)
(Emphasis ours.) (pp. 258-259).
Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify and
thereby render binding upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither contrary to law, morals,
public order or public policy. It is a corporate transaction or contract which is within the
corporate powers, but which is defective from a supported failure to observe in its execution
the. requirement of the law that the investment must be authorized by the affirmative vote of
the stockholders holding two-thirds of the voting power. This requirement is for the benefit
of the stockholders. The stockholders for whose benefit the requirement was enacted may,
therefore, ratify the investment and its ratification by said stockholders obliterates any defect
which it may have had at the outset. "Mere ultra vires acts", said this Court in Pirovano, 71 "or
those which are not illegal and void ab initio, but are not merely within the scope of the
articles of incorporation, are merely voidable and may become binding and enforceable when
ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for ratification
at the annual meeting of May 10, 1977 cannot be construed as an admission that respondent
32
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corporation had committed an ultra vires act, considering the common practice of
corporations of periodically submitting for the gratification of their stockholders the acts of
their directors, officers and managers.
WHEREFORE, judgment is hereby rendered as follows:
In resume, subject to the qualifications aforestated judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the
validity of the amended by- laws and the ratification of the foreign investment of respondent
corporation, for lack of necessary votes, is hereby DISMISSED. No costs.

The Court voted unanimously to grant the petition insofar as it prays that petitioner
be allowed to examine the books and records of San Miguel International, Inc., as specified by
him.

On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad
Santos and De Castro, voted to sustain the validity per se of the amended by-laws in question
and to dismiss the petition without prejudice to the question of the actual disqualification of
petitioner John Gokongwei, Jr. to run and if elected to sit as director of respondent San
Miguel Corporation being decided, after a new and proper hearing by the Board of Directors
of said corporation, whose decision shall be appealable to the respondent Securities and
Exchange Commission deliberating and acting en banc and ultimately to this Court. Unless
disqualified in the manner herein provided, the prohibition in the afore-mentioned amended
by-laws shall not apply to petitioner.

The afore-mentioned six (6) Justices, together with Justice Fernando, voted to
declare the issue on the validity of the foreign investment of respondent corporation as moot.

Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-
laws, pending hearing by this Court on the applicability of section 13(5) of the Corporation
Law to petitioner.

Justice Fernando reserved his vote on the validity of subject amendment to the by-
laws but otherwise concurs in the result.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and
Guerrero filed a separate opinion, wherein they voted against the validity of the questioned
amended bylaws and that this question should properly be resolved first by the SEC as the
agency of primary jurisdiction. They concur in the result that petitioner may be allowed to run
for and sit as director of respondent SMC in the scheduled May 6, 1979 election and
subsequent elections until disqualified after proper hearing by the respondent's Board of
Directors and petitioner's disqualification shall have been sustained by respondent SEC en
banc and ultimately by final judgment of this Court.

33

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 91478 February 7, 1991
ROSITA PEA petitioner,
vs.
THE COURT OF APPEALS, SPOUSES RISING T. YAP and CATALINA YAP, PAMPANGA BUS CO.,
INC., JESUS DOMINGO, JOAQUIN BRIONES, SALVADOR BERNARDEZ, MARCELINO ENRIQUEZ
and EDGARDO A. ZABAT, respondents.
Corporation Law; By-laws; Quorum; Three (3) out of five (5) members of the board of
directors present in the special meeting of respondent PAMBUSCO do not constitute a quorum
to validly transact business. Section 4 of its amended by-laws requires at least four (4)
members present to constitute a quorum in a special meeting of its board of directors.The
by-laws of a corporation are its own private laws which substantially have the same effect as
the laws of the corporation. They are in effect, written, into the charter. In this sense they
become part of the fundamental law of the corporation with which the corporation and its
directors and officers must comply. Apparently, only three (3) out of five (5) members of the
board of directors of respondent PAMBUSCO convened on November 19, 1974 by virtue of a
prior notice of a special meeting. There was no quorum to validly transact business since,
under Section 4 of the amended by-laws hereinabove reproduced, at least four (4) members
must be present to constitute a quorum in a special meeting of the board of directors of
respondent PAMBUSCO.
Same; Board of Directors; Only persons who own at least one (1) share in their own
right may qualify to be directors of a corporation.As a matter of fact, the three (3) alleged
directors who attended the special meeting on November 19,1974 were not listed as directors
of respondent PAMBUSCO in the latest general information sheet of respondent PAMBUSCO
filed with the SEC dated 18 March 1951. Similarly, the latest list of stockholders of respondent
PAMBUSCO on file with the SEC does not show that the said alleged directors were among
the stockholders of respondent PAMBUSCO. Under Section 30 of the then applicable
Corporation Law, only persons who own at least one (1) share in their own right may qualify
to be directors of a corporation. Further, under Section 28 1/2 ofthe said law, the sale or
disposition of all and/or substantially all properties of the corporation requires, in addition to
a proper board resolution, the affirmative votes of the stockholders holding at least two-
thirds (2/3) of the voting power in the corporation in a meeting duly called for that purpose.
No doubt, the questioned resolution was not confirmed at a subsequent stockholders
meeting duly called for the purpose by the affirmative votes of the stockholders holding at
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least two-thirds (2/3) of the voting power in the corporation. The same requirement is found
in Section 40 of the present Corporation Code.
Same; Deed of Assignment; Civil Law; Donation; Liberality as a consideration in the
deed of assignment of the respondent PAMBUSCO in favor of its former corporate officer for
services rendered is not just an ordinary deed of assignment but a donation.Respondent
court, in upholding the questioned deed of assignment, which appears to be without any
consideration at all, held that the consideration thereof is the liberality of the respondent
PAMBUSCO in favor of its former corporate officer, respondent Enriquez, for services
rendered. Assuming this to be so, then as correctly argued by petitioner, it is not just an
ordinary, deed of assignment, but is in fact a donation. Under Article 725 of the Civil Code, in
order to be valid, such a donation must be made in a public document and the acceptance
must be made in the same or in a separate instrument. In the latter case, the donor shall be
notified of the acceptance in an authentic form and such step must be noted in both
instruments. Non-compliance with this requirement renders the donation null and void. Since
undeniably the deed of assignment dated March 8, 1975 in question, shows that there was no
acceptance of the donation in the same and in a separate document, the said deed of
assignment is thus void ab initio and of no force and effect.
PETITION for certiorari to review the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Cesar L. Villanueva for petitioner.
Martin N. Roque for private respondents.
GANCAYCO, J.:
The validity of the redemption of a foreclosed real property is the center of this
controversy.
The facts as found by the respondent court are not disputed.
A reading of the records shows that [Pampanga Bus Co.] PAMBUSCO,
original owners of the lots in question under TCT Nos. 4314, 4315 and 4316,
mortgaged the same to the Development Bank of the Philippines (DBP) on January 3,
1962 in consideration of the amount of P935,000.00. This mortgage was foreclosed.
In the foreclosure sale under Act No. 3135 held on October 25, 1974, the said
properties were awarded to Rosita Pea as highest bidder. A certificate of sale was
issued in her favor by the Senior Deputy Sheriff of Pampanga, Edgardo A. Zabat,
34

upon payment of the sum of P128,000.00 to the Office of the Provincial Sheriff (Exh.
23). The certificate of sale was registered on October 29, 1974 (Exh. G).
On November 19, 1974, the board of directors of PAMBUSCO, through three
(3) out of its five (5) directors, resolved to assign its right of redemption over the
aforesaid lots and authorized one of its members, Atty. Joaquin Briones "to execute
and sign a Deed of Assignment for and in behalf of PAMBUSCO in favor of any
interested party . . ." (Exh. 24). Consequently, on March 18, 1975, Briones executed a
Deed of Assignment of PAMBUSCO's redemption right over the subject lots in favor
of Marcelino Enriquez (Exh. 25). The latter then redeemed the said properties and a
certificate of redemption dated August 15, 1975 was issued in his favor by Sheriff
Zabat upon payment of the sum of one hundred forty thousand, four hundred
seventy four pesos P140,474.00) to the Office of the Provincial Sheriff of Pampanga
(Exh. 26).
A day after the aforesaid certificate was issued, Enriquez executed a deed of
absolute sale of the subject properties in favor of plaintiffs-appellants, the spouses
Rising T. Yap and Catalina Lugue, for the sum of P140,000.00 (Exh. F).
On August 18, 1975, a levy on attachment in favor of Capitol Allied Trading
was entered as an additional encumbrance on TCT Nos. 4314, 4315 and 4316 and a
Notice of a pending consulta was also annotated on the same titles concerning the
Allied Trading case entitled Dante Gutierrez, et al. vs. PAMBUSCO (Civil Case No. 4310)
in which the registrability of the aforesaid lots in the name of the spouses Yap was
sought to be resolved (Exh. 20-F). The certificate of sale issued by the Sheriff in favor
of defendant Pea, the resolution of the PAMBUSCO's board of directors assigning
its redemption rights to any interested party, the deed of assignment PAMBUSCO
executed in favor of Marcelino B. Enriquez, the certificate of redemption issued by
the Sheriff in favor of Enriquez as well as the deed of absolute sale of the subject lots
executed by Enriquez in favor of the plaintiffs-appellants were all annotated on the
same certificates of title likewise on August 18, 1975. Also, on the same date, the
Office of the Provincial Sheriff of San Fernando, Pampanga informed defendant-
appellee by registered mail "that the properties under TCT Nos. 4314, 4315 and 4316 . .
. . were all redeemed by Mr. Marcelino B. Enriquez on August 15,1975 . . . ;" and that
she may now get her money at the Sheriffs Office (Exh. J and J-1).
On September 8, 1975, Pea wrote the Sheriff notifying him that the redemption was
not valid as it was made under a void deed of assignment. She then requested the
recall of the said redemption and a restraint on any registration or transaction
regarding the lots in question (Exh. 27).
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On Sept. 10, 1975, the CFI Branch III, Pampanga in the aforementioned Civil
Case No. 4310, entitled Dante Gutierrez, et al. vs. PAMBUSCO, et al., ordered the
Register of Deeds of Pampanga . . . to desist from registering or noting in his registry
of property . . . any of the following documents under contract, until further orders:
(a) Deed of Assignment dated March 18, 1975 executed by the defendant
Pampanga Bus Company in virtue of a resolution of its Board of Directors in favor of
defendant Marcelino Enriquez;
(b) A Certificate of Redemption issued by defendant Deputy Sheriff Edgardo
Zabat in favor of defendant Marcelino Enriquez dated August 15, 1975;
(c) Deed of Sale dated August 16, 1975 executed by defendant Marcelino
Enriquez in favor of defendant Rising Yap. (Original Record, p. 244)
On November 17, 1975, the Land Registration Commission opined under LRC
Resolution No. 1029 that "the levy on attachment in favor of Capitol Allied Trading
(represented by Dante Gutierrez) should be carried over on the new title that would
be issued in the name of Rising Yap in the event that he is able to present the
owner's duplicates of the certificates of title herein involved" (Exh. G).
Meanwhile, defendant Pea, through counsel, wrote the Sheriff asking for
the execution of a deed of final sale in her favor on the ground that "the one (1) year
period of redemption has long elapsed without any valid redemption having been
exercised;" hence she "will now refuse to receive the redemption money . . . (Exh.
28).
On Dec. 30, 1977, plaintiff Yap wrote defendant Pea asking payment of back
rentals in the amount of P42,750.00 "for the use and occupancy of the land and
house located at Sta. Lucia, San Fernando, Pampanga," and informing her of an
increase in monthly rental to P2,000; otherwise, to vacate the premises or face an
eviction cum collection suit (Exh. D).
In the meantime, the subject lots, formerly under TCT Nos. 4314, 4315 and
4316 were registered on June 16, 1978 in the name of the spouses Yap under TCT Nos.
148983-R, 148984-R and 148985-R, with an annotation of a levy on attachment in
favor of Capitol Allied Trading. The LRC Resolution No. 1029 allowing the conditioned
registration of the subject lots in the name of the spouses Yap was also annotated on
TCT No. 4315 on June 16, 1978 and the notice of a pending consulta noted thereon on
August 18, 1975 was cancelled on the same date.
35

No Trial on the merits was held concerning Civil Case No. 4310. In an order
dated February 17, 1983, the case was dismissed without prejudice.
Despite the foregoing, defendant-appellee Pea remained in possession of
the lots in question hence, the spouses Yap were prompted to file the instant case. 1
The antecedents of the present petition are as follows:
Plaintiffs-appellants, the spouses Rising T. Yap and Catalina Lugue, are the
registered owners of the lots in question under Transfer Certificate of Title (TCT) Nos.
148983-R, 148984-R, 148985-R. In the complaint filed on December 15, 1978,
appellants sought to recover possession over the subject lands from defendants
Rosita Pea and Washington Distillery on the ground that being registered owners,
they have to enforce their right to possession against defendants who have been
allegedly in unlawful possession thereof since October 1974 "when the previous
owners assigned (their) right to collect rentals . . . in favor of plaintiffs" (Record, p. 5).
The amount claimed as damages is pegged on the total amount of unpaid rentals
from October 1974 (as taken from the allegations in the complaint) up to December
1978 at a monthly rate of P1,500.00 'and the further sum of P2,000.00 a month from
January 1979 until the defendants finally vacate the . . . premises in question with
interest at the legal rate (Record, p. 61).
In their answer, defendants Rosita Pea and Washington Distillery denied
the material allegations of the complaint and by way of an affirmative and special
defense asserted that Pea is now the legitimate owner of the subject lands for
having purchased the same in a foreclosure proceeding instituted by the DBP . . .
against PAMBUSCO . . . and no valid redemption having been effected within the
period provided by law. It was contended that plaintiffs could not have acquired
ownership over the subject properties under a deed of absolute sale executed in
their favor by one Marcelino B. Enriquez who likewise could not have become [the]
owner of the properties in question by redeeming the same on August 18, 1975 (Exh.
26) under an alleged[ly] void deed of assignment executed in his favor on March 18,
1975 by the original owners of the land in question, the PAMBUSCO. The defense was
that since the deed of assignment executed by PAMBUSCO in favor of Enriquez was
void ab initio for being an ultra vires act of its board of directors and, for being
without any valuable consideration, it could not have had any legal effect; hence, all
the acts which flowed from it and all the rights and obligations which derived from
the aforesaid void deed are likewise void and without any legal effect.
Further, it was alleged in the same Answer that plaintiffs are buyers in bad
faith because they have caused the titles of the subject properties with the Register
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Corporation Law
of Deeds to be issued in their names despite an order from the then CFI, Br. III,
Pampanga in Civil Case No. 4310, entitled Dante Gutierrez, et al. vs. Pampanga Bus
Company, Inc., et al., to desist from registering or noting in his registry of property . . .
any of the above-mentioned documents under contest, until further orders. (Record,
p. 11).
For its part, defendant Washington Distillery stated that it has never
occupied the subject lots hence they should not have been impleaded in the
complaint.
The defendants, therefore, prayed that the complaint be dismissed; that the
deed of assignment executed in favor of Marcelino Enriquez, the certificate of
redemption issued by the Provincial Sheriff also in favor of Marcelino Enriquez, and
the deed of sale of these parcels of land executed by Marcelino Enriquez in favor of
the plaintiffs herein be all declared null and void; and further, that TCT Nos. 148983-R,
148984-R and 148985-R, covering these parcels issued in the plaintiffs name be
cancelled and, in lieu thereof, corresponding certificates of title over these same
parcels be issued in the name of defendant Rosita Pea.
Thereafter, the defendants with prior leave of court filed a third-party
complaint third-party defendants PAMBUSCO, Jesus Domingo, Joaquin Briones,
Salvador Bernardez (as members of the Board of Directors of PAMBUSCO),
Marcelino Enriquez, and Deputy Sheriff Edgardo Zabat of Pampanga. All these third-
party defendants, how ever, were declared as in default for failure to file their
answer, except Edgardo Zabat who did file his answer but failed to appear at the pre-
trial.
After trial, a decision was rendered by the court in favor of the defendants-
appellees, to wit:
WHEREFORE, and in view of all the foregoing, judgment is hereby
rendered dismissing the complaint filed by the plaintiffs against the
defendants and declaring as null and void the following:
(a) The resolution of the Board of Directors of PAMBUSCO approved on
November 19, 1974 assigning the PAMBUSCO's right of redemption
concerning the parcels involved herein
(b) The deed of assignment dated March 18, 1975 executed in favor of
Marcelino Enriquez pursuant to the resolution referred to in the preceding
paragraph;
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(c) The certificate of redemption dated August 15, 1975 issued by Deputy
Sheriff Edgardo Zabat in favor of Marcelino Enriquez concerning these
parcels;
(d) The deed of absolute sale dated August 15, 1975 executed by Marcelino
Enriquez in favor of the plaintiffs concerning the same parcels and
(e) TCT Nos. 148983-R, 148984-R and 148985-R of the Register of Deeds of
Pampanga in the name of the plaintiffs also covering these parcels.
Third-party defendant Edgardo Zabat, in his capacity as Deputy
Sheriff of Pampanga is directed to execute in favor of defendant Rosita Pea
the corresponding certificate of final sale involving the parcels bought by her
in the auction sale of October 25, 1974 for which a certificate of sale had
been issued to her.
Finally, the third-party defendants herein except Deputy Sheriff
Edgardo Zabat are hereby ordered to pay the defendants/third party
plaintiffs, jointly and severally, the amount of P10,000.00 as attorney's fees
plus costs.2
Thus, an appeal from said judgment of the trial court was interposed by private
respondents to the Court of Appeals wherein in due course a decision was rendered on June
20, 1989, the dispositive part of which reads as follows:
WHEREFORE, premises considered, the judgment of the trial court on appeal
is REVERSED. Defendant-appellee Pea is hereby ordered to vacate the lands in
question and pay the plaintiffs-appellants the accrued rentals from October, 1974 in
the amount of P1,500.00 per month up to December, 1978 and the amount of
P2,000.00 per month thereafter, until appellee finally vacate (sic) the premises with
interest at the legal rate.
SO ORDERED.3
A motion for reconsideration filed by the appellee was denied in a resolution dated
December 27, 1989.
Hence, this petition for review on certiorari of said decision and resolution of the
appellate court predicated on the following assigned errors:
First Assignment of Error
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THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE TRIAL
COURT HAD NO JURISDICTION TO RULE ON THE VALIDITY OF THE QUESTIONED
RESOLUTION AND TRANSFERS.
Second Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAS NO LEGAL STANDING TO ASSAIL THE VALIDITY OF THE
QUESTIONED RESOLUTION AND THE SERIES OF SUCCEEDING TRANSACTIONS
LEADING TO THE REGISTRATION OF THE SUBJECT PROPERTIES IN FAVOR OF THE
RESPONDENTS YAP.
Third Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE
RESOLUTION OF RESPONDENT PAMBUSCO, ADOPTED ON 19 NOVEMBER 1974,
ASSIGNING ITS RIGHT OF REDEMPTION IS NOT VOID OR AT THE VERY LEAST
LEGALLY DEFECTIVE.
Fourth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT THE DEED
OF ASSIGNMENT, DATED 8 MARCH 1975, IN FAVOR OF RESPONDENT ENRIQUEZ IS
NOT VOID OR AT THE VERY LEAST VOIDABLE OR RESCISSIBLE.
Fifth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
QUESTIONED DEED OF ASSIGNMENT, DATED 8 MARCH 1975, WAS VOID AB
INITIO FOR FAILING TO COMPLY WITH THE FORMALITIES MANDATORILY REQUIRED
UNDER THE LAW FOR DONATIONS.
Sixth Assignment of Error
THE RESPONDENT COURT OF APPEALS ERRED IN HOLDING THAT
RESPONDENTS YAP ARE PURCHASERS IN GOOD FAITH AND IN FURTHER HOLDING
THAT IT WAS TOO LATE FOR PETITIONER TO INTERPOSE THE ISSUE THAT
RESPONDENTS YAP WERE PURCHASERS IN BAD FAITH.
Seventh Assignment of Error
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THE RESPONDENT COURT OF APPEALS ERRED IN REVERSING THE DECISION
OF THE TRIAL COURT. 4
The petition is impressed with merit.
First, the preliminary issues.
The respondent court ruled that the trial court has no jurisdiction to annul the board
resolution as the matter falls within the jurisdiction of the Securities and Exchange
Commission (SEC) and that petitioner did not have the proper standing to have the same
declared null and void.
In Philex Mining Corporation vs. Reyes, 5 this Court held that it is the fact of
relationship between the parties that determines the proper and exclusive jurisdiction of the
SEC to hear and decide intra-corporate disputes; that unless the controversy has arisen
between and among stockholders of the corporation, or between the stockholders and the
officers of the corporation, then the case is not within the jurisdiction of the SEC. Where the
issue involves a party who is neither a stockholder or officer of the corporation, the same is
not within the jurisdiction of the SEC.
In Union Glass & Container Corporation vs. Securities and Exchange Commission, 6 this
Court defined the relationships which are covered within "intra-corporate disputes" under
Presidential Decree No. 902-A, as amended, as follows:
Otherwise stated, in order that the SEC can take cognizance of a case, the
controversy must pertain to any of the following relationships (a) between the
corporation, partnership or association and the public; (b) between the corporation,
partnership or association and its stockholders, partners, members, or officers; (c)
between the corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned; and (d) among the stockholders,
partners or associates themselves.
In this case, neither petitioner nor respondents Yap spouses are stockholders or
officers of PAMBUSCO. Consequently, the issue of the validity of the series of transactions
resulting in the subject properties being registered in the names of respondents Yap may be
resolved only by the regular courts.
Respondent court held that petitioner being a stranger to the questioned resolution
and series of succeeding transactions has no legal standing to question their validity.
In Teves vs. People's Homesite and Housing Corporation, 7 this Court held:
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Corporation Law
We note however, in reading the complaint that the plaintiff is seeking the
declaration of the nullity of the deed of sale, not as a party in the deed, or because
she is obliged principally or subsidiarily under the deed, but because she has an
interest that is affected by the deed. This Court has held that a person who is not a
party obliged principally or subsidiarily in a contract may exercise an action for nullity of
the contract if he is prejudiced in his rights with respect to one of the contracting
parties, and can show the detriment which would positively result to him from the
contract in which he had no intervention, Indeed, in the case now before Us, the
complaint alleges facts which show that plaintiff suffered detriment as a result of the
deed of sale entered into by and between defendant PHHC and defendant Melisenda
L. Santos. We believe that the plaintiff should be given a chance to present evidence
to establish that she suffered detriment and that she is entitled to relief. (Emphasis
supplied.)
There can be no question in this case that the questioned resolution and series of
transactions resulting in the registration of the properties in the name of respondent Yap
spouses adversely affected the rights of petitioner to the said properties. Consequently,
petitioner has the legal standing to question the validity of said resolution and transactions.
As to the question of validity of the board resolution of respondent PAMBUSCO
adopted on November 19, 1974, Section 4, Article III of the amended by-laws of respondent
PAMBUSCO, provides as follows:
Sec. 4. Notices of regular and special meetings of the Board of Directors shall
be mailed to each Director not less than five days before any such meeting, and
notices of special meeting shall state the purpose or purposes thereof Notices of
regular meetings shall be sent by the Secretary and notices of special meetings by
the President or Directors issuing the call. No failure or irregularity of notice of
meeting shall invalidate any regular meeting or proceeding thereat; Provided a
quorum of the Board is present, nor of any special meeting; Provided at least four
Directors are present. (Emphasis supplied.) 8
The trial court in finding the resolution void held as follows:
On the other hand, this Court finds merit in the position taken by the
defendants that the questioned resolution should be declared invalid it having been
approved in a meeting attended by only 3 of the 5 members of the Board of Directors
of PAMBUSCO which attendance is short of the number required by the by-laws of
the corporation.
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xxx xxx xxx
In the meeting of November 19, 1974 when the questioned resolution was
approved, the three members of the Board of Directors of PAMBUSCO who were
present were Jesus Domingo, Joaquin Briones, and Salvador Bernardez The
remaining 2 others, namely: Judge Pio Marcos and Alfredo Mamuyac were both
absent therefrom.
As it becomes clear that the resolution approved on November 19, 1974 is
null and void it having been approved by only 3 of the members of the Board of
Directors who were the only ones present at the said meeting, the deed of
assignment subsequently executed in favor of Marcelino Enriquez pursuant to this
resolution also becomes null and void. . . . 9
However, the respondent court overturning said legal conclusions of the trial court made the
following disquisition:
It should be noted that the provision in Section 4, Article III of PAMBUSCO's
amended by-laws would apply only in case of a failure to notify the members of the
board of directors on the holding of a special meeting, . . . .
In the instant case, however, there was no proof whatsoever, either by way
of documentary or testimonial evidence, that there was such a failure or irregularity
of notice as to make the aforecited provision apply. There was not even such an
allegation in the Answer that should have necessitated a proof thereof. The fact
alone that only three (3) out of five (5) members of the board of directors attended
the subject special meeting, was not enough to declare the aforesaid proceeding
void ab initio, much less the board resolution borne out of it, when there was no
proof of irregularity nor failure of notice and when the defense made in the Answer
did not touch upon the said failure of attendance. Therefore, the judgment declaring
the nullity of the subject board resolution must be set aside for lack of proof.
Moreover, there is no categorical declaration in the by-laws that a failure to
comply with the attendance requirement in a special meeting should make all the
acts of the board therein null and void ab initio. A cursory reading of the subject
provision, as aforequoted, would show that its framers only intended to make
voidable a board meeting held without the necessary compliance with the
attendance requirement in the by-laws. Just the use of the word "invalidate" already
denotes a legal imputation of validity to the questioned board meeting absent its
invalidation in the proceedings prescribed by the corporation's by-laws and/or the
general incorporation law. More significantly, it should be noted that even if the
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subject special meeting is itself declared void, it does not follow that the acts of the
board therein are ipso facto void and without any legal effect. Without the
declaration of nullity of the subject board proceedings, its validity should be
maintained and the acts borne out of it should be presumed valid. Considering that
the subject special board meeting has not been declared void in a proper proceeding,
nor even in the trial by the court below, there is no reason why the acts of the board
in the said special meeting should be treated as void AB. initio. . . . 10
The Court disagrees.
The by-laws of a corporation are its own private laws which substantially have the
same effect as the laws of the corporation. They are in effect, written, into the charter. In this
sense they become part of the fundamental law of the corporation with which the
corporation and its directors and officers must comply. 11
Apparently, only three (3) out of five (5) members of the board of directors of
respondent PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of a
special meeting. There was no quorum to validly transact business since, under Section 4 of
the amended by-laws hereinabove reproduced, at least four (4) members must be present to
constitute a quorum in a special meeting of the board of directors of respondent PAMBUSCO.
Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the majority of the
number of board members to constitute the quorum necessary for the valid transaction of
business. Any number less than the number provided in the articles or by-laws therein cannot
constitute a quorum and any act therein would not bind the corporation; all that the
attending directors could do is to adjourn. 12
Moreover, the records show that respondent PAMBUSCO ceased to operate as of
November 15, 1949 as evidenced by a letter of the SEC to said corporation dated April 17,
1980. 13 Being a dormant corporation for several years, it was highly irregular, if not
anomalous, for a group of three (3) individuals representing themselves to be the directors of
respondent PAMBUSCO to pass a resolution disposing of the only remaining asset of the
corporation in favor of a former corporate officer.
As a matter of fact, the three (3) alleged directors who attended the special meeting
on November 19, 1974 were not listed as directors of respondent PAMBUSCO in the latest
general information sheet of respondent PAMBUSCO filed with the SEC dated 18 March
1951. 14 Similarly, the latest list of stockholders of respondent PAMBUSCO on file with the SEC
39
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does not show that the said alleged directors were among the stockholders of respondent SO ORDERED.
PAMBUSCO. 15
Narvasa, Cruz, Grio-Aquino and Medialdea, JJ., concur.
Under Section 30 of the then applicable Corporation Law, only persons who own at
least one (1) share in their own right may qualify to be directors of a corporation. Further,
under Section 28 1/2 of the said law, the sale or disposition of an and/or substantially all
properties of the corporation requires, in addition to a proper board resolution, the
affirmative votes of the stockholders holding at least two-thirds (2/3) of the voting power in
the corporation in a meeting duly called for that purpose. No doubt, the questioned
resolution was not confirmed at a subsequent stockholders meeting duly called for the
purpose by the affirmative votes of the stockholders holding at least two-thirds (2/3) of the
voting power in the corporation. The same requirement is found in Section 40 of the present
Corporation Code.

It is also undisputed that at the time of the passage of the questioned resolution,
respondent PAMBUSCO was insolvent and its only remaining asset was its right of
redemption over the subject properties. Since the disposition of said redemption right of
respondent PAMBUSCO by virtue of the questioned resolution was not approved by the
required number of stockholders under the law, the said resolution, as well as the subsequent
assignment executed on March 8, 1975 assigning to respondent Enriquez the said right of
redemption, should be struck down as null and void.
Respondent court, in upholding the questioned deed of assignment, which appears to be
without any consideration at all, held that the consideration thereof is the liberality of the
respondent PAMBUSCO in favor of its former corporate officer, respondent Enriquez, for
services rendered. Assuming this to be so, then as correctly argued by petitioner, it is not just
an ordinary deed of assignment, but is in fact a donation. Under Article 725 of the Civil Code,
in order to be valid, such a donation must be made in a public document and the acceptance
must be made in the same or in a separate instrument. In the latter case, the donor shall be
notified of the acceptance in an authentic form and such step must be noted in both
instruments. 16

Non-compliance with this requirement renders the donation null and

void. Since undeniably the deed of assignment dated March 8, 1975 in question, 18 shows
17

that there was no acceptance of the donation in the same and in a separate document, the
said deed of assignment is thus void ab initio and of no force and effect.

WHEREFORE, the petition is GRANTED. The questioned decision of the respondent

Court of Appeals dated June 20, 1989 and its resolution dated December 27, 1989 are hereby
REVERSED AND SET ASIDE and another judgment is hereby rendered AFFIRMING in toto the
decision of the trial court.

40

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 108905 October 23, 1997
GRACE CHRISTIAN HIGH SCHOOL, petitioner,
vs.
THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and
ERNESTO L. GO, respondents.
Corporation Law; Board of Directors; The board of directors of corporations must be
elected from among the stockholders or mem-bers.These provisions of the former and
present corporation law leave no room for doubt as to their meaning: the board of directors
of corporations must be elected from among the stockholders or members. There may be
corporations in which there are unelected members in the board but it is clear that in the
examples cited by petitioner the unelected members sit as ex officio members, i.e., by virtue
of and for as long as they hold a particular office. But in the case of petitioner, there is no
reason at all for its representative to be given a seat in the board. Nor does petitioner claim a
right to such seat by virtue of an office held. In fact it was not given such seat in the
beginning. It was only in 1975 that a proposed amendment to the by-laws sought to give it
one.
Same; Same; By-Laws; No provision of the by-laws can be adopted if it is contrary to
law.Since the provision in question is contrary to law, the fact that for fifteen years it has
not been questioned or challenged but, on the contrary, appears to have been implemented
by the members of the association cannot forestall a later challenge to its validity. Neither can
it attain validity through acquiescence because, if it is contrary to law, it is beyond the power
of the members of the association to waive its invalidity. For that matter the members of the
association may have formally adopted the provision in question, but their action would be of
no avail because no provision of the by-laws can be adopted if it is contrary to law.
Same; Same; Same; Tolerance cannot be considered a ratification.It is probable
that, in allowing petitioners representative to sit on the board, the members of the
association were not aware that this was contrary to law. It should be noted that they did not
actually implement the provision in question except perhaps insofar as it increased the
number of directors from 11 to 15, but certainly not the allowance of petitioners
representative as an unelected member of the board of directors. It is more accurate to say
that the members merely tolerated petitioners representative and tolerance cannot be
considered ratification.
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Same; Same; Same; Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law.Nor can petitioner claim a vested right to sit in the board
on the basis of practice. Practice, no matter how long continued, cannot give rise to any
vested right if it is contrary to law. Even less tenable is petitioners claim that its right is
coterminus with the existence of the association.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
MENDOZA, J.:
The question for decision in this case is the right of petitioner's representative to sit
in the board of directors of respondent Grace Village Association, Inc. as a permanent
member thereof. For fifteen years from 1975 until 1989 petitioner's representative had
been recognized as a "permanent director" of the association. But on February 13, 1990,
petitioner received notice from the association's committee on election that the latter was
"reexamining" (actually, reconsidering) the right of petitioner's representative to continue as
an unelected member of the board. As the board denied petitioner's request to be allowed
representation without election, petitioner brought an action for mandamus in the Home
Insurance and Guaranty Corporation. Its action was dismissed by the hearing officer whose
decision was subsequently affirmed by the appeals board. Petitioner appealed to the Court of
Appeals, which in turn upheld the decision of the HIGC's appeals board. Hence this petition
for review based on the following contentions:
1. The Petitioner herein has already acquired a vested right to a permanent
seat in the Board of Directors of Grace Village Association;
2. The amended By-laws of the Association drafted and promulgated by a
Committee on December 20, 1975 is valid and binding; and
3. The Practice of tolerating the automatic inclusion of petitioner as a
permanent member of the Board of Directors of the Association without the
benefit of election is allowed under the law. 1
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution offering
preparatory, kindergarten and secondary courses at the Grace Village in Quezon City. Private
respondent Grace Village Association, Inc., on the other hand, is an organization of lot and/or
building owners, lessees and residents at Grace Village, while private respondents Alejandro
41

G. Beltran and Ernesto L. Go were its president and chairman of the committee on election,
respectively, in 1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in Article IV, as follows:
The annual meeting of the members of the Association shall be held on the
first Sunday of January in each calendar year at the principal office of the
Association at 2:00 P.M. where they shall elect by plurality vote and by secret
balloting, the Board of Directors, composed of eleven (11) members to serve
for one (1) year until their successors are duly elected and have qualified. 2
It appears, that on December 20, 1975, a committee of the board of directors
prepared a draft of an amendment to the by-laws, reading as follows: 3
VI. ANNUAL MEETING
The Annual Meeting of the members of the Association shall be held on
the second Thursday of January of each year. Each Charter or
Associate Member of the Association is entitled to vote. He shall be entitled
to as many votes as he has acquired thru his monthly membership fees
only computed on a ratio of TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest number
of votes shall be declared and proclaimed elected until their successors are
elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
This draft was never presented to the general membership for approval.
Nevertheless, from 1975, after it was presumably submitted to the board, up to 1990,
petitioner was given a permanent seat in the board of directors of the association. On
February 13, 1990, the association's committee on election in a letter informed James Tan,
principal of the school, that "it was the sentiment that all directors should be elected by
members of the association" because "to make a person or entity a permanent Director
would deprive the right of voters to vote for fifteen (15) members of the Board," and "it is
undemocratic for a person or entity to hold office in perpetuity." 4For this reason, Tan was
told that "the proposal to make the Grace Christian High School representative as a
permanent director of the association, although previously tolerated in the past elections
should be reexamined." Following this advice, notices were sent to the members of the
association that the provision on election of directors of the 1968 by-laws of the association
would be observed.
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Petitioner requested the chairman of the election committee to change the notice of
election by following the procedure in previous elections, claiming that the notice issued for
the 1990 elections ran "counter to the practice in previous years" and was "in violation of the
by-laws (of 1975)" and "unlawfully deprive[d] Grace Christian High School of its vested right
[to] a permanent seat in the board." 5
As the association denied its request, the school brought suit for mandamus in the
Home Insurance and Guaranty Corporation to compel the board of directors of the
association to recognize its right to a permanent seat in the board. Petitioner based its claim
on the following portion of the proposed amendment which, it contended, had become part
of the by-laws of the association as Article VI, paragraph 2, thereof:
The Charter and Associate Members shall elect the Directors of the
Association. The candidates receiving the first fourteen (14) highest number
of votes shall be declared and proclaimed elected until their successors are
elected and qualified. GRACE CHRISTIAN HIGH SCHOOL representative is a
permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and Exchange Commission on the validity
of this provision was sought by the association and that in reply to the query, the SEC
rendered an opinion to the effect that the practice of allowing unelected members in the
board was contrary to the existing by-laws of the association and to 92 of the Corporation
Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its answer. Additionally, the
association contended that the basis of the petition for mandamus was merely "a proposed
by-laws which has not yet been approved by competent authority nor registered with the SEC
or HIGC." It argued that "the by-laws which was registered with the SEC on January 16, 1969
should be the prevailing by-laws of the association and not the proposed amended by-laws." 6
In reply, petitioner maintained that the "amended by-laws is valid and binding" and
that the association was estopped from questioning the by-laws. 7
A preliminary conference was held on March 29, 1990 but nothing substantial was
agreed upon. The parties merely agreed that the board of directors of the association should
meet on April 17, 1990 and April 24, 1990 for the purpose of discussing the amendment of the
by-laws and a possible amicable settlement of the case. A meeting was held on April 17, 1990,
but the parties failed to reach an agreement. Instead, the board adopted a resolution
declaring the 1975 provision null and void for lack of approval by members of the association
and the 1968 by-laws to be effective.
42

On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing
petitioner's action. The hearing officer held that the amended by-laws, upon which petitioner
based its claim, "[was] merely a proposed by-laws which, although implemented in the past,
had not yet been ratified by the members of the association nor approved by competent
authority"; that, on the contrary, in the meeting held on April 17, 1990, the directors of the
association declared "the proposed by-law dated December 20, 1975 prepared by the
committee on by-laws . . . null and void" and the by-laws of December 17, 1968 as the
"prevailing by-laws under which the association is to operate until such time that the
proposed amendments to the by-laws are approved and ratified by a majority of the members
of the association and duly filed and approved by the pertinent government agency." The
hearing officer rejected petitioner's contention that it had acquired a vested right to a
permanent seat in the board of directors. He held that past practice in election of directors
could not give rise to a vested right and that departure from such practice was justified
because it deprived members of association of their right to elect or to be voted in office, not
to say that "allowing the automatic inclusion of a member representative of petitioner as
permanent director [was] contrary to law and the registered by-laws of respondent
association." 8
The appeals board of the HIGC affirmed the decision of the hearing officer in its
resolution dated September 13, 1990. It cited the opinion of the SEC based on 92 of the
Corporation Code which reads:
92. Election and term of trustees. Unless otherwise provided in the
articles of incorporation or the by-laws, the board of trustees of non-stock
corporations, which may be more than fifteen (15) in number as may be fixed
in their articles of incorporation or by-laws, shall, as soon as organized, so
classify themselves that the term of office of one-third (1/3) of the number
shall expire every year; and subsequent elections of trustees comprising one-
third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to fill
vacancies occurring before the expiration of a particular term shall hold
office only for the unexpired period.
The HIGC appeals board denied claims that the school "[was] being deprived
of its right to be a member of the Board of Directors of respondent association,"
because the fact was that "it may nominate as many representatives to the
Association's Board as it may deem appropriate." It said that "what is merely being
upheld is the act of the incumbent directors of the Board of correcting a long
standing practice which is not anchored upon any legal basis." 9
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Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate
court on February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held that
there was no valid amendment of the association's by-laws because of failure to comply with
the requirement of its existing by-laws, prescribing the affirmative vote of the majority of the
members of the association at a regular or special meeting called for the adoption of
amendment to the by-laws. Article XIX of the by-laws provides: 10
The members of the Association by an affirmative vote of the
majority at any regular or special meeting called for the purpose, may alter,
amend, change or adopt any new by-laws.
This provision of the by-laws actually implements 22 of the Corporation Law (Act No.
1459) which provides:
22. The owners of a majority of the subscribed capital stock, or a
majority of the members if there be no capital stock, may, at a regular or
special meeting duly called for the purpose, amend or repeal any by-law or
adopt new by-laws. The owners of two-thirds of the subscribed capital stock,
or two-thirds of the members if there be no capital stock, may delegate to
the board of directors the power to amend or repeal any by-law or to adopt
new by-laws: Provided, however, That any power delegated to the board of
directors to amend or repeal any by-law or adopt new by-laws shall be
considered as revoked whenever a majority of the stockholders or of the
members of the corporation shall so vote at a regular or special
meeting. And provided, further, That the Director of the Bureau of
Commerce and Industry shall not hereafter file an amendment to the by-laws
of any bank, banking institution or building and loan association, unless
accompanied by certificate of the Bank Commissioner to the effect that such
amendments are in accordance with law.
The proposed amendment to the by-laws was never approved by the majority of the
members of the association as required by these provisions of the law and by-laws. But
petitioner contends that the members of the committee which prepared the proposed
amendment were duly authorized to do so and that because the members of the association
thereafter implemented the provision for fifteen years, the proposed amendment for all
intents and purposes should be considered to have been ratified by them. Petitioner
contends: 11
Considering, therefore, that the "agents" or committee were duly
authorized to draft the amended by-laws and the acts done by the "agents"
were in accordance with such authority, the acts of the "agents" from the
43

very beginning were lawful and binding on the homeowners (the
principals) per se without need of any ratification or adoption. The more has
the amended by-laws become binding on the homeowners when the
homeowners followed and implemented the provisions of the amended by-
laws. This is not merely tantamount to tacit ratification of the acts done by
duly authorized "agents" but express approval and confirmation of what the
"agents" did pursuant to the authority granted to them.
Corollarily, petitioner claims that it has acquired a vested right to a permanent seat in
the board. Says petitioner:
The right of the petitioner to an automatic membership in the board
of the Association was granted by the members of the Association
themselves and this grant has been implemented by members of the board
themselves all through the years. Outside the present membership of the
board, not a single member of the Association has registered any desire to
remove the right of herein petitioner to an automatic membership in the
board. If there is anybody who has the right to take away such right of the
petitioner, it would be the individual members of the Association through a
referendum and not the present board some of the members of which are
motivated by personal interest.
Petitioner disputes the ruling that the provision in question, giving
petitioner's representative a permanent seat in the board of the association, is
contrary to law. Petitioner claims that that is not so because there is really no
provision of law prohibiting unelected members of boards of directors of
corporations. Referring to 92 of the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code only
provides for the manner of election of the members of the board of trustees
of non-stock corporations which may be more than fifteen in number and
which manner of election is even subject to what is provided in the articles
of incorporation or by-laws of the association thus showing that the above
provisions [are] not even mandatory.
Even a careful perusal of the above provision of the Corporation
Code would not show that it prohibits a non-stock corporation or association
from granting one of its members a permanent seat in its board of directors
or trustees. If there is no such legal prohibition then it is allowable provided
it is so provided in the Articles of Incorporation or in the by-laws as in the
instant case.
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xxx xxx xxx
If fact, the truth is that this is allowed and is being practiced by
some corporations duly organized and existing under the laws of the
Philippines.
One example is the Plus XII Catholic Center, Inc. Under the by-laws
of this corporation, that whoever is the Archbishop of Manila is considered a
member of the board of trustees without benefit of election. And not only
that. He also automatically sits as the Chairman of the Board of Trustees,
again without need of any election.
Another concrete example is the Cardinal Santos Memorial Hospital,
Inc. It is also provided in the by-laws of this corporation that whoever is the
Archbishop of Manila is considered a member of the board of trustees year
after year without benefit of any election and he also sits automatically as
the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29
of the former one which require members of the boards of directors of corporations to be
elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all
corporations formed under this Act shall be exercised, all business conducted
and all property of such corporations controlled and held by a board of not less
than five nor more than eleven directors to be elected from among the holders
of stock or, where there is no stock, from the members of the
corporation: Provided, however, That in corporations, other than banks, in
which the United States has or may have a vested interest, pursuant to the
powers granted or delegated by the Trading with the Enemy Act, as
amended, and similar Acts of Congress of the United States relating to the
same subject, or by Executive Order No. 9095 of the President of the United
States, as heretofore or hereafter amended, or both, the directors need not
be elected from among the holders of the stock, or, where there is no stock
from the members of the corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or at such
subsequent meeting as may be then determined, directors shall be elected
to hold their offices for one year and until their successors are elected and
qualified. Thereafter the directors of the corporation shall be elected annually
44

by the stockholders if it be a stock corporation or by the members if it be a
nonstock corporation, and if no provision is made in the by-laws for the time of
election the same shall be held on the first Tuesday after the first Monday in
January. Unless otherwise provided in the by-laws, two weeks' notice of the
election of directors must be given by publication in some newspaper of
general circulation devoted to the publication of general news at the place
where the principal office of the corporation is established or located, and
by written notice deposited in the post-office, postage pre-paid, addressed
to each stockholder, or, if there be no stockholders, then to each member,
at his last known place of residence. If there be no newspaper published at
the place where the principal office of the corporation is established or
located, a notice of the election of directors shall be posted for a period of
three weeks immediately preceding the election in at least three public
places, in the place where the principal office of the corporation is
established or located. (Emphasis added)
The present Corporation Code (B.P. Blg. 68), which took effect on May 1,
1980, 12 similarly provides:
23. The Board of Directors or Trustees. Unless otherwise provided in this
Code, the corporate powers of all corporations formed under this Code shall
be exercised, all business conducted and all property of such corporations
controlled and held by the board of directors or trustees to be elected from
among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year and until
their successors are elected and qualified. (Emphasis added)
These provisions of the former and present corporation law leave no room for doubt
as to their meaning: the board of directors of corporations must be elected from among the
stockholders or members. There may be corporations in which there are unelected members
in the board but it is clear that in the examples cited by petitioner the unelected members sit
as ex officio members, i.e., by virtue of and for as long as they hold a particular office. But in
the case of petitioner, there is no reason at all for its representative to be given a seat in the
board. Nor does petitioner claim a right to such seat by virtue of an office held. In fact it was
not given such seat in the beginning. It was only in 1975 that a proposed amendment to the
by-laws sought to give it one.
Since the provision in question is contrary to law, the fact that for fifteen years it has
not been questioned or challenged but, on the contrary, appears to have been implemented
by the members of the association cannot forestall a later challenge to its validity. Neither can
it attain validity through acquiescence because, if it is contrary to law, it is beyond the power
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Corporation Law
of the members of the association to waive its invalidity. For that matter the members of the
association may have formally adopted the provision in question, but their action would be of
no avail because no provision of the by-laws can be adopted if it is contrary to law. 13
It is probable that, in allowing petitioner's representative to sit on the board, the
members of the association were not aware that this was contrary to law. It should be noted
that they did not actually implement the provision in question except perhaps insofar as it
increased the number of directors from 11 to 15, but certainly not the allowance of petitioner's
representative as an unelected member of the board of directors. It is more accurate to say
that the members merely tolerated petitioner's representative and tolerance cannot be
considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of "practice."
Practice, no matter how long continued, cannot give rise to any vested right if it is contrary to
law. Even less tenable is petitioner's claim that its right is "coterminus with the existence of
the association." 14
Finally, petitioner questions the authority of the SEC to render an opinion on the
validity of the provision in question. It contends that jurisdiction over this case is exclusively
vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as
authority for its ruling the opinion of the SEC chairman. The HIGC could have cited any other
authority for the view that under the law members of the board of directors of a corporation
must be elected and it would be none the worse for doing so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Puno and Torres, Jr., JJ., concur.
45

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117604 March 26, 1997
CHINA BANKING CORPORATION, petitioner,
vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.
Securities and Exchange Commission; Actions; Jurisdiction; The better policy in
determining which body has jurisdiction over a case would be to consider not only the status of
relationship of the parties but also the nature of the question that is the subject of their
controversy.The basic issue we must first hurdle is which body has jurisdiction over the
controversy, the regular courts or the SEC. P.D. No. 902-A conferred upon the SEC the
following pertinent powers: * * * The aforecited law was expounded upon in Viray v. CA and
in the recent cases of Mainland Construction Co., Inc. v. Movilla and Bernardo v. CA, thus: . . . .
The better policy in determining which body has jurisdiction over a case would be to consider
not only the status or relationship of the parties but also the nature of the question that is the
subject of their controversy.
Same; Same; Same; Corporation Law; The purchase of a share or membership
certificate at public auction by a party (and the issuance to it of the corresponding Certificate
of Sale) transfers ownership of the same to the latter and thus entitle it to have the said share
registered in its name as a member.As to the first query, there is no question that the
purchase of the subject share or membership certificate at public auction by petitioner (and
the issuance to it of the corresponding Certificate of Sale) transferred ownership of the same
to the latter and thus entitled petitioner to have the said share registered in its name as a
member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has
in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner and has even noted said
agreement in its corporate books. In addition, Calapatia, the original owner of the subject
share, has not contested the said transfer. By virtue of the afore-mentioned sale, petitioner
became a bona fide stockholder of VGCCI and, therefore, the conflict that arose between
petitioner and VGCCI aptly exemplifies an intra-corporate controversy between a corporation
and its stockholder under Sec. 5(b) of P.D. 902-A.
Same; Same; Same; Same; By-Laws; The proper interpretation and application of a
corporations by-laws is a subject which irrefutably calls for the special competence of the
SEC.An important consideration, moreover, is the nature of the controversy between
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petitioner and private respondent corporation. VGCCI claims a prior right over the subject
share anchored mainly on Sec. 3, Art. VIII of its by-laws which provides that after a member
shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the
claims of the Club . . . It is pursuant to this provision that VGCCI also sold the subject share at
public auction, of which it was the highest bidder. VGCCI caps its argument by asserting that
its corporate by-laws should prevail. The bone of contention, thus, is the proper
interpretation and application of VGCCIs aforequoted bylaws, a subject which irrefutably calls
for the special competence of the SEC.
Same; Same; Same; Estoppel; The plaintiff who files a complaint with one court which
has no jurisdiction over it is not estopped from filing the same complaint later with the
competent court.In Zamora v. Court of Appeals, this Court, through Mr. Justice Isagani A.
Cruz, declared that: It follows that as a rule the filing of a complaint with one court which has
no jurisdiction over it does not prevent the plaintiff from filing the same complaint later with
the competent court. The plaintiff is not estopped from doing so simply because it made a
mistake before in the choice of the proper forum. . . .
Appeals; Procedural Rules; Remand of Cases; The remand of the case or of an issue to
the lower court for further reception of evidence is not necessary where the Supreme Court is
in position to resolve the dispute based on the records before it and particularly where the
ends of justice would not be subserved by the remand thereof.Applicable to this case is the
principle succinctly enunciated in the case of Heirs of Crisanta Y. Gabriel-Almoradie v. Court of
Appeals, citing Escudero v. Dulay and The Roman Catholic Archbishop of Manila v. Court of
Appeals: In the interest of the public and for the expeditious administration of justice the
issue on infringement shall be resolved by the court considering that this case has dragged on
for years and has gone from one forum to another. It is a rule of procedure for the Supreme
Court to strive to settle the entire controversy in a single proceeding leaving no root or
branch to bear the seeds of future litigation. No useful purpose will be served if a case or the
determination of an issue in a case is remanded to the trial court only to have its decision
raised again to the Court of Appeals and from there to the Supreme Court. We have laid down
the rule that the remand of the case or of an issue to the lower court for further reception of
evidence is not necessary where the Court is in position to resolve the dispute based on the
records before it and particularly where the ends of justice would not be subserved by the
remand thereof. Moreover, the Supreme Court is clothed with ample authority to review
matters, even those not raised on appeal if it finds that their consideration is necessary in
arriving at a just disposition of the case.
Loans; Pledge; The contracting parties to a pledge agreement may stipulate that the
said pledge will also stand as security for any future advancements (or renewals thereof) that
the pledgor may procure from the pledgee.VGCCI assails the validity of the pledge
agreement executed by Calapatia in petitioners favor. It contends that the same was null and
46

void for lack of consideration because the pledge agreement was entered into on 21 August
1974 but the loan or promissory note which it secured was obtained by Calapatia much later
or only on 3 August 1983. VGCCIs contention is unmeritorious. A careful perusal of the pledge
agreement will readily reveal that the contracting parties explicitly stipulated therein that the
said pledge will also stand as security for any future advancements (or renewals thereof) that
Calapatia (the pledgor) may procure from petitioner.
Corporation Law; By-Laws; In order to be bound, a third party must have acquired
knowledge of the pertinent by-laws at the time the transaction or agreement between said
third person and the shareholder was entered into.In order to be bound, the third party
must have acquired knowledge of the pertinent bylaws at the time the transaction or
agreement between said third party and the shareholder was entered into, in this case, at the
time the pledge agreement was executed. VGCCI could have easily informed petitioner of its
by-laws when it sent notice formally recognizing petitioner as pledgee of one of its shares
registered in Calapatias name. Petitioners belated notice of said by-laws at the time of
foreclosure will not suffice.
Same; Words and Phrases; A membership share is quite different in character from a
pawn ticket.Similarly, VGCCIs contention that petitioner is duty-bound to know its by-laws
because of Art. 2099 of the Civil Code which stipulates that the creditor must take care of the
thing pledged with the diligence of a good father of a family, fails to convince. The case of
Cruz & Serrano v. Chua A. H. Lee, is clearly not applicable: In applying this provision to the
situation before us it must be borne in mind that the ordinary pawn ticket is a document by
virtue of which the property in the thing pledged passes from hand to hand by mere delivery
of the ticket; and the contract of the pledge is, therefore, absolvable to bearer. It results that
one who takes a pawn ticket in pledge acquires domination over the pledge; and it is the
holder who must renew the pledge, if it is to be kept alive. It is quite obvious from the
aforequoted case that a membership share is quite different in character from a pawn ticket
and to reiterate, petitioner was never informed of Calapatias unpaid accounts and the
restrictive provisions in VGCCIs by-laws.
Same; Same; The term unpaid claim in Sec. 63 of the Corporation Code refers to
any unpaid claim arising from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any other transaction, such
as monthly dues.Finally, Sec. 63 of the Corporation Code which provides that no shares of
stock against which the corporation holds any unpaid claim shall be transferable in the books
of the corporation cannot be utilized by VGCCI. The term unpaid claim refers to any
unpaid claim arising from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any other transaction. In
the case at bar, the subscription for the share in question has been fully paid as evidenced by
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Corporation Law
the issuance of Membership Certificate No. 1219. What Calapatia owed the corporation were
merely the monthly dues.
Hence, the aforequoted provision does not apply.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court
KAPUNAN, J.:
Through a petition for review on certiorari under Rule 45 of the Revised Rules of
Court, petitioner China Banking Corporation seeks the reversal of the decision of the Court of
Appeals dated 15 August 1994 nullifying the Securities and Exchange Commission's order and
resolution dated 4 June 1993 and 7 December 1993, respectively, for lack of jurisdiction.
Similarly impugned is the Court of Appeals' resolution dated 4 September 1994 which denied
petitioner's motion for reconsideration.
The case unfolds thus:
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of
private respondent Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock
Certificate No. 1219 to petitioner China Banking Corporation (CBC, for brevity). 1
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books. 2
In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by
Calapatia in petitioner's favor was duly noted in its corporate books. 3
On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment
of which was secured by the aforestated pledge agreement still existing between Calapatia
and petitioner. 4
Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a
petition for extrajudicial foreclosure before Notary Public Antonio T. de Vera of Manila,
requesting the latter to conduct a public auction sale of the pledged stock. 5
On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure
proceedings and requested that the pledged stock be transferred to its (petitioner's) name
and the same be recorded in the corporate books. However, on 15 July 1985, VGCCI wrote
47

petitioner expressing its inability to accede to petitioner's request in view of Calapatia's
unsettled accounts with the club. 6
Despite the foregoing, Notary Public de Vera held a public auction on 17 September
1985 and petitioner emerged as the highest bidder at P20,000.00 for the pledged stock.
Consequently, petitioner was issued the corresponding certificate of sale. 7
On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his
overdue account in the amount of P18,783.24. 8 Said notice was followed by a demand letter
dated 12 December 1985 for the same amount 9and another notice dated 22 November 1986
for P23,483.24. 10
On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a
notice of auction sale of a number of its stock certificates, to be held on 10 December 1986 at
10:00 a.m. Included therein was Calapatia's own share of stock (Stock Certificate No. 1219).
Through a letter dated 15 December 1986, VGCCI informed Calapatia of the
termination of his membership due to the sale of his share of stock in the 10 December 1986
auction. 11
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock
Certificate No. 1219 by virtue of being the highest bidder in the 17 September 1985 auction and
requested that a new certificate of stock be issued in its name. 12
On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock
was sold at the public auction held on 10 December 1986 for P25,000.00. 13
On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock
and thereafter filed a case with the Regional Trial Court of Makati for the nullification of the 10
December 1986 auction and for the issuance of a new stock certificate in its name. 14
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack
of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute
and on 27 August 1990 denied petitioner's motion for reconsideration.
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange
Commission (SEC) for the nullification of the sale of Calapatia's stock by VGCCI; the
cancellation of any new stock certificate issued pursuant thereto; for the issuance of a new
certificate in petitioner's name; and for damages, attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor
of VGCCI, stating in the main that "(c)onsidering that the said share is delinquent, (VGCCI) had
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valid reason not to transfer the share in the name of the petitioner in the books of (VGCCI)
until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for
reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an
order reversing the decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right
over the pledged share and because of pledgor's failure to pay the principal
debt upon maturity, appellant-petitioner can proceed with the foreclosure of
the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April
14, 1992 are hereby SET ASIDE. The auction sale conducted by appellee-
respondent Club on December 10, 1986 is declared NULL and VOID. Finally,
appellee-respondent Club is ordered to issue another membership certificate
in the name of appellant-petitioner bank.
SO ORDERED. 18
VGCCI sought reconsideration of the abovecited order. However, the SEC denied the
same in its resolution dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On
15 August 1994, the Court of Appeals rendered its decision nullifying and setting aside the
orders of the SEC and its hearing officer on ground of lack of jurisdiction over the subject
matter and, consequently, dismissed petitioner's original complaint. The Court of Appeals
declared that the controversy between CBC and VGCCI is not intra-corporate. It ruled as
follows:
In order that the respondent Commission can take cognizance of a case, the
controversy must pertain to any of the following relationships: (a) between
the corporation, partnership or association and the public; (b) between the
corporation, partnership or association and its stockholders, partners,
members, or officers; (c) between the corporation, partnership or
association and the state in so far as its franchise, permit or license to
operate is concerned, and (d) among the stockholders, partners or
associates themselves (Union Glass and Container Corporation vs. SEC,
48

November 28, 1983, 126 SCRA 31). The establishment of any of the
relationship mentioned will not necessarily always confer jurisdiction over
the dispute on the Securities and Exchange Commission to the exclusion of
the regular courts. The statement made in Philex Mining Corp. vs. Reyes, 118
SCRA 602, that the rule admits of no exceptions or distinctions is not that
absolute. The better policy in determining which body has jurisdiction over a
case would be to consider not only the status or relationship of the parties
but also the nature of the question that is the subject of their controversy
(Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-323).
Indeed, the controversy between petitioner and respondent bank
which involves ownership of the stock that used to belong to Calapatia, Jr. is
not within the competence of respondent Commission to decide. It is not
any of those mentioned in the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated
December 7, 1993 of respondent Securities and Exchange Commission
(Annexes Y and BB, petition) and of its hearing officer dated January 3, 1992
and April 14, 1992 (Annexes S and W, petition) are all nullified and set aside
for lack of jurisdiction over the subject matter of the case. Accordingly, the
complaint of respondent China Banking Corporation (Annex Q, petition) is
DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by the Court of
Appeals in its resolution dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth
Division) GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND
ORDER DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC, AND WHEN IT DISMISSED THE COMPLAINT OF
PETITIONER AGAINST RESPONDENT VALLEY GOLF ALL FOR LACK OF
JURISDICTION OVER THE SUBJECT MATTER OF THE CASE;
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2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT
EVIDENCE SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF
MEMBERSHIP CERTIFICATE NO. 1219 FOR ONE SHARE OF RESPONDENT
VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the
controversy, the regular courts or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and
control over all corporations, partnerships or associations, who are the
grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines, and in the exercise of its authority,
it shall have the power to enlist the aid and support of and to deputize any
and all enforcement agencies of the government, civil or military as well as
any private institution, corporation, firm, association or person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of
the Securities and Exchange Commission over corporations, partnerships
and other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
a) Devices or schemes employed by or any acts of the
board of directors, business associates, its officers or
partners, amounting to fraud and misrepresentation which
may be detrimental to the interest of the public and/or of
the stockholders, partners, members of associations or
organizations registered with the Commission.
b) Controversies arising out of intra-corporate or
partnership relations, between and among stockholders,
members, or associates; between any or all of them and the
corporation, partnership or association of which they are
49

stockholders, members or associates, respectively; and
between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or
right to exist as such entity;
c) Controversies in the election or appointment of
directors, trustees, officers, or managers of such
corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to
be declared in the state of suspension of payments in cases
where the corporation, partnership or association
possesses property to cover all of its debts but foresees the
impossibility of meeting them when they respectively fall
due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities,
but is under the Management Committee created pursuant
to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases
of Mainland Construction Co., Inc. v. Movilla 23 and Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has jurisdiction over a case
would be to consider not only the status or relationship of the parties but
also the nature of the question that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal has
jurisdiction we have to determine therefore whether or not petitioner is a stockholder of
VGCCI and whether or not the nature of the controversy between petitioner and private
respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or
membership certificate at public auction by petitioner (and the issuance to it of the
corresponding Certificate of Sale) transferred ownership of the same to the latter and thus
entitled petitioner to have the said share registered in its name as a member of VGCCI. It is
readily observed that VGCCI did not assail the transfer directly and has in fact, in its letter of 27
September 1974, expressly recognized the pledge agreement executed by the original owner,
Calapatia, in favor of petitioner and has even noted said agreement in its corporate
books. 25 In addition, Calapatia, the original owner of the subject share, has not contested the
said transfer.
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By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of
VGCCI and, therefore, the conflict that arose between petitioner and VGCCI aptly exemplies
an intra-corporate controversy between a corporation and its stockholder under Sec. 5(b) of
P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between
petitioner and private respondent corporation. VGCCI claims a prior right over the subject
share anchored mainly on Sec. 3, Art VIII of its by-laws which provides that "after a member
shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the
claims of the Club. . ." 26 It is pursuant to this provision that VGCCI also sold the subject share
at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting
that its corporate by-laws should prevail. The bone of contention, thus, is the proper
interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably
calls for the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction
in administrative commissions and boards the power to resolve specialized
disputes in the field of labor (as in corporations, public transportation and
public utilities) ruled that Congress in requiring the Industrial Court's
intervention in the resolution of labor-management controversies likely to
cause strikes or lockouts meant such jurisdiction to be exclusive, although it
did not so expressly state in the law. The Court held that under the "sense-
making and expeditious doctrine of primary jurisdiction . . . the courts cannot
or will not determine a controversy involving a question which is within the
jurisdiction of an administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to determine technical
and intricate matters of fact, and a uniformity of ruling is essential to comply
with the purposes of the regulatory statute administered.
In this era of clogged court dockets, the need for specialized administrative
boards or commissions with the special knowledge, experience and
capability to hear and determine promptly disputes on technical matters or
essentially factual matters, subject to judicial review in case of grave abuse
of discretion, has become well nigh indispensable. Thus, in 1984, the Court
noted that "between the power lodged in an administrative body and a
court, the unmistakable trend has been to refer it to the former.
'Increasingly, this Court has been committed to the view that unless the law
speaks clearly and unequivocably, the choice should fall on [an
administrative agency.]'" The Court in the earlier case of Ebon v. De Guzman,
50

noted that the lawmaking authority, in restoring to the labor arbiters and the
NLRC their jurisdiction to award all kinds of damages in labor cases, as
against the previous P.D. amendment splitting their jurisdiction with the
regular courts, "evidently, . . . had second thoughts about depriving the
Labor Arbiters and the NLRC of the jurisdiction to award damages in labor
cases because that setup would mean duplicity of suits, splitting the cause of
action and possible conflicting findings and conclusions by two tribunals on
one and the same claim."
In this case, the need for the SEC's technical expertise cannot be over-emphasized
involving as it does the meticulous analysis and correct interpretation of a corporation's by-
laws as well as the applicable provisions of the Corporation Code in order to determine the
validity of VGCCI's claims. The SEC, therefore, took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position,
in the first complaint it filed with the RTC of Makati (Civil Case No. 90-1112) that there is no
intra-corporate relations between itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz,
declared that:
It follows that as a rule the filing of a complaint with one court which has no
jurisdiction over it does not prevent the plaintiff from filing the same
complaint later with the competent court. The plaintiff is not estopped from
doing so simply because it made a mistake before in the choice of the proper
forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it
categorically stated (in its motion to dismiss) that the case between itself and petitioner is
intra-corporate and insisted that it is the SEC and not the regular courts which has jurisdiction.
This is precisely the reason why the said court dismissed petitioner's complaint and led to
petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the
Court of Appeals, this Court likewise deems it procedurally sound to proceed and rule on its
merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for review
on certiorari on the issue of jurisdiction. In its assignment of errors, petitioner specifically
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raised questions on the merits of the case. In turn, in its responsive pleadings, private
respondent duly answered and countered all the issues raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of
Crisanta Y. Gabriel-Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman
Catholic Archbishop of Manila v. Court of Appeals. 31
In the interest of the public and for the expeditious administration
of justice the issue on infringement shall be resolved by the court
considering that this case has dragged on for years and has gone from one
forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the
entire controversy in a single proceeding leaving no root or branch to bear
the seeds of future litigation. No useful purpose will be served if a case or
the determination of an issue in a case is remanded to the trial court only to
have its decision raised again to the Court of Appeals and from there to the
Supreme Court.
We have laid down the rule that the remand of the case or of an
issue to the lower court for further reception of evidence is not necessary
where the Court is in position to resolve the dispute based on the records
before it and particularly where the ends of justice would not be subserved
by the remand thereof. Moreover, the Supreme Court is clothed with ample
authority to review matters, even those not raised on appeal if it finds that
their consideration is necessary in arriving at a just disposition of the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court,
through Mr. Justice Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that since
the filing of this suit before the trial court, none of the substantial issues
have been resolved. To avoid and gloss over the issues raised by the parties,
as what the trial court and respondent Court of Appeals did, would unduly
prolong this litigation involving a rather simple case of foreclosure of
mortgage. Undoubtedly, this will run counter to the avowed purpose of the
rules, i.e., to assist the parties in obtaining just, speedy and inexpensive
determination of every action or proceeding. The Court, therefore, feels that
the central issues of the case, albeit unresolved by the courts below, should
now be settled specially as they involved pure questions of law.
Furthermore, the pleadings of the respective parties on file have amply
51

ventilated their various positions and arguments on the matter necessitating
prompt adjudication.
In the case at bar, since we already have the records of the case (from the
proceedings before the SEC) sufficient to enable us to render a sound judgment and since
only questions of law were raised (the proper jurisdiction for Supreme Court review), we can,
therefore, unerringly take cognizance of and rule on the merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor.
It contends that the same was null and void for lack of consideration because the pledge
agreement was entered into on 21 August
33
1974 but the loan or promissory note which it secured was obtained by Calapatia much later
or only on 3 August 1983. 34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting
parties explicitly stipulated therein that the said pledge will also stand as security for any
future advancements (or renewals thereof) that Calapatia (the pledgor) may procure from
petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due
of all loans, overdrafts, promissory notes, drafts, bills or exchange,
discounts, and all other obligations of every kind which have heretofore
been contracted, or which may hereafter be contracted, by the PLEDGOR(S)
and/or DEBTOR(S) or any one of them, in favor of the PLEDGEE, including
discounts of Chinese drafts, bills of exchange, promissory notes, etc.,
without any further endorsement by the PLEDGOR(S) and/or Debtor(s) up to
the sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the
accrued interest thereon, as hereinafter provided, plus the costs, losses,
damages and expenses (including attorney's fees) which PLEDGEE may incur
in connection with the collection thereof. 35 (Emphasis ours.)
The validity of the pledge agreement between petitioner and Calapatia cannot thus
be held suspect by VGCCI. As candidly explained by petitioner, the promissory note of 3
August 1983 in the amount of P20,000.00 was but a renewal of the first promissory note
covered by the same pledge agreement.
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VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had
the right to sell the share in question in accordance with the express provision found in its by-
laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI
began sending notices of delinquency to Calapatia after it was informed by petitioner
(through its letter dated 14 May 1985) of the foreclosure proceedings initiated against
Calapatia's pledged share, although Calapatia has been delinquent in paying his monthly dues
to the club since 1975. Stranger still, petitioner, whom VGCCI had officially recognized as the
pledgee of Calapatia's share, was neither informed nor furnished copies of these letters of
overdue accounts until VGCCI itself sold the pledged share at another public auction. By doing
so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give
petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good
faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-
laws. It argues in this wise:
The general rule really is that third persons are not bound by the by-
laws of a corporation since they are not privy thereto (Fleischer v. Botica
Nolasco, 47 Phil. 584). The exception to this is when third persons have
actual or constructive knowledge of the same. In the case at bar, petitioner
had actual knowledge of the by-laws of private respondent when petitioner
foreclosed the pledge made by Calapatia and when petitioner purchased the
share foreclosed on September 17, 1985. This is proven by the fact that prior
thereto, i.e., on May 14, 1985 petitioner even quoted a portion of private
respondent's by-laws which is material to the issue herein in a letter it wrote
to private respondent. Because of this actual knowledge of such by-laws
then the same bound the petitioner as of the time when petitioner
purchased the share. Since the by-laws was already binding upon petitioner
when the latter purchased the share of Calapatia on September 17, 1985 then
the petitioner purchased the said share subject to the right of the private
respondent to sell the said share for reasons of delinquency and the right of
private respondent to have a first lien on said shares as these rights are
provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
And moreover, the by-law now in question cannot have any effect on
the appellee. He had no knowledge of such by-law when the shares were
assigned to him. He obtained them in good faith and for a valuable
52

consideration. He was not a privy to the contract created by said by-law
between the shareholder Manuel Gonzales and the Botica Nolasco, Inc. Said
by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares
without first offering them to the corporation for a period of thirty days is
not binding upon an assignee of the stock as a personal contract, although
his assignor knew of the by-law and took part in its adoption. (10 Cyc., 579;
Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of
corporate stock, a purchaser is not affected by any contractual restriction of
which he had no notice. (Brinkerhoff-Farris Trust & Savings Co. vs. Home
Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has
assented to an unauthorized by-law has only the effect of a contract by, and
enforceable against, the assignor; the assignee is not bound by such by-law
by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock
shall not be valid unless approved by the board of directors, while it may be
enforced as a reasonable regulation for the protection of the corporation
against worthless stockholders, cannot be made available to defeat the
rights of third persons. (Farmers' and Merchants' Bank of Lineville vs.
Wasson, 48 Iowa, 336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent
by-laws at the time the transaction or agreement between said third party and the
shareholder was entered into, in this case, at the time the pledge agreement was executed.
VGCCI could have easily informed petitioner of its by-laws when it sent notice formally
recognizing petitioner as pledgee of one of its shares registered in Calapatia's name.
Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The ruling
of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted
by the corporation to regulate, govern and control its own actions, affairs
and concerns and its stockholders or members and directors and officers
with relation thereto and among themselves in their relation to it. In other
words, by-laws are the relatively permanent and continuing rules of action
adopted by the corporation for its own government and that of the
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individuals composing it and having the direction, management and control
of its affairs, in whole or in part, in the management and control of its affairs
and activities. (9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the
duties of the members towards the corporation and among themselves.
They are self-imposed and, although adopted pursuant to statutory
authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are
not bound by by-laws, except when they have knowledge of the provisions
either actually or constructively. In the case of Fleisher v. Botica Nolasco, 47
Phil. 584, the Supreme Court held that the by-law restricting the transfer of
shares cannot have any effect on the transferee of the shares in question as
he "had no knowledge of such by-law when the shares were assigned to
him. He obtained them in good faith and for a valuable consideration. He was
not a privy to the contract created by the by-law between the shareholder . .
. and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his right as
a purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the
opinion that said case is applicable to the present controversy. Appellant-
petitioner bank as a third party can not be bound by appellee-respondent's
by-laws. It must be recalled that when appellee-respondent communicated
to appellant-petitioner bank that the pledge agreement was duly noted in
the club's books there was no mention of the shareholder-pledgor's unpaid
accounts. The transcript of stenographic notes of the June 25, 1991 Hearing
reveals that the pledgor became delinquent only in 1975. Thus, appellant-
petitioner was in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the
general accepted rule that third persons are not bound by by-laws to be
applicable and binding upon the pledgee, knowledge of the provisions of the
VGCI By-laws must be acquired at the time the pledge agreement was
contracted. Knowledge of said provisions, either actual or constructive, at
the time of foreclosure will not affect pledgee's right over the pledged
share. Art. 2087 of the Civil Code provides that it is also of the essence of
these contracts that when the principal obligation becomes due, the things
in which the pledge or mortgage consists maybe alienated for the payment
to the creditor.
53

In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc.,
the Commission issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the
certificate, their cancellation, and the issuance to him of
new ones, and when done, the pledgee will be fully
protected against a subsequent purchaser who would be
charged with constructive notice that the certificate is
covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock
until the pledgor pays or tenders to him the amount due on
the debt secured. In other words, the pledgee has the right
to resort to its collateral for the payment of the debts. (Ibid,
502)
To cancel the pledged certificate outright and the issuance
of new certificate to a third person who purchased the
same certificate covered by the pledge, will certainly defeat
the right of the pledgee to resort to its collateral for the
payment of the debt. The pledgor or his representative or
registered stockholders has no right to require a return of
the pledged stock until the debt for which it was given as
security is paid and satisfied, regardless of the length of
time which have elapsed since debt was created. (12-A
Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or
liens in favor either of the corporation or of third persons, if he has no notice
thereof, but not otherwise. He also takes it free of liens or claims that may
subsequently arise in favor of the corporation if it has notice of the pledge,
although no demand for a transfer of the stock to the pledgee on the
corporate books has been made. (12-A Fletcher 5634, 1982 ed., citing Snyder
v. Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws
because of Art. 2099 of the Civil Code which stipulates that the creditor must take care of the
thing pledged with the diligence of a good father of a family, fails to convince. The case
of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not applicable:
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In applying this provision to the situation before us it must be borne
in mind that the ordinary pawn ticket is a document by virtue of which the
property in the thing pledged passes from hand to hand by mere delivery of
the ticket; and the contract of the pledge is, therefore, absolvable to bearer.
It results that one who takes a pawn ticket in pledge acquires domination
over the pledge; and it is the holder who must renew the pledge, if it is to be
kept alive.
It is quite obvious from the aforequoted case that a membership share is
quite different in character from a pawn ticket and to reiterate, petitioner was never
informed of Calapatia's unpaid accounts and the restrictive provisions in VGCCI's by-
laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the books of the
corporation" cannot be utilized by VGCCI. The term "unpaid claim" refers to "any unpaid claim
arising from unpaid subscription, and not to any indebtedness which a subscriber or
stockholder may owe the corporation arising from any other transaction." 40 In the case at
bar, the subscription for the share in question has been fully paid as evidenced by the
issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation were
merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED
and the order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.
Padilla, Bellosillo, Vitug and Hermosisima, Jr., JJ., concur.
54

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-15092 May 18, 1962
ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,
vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Sugar Centrals; Milling Contracts; Concessions given by central to planters, if
retracted, will constitute fraud; Case at Bar.Since there is no rational explanation for the
company's assenting to the further concessions asked by the planters before the contracts
were signed, except as further inducement for the planters to agree to the extension of the
contract period, to allow the company now to retract such concessions would be to sanction
a fraud upon the planters who relied on such additional stipulations.
Contracts; Novation; Modification before a bargain not novation in law.There can
be no novation unless two distinct and successive binding contracts take place, with the later
one designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Same; Assent and concurrence of parties necessary to perfect a contract; Setting down
of terms not important except in certain cases.Except in the cases of statutory forms or
solemn agreements, it is the assent and concurrence of the parties, and not the setting down
of its terms, that constitutes a binding contract.
Corporations; Exercise of charter powers; Test to be applied."It is a question,
therefore, in each case, of the logical relation of the act to the corporate purpose expressed
in the charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done
for the purpose of serving corporate ends, and is reasonably tributary to the promotion of
those ends, in a substantial, and not in a remote and fanciful, sense, it may fairly be
considered within charter powers. The test to be applied is whether the act in question is in
direct and immediate furtherance of the corporation's business, fairly incident to the express
powers and reasonably necessary to their exercise. If so, the corporation has the power to do
it; otherwise, not." (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
Same; Same; Question on probable losses or decrease in profits not reviewable by
courts.Whether or not a valid and binding resolution passed by the board of directors, will
cause losses or decrease the profits of the corporation, may not be reviewed by the courts.
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APPEAL from a judgment of the Court of First Instance of Occidental Negros.
The facts are stated in the opinion of the Court
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel the
defendant Milling Company to increase plaintiff's share in the sugar produced from their
cane, from 60% to 62.33%, starting from the 1951-1952 crop year.
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro
Montelibano, and the Limited co-partnership Gonzaga and Company, had been and are sugar
planters adhered to the defendant-appellee's sugar central mill under identical milling
contracts. Originally executed in 1919, said contracts were stipulated to be in force for 30
years starting with the 1920-21 crop, and provided that the resulting product should be divided
in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was proposed to
execute amended milling contracts, increasing the planters' share to 60% of the manufactured
sugar and resulting molasses, besides other concessions, but extending the operation of the
milling contract from the original 30 years to 45 years. To this effect, a printed Amended
Milling Contract form was drawn up. On August 20, 1936, the Board of Directors of the
appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No. 11, Acuerdo No. 1)
granting further concessions to the planters over and above those contained in the printed
Amended Milling Contract. The bone of contention is paragraph 9 of this resolution, that
reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en
consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx xxx xxx
55

9.a Que si durante la vigencia de este contrato de Molienda Enmendado,
lascentrales azucareras, de Negros Occidental, cuya produccion anual de
azucar centrifugado sea mas de una tercera parte de la produccion total de
todas lascentrales azucareras de Negros Occidental, concedieren a sus
plantadores mejores condiciones que la estipuladas en el presente contrato,
entonces esas mejores condiciones se concederan y por el presente se
entenderan concedidas a los platadores que hayan otorgado este Contrato
de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September
10, 1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation
Las enmiendas arriba transcritas forman parte del contrato de molienda
enmendado, otorgado por y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros
sugar centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under paragraph
9 of the resolution of August 20, 1936, heretofore quoted, the appellee had become obligated
to grant similar concessions to the plaintiffs (appellants herein). The appellee Bacolod-Murcia
Milling Co., inc., resisted the claim, and defended by urging that the stipulations contained in
the resolution were made without consideration; that the resolution in question was,
therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond
the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this
Court.
We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that when the Milling Contract was
executed, the concessions granted by the disputed resolution had been already incorporated
into its terms. No reason appears of record why, in the face of such concessions, the
appellants should reject them or consider them as separate and apart from the main
amended milling contract, specially taking into account that appellant Alfredo Montelibano
was, at the time, the President of the Planters Association (Exhibit 4, p. 11) that had agitated
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Corporation Law
for the concessions embodied in the resolution of August 20, 1936. That the resolution
formed an integral part of the amended milling contract, signed on September 10, and not a
separate bargain, is further shown by the fact that a copy of the resolution was simply
attached to the printed contract without special negotiations or agreement between the
parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and beyond
the 30 years stipulated in the original contract. Hence, the conclusion of the court below that
the resolution constituted gratuitous concessions not supported by any consideration is
legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after the appellants had already
bound themselves to the terms of the printed milling contract. But this was not the case.
When the resolution was adopted and the additional concessions were made by the
company, the appellants were not yet obligated by the terms of the printed contract, since
they admittedly did not sign it until twenty-one days later, on September 10, 1936. Before that
date, the printed form was no more than a proposal that either party could modify at its
pleasure, and the appellee actually modified it by adopting the resolution in question. So that
by September 10, 1936 defendant corporation already understood that the printed terms
were not controlling, save as modified by its resolution of August 20, 1936; and we are
satisfied that such was also the understanding of appellants herein, and that the minds of the
parties met upon that basis. Otherwise there would have been no consent or "meeting of the
minds", and no binding contract at all. But the conduct of the parties indicates that they
assumed, and they do not now deny, that the signing of the contract on September 10, 1936,
did give rise to a binding agreement. That agreement had to exist on the basis of the printed
terms as modified by the resolution of August 20, 1936, or not at all. Since there is no rational
explanation for the company's assenting to the further concessions asked by the planters
before the contracts were signed, except as further inducement for the planters to agree to
the extension of the contract period, to allow the company now to retract such concessions
would be to sanction a fraud upon the planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There
can be no novation unless two distinct and successive binding contracts take place, with the
later designed to replace the preceding convention. Modifications introduced before a
bargain becomes obligatory can in no sense constitute novation in law.
56

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory forms
or solemn agreements (and it is not claimed that this is one), it is the assent and concurrence
(the "meeting of the minds") of the parties, and not the setting down of its terms, that
constitutes a binding contract. And the fact that the addendum is only signed by the General
Manager of the milling company emphasizes that the addition was made solely in order that
the memorial of the terms of the agreement should be full and complete.
Much is made of the circumstance that the report submitted by the Board of Directors of the
appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the planters
having agreed to the 60-40 sharing of the sugar set forth in the printed "amended milling
contracts", and did not make any reference at all to the terms of the resolution of August 20,
1936. But a reading of this report shows that it was not intended to inventory all the details of
the amended contract; numerous provisions of the printed terms are alao glossed over. The
Directors of the appellee Milling Company had no reason at the time to call attention to the
provisions of the resolution in question, since it contained mostly modifications in detail of
the printed terms, and the only major change was paragraph 9 heretofore quoted; but when
the report was made, that paragraph was not yet in effect, since it was conditioned on other
centrals granting better concessions to their planters, and that did not happen until after
1950. There was no reason in 1936 to emphasize a concession that was not yet, and might
never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to
modify the proposed terms of the Amended Milling Contract for the purpose of making its
terms more acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in itself,
and not otherwise prohibited, is done for the purpose of serving corporate ends, and
is reasonably tributary to the promotion of those ends, in a substantial, and not in a
remote and fanciful sense, it may fairly be considered within charter powers. The test
to be applied is whether the act in question is in direct and immediate furtherance of
the corporation's business, fairly incident to the express powers and reasonably
necessary to their exercise. If so, the corporation has the power to do it; otherwise,
not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is
valid and binding, and whether or not it will cause losses or decrease the profits of the
central, the court has no authority to review them.
They hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled in the
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Corporation Law
reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or close down at a
smaller loss, is a purely business and economic problem to be determined by the
directors of the corporation and not by the court. It is a well-known rule of law that
questions of policy or of management are left solely to the honest decision of
officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business manager
of the corporation, and so long as it acts in good faith its orders are not reviewable
by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing participations
to their adhered planter at an average rate of
62.333% for the 1951-52 crop year;
64.2% for 1952-53;
64.3% for 1953-54;
64.5% for 1954-55; and
63.5% for 1955-56,
the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August
20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance with paragraph 9 of the appellee
Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed
Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having
received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants
thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
57
 MATABABE FILES
Corporation Law

4.5% for the 1954-1955 crop year;

3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional increases
as they may be entitled to for the crop years subsequent to those herein adjudged.

Costs against appellee, Bacolod-Murcia Milling Co.

Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes and Dizon, JJ., concur.

58

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 109491 February 28, 2001
ATRIUM MANAGEMENT CORPORATION, petitioner,
vs.
COURT OF APPEALS, E.T. HENRY AND CO., LOURDES VICTORIA M. DE LEON, RAFAEL DE
LEON, JR., AND HI-CEMENT CORPORATION, respondents.
----------------------------------------
G.R. No. 121794 February 28, 2001
LOURDES M. DE LEON, petitioner,
vs.
COURT OF APPEALS, ATRIUM MANAGEMENT CORPORATION, AND HI-CEMENT
CORPORATION, respondents.
Corporation Law; Ultra Vires Acts; Checks; The act of issuing checks for the purpose of
securing a loan to finance the activities of the corporation is well within the ambit of a valid
corporate act, hence, not an ultra vires act.Hi-Cement, however, maintains that the checks
were not issued for consideration and that Lourdes and E.T. Henry engaged in a kiting
operation to raise funds for E.T. Henry, who admittedly was in need of financial assistance.
The Court finds that there was no sufficient evidence to show that such is the case. Lourdes
M. de Leon is the treasurer of the corporation and is authorized to sign checks for the
corporation. At the time of the issuance of the checks, there were sufficient funds in the bank
to cover payment of the amount of P2 million pesos. It is, however, our view that there is
basis to rule that the act of issuing the checks was well within the ambit of a valid corporate
act, for it was for securing a loan to finance the activities of the corporation, hence, not an
ultra vires act.
Same; Same; Words and Phrases; Ultra Vires Acts, Explained.An ultra vires act is the person negotiating it.
one committed outside the object for which a corporation is created as defined by the law of
its organization and therefore beyond the power conferred upon it by law. The term ultra
vires is distinguished from an illegal act for the former is merely voidable which may be
enforced by performance, ratification, or estoppel, while the latter is void and cannot be
validated.
Same; Same; Instances when personal liability of corporate directors, trustees or
officers may validly attach.The next question to determine is whether Lourdes M. de Leon
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Corporation Law
and Antonio de las Alas were personally liable for the checks issued as corporate officers and
authorized signatories of the check. Personal liability of a corporate director, trustee or
officer along (although not necessarily) with the corporation may so validly attach, as a rule,
only when: 1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith
or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages
to the corporation, its stockholders or other persons; 2. He consents to the issuance of
watered down stocks or who, having knowledge thereof, does not forthwith file with the
corporate secretary his written objection thereto; 3. He agrees to hold himself personally
and solidarily liable with the corporation; or 4. He is made, by a specific provision of law, to
personally answer for his corporate action.
Same; Same; Checks; A treasurer of a corporation whose negligence in signing a
confirmation letter for rediscounting of crossed checks, knowing fully well that the checks
were strictly endorsed for deposit only to the payees account and not to be further
negotiated, resulting in damage to the corporation may be personally liable therefor.In the
case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and Chairman of
HiCement were authorized to issue the checks. However, Ms. de Leon was negligent when
she signed the confirmation letter requested by Mr. Yap of Atrium and Mr. Henry of E.T.
Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry. She was
aware that the checks were strictly endorsed for deposit only to the payees account and not
to be further negotiated. What is more, the confirmation letter contained a clause that was
not true, that is, that the checks issued to E.T. Henry were in payment of Hydro oil bought by
Hi-Cement from E.T. Henry. Her negligence resulted in damage to the corporation. Hence,
Ms. de Leon may be held personally liable therefor.
Negotiable Instrument Law; Checks; Words and Phrases; Holder in Due Course,
Explained.The next issue is whether or not petitioner Atrium was a holder of the checks in
due course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:
A holder in due course is a holder who has taken the instrument under the following
conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of
it before it was overdue, and without notice that it had been previously dishonored, if such
was the fact; (c) That he took it in good faith and for value; (d) That at the time it was
negotiated to him he had no notice of any infirmity in the instrument or defect in the title of
Same; Same; A person to whom a crossed check was endorsed by the payee of said
check could not be considered a holder in due course.In the instant case, the checks were
crossed checks and specifically indorsed for deposit to payees account only. From the
beginning, Atrium was aware of the fact that the checks were all for deposit only to payees
account, meaning E.T. Henry. Clearly, then, Atrium could not be considered a holder in due
course.
59

Same; Same; A holder not in due course may still recover on the instrument.It does
not follow as a legal proposition that simply because petitioner Atrium was not a holder in
due course for having taken the instruments in question with notice that the same was for
deposit only to the account of payee E.T. Henry that it was altogether precluded from
recovering on the instrument. The Negotiable Instruments Law does not provide that a holder
not in due course can not recover on the instrument.
Same; Same; The disadvantage of a holder not in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable, such as absence or failure of
consideration.The disadvantage of Atrium in not being a holder in due course is that the
negotiable instrument is subject to defenses as if it were non-negotiable. One such defense is
absence or failure of consideration.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court. Atrium Management Corporation vs.
Court of Appeals, 353 SCRA 23, G.R. No. 109491, G.R. No. 121794 February 28, 2001
PARDO, J.:
What is before the Court are separate appeals from the decision of the Court of
Appeals,1 ruling that Hi-Cement Corporation is not liable for four checks amounting to P2
million issued to E.T. Henry and Co. and discounted to Atrium Management Corporation.
On January 3, 1983, Atrium Management Corporation filed with the Regional Trial
Court, Manila an action for collection of the proceeds of four postdated checks in the total
amount of P2 million. Hi-Cement Corporation through its corporate signatories, petitioner
Lourdes M. de Leon,2 treasurer, and the late Antonio de las Alas, Chairman, issued checks in
favor of E.T. Henry and Co. Inc., as payee. E.T. Henry and Co., Inc., in turn, endorsed the four
checks to petitioner Atrium Management Corporation for valuable consideration. Upon
presentment for payment, the drawee bank dishonored all four checks for the common
reason "payment stopped". Atrium, thus, instituted this action after its demand for payment
of the value of the checks was denied.3
After due proceedings, on July 20, 1989, the trial court rendered a decision ordering
Lourdes M. de Leon, her husband Rafael de Leon, E.T. Henry and Co., Inc. and Hi-Cement
Corporation to pay petitioner Atrium, jointly and severally, the amount of P2 million
corresponding to the value of the four checks, plus interest and attorney's fees. 4
On appeal to the Court of Appeals, on March 17, 1993, the Court of Appeals
promulgated its decision modifying the decision of the trial court, absolving Hi-Cement
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Corporation Law
Corporation from liability and dismissing the complaint as against it. The appellate court ruled
that: (1) Lourdes M. de Leon was not authorized to issue the subject checks in favor of E.T.
Henry, Inc.; (2) The issuance of the subject checks by Lourdes M. de Leon and the late Antonio
de las Alas constituted ultra vires acts; and (3) The subject checks were not issued for valuable
consideration.5
At the trial, Atrium presented as its witness Carlos C. Syquia who testified that in
February 1981, Enrique Tan of E.T. Henry approached Atrium for financial assistance, offering
to discount four RCBC checks in the total amount of P2 million, issued by Hi-Cement in favor
of E.T. Henry. Atrium agreed to discount the checks, provided it be allowed to confirm with Hi-
Cement the fact that the checks represented payment for petroleum products which E.T.
Henry delivered to Hi-Cement. Carlos C. Syquia identified two letters, dated February 6, 1981
and February 9, 1981 issued by Hi-Cement through Lourdes M. de Leon, as treasurer,
confirming the issuance of the four checks in favor of E.T. Henry in payment for petroleum
products.6
Respondent Hi-Cement presented as witness Ms. Erlinda Yap who testified that she
was once a secretary to the treasurer of Hi-Cement, Lourdes M. de Leon, and as such she was
familiar with the four RCBC checks as the postdated checks issued by Hi-Cement to E.T. Henry
upon instructions of Ms. de Leon. She testified that E.T. Henry offered to give Hi-Cement a
loan which the subject checks would secure as collateral.7
On July 20, 1989, the Regional Trial Court, Manila, Branch 09 rendered a decision, the
dispositive portion of which reads:
"WHEREFORE, in view of the foregoing considerations, and plaintiff having
proved its cause of action by preponderance of evidence, judgment is hereby
rendered ordering all the defendants except defendant Antonio de las Alas to pay
plaintiff jointly and severally the amount of TWO MILLION (P2,000,000.00) PESOS
with the legal rate of interest from the filling of the complaint until fully paid, plus the
sum of TWENTY THOUSAND (P20,000.00) PESOS as and for attorney's fees and the
cost of suit."
All other claims are, for lack of merit dismissed.
SO ORDERED."8
In due time, both Lourdes M. de Leon and Hi-Cement appealed to the Court of
Appeals.9
Lourdes M. de Leon submitted that the trial court erred in ruling that she was
solidarilly liable with Hi-Cement for the amount of the check. Also, that the trial court erred in
60

ruling that Atrium was an ordinary holder, not a holder in due course of the rediscounted
checks.10
Hi-Cement on its part submitted that the trial court erred in ruling that even if Hi-
Cement did not authorize the issuance of the checks, it could still be held liable for the checks.
And assuming that the checks were issued with its authorization, the same was without any
consideration, which is a defense against a holder in due course and that the liability shall be
borne alone by E.T. Henry.11
On March 17, 1993, the Court of Appeals promulgated its decision modifying the
ruling of the trial court, the dispositive portion of which reads:
"Judgement is hereby rendered:
(1) dismissing the plaintiff's complaint as against defendants Hi-Cement Corporation
and Antonio De las Alas;
(2) ordering the defendants E.T. Henry and Co., Inc. and Lourdes M. de Leon, jointly
and severally to pay the plaintiff the sum of TWO MILLION PESOS (P2,000,000.00)
with interest at the legal rate from the filling of the complaint until fully paid, plus
P20,000.00 for attorney's fees.
(3) Ordering the plaintiff and defendants E.T. Henry and Co., Inc. and Lourdes M. de
Leon, jointly and severally to pay defendant Hi-Cement Corporation, the sum of
P20,000.00 as and for attorney's fees.
With cost in this instance against the appellee Atrium Management Corporation and
appellant Lourdes Victoria M. de Leon.
So ordered."12
Hence, the recourse to this Court.13
The issues raised are the following:
In G. R. No. 109491 (Atrium, petitioner):
1. Whether the issuance of the questioned checks was an ultra vires act;
2. Whether Atrium was not a holder in due course and for value; and
3. Whether the Court of Appeals erred in dismissing the case against Hi-Cement and
ordering it to pay P20,000.00 as attorney's fees.14
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Corporation Law
In G. R. No. 121794 (de Leon, petitioner):
1. Whether the Court of Appeals erred in holding petitioner personally liable for the
Hi-Cement checks issued to E.T. Henry;
2. Whether the Court of Appeals erred in ruling that Atrium is a holder in due course;
3. Whether the Court of Appeals erred in ruling that petitioner Lourdes M. de Leon as
signatory of the checks was personally liable for the value of the checks, which were
declared to be issued without consideration;
4. Whether the Court of Appeals erred in ordering petitioner to pay Hi-Cement
attorney's fees and costs.15
We affirm the decision of the Court of Appeals.
We first resolve the issue of whether the issuance of the checks was an ultra vires act.
The record reveals that Hi-Cement Corporation issued the four (4) checks to extend financial
assistance to E.T. Henry, not as payment of the balance of the P30 million pesos cost of hydro
oil delivered by E.T. Henry to Hi-Cement. Why else would petitioner de Leon ask for
counterpart checks from E.T. Henry if the checks were in payment for hydro oil delivered
by E.T. Henry to Hi-Cement?
Hi-Cement, however, maintains that the checks were not issued for consideration
and that Lourdes and E.T. Henry engaged in a "kiting operation" to raise funds for E.T. Henry,
who admittedly was in need of financial assistance. The Court finds that there was no
sufficient evidence to show that such is the case. Lourdes M. de Leon is the treasurer of the
corporation and is authorized to sign checks for the corporation. At the time of the issuance
of the checks, there were sufficient funds in the bank to cover payment of the amount of P2
million pesos.
It is, however, our view that there is basis to rule that the act of issuing the checks
was well within the ambit of a valid corporate act, for it was for securing a loan to finance the
activities of the corporation, hence, not an ultra vires act.
"An ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the power conferred
upon it by law"16 The term "ultra vires" is "distinguished from an illegal act for the former is
merely voidable which may be enforced by performance, ratification, or estoppel, while the
latter is void and cannot be validated."17
61

The next question to determine is whether Lourdes M. de Leon and Antonio de las
Alas were personally liable for the checks issued as corporate officers and authorized
signatories of the check.
"Personal liability of a corporate director, trustee or officer along (although not
necessarily) with the corporation may so validly attach, as a rule, only when:
"1. He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or
gross negligence in directing its affairs, or (c) for conflict of interest, resulting in
damages to the corporation, its stockholders or other persons;
"2. He consents to the issuance of watered down stocks or who, having knowledge
thereof, does not forthwith file with the corporate secretary his written objection
thereto;
"3. He agrees to hold himself personally and solidarily liable with the corporation; or
"4. He is made, by a specific provision of law, to personally answer for his corporate
action."18
In the case at bar, Lourdes M. de Leon and Antonio de las Alas as treasurer and
Chairman of Hi-Cement were authorized to issue the checks. However, Ms. de Leon was
negligent when she signed the confirmation letter requested by Mr. Yap of Atrium and Mr.
Henry of E.T. Henry for the rediscounting of the crossed checks issued in favor of E.T. Henry.
She was aware that the checks were strictly endorsed for deposit only to the payee's account
and not to be further negotiated. What is more, the confirmation letter contained a clause
that was not true, that is, "that the checks issued to E.T. Henry were in payment of Hydro oil
bought by Hi-Cement from E.T. Henry". Her negligence resulted in damage to the corporation.
Hence, Ms. de Leon may be held personally liable therefor.
The next issue is whether or not petitioner Atrium was a holder of the checks in due
course. The Negotiable Instruments Law, Section 52 defines a holder in due course, thus:
"A holder in due course is a holder who has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was overdue, and without
notice that it had been previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
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Corporation Law
(d) That at the time it was negotiated to him he had no notice of any
infirmity in the instrument or defect in the title of the person negotiating it."
In the instant case, the checks were crossed checks and specifically indorsed for
deposit to payee's account only. From the beginning, Atrium was aware of the fact that the
checks were all for deposit only to payee's account, meaning E.T. Henry. Clearly, then, Atrium
could not be considered a holder in due course.
However, it does not follow as a legal proposition that simply because petitioner
Atrium was not a holder in due course for having taken the instruments in question with
notice that the same was for deposit only to the account of payee E.T. Henry that it was
altogether precluded from recovering on the instrument. The Negotiable Instruments Law
does not provide that a holder not in due course can not recover on the instrument. 19
The disadvantage of Atrium in not being a holder in due course is that the negotiable
instrument is subject to defenses as if it were non-negotiable.20 One such defense is absence
or failure of consideration.21
We need not rule on the other issues raised, as they merely follow as a consequence
of the foregoing resolutions.
WHEREFORE, the petitions are hereby DENIED. The decision and resolution of the
Court of Appeals in CA-G. R. CV No. 26686, are hereby AFFIRMED in toto. No costs.
Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 111448 January 16, 2002
AF REALTY & DEVELOPMENT, INC. and ZENAIDA R. RANULLO, petitioners,
vs.
DIESELMAN FREIGHT SERVICES, CO., MANUEL C. CRUZ, JR. and MIDAS DEVELOPMENT
CORPORATION, respondents.
Corporation Law; Agency; Contracts or acts of a corporation must be made either by
the board of directors or by a corporate agent duly authorized by the board; Absent such valid
delegation/authorization the rule is that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or connected with, the performance of
authorized duties of such director, are held not binding on the corporation.Section 23 of the
Corporation Code expressly provides that the corporate powers of all corporations shall be
62

exercised by the board of directors. Just as a natural person may authorize another to do
certain acts in his behalf, so may the board of directors of a corporation validly delegate some
of its functions to individual officers or agents appointed by it. Thus, contracts or acts of a
corporation must be made either by the board of directors or by a corporate agent duly
authorized by the board. Absent such valid delegation/authorization, the rule is that the
declarations of an individual director relating to the affairs of the corporation, but not in the
course of, or connected with, the performance of authorized duties of such director, are held
not binding on the corporation.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
SANDOVAL-GUTIERREZ, J.:
Petition for review on certiorari assailing the Decision dated December 10, 1992 and
the Resolution (Amending Decision) dated August 5, 1993 of the Court of Appeals in CA-G.R.
CV No. 30133.
Dieselman Freight Service Co. (Dieselman for brevity) is a domestic corporation and a
registered owner of a parcel of commercial lot consisting of 2,094 square meters, located at
104 E. Rodriguez Avenue, Barrio Ugong, Pasig City, Metro Manila. The property is covered by
Transfer Certificate of Title No. 39849 issued by the Registry of Deeds of the Province of
Rizal.1
On May 10, 1988, Manuel C. Cruz, Jr., a member of the board of directors of
Dieselman, issued a letter denominated as "Authority To Sell Real Estate" 2 to Cristeta N.
Polintan, a real estate broker of the CNP Real Estate Brokerage. Cruz, Jr. authorized Polintan
"to look for a buyer/buyers and negotiate the sale" of the lot at P3,000.00 per square meter,
or a total of P6,282,000.00. Cruz, Jr. has no written authority from Dieselman to sell the lot.
In turn, Cristeta Polintan, through a letter3 dated May 19, 1988, authorized Felicisima
("Mimi") Noble4 to sell the same lot.
Felicisima Noble then offered for sale the property to AF Realty & Development, Inc.
(AF Realty) at P2,500.00 per square meter.5 Zenaida Ranullo, board member and vice-
president of AF Realty, accepted the offer and issued a check in the amount of P300,000.00
payable to the order of Dieselman. Polintan received the check and signed an
"Acknowledgement Receipt"6 indicating that the amount of P300,000.00 represents the
partial payment of the property but refundable within two weeks should AF Realty
disapprove Ranullo's action on the matter.
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On June 29, 1988, AF Realty confirmed its intention to buy the lot. Hence, Ranullo
asked Polintan for the board resolution of Dieselman authorizing the sale of the property.
However, Polintan could only give Ranullo the original copy of TCT No. 39849, the tax
declaration and tax receipt for the lot, and a photocopy of the Articles of Incorporation of
Dieselman.7
On August 2, 1988, Manuel F. Cruz, Sr., president of Dieselman, acknowledged receipt
of the said P300,000.00 as "earnest money" but required AF Realty to finalize the sale
at P4,000.00 per square meter.8 AF Realty replied that it has paid an initial down payment of
P300,000.00 and is willing to pay the balance.9
However, on August 13, 1988, Mr. Cruz, Sr. terminated the offer and demanded from
AF Realty the return of the title of the lot earlier delivered by Polintan.10
Claiming that there was a perfected contract of sale between them, AF Realty filed
with the Regional Trial Court, Branch 160, Pasig City a complaint for specific performance (Civil
Case No. 56278) against Dieselman and Cruz, Jr.. The complaint prays that Dieselman be
ordered to execute and deliver a final deed of sale in favor of AF Realty. 11 In its amended
complaint,12 AF Realty asked for payment of P1,500,000.00 as compensatory damages;
P400,000.00 as attorney's fees; and P500,000.00 as exemplary damages.
In its answer, Dieselman alleged that there was no meeting of the minds between the
parties in the sale of the property and that it did not authorize any person to enter into such
transaction on its behalf.
Meanwhile, on July 30, 1988, Dieselman and Midas Development Corporation (Midas)
executed a Deed of Absolute Sale13 of the same property. The agreed price was P2,800.00 per
square meter. Midas delivered to Dieselman P500,000.00 as down payment and deposited
the balance of P5,300,000.00 in escrow account with the PCIBank.
Constrained to protect its interest in the property, Midas filed on April 3, 1989 a
Motion for Leave to Intervene in Civil Case No. 56278. Midas alleged that it has purchased the
property and took possession thereof, hence Dieselman cannot be compelled to sell and
convey it to AF Realty. The trial court granted Midas' motion.
After trial, the lower court rendered the challenged Decision holding that the acts of
Cruz, Jr. bound Dieselman in the sale of the lot to AF Realty. 14 Consequently, the perfected
contract of sale between Dieselman and AF Realty bars Midas' intervention. The trial court
also held that Midas acted in bad faith when it initially paid Dieselman P500,000.00 even
without seeing the latter's title to the property. Moreover, the notarial report of the sale was
63

not submitted to the Clerk of Court of the Quezon City RTC and the balance of P5,300,000.00
purportedly deposited in escrow by Midas with a bank was not established.
The dispositive portion of the trial court's Decision reads:
"WHEREFORE, foregoing considered, judgment is hereby rendered ordering
defendant to execute and deliver to plaintiffs the final deed of sale of the property
covered by the Transfer Certificate of Title No. 39849 of the Registry of Deed of Rizal,
Metro Manila District II, including the improvements thereon, and ordering
defendants to pay plaintiffs attorney's fees in the amount of P50,000.00 and to pay
the costs.
"The counterclaim of defendants is necessarily dismissed.
"The counterclaim and/or the complaint in intervention are likewise dismissed
"SO ORDERED."15
Dissatisfied, all the parties appealed to the Court of Appeals.
AF Realty alleged that the trial court erred in not holding Dieselman liable for moral,
compensatory and exemplary damages, and in dismissing its counterclaim against Midas.
Upon the other hand, Dieselman and Midas claimed that the trial court erred in
finding that a contract of sale between Dieselman and AF Realty was perfected. Midas further
averred that there was no bad faith on its part when it purchased the lot from Dieselman.
In its Decision dated December 10, 1992, the Court of Appeals reversed the judgment
of the trial court holding that since Cruz, Jr. was not authorized in writing by Dieselman to sell
the subject property to AF Realty, the sale was not perfected; and that the Deed of Absolute
Sale between Dieselman and Midas is valid, there being no bad faith on the part of the latter.
The Court of Appeals then declared Dieselman and Cruz, Jr. jointly and severally liable to AF
Realty for P100,000.00 as moral damages; P100,000.00 as exemplary damages; and
P100,000.00 as attorney's fees.16
On August 5, 1993, the Court of Appeals, upon motions for reconsideration filed by
the parties, promulgated an Amending Decision, the dispositive portion of which reads:
"WHEREFORE, The Decision promulgated on October 10, 1992, is hereby AMENDED in
the sense that only defendant Mr. Manuel Cruz, Jr. should be made liable to pay the
plaintiffs the damages and attorney's fees awarded therein, plus the amount of
P300,000.00 unless, in the case of the said P300,000.00, the same is still deposited
with the Court which should be restituted to plaintiffs.
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"SO ORDERED."17
AF Realty now comes to this Court via the instant petition alleging that the Court of
Appeals committed errors of law.
The focal issue for consideration by this Court is who between petitioner AF Realty
and respondent Midas has a right over the subject lot.
The Court of Appeals, in reversing the judgment of the trial court, made the following
ratiocination:
"From the foregoing scenario, the fact that the board of directors of Dieselman never
authorized, verbally and in writing, Cruz, Jr. to sell the property in question or to look
for buyers and negotiate the sale of the subject property is undeniable.
"While Cristeta Polintan was actually authorized by Cruz, Jr. to look for buyers and
negotiate the sale of the subject property, it should be noted that Cruz, Jr. could not
confer on Polintan any authority which he himself did not have. Nemo dat quod non
habet. In the same manner, Felicisima Noble could not have possessed authority
broader in scope, being a mere extension of Polintan's purported authority, for it is a
legal truism in our jurisdiction that a spring cannot rise higher than its source.
Succinctly stated, the alleged sale of the subject property was effected through
persons who were absolutely without any authority whatsoever from Dieselman.
"The argument that Dieselman ratified the contract by accepting the P300,000.00 as
partial payment of the purchase price of the subject property is equally untenable.
The sale of land through an agent without any written authority is void.
xxx xxx xxx
"On the contrary, anent the sale of the subject property by Dieselman to intervenor
Midas, the records bear out that Midas purchased the same from Dieselman on 30
July 1988. The notice of lis pendens was subsequently annotated on the title of the
property by plaintiffs on 15 August 1988. However, this subsequent annotation of the
notice of lis pendens certainly operated prospectively and did not retroact to make
the previous sale of the property to Midas a conveyance in bad faith. A subsequently
registered notice of lis pendens surely is not proof of bad faith. It must therefore be
borne in mind that the 30 July 1988 deed of sale between Midas and Dieselman is a
document duly certified by notary public under his hand and seal. x x x. Such a deed
of sale being public document acknowledged before a notary public is admissible as
to the date and fact of its execution without further proof of its due execution and
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delivery (Bael vs. Intermediate Appellate Court, 169 SCRA617; Joson vs. Baltazar, 194
SCRA 114) and to prove the defects and lack of consent in the execution thereof, the
evidence must be strong and not merely preponderant x x x." 18
We agree with the Court of Appeals.
Section 23 of the Corporation Code expressly provides that the corporate powers of
all corporations shall be exercised by the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents appointed
by it.19 Thus, contracts or acts of a corporation must be made either by the board of directors
or by a corporate agent duly authorized by the board. 20 Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or connected with, the performance of
authorized duties of such director, are held not binding on the corporation.21
In the instant case, it is undisputed that respondent Cruz, Jr. has no written authority
from the board of directors of respondent Dieselman to sell or to negotiate the sale of the lot,
much less to appoint other persons for the same purpose. Respondent Cruz, Jr.'s lack of such
authority precludes him from conferring any authority to Polintan involving the subject realty.
Necessarily, neither could Polintan authorize Felicisima Noble. Clearly, the collective acts of
respondent Cruz, Jr., Polintan and Noble cannot bind Dieselman in the purported contract of
sale.
Petitioner AF Realty maintains that the sale of land by an unauthorized agent may be
ratified where, as here, there is acceptance of the benefits involved. In this case the receipt by
respondent Cruz, Jr. from AF Realty of the P300,000.00 as partial payment of the lot
effectively binds respondent Dieselman.22
We are not persuaded.
Involved in this case is a sale of land through an agent. Thus, the law on agency under
the Civil Code takes precedence. This is well stressed in Yao Ka Sin Trading vs. Court of
Appeals:23
"Since a corporation, such as the private respondent, can act only through its officers
and agents, all acts within the powers of said corporation may be performed by
agents of its selection; and, except so far as limitations or restrictions may be
imposed by special charter, by-law, or statutory provisions, the same general
principles of law which govern the relation of agency for a natural person govern
the officer or agent of a corporation, of whatever status or rank, in respect to
his power to act for the corporation; and agents when once appointed, or members
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acting in their stead, are subject to thesame rules, liabilities, and incapacities as are
agents of individuals and private persons." (Emphasis supplied)
Pertinently, Article 1874 of the same Code provides:
"ART. 1874. When a sale of piece of land or any interest therein is through an agent,
the authority of the latter shall be in writing; otherwise, the sale shall be void."
(Emphasis supplied)
Considering that respondent Cruz, Jr., Cristeta Polintan and Felicisima Ranullo were
not authorized by respondent Dieselman to sell its lot, the supposed contract is void. Being a
void contract, it is not susceptible of ratification by clear mandate of Article 1409 of the Civil
Code, thus:
"ART. 1409. The following contracts are inexistent and void from the very beginning:
xxx
(7) Those expressly prohibited or declared void by law.
"These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived." (Emphasis supplied)
Upon the other hand, the validity of the sale of the subject lot to respondent Midas is
unquestionable. As aptly noted by the Court of Appeals,24 the sale was authorized by a board
resolution of respondent Dieselman dated May 27, 1988.
The Court of Appeals awarded attorney's fees and moral and exemplary damages in
favor of petitioner AF Realty and against respondent Cruz, Jr.. The award was made by reason
of a breach of contract imputable to respondent Cruz, Jr. for having acted in bad faith. We are
no persuaded. It bears stressing that petitioner Zenaida Ranullo, board member and vice-
president of petitioner AF Realty who accepted the offer to sell the property, admitted in her
testimony25that a board resolution from respondent Dieselman authorizing the sale is
necessary to bind the latter in the transaction; and that respondent Cruz, Jr. has no such
written authority. In fact, despite demand, such written authority was not presented to
her.26 This notwithstanding, petitioner Ranullo tendered a partial payment for the
unauthorized transaction. Clearly, respondent Cruz, Jr. should not be held liable for damages
and attorney's fees.
WHEREFORE, the assailed Decision and Resolution of the Court of Appeals are
hereby AFFIRMED with MODIFICATION in the sense that the award of damages and
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attorney's fees is deleted. Respondent Dieselman is ordered to return to petitioner AF Realty

its partial payment of P300,000.00. Costs against petitioners.

SO ORDERED.

66

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5377 December 29, 1954
MARIA CLARA PIROVANA ET AL., plaintiffs-appellees,
vs.
THE DE LA RAMA STEAMSHIP CO., defendant-appellant.
1. CORPORATIONS; DONATIONS; DONATION GlVEN "OUT OF GRATITUDE FOR SERVICES
RENDERED" Is REMUNERATIVE.A donation given by the corporation to the minor children of
its late president because he "was to a large extent responsible for the rapid and very
successful development and expansion of the activities of this company" is remunerative in
nature in contemplation of law.
2. ID.; ID.; PERFECTED DONATION CAN ONLY BE RESCINDED ON LEGAL GROUNDS.
Where the donation made by the corporation has not only been granted in several resolutions
duly adopted by its board of directors but also it has been formally ratified by its stockholders,
with the concurrence of its only creditor, and accepted by the donee, the donation -has
reached the stage of perfection which is valid and binding upon the corporation and as such
cannot be rescinded unless there exist legal grounds for doing so.
3. ID.; ID.; DONATION DISTINGUISHED FROM GRATUITY.While a donation may
technically be different from a gratuity, in substance they are the same. They are even similar
to a pension. Thus, it was said that "A pension is a gratuity only when it is granted for services
previously rendered, and which at the time they were rendered gave rise to no legal
obligation." (Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Ck, 169 Pac., 306, 176
Cal., 659.)
4. ID.; POWERS OF A CORPORATION; ACTS PERFORMED WITHIN THE POWERS
GRANTED ARE NOT "ULTRA VIRES".Where the corporation was given broad and almost
unlimited powers to carry out the purposes for which it was organized among them, to aid in
any other manner any person in the affairs and prosperity of whom it has a lawful interest, a
donation made to the heirs of its late president in recognition of the valuable services
rendered by the latter which had immensely contributed to its growth, comes within this
broad grant of power and can not be considered an ultra vires act.
5. ID.; ID.; "ULTRA VIRES" ILLEGAL ACTS DISTINGUISHED; EFFECT OF RATIFICATION BY
STOCKHOLDERS.Illegal acts of a corporation contemplate the doing of an act which is
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Corporation Law
contrary to law, morals, or public order, or contravene some rules of public policy or public
duty, and are, like similar transactions between individuals, void. They can not serve as basis
of a court action, nor acquire validity by performance, ratification, or estoppel. On the other
hand, ultra vires acts or those which are not illegal and void ab initio but are merely within the
scope of the article of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
6. ID.; ID.; "ULTRA VIRES" ACTS; RATIFICATION BY STOCKHOLDERS OF "ULTRA VIRES"
ACTS CURES INFIRMITY.The ratification by the stockholders of an ultra vires act which is not
illegal cures the infirmity of the corporate act and makes it perfectly valid and enforceable,
specially so if it is not merely executory but executed and consummated and no creditors are
prejudiced thereby.
7. ATTORNEY'S FEES, WHEN MAY BE AWARDED AS DAMAGES.When the
defendant's act or omission has compelled the plaintiff to litigate with third persons or to
incur expenses to protect his interest, attorney's fees may be awarded as damages (Article
2208, paragraph 2, of the new Civil Code).
APPEAL from a judgment of the Court of First Instance of Rizal. Tan, J.
The facts are stated in the opinion of the Court.
Del Rosario and Garcia for appellant.
Vicente J. Francisco for appellees.
BAUTISTA ANGELO, J.:
This is an appeal from a decision of the Court of First Instance of Rizal declaring the
donation made by the defendant in favor of the minor children of the late Enrico Pirovano of
the proceeds of the insurance policies taken on his life valid and binding, and ordering said
defendant to pay to said minor children the sum of P583,813.59, with interest thereon at the
rate of per cent from the date of filing of the complaint, plus an additional amount equivalent
to 20 per cent of said sum of P538,813.59 as damages by way of attorney's fees and the costs
of action.
Plaintiffs herein are the minor children of the late Enrico Pirovano represented by
their mother and judicial guardian Estefania R. Pirovano. They seek to enforce certain
resolutions adopted by the Board of Directors and stockholders of the defendant company
giving to said minor children of the proceeds of the insurance policies taken on the life of their
deceased father Enrico Pirovano with the company as beneficiary. Defendant's main defense
is: that said resolutions and the contract executed pursuant thereto are ultra vires, and, if
valid, the obligation to pay the amount given is not yet due and demandable.
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The trial court resolved all the issues raised by the parties in favor of the plaintiffs
and, after considering the evidence, both oral and documentary, arrived at the following
conclusions:
First. That the contract executed between the plaintiffs and the defendant is a
renumerative donation.
Second. That said contract or donation is not ultra vires, but an act executed within
the powers of the defendant corporation in accordance with its articles of
incorporation and by laws, sanctioned and approved by its Board of Directors and
stockholders; and subsequently ratified by other subsequent acts of the defendant
company.
Third. That the said donation is in accordance with the trend of modern and more
enlightened legislation in its treatment of questions between labor and capital.
Fourth. That the condition mentioned in the donation is null and void because it
depends on the provisions of Article 1115 of the old Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandates of the
majority of the stockholders.
Sixth. That the non-payment of the debt in favor of the National Development
Company is not due to the lack of funds, nor to lack of authority, but the desire of the
President of the corporation to preserve and continue the Government participation
in the company.
Seventh. That due demands were made by the plaintiffs and their attorneys and
these demands were rejected for no justifiable or legal grounds.
The important facts which need to be considered for purposes of this appeal may be
briefly stated as follows: Defendant is a corporation duly organized in accordance with law
with an authorized capital of P500,000, divided into 5,000 shares, with a par value of P100
each share. The stockholders were: Esteban de la Rama, 1,800 shares, Leonor de la Rama, 100
shares, Estefania de la Rama, 100 shares, and Eliseo Hervas, Tomas Concepcion, Antonio G.
Juanco, and Gaudencio Volasote with 5 shares each. Leonor and Estefania are daughters of
Don Esteban, while the rest his employees. Estefania de la Rama was married to the late
Enrico Pirovano and to them four children were born who are the plaintiffs in this case.
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Enrico Pirovano became the president of the defendant company and under his
management the company grew and progressed until it became a multi-million corporation by
the time Pirovano was executed by the Japanese during the occupation. On May 13, 1941, the
capital stock of the corporation was increased to P2,000,000, after which a 100 per cent stock
dividend was declared. Subsequently, or before the outbreak of the war , new stock dividends
of 200 per cent and 33 1/3 per cent were again declared. On December 4, 1941, the capital
stock was once more increased to P5,000,000. Under Pirovano's management, the assets of
the company grew and increased from an original paid up capital of around P240,000 to
P15,538,024.37 by September 30, 1941 (Exhibit HH).
In the meantime, Don Esteban de la Rama, who practically owned and controlled the
stock of the defendant corporation, distributed his shareholding among his five daughters,
namely, Leonor, Estefania, Lourdes, Lolita and Conchita and his wife Natividad Aguilar so that,
at that time, or on July 10, 1946, the stockholding of the corporation stood as follows: Esteban
de la Rama, 869 shares, Leonor de la Rama, 3,375 shares, Estefania de la Rama, 3,368 shares,
Lourdes de la Rama, 3,368 shares, Lolita de la Rama, 3,368 shares, Conchita de la Rama, 3,376
shares, and Natividad Aguilar, 2,136 shares. The other stockholders , namely, Eliseo Hervas,
Tomas Concepcion, Antonio Juanco, and Jose Aguilar, who were merely employees of Don
Esteban, were given 40 shares each, while Pio Pedrosa, Marcial P. Lichauco and Rafael Roces,
one share each, because they merely represented the National Development Company. This
Company was given representation in the Board Of Directors of the corporation because at
that time the latter had an outstanding bonded indebtedness to the National Development
Company.
This bonded indebtedness was incurred on February 26, 1940 and was in the amount
of P7,500.00. The bond held by the National Development Company was redeemable within a
period of 20 years from March 1, 1940,. bearing interest at the rate of 5 per cent per annum.
To secure said bonded indebtedness, all the assets of the De la Rama Steamship Co., Inc., and
properties of Don Esteban de la Rama, as well as those of the Hijos de I. de la Rama and Co.,
Inc., a sister corporation owned by Don Esteban and his family, were mortgaged to the
National Development Company (Annexes A, B, C, D of Exhibit 3, Deed of Trust). Payments
made by the corporation under the management of Pirovano reduced this bonded
indebtedness to P3,260,855.77.
Upon arrangement made with the National Development Company, the outstanding
bonded indebtedness was converted into non-voting preferred shares of stock of the De la
Rama company under the express condition that they would bear affixed cumulative dividend
of 6 per cent per annum and would be redeemable within 15 years (Exhibits 5 and 7). This
conversion was carried out on September 23, 1949, when the National Development Company
executed a "Deed of Termination of Trust and Release of Mortgage" in favor of the De la
Rama company (Exhibit 6.) The immediate effect of this conversion was the released from
68

incumbrance of all the properties Of Don Esteban and of the Hijos de I. de la Rama and Co.,
Inc., which was apparently favorable to the interests of the De la Rama company, but, on the
other hand, it resulted in the inconvenience that, as holder of the preferred stock, the
National Development Company, was given to the right to 40 per cent of the membership of
the Board of Directors of the De la Rama company, which meant an increase in the
representation of the National Development Company from 2 to 4 of the 9 members of said
Board of Directors.
The first resolution granting to the Pirovano children the proceeds of the insurance
policies taken on his life by the defendant company was adopted by the Board of Directors at
a meeting held on July 10, 1946, (Exhibit B). This grant was called in the resolution as "Special
Payment to Minor Heirs of the late Enrico Pirovano". Because of its direct hearing on the
issues involved in this case, said resolution is hereunder reproduced in toto:
SPECIAL PAYMENT TO MINORS HEIRS OF THE LATE ENRICO PIROVANO
The President stated that the principal purpose for which the meeting had
been called was to discuss the advisability of making some form of compensation to
the minor heirs of the late Enrico Pirovano, former President and General Manager of
the Company. As every member of the Board knows, said the President, the late
Enrico Pirovano who was largely responsible for the very successful development of
the activities of the Company prior to war was killed by the Japanese in Manila
sometime in 1944 leaving as his only heirs four minor children, Maria Carla, Esteban,
Enrico and John Albert. Early in 1941, explained the President, the Company had
insured the life of Mr. Pirovano for a million pesos. Following the occupation of the
Philippines by Japanese forces the Company was unable to pay the premiums on
those policies issued by Filipino companies and these policies had lapsed. But with
regards to the York Office of the De la Rama Steamship Co., Inc. had kept up
payment of the premiums from year to year. The payments made on account of
these premiums, however, are very small compared to the amount which the
Company will now receive as a result of Mr. Pirovano's death. The President
proposed therefore that out of the proceeds of these policies the sum of P400,000
be set aside for the minor children of the deceased, said sum of money to be
convertible into 4,000 shares of the stock of the Company, at par, or 1,000 shares for
each child. This proposal, explained the President as being made by him upon
suggestion of President Roxas, but, he added, that he himself was very much in favor
of it also. On motion of Miss Leonor de la Rama duly seconded by Mrs. Lourdes de la
Rama de Osmea, the following resolution was, thereupon, unanimously approved:
Whereas, the late Enrico Pirovano, President and General Manager of the De
la Rama Steamship Company, died in Manila sometime in November, 1944:
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Whereas, the said Enrico Pirovano was largely responsible for the rapid and
very successful development of the activities of thus company;
Whereas, early in 1941 this company insured the life of said Enrico Pirovano in
various Philippine and American Life Insurance companies for the total sum of
P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow, Estefania
Pirovano and four minor children, to wit: Esteban, Maria Carla, Enrico and John
Albert, all surnamed Pirovano;
Whereas, said Enrico Pirovano left practically nothing to his heirs and it is but
fit proper that this company which owes so much to the deceased should make some
provision for his children;
Whereas, this company paid premium on Mr. Pirovano's life insurance
policies for a period of only 4 years so that it will receive from the insurance
companies sums of money greatly in excess of the premiums paid by this company.
Be it resolved, That out of the proceeds to be collected from the life
insurance policies on the life of the late Enrico Pirovano, the sum of P400,000 be set
aside for equal division among the 4 minor children of the deceased, to wit: Esteban,
Maria Carla, Enrico and John Albert, all surnamed Pirovano, which sum of money shall
be convertible into shares of stock of the De la Rama Steamship Company, at par
and, for that purpose, that the present registered stockholders of the corporation be
requested to waive their preemptive right to 4,000 shares of the unissued stock of
the company in order to enable each of the 4 minor heirs of the deceased, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, to obtain 1,000
shares at par;
Resolved, further, that in view of the fact that under the provisions of the indenture
with the National Development Company, it is necessary that action herein proposed
to be confirmed by the Board of Directors of that company, the Secretary is hereby
instructed to send a copy of this resolution to the proper officers of the National
Development Company for appropriate action. (Exhibit B)
The above resolution, which was adopted on July 10, 1946, was submitted to the
stockholders of the De la Rama company at a meeting properly convened, and on that same
date, July 10, 1946, the same was duly approved.
It appears that, although Don Esteban and the Members of his family were agreeable
to giving to the Pirovano children the amount of P400,000 out of the proceeds of the
69

insurance policies taken on the life of Enrico Pirovano, they did not realize that when they
provided in the above referred two resolutions that said Amount should be paid in the form
of shares of stock, they would be actually giving to the Pirovano children more than what
they intended to give. This came about when Lourdes de la Rama, wife of Sergio Osmea, Jr.,
showed to the latter copies of said resolutions and asked him to explain their import and
meaning, and it was value then that Osmea explained that because the value then of the
shares of stock was actually 3.6 times their par value, the donation their value, the donation,
although purporting to be only P400,00, would actually amount to a total of P1,440,000. He
further explained that if the Pirovano children would given shares of stock in lieu of the
amount to be donated, the voting strength of the five daughters of Don Esteban in the
company would be adversely affected in the sense that Mrs. Pirovano would be adversely
affected in the sense that Mrs. Pirovano would have a voting power twice as much as that of
her sisters. This caused Lourdes de la Rama to write to the secretary of the corporation, Atty.
Marcial Lichauco, asking him to cancel the waiver she supposedly gave of her pre-emptive
rights. Osmea elaborated on this matter at the annual meeting of the stockholders held on
December 12, 1946 but at said meeting it was decided to leave the matter in abeyance
pending further action on the part of the members of the De la Rama family.
Osmea, in the meantime, took up the matter with Don Esteban and, as
consequence, the latter, on December 30, 1946, addressed to Marcial Lichauco a letter
stating, among other things, that "in view of the total lack of understanding by me and my
daughters of the two Resolutions abovementioned, namely, Directors' and Stockholders'
dated July 10, 1946, as finally resolved by the majority of the Stockholders and Directors
present yesterday, that you consider the abovementioned resolutions nullified." (Exhibit CC).
On January 6, 1947, the Board of Directors of the De la Rama company, as a
consequence of the change of attitude of Don Esteban, adopted a resolution changing the
form of the donation to the Pirovano children from a donation of 4,000 shares of stock as
originally planned into a renunciation in favor of the children of all the company's "right, title,
and interest as beneficiary in and to the proceeds of the abovementioned life insurance
policies", subject to the express condition that said proceeds should be retained by the
company as a loan drawing interest at the rate of 5 per cent per annum and payable to the
Pirovano children after the company "shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of approximately P5,000,000" (Exhibit C). This
resolution was concurred in by the representatives of the National Development Company.
The pertinent portion of the resolution reads as follows:
Be resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, all of his right, title, and interest as beneficiary in
and to the proceeds of the abovementioned life insurance policies in favor of
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Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano, subject to the
terms and conditions herein after provided;
That the proceeds of said insurance policies shall be retained by the
Company in the nature of a loan drawing interest at the rate of 5 per cent annum
from the date of receipt of payment by the Company from the various insurance
companies above-mentioned until the time the time the same amounts are paid to
the minor heirs of Enrico Pirovano previously mentioned;
That all amounts received from the above-mentioned policies shall be
divided equally among the minors heirs of said Enrico Pirovano;
That the company shall proceed to pay the proceeds of said insurance
policies plus interests that may have accrued to each of the heirs of the said Enrico
Pirovano or their duly appointed representatives after the Company shall have first
settled in full the balance of its present remaining bonded indebtedness in the sum of
the approximately P5,000,000.
The above resolution was carried out by the company and Mrs. Estefania R. Pirovano,
the latter acting as guardian of her children, by executing a Memorandum Agreement on
January 10, 1947 and June 17, 1947, respectively, stating therein that the De la Rama Steamship
Co., Inc., shall enter in its books as a loan the proceeds of the life insurance policies taken on
the life of Pirovano totalling S321,500, which loan would earn interest at the rate of 5 per cent
per annum. Mrs. Pirovano, in executing the agreement, acted with the express authority
granted to her by the court in an order dated March 26, 1947.
On June 24, 1947, the Board of Directors approved a resolution providing therein that
instead of the interest on the loan being payable, together with the principal, only after the
company shall have first settled in full its bonded indebtedness, said interest may be paid to
the Pirovano children "whenever the company is in a position to met said obligation" (Exhibit
D), and on February 26, 1948, Mrs. Pirovano executed a public document in which she
formally accepted the donation (Exhibit H). The Dela Rama company took "official notice" of
this formal acceptance at a meeting held by its Board of Directors on February 26, 1948.
In connection with the above negotiations, the Board of Directors took up at its
meeting on July 25, 1949, the proposition of Mrs. Pirovano to buy the house at New Rochelle,
New York, owned by the Demwood Realty, a subsidiary of the De la Rama company at its
original costs of $75,000, which would be paid from the funds held in trust belonging to her
minor children. After a brief discussion relative to the matter, the proposition was approved
in a resolution adopted on the same date.
The formal transfer was made in an agreement signed on September 5, 1949 by Mrs.
Pirovano, as guardian of her children, and by the De la Rama company, represented by its new
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General Manager, Sergio Osmea, Jr. The transfer of this property was approved by the court
in its order of September 20, 1949.
On September 13, 1949, or two years and 3 months after the donation had been
approved in the various resolutions herein above mentioned, the stockholders of the De la
Rama company formally ratified the donation (Exhibit E), with certain clarifying modifications,
including the resolution approving the transfer of the Demwood property to the Pirovano
children. The clarifying modifications are quoted hereunder:
1. That the payment of the above-mentioned donation shall not be affected until such
time as the Company shall have first duly liquidated its present bonded indebtedness
in the amount of P3,260,855.77 with The National Development Company, or fully
redeemed the preferred shares of stock in the amount which shall be issued to the
National Development Company in lieu thereof;
2. That any and all taxes, legal fees, and expenses in any way connected with the
above transaction shall be chargeable and deducted from the proceeds of the life
insurance policies mentioned in the resolutions of the Board of Directors. (Exhibit E)
Sometime in March 1950, the President of the corporation, Sergio Osmea, Jr.,
addressed an inquiry to the Securities and Exchange Commission asking for opinion regarding
the validity of the donation of the proceeds of the insurance policies to the Pirovano children.
On June 20, 1950 that office rendered its opinion that the donation was void because the
corporation could not dispose of its assets by gift and therefore the corporation acted
beyond the scope of its corporate powers. This opinion was submitted to the Board of
Directors at its meting on July 12, 1950, on which occasion the president recommend that
other legal ways be studied whereby the donation could be carried out. On September 14,
1950, another meeting was held to discuss the propriety of the donation. At this meeting the
president expressed the view that, since the corporation was not authorized by its charter to
make the donation to the Pirovano children and the majority of the stockholders was in favor
of making provision for said children, the manner he believed this could be done would be to
declare a cash dividend in favor of the stockholders in the exact amount of the insurance
proceeds and thereafter have the stockholders make the donation to the children in their
individual capacity. Notwithstanding this proposal of the president, the board took no action
on the matter, and on March 8, 1951, at a stockholders' meeting convened on that date the
majority of the stockholders' voted to revoke the resolution approving the donation to the
Pirovano children.
The pertinent portion of the resolution reads as follows:
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Be it resolved, as it is hereby resolved, that in view of the failure of
compliance with the above conditions to which the above donation was made
subject, and in view of the opinion of the Securities and Exchange Commissioner, the
stockholders revoke, rescind and annul, as they do thereby revoke, rescind and
annul, its ratification and approval on September 13, 1949 of the aforementioned
resolution of the Board of Directors of January 6, 1947, as amended on June 24, 1947.
(Exhibit T)
In view of the resolution declaring that the corporation failed to comply with the
condition set for the effectivity of the donation and revoking at the same time the approval
given to it by the corporation, and considering that the corporation can no longer set aside
said donation because it had no longer set aside said donation because it had long been
perfected and consummated, the minor children of the late Enrico Pirovano, represented by
their mother and guardian, Estefania R. de Pirovano, demanded the payment of the credit due
them as of December 31, 1951, amounting to P564,980.89, and this payment having been
refused, they instituted the present action in the Court of First Instance of Rizal wherein they
prayed that the be granted an alternative relief of the following tenor: (1) sentencing
defendant to pay to the plaintiff the sum of P564,980.89 as of December 31, 1951, with the
corresponding interest thereon; (2) as an alternative relief, sentencing defendant to pay to
the plaintiffs the interests on said sum of P564,980.89 at the rate of 5 per cent per annum,
and the sum of P564,980.89 after the redemption of the preferred shares of the corporation
held by the National Development Company; and (3) in any event, sentencing defendant to
pay the plaintiffs damages in the amount of not less than 20 per cent of the sum that may be
adjudged to the plaintiffs, and the costs of action.
The only issues which in the opinion of the court need to be determined in order to
reach a decision in this appeal are: (1) Is the grant of the proceeds of the insurance policies
taken on the life of the late Enrico Pirovano as embodied in the resolution of the Board of
Directors of defendant corporation adopted on January 6, 1947 and June 24, 1947 a
remunerative donation as found by the lower court?; (2) IN the affirmative case, has that
donation been perfected before its rescission or nullification by the stockholders of the
corporation on March 8, 1951?; (3) Can defendant corporation give by way of donation the
proceeds of said insurance policies to the minor children of the late Enrico Pirovano under the
law or its articles of corporation, or is that donation an ultra vires act?; and (4) has the
defendant corporation, by the acts it performed subsequent to the granting of the donation,
deliberately prevented the fulfillment of the condition precedent to the payment of said
donation such that it can be said it has forfeited its right to demand its fulfillment and has
made the donation entirely due and demandable?
We will discuss these issues separately.
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1. To determine the nature of the grant made by the defendant corporation to the
minor children of the late Enrico Pirovano, we do not need to go far nor dig into the
voluminous record that lies at the bottom of this case. We do not even need to inquire into
the interest which has allegedly been shown by President Roxas in the welfare of the children
of his good friend Enrico Pirovano. Whether President Roxas has taken the initiative in the
move to give something to said children which later culminated in the donation now in
dispute, is of no moment for the fact is that, from the mass of evidence on hand, such a
donation has been given the full indorsement and encouraging support by Don Esteban de la
Rama who was practically the owner of the corporation. We only need to fall back to
accomplish this purpose on the several resolutions of the Board of Directors of the
corporations containing said grant for they clearly state the reasons and purposes why the
donation has been given.
Before we proceed further, it is convenient to state here in passing that, before the
Board of Directors had approved its resolution of January 6, 1947, as later amended by
another resolution adopted on June 24, 1947, the corporation had already decided to give to
the minor children of the late Enrico Pirovano the sum of P400,000 out of the proceeds of the
insurance policies taken on his life in the form of shares, and that when this form was
considered objectionable because its result and effect would be to give to said children a
much greater amount considering the value then of the stock of the corporation, the Board of
Directors decided to amend the donation in the form and under the terms stated in the
aforesaid resolutions. Thus, in the original resolution approved by the Board of Directors on
July 10, 1946, wherein the reasons for granting the donation to the minor children of the late
Enrico Pirovano were clearly, we find out the following revealing statements:
Whereas, the late Enrico Pirovano President and General Manager of the De
la Rama Steamship Company, died in Manila sometime in November, 1944;
Whereas, the said Enrico Pirovano was largely responsible for the rapid and
very successful development of the activities of this company;
Whereas, early in 1941 this company insured the life of said Enrico Pirovano in various
Philippine and American Life Insurance companies for the total sum of P1,000,000;
Whereas, the said Enrico Pirovano is survived by his widow, Estefania
Pirovano and 4 minor children, to wit: Esteban, Maria Carla, Enrico and John Albert,
all surnamed Pirovano;
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is
but fit and proper that this company which owes so much to the deceased should
make some provisions for his children;
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Whereas, this company paid premiums on Mr. Pirovano's life insurance policies for a
period of only 4 years so that it will receive from the insurance companies sums of
money greatly in excess of the premiums paid by the company,
Again, in the resolution approved by the Board of Directors on January 6, 1947, we
also find the following expressive statements which are but a reiteration of those already
expressed in the original resolution:
Whereas, the late Enrico Pirovano, President and General Manager of the De
la Rama Steamship Co., Inc., died in Manila sometime during the latter part of the
year 1944;
Whereas, the said Enrico Pirovano was to a large extent responsible for the
rapid and very successful development and expansion of the activities of this
company;
Whereas, early in 1941, the life of the said Enrico Pirovano was insured in
various life companies, to wit:
Whereas, the said Enrico Pirovano is survived by 4 minor children, to wit:
Esteban, Maria Carla, Enrico and John Albert, all surnamed Pirovano; and
Whereas, the said Enrico Pirovano left practically nothing to his heirs and it is
but fit and proper that this Company which owes so much to the deceased should
make some provision for his children;
Be it resolved, that out of gratitude to the late Enrico Pirovano this Company
renounce as it hereby renounces, . . . .
From the above it clearly appears that the corporation thought of giving the
donation to the children of the late Enrico Pirovano because he "was to a large extent
responsible for the rapid and very successful development and expansion of the activities of
this company"; and also because he "left practically nothing to his heirs and it is but fit and
proper that this company which owes so much to the deceased should make some provision
to his children", and so, the donation was given "out of gratitude to the late Enrico Pirovano."
We do not need to stretch our imagination to see that a grant or donation given under these
circumstances is remunerative in nature in contemplation of law.
That which is made to a person in consideration of his merits or for services
rendered to the donor, provided they do not constitute recoverable debts, or that in
which a burden less than the value of the thing given is imposed upon the donee, is
also a donation." (Art. 619, old Civil Code.)
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In donations made to a person for services rendered to the donor, the
donor's will is moved by acts which directly benefit him. The motivating cause is
gratitude, acknowledgment of a favor, a desire to compensate. A donation made to
one who saved the donor's life, or a lawyer who renounced his fees for services
rendered to the donor, would fall under this class of donations. These donations are
called remunerative donations . (Sinco and Capistrano, The Civil Code, Vol. 1, p. 676;
Manresa, 5th ed., pp. 72-73.)
2. The next question to be determined is whether the donation has been perfected
such that the corporation can no longer rescind it even if it wanted to. The answer to this
question cannot but be in the affirmative considering that the same has not only been
granted in several resolutions duly adopted by the Board of Directors of the defendant
corporation, and in all these corporate acts the concurrence of the representatives of the
National Development Company, the only creditor whose interest may be affected by the
donation, has been expressly given. The corporation has even gone further. It actually
transferred the ownership of the credit subject of donation to the Pirovano children with the
express understanding that the money would be retained by the corporation subject to the
condition that the latter would pay interest thereon at the rate of 5 per cent per annum
payable whenever said corporation may be in a financial position to do so. Thus, the following
acts of the corporation as reflected from the evidence bear this out:
(a) The donation was embodied in a resolution duly approved by the Board of
Directors on January 6, 19437. In this resolution, the representatives of the National
Development Company, have given their concurrence. This is the only creditor which can be
considered as being adversely affected by the donation. The resolution of June 24, 1947 did
not modify the substance of the former resolution for it merely provided that instead of the
interest on the loan being payable, together with the principal, only after the corporation had
first settled in full its bonded indebtedness, said interest would be paid "whenever the
company is in a position to meet said obligation."
(b) The resolution of January 6, 1947 was actually carried out when the company and
Mrs. Estefania R. Pirovano, executed a memorandum agreement stating therein hat the
proceeds of the insurance policies would be entered in the books of the corporation as a loan
which would bear an interest at the rate of 5 per cent per annum, and said agreement was
signed by Mrs. Pirovano as judicial guardian of her children after she had been expressly
authorized by the court to accept the donation in behalf of her children.
(c) While the donation can be considered as duly executed by the execution of the
document stated in the preceding paragraph, and by the entry in the books of the
corporation of the donation as a loan, a further record of said execution was made when Mrs.
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Pirovano executed a public document on February 26, 1948 making similar acceptance of the
donation. And this acceptance was officially recorded by the corporation when on the same
date its Board of Directors approved a resolution taking "official notice" of said acceptance.
(d) On July 25, 1949, the Board of Directors approved the proposal of Mrs. Pirovano
to buy the house at New Rochelle, New York, owned by a subsidiary of the corporation at the
costs of S75,000 which would be paid from the sum held in trust belonging to her minor
children. And this agreement was actually carried out in a document signed by the general
manager of the corporation and by Mrs. Pirovano, who acted on the matter with the express
authority of the court.
(e) And on September 30, 1949, or two years and 3 months after the donation had
been executed, the stockholders of the defendant corporation formally ratified and gave
approval to the donation as embodied in the resolutions above referred to, subject to certain
modifications which did not materially affect the nature of the donation.
There can be no doubt from the foregoing relation of facts the donation was a
corporate act carried out by the corporation not only with the sanction of its Board of
Directors but also of its stockholders. It is evident that the donation has reached the stage of
perfection which is valid and binding upon the corporation and as such cannot be rescinded
unless there is exists legal grounds for doing so. In this case, we see none. The two reasons
given for the rescission of said donation in the resolution of the corporation adopted on
March 8, 1951, to wit: that the corporation failed to comply with the conditions to which the
above donation was made subject, and that in the opinion of the Securities and Exchange
Commission said donation is ultra vires, are not, in our opinion, valid and legal as to justify the
rescission of a perfected donation. These reasons, as we will discuss in the latter part of this
decision, cannot be invoked by the corporation to rescind or set at naught the donation, and
the only way by which this can be done is to show that the donee has been in default, or that
the donation has not been validly executed, or is illegal or ultra vires, and such is not the case
as we will see hereafter. We therefore declare that the resolution approved by the
stockholders of the defendant corporation on March 8, 1951 did not and cannot have the
effect of nullifying the donation in question.
3. The third question to be determined is: Can defendant corporation give by way of
donation the proceeds of said insurance policies to the minor children of the late Enrico
Pirovano under the law or its articles of corporation, or is that donation an ultra vires act? To
answer this question it is important for us to examine the articles of incorporation of the De la
Rama company to see this question it is important for us to examine the articles of
incorporation of the De la Rama company to see if the act or donation is outside of their
scope. Paragraph second of said articles provides:
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Second. The purposes for which said corporation is formed are:
(a) To purchase, charter, hire, build, or otherwise acquire steam or other ships or
vessels, together with equipments and furniture therefor, and to employ the same in
conveyance and carriage of goods, wares and merchandise of every description, and
of passengers upon the high seas.
(b) To sell, let, charter, or otherwise dispose of the said vessels or other property of
the company.
(c) To carry on the business of carriers by water.
(d) To carry on the business of shipowners in all of its branches.
(e) To purchase or take on lease, lands, wharves, stores, lighters, barges and other
things which the company may deem necessary or advisable to be purchased or
leased for the necessary and proper purposes of the business of the company, and
from time to time to sell the dispose of the same.
(f) To promote any company or companies for the purposes of acquiring all or any of
the property or liabilities of this company, or both, or for any other purpose which
may seem directly or indirectly calculated to benefit the company.
(g) To invest and deal with the moneys of the company and immediately required, in
such manner as from time to time may be determined.
(h) To borrow, or raise, or secure the payment of money in such manner as the
company shall think fit.
(i) Generally, to do all such other thing and to transact all business as may be directly
or indirectly incidental or conducive to the attainment of the above object, or any of
them respectively.
(j) Without in any particular limiting or restricting any of the objects and powers of
the corporation, it is hereby expressly declared and provided that the corporation
shall have power to issue bonds and provided that the corporation shall have power
to issue bonds and other obligations, to mortgage or pledge any stocks, bonds or
other obligations or any property which may be required by said corporations; to
secure any bonds, guarantees or other obligations by it issued or incurred; to lend
money or credit to and to aid in any other manner any person, association, or
corporation of which any obligation or in which any interest is held by this corporation
or in the affairs or prosperity of which this corporation or in the affairs or prosperity of
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which this corporation has a lawful interest, and to do such acts and things as may be
necessary to protect, preserve, improve, or enhance the value of any such obligation
or interest; and, in general, to do such other acts in connection with the purposes for
which this corporation has been formed which is calculated to promote the interest
of the corporation or to enhance the value of its property and to exercise all the
rights, powers and privileges which are now or may hereafter be conferred by the
laws of the Philippines upon corporations formed under the Philippine Corporation
Act; to execute from time to time general or special powers of attorney to persons,
firms, associations or corporations either in the Philippines, in the United States, or in
any other country and to revoke the same as and when the Directors may determine
and to do any and or all of the things hereinafter set forth and to the same extent as
natural persons might or could do.
After a careful perusal of the provisions above quoted we find that the corporation
was given broad and almost unlimited powers to carry out the purposes for which it was
organized among them, (1) "To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time may be determined" and, (2) "to
aid in any other manner any person, association, or corporation of which any obligation or in
which any interest is held by this corporation or in the affairs or prosperity of which this
corporation has a lawful interest." The world deal is broad enough to include any manner of
disposition, and refers to moneys not immediately required by the corporation, and such
disposition may be made in such manner as from time to time may be determined by the
corporations. The donation in question undoubtedly comes within the scope of this broad
power for it is a fact appearing in the evidence that the insurance proceeds were not
immediately required when they were given away. In fact, the evidence shows that the
corporation declared a 100 per cent cash dividend, or P2,000,000, and later on another 30 per
cent cash dividend. This is clear proof of the solvency of the corporation. It may be that, as
insinuated, Don Esteban wanted to make use of the insurance money to rehabilitate the
central owned by a sister corporation, known as Hijos de I. de la Rama and Co., Inc., situated
in Bago, Negros Occidental, but this, far from reflecting against the solvency of the De la
Rama company, only shows that the funds were not needed by the corporation.
Under the second broad power we have the above stated, that is, to aid in any other
manner any person in the affairs and prosperity of whom the corporation has a lawful interest,
the record of this case is replete with instances which clearly show that the corporation knew
well its scope and meaning so much so that, with the exception of the instant case, no one
has lifted a finger to dispute their validity. Thus, under this broad grant of power, this
corporation paid to the heirs of one Florentino Nonato, an engineer of one of the ships of the
company who died in Japan, a gratuity of P7,000, equivalent to one month salary for each
year of service. It also gave to Ramon Pons, a captain of one of its ships , a retirement gratuity
equivalent to one month salary for every year of service, the same to be based upon his
highest salary. And it contributed P2,000 to the fund raised by the Associated Steamship Lines
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for the widow of the late Francis Gispert, secretary of said Association, of which the De la
Rama Steamship Co., Inc., was a member along with about 30 other steamship companies. In
this instance, Gispert was not even an employee of the corporation. And invoking this vast
power, the corporation even went to the extent of contributing P100,000 to the Liberal Party
campaign funds, apparently in the hope that by conserving its cordial relations with that party
it might continue to retain the patronage of the administration. All these acts executed
before and after the donation in question have never been questioned and were willingly and
actually carried out.
We don't see much distinction between these acts of generosity or benevolence
extended to some employees of the corporation, and even to some in whom the corporation
was merely interested because of certain moral or political considerations, and the donation
which the corporation has seen fit to give to the children of the late Enrico Pirovano from the
point of view of the power of the corporation as expressed in its articles of incorporation.
And if the former had been sanctioned and had been considered valid and intra vires, we see
no plausible reasons why the latter should now be deemed ultra vires. It may perhaps be
argued that the donation given to the children of the late Enrico Pirovano is so large and
disproportionate that it can hardly be considered a pension of gratuity that can be placed on a
par with the instances above mentioned, but this argument overlooks one consideration: the
gratuity here given was not merely motivated by pure liberality or act of generosity, but by a
deep sense of recognition of the valuable services rendered by the late Enrico Pirovano which
had immensely contributed to the growth of the corporation to the extent that from its
humble capitalization it blossomed into a multi-million corporation that it is today. In other
words of the very resolutions granting the donation or gratuity, said donation was given not
only because the company was so indebted to him that it saw fit and proper to make
provisions for his children, but it did so out of a sense of gratitude. Another factor that we
should bear in mind is that Enrico Pirovano was not only a high official of the company but
was at the same time a member of the De la Rama family, and the recipient of the donation
are the grandchildren of Don Esteban de la Rama. This we, may say, is the motivating root
cause behind the grant of this bounty.
It may be contended that a donation is different from a gratuity. While technically this may be
so in substance they are the same. They are even similar to a pension. Thus, it was granted for
services previously rendered, and which at the time they were rendered gave rise to no legal
obligation. " (Words and Phrases, Permanent Edition, p. 675; O'Dea vs. Cook,, 169 Pac., 306,
176 Cal., 659.) Or stated in another way, a "Gratuity is mere bounty given by the Government
in consideration or recognition or meritorious services and springs from the appreciation an d
graciousness of the Government", (Ilagan vs. Ilaya, G.R. No. 33507, Dec. 20 1930) or "A
gratuity is something given freely, or without recompense, a gift, something voluntarily given
in return for a favor or services; a bounty; a tip." Wood Mercantile Co. vs. Cole, 209 S.W. 2d.
290; Mendoza vs. Dizon, 77 Phil., 533, 43 Off. Gaz. p. 4633. We do not see much difference
between this definition of gratuity and a remunerative donation contemplated in the Civil
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Code. In essence they are the same. Such being the case, it may be said that this donation is
gratuity in a large sense for it was given for valuable services rendered an ultra vires act in the
light of the following authorities:
Indeed, some cases seem to hold that the giving of a pure gratuity to
directors is ultra vires of corporation, so that it could not be legalized even if the
approval of the shareholders; but this position has no sound reason to support it,
and is opposed to the weight of authority (Suffaker vs. Kierger's Assignee, 53 S.W.
Rep. 288; !07 Ky. 200; 46 L.R.A. 384).
But although business corporations cannot contribute to charity or
benevolence, yet they are not required always to insist on the full extent of their
legal rights. They are not forbidden for the recognizing moral obligation of which
strict law takes no cognizance. They are not prohibited from establishing a reputation
for board, liberal, equitable dealing which may stand them in good stead in
competition with less fair rivals. Thus, an incorporated fire insurance company which
policies except losses from explosions may nevertheless pay a loss from that cause
when other companies are accustomed to do so, such liberal dealing being deemed
conducive to the prosperity of the corporation." (Modern Law of Corporations,
Machen, Vol. 1, p. 81).
So, a bank may grant a five years pension to the family at one of its officers.
In all cases in this sorts, the amount of the gratuity rests entirely within the discretion
of the company, unless indeed it be all together out of the reason and fitness. But
where the company has ceased to be going concerned, this power to make gifts or
present it at the end. (Modern Law of Corporations, Machen, Vol. 1, p. 82.).
Payment of Gratitude out of Capital. There seems on principle no reason to doubt
that gifts or gratuities wherever they are lawful may be paid out of capital as well as
out of profits. (Modern Law of corporations, Machen, Vol. 1 p. 83.).
Whether desirable to supplement implied powers of this kind by express provisions.
Enough has been said to show that the implied powers of a corporation to give
gratuities to its servants and officers, as well as to strangers, are ample, so that there
is therefore no need to supplement them by express provisions." (modern Law of
Corporations, Machen, Vol. 1, p. 83.) 1
Granting arguendo that the donation given by Pirovano children is outside the scope
of the powers of the defendant corporation, or the scope of the powers that it may exercise
under the law, or it is an ultra vires act, still it may said that the same can not be invalidated, or
declared legally ineffective for the reason alone, it appearing that the donation represents not
75

only the act of the Board of Directors but of the stockholders themselves as shown by the
fact that the same has been expressly ratified in a resolution duly approved by the latter. By
this ratification, the infirmity of the corporate act, it may has been obliterated thereby making
the cat perfectly valid and enforceable. This is specially so if the donation is not merely
executory but executed and consummated and no creditors are prejudice, or if there are
creditors affected, the latter has expressly given their confirmity.
In making this pronouncement, advertence should made of the nature of the ultra
vires act that is in question. A little digression needs be made on this matter to show the
different legal effect that may result consequent upon the performance of a particular ultra
vires act on the part of the corporation. may authorities may be cited interpreting or defining,
extent, and scope of an ultra vires act, but all of them are uniform and unanimous that the
same may be either an act performed merely outside the scope of the powers granted to it by
it articles of incorporation, or one which is contrary to law or violative of any principle which
will void any contract whether done individually or collectively. In other words, a distinction
should be made between corporate acts or contracts which are illegal and those which are
merely ultra vires. The former contemplates the doing of an act which is contrary to law,
morals, or public policy or public duty, and are, like similar transactions between the
individuals void. They cannot serve as basis of a court action, nor require validity ultra
vires acts on the other hand, or those which are not illegal and void ab initio, but are merely
within are not illegal and void ab initio, but are not merely within the scope of the articles of
incorporation, are merely voidable and may become binding and enforceable when ratified by
the stockholders.
Strictly speaking, an ultra vires act is one outside the scope of the power
conferred by the legislature, and although the term has been used indiscriminately, it
is properly distinguishable from acts which are illegal, in excess or abuse of power, or
executed in an unauthorized manner, or acts within corporate powers but outside
the authority of particular officers or agents (19 C. J. S. 419).
Corporate transactions which are illegal because prohibited by statute or
against public policy are ordinarily void and unenforceable regardless of the part
performance, ratification, or estoppel; but general prohibitions against exceeding
corporate powers and prohibitions intended to protect a particular class or specifying
the consequences of violation may not preclude enforcement of the transaction and
an action may be had for the part unaffected by the illegality or for equitable
restitution. (19 C.J.S. 421.)
Generally, a transaction within corporate powers but executed in an irregular or
unauthorized manner is voidable only, and may become enforceable by reason of
ratification or express or implied assent by the stockholders or by reason of estoppel
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of the corporation or the other party to the transaction to raise the objection,
particularly where the benefits are retained
As appears in paragraphs 960-964 supra, the general rule is that a
corporation must act in the manner and with the formalities, if any, prescribed by its
character or by the general law. However, a corporation transaction or contract
which is within the corporation powers, which is neither wrong in itself nor against
public policy, but which is defective from a failure to observe in its execution a
requirement of law enacted for the benefit or protection of a certain class, is
voidable and is valid until avoided, not void until validated; the parties for whose
benefit the requirement was enacted may ratify it or be estoppel to assert its
invalidity, and third persons acting in good faith are not usually affected by an
irregularity on the part of the corporation in the exercise of its granted powers. (19
C.J.S., 423-24.)
It is true that there are authorities which told that ultra vires acts, or those performed
beyond the powers conferred upon the corporation either by law or by its articles of
incorporation, are not only voidable, but wholly void and of no legal effect, and that such acts
cannot be validated by ratification or be the basis of any action in court; but such ruling does
not constitute the weight of authority, the reason being that they fail to make the important
distinction we have above adverted to. Because rule has been rejected by most of the state
courts and even by the modern treaties or corporations (7 Flethcer, Cyc. Corps., 563-564). And
now it can be said that the majority of the cases hold that acts which are merely ultra vires, or
acts which are not illegal, may be ratified by the stockholders of a corporation (Brooklyn
Heights R. Co. vs. Brooklyn City R. Co., 135 N.Y. Supp. 1001).
Strictly speaking, an act of a corporation outside of its character powers is
just as such ultra vires where all the stockholders consent thereto as in a case where
none of the stockholders expressly or cannot be ratified so as to make it valid, even
though all the stockholders consent thereto; but inasmuch as the stockholders in
reality constitute the corporation, it should , it would seem, be estopped to
allege ultra vires, and it is generally so held where there are no creditors, or the
creditors are not injured thereby, and where the rights of the state or the public are not
involved, unless the act is not only ultra vires but in addition illegal and void. of course,
such consent of all the stockholders cannot adversely affect creditors of the
corporation nor preclude a proper attack by the state because of such ultra vires act.
(7 Fletcher Corp., Sec. 3432, p. 585)
Since it is not contended that the donation under consideration is illegal, or contrary
to any of the express provision of the articles of incorporation, nor prejudicial to the creditors
of the defendant corporation, we cannot but logically conclude, on the strength of the
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authorities we have quoted above, that said donation, even if ultravires in the supposition we
have adverted to, is not void, and if voidable its infirmity has been cured by ratification and
subsequent acts of the defendant corporation. The defendant corporation, therefore, is now
prevented or estopped from contesting the validity of the donation. This is specially so in this
case when the very directors who conceived the idea of granting said donation are practically
the stockholders themselves, with few nominal exception. This applies to the new
stockholder Jose Cojuangco who acquired his interest after the donation has been made
because of the rule that a "purchaser of shares of stock cannot avoid ultra vires acts of the
corporation authorized by its vendor, except those done after the purchase" (7 Fletcher, Cyc.
Corps. section 3456, p. 603; Pascual vs. Del Saz Orozco, 19 Phil., 82.) Indeed, how can the
stockholders now pretend to revoke the donation which has been partly consummated? How
can the corporation now set at naught the transfer made to Mrs. Pirovano of the property in
New York, U.S.A., the price of which was paid by her but of the proceeds of the insurance
policies given as donation. To allow the corporation to undo what it has done would only be
most unfair but would contravene the well-settled doctrine that the defense of ultra
vires cannot be set up or availed of in completed transactions (7 Fletcher, Cyc. Corps. Section
3497, p. 652; 19 C.J.S., 431).
4. We now come to the fourth and last question that the defendant corporation, by
the acts it has performed subsequent to the granting of the donation, deliberately prevented
the fulfillment of the condition precedent to the payment of said donation such that it can be
said it has forfeited entirely due and demandable.
It should be recalled that the original resolution of the Board of Directors adopted on
July 10, 1946 which provided for the donation of P400,000 out of the proceeds which the De
la Rama company would collect on the insurance policies taken on the life of the late Enrico
Pirovano was, as already stated above, amended on January 6, 1947 to include, among the
conditions therein provided, that the corporation shall proceed to pay said amount, as well as
the interest due thereon, after it shall have settled in full balance of its bonded indebtedness
in the sum of P5,000,000. It should be recalled that on September 13, 1949, or more than 2
years after the last amendment referred too above, the stockholders adopted another
resolution whereby they formally ratified said donation but subject to the following
clarifications: (1) that the amount of the donation shall not be effected until such time as the
company shall have first duly liquidated its present bonded indebtedness in the amount of
P3,260,855.77 to the National Development Company, or shall have first fully redeemed the
preferred shares of stock in the amount to be issued to said company in lieu thereof, and (2)
that any and all taxes, legal fees, and expenses connected with the transaction shall be
chargeable from the proceeds of said insurance policies.
The trial court, in considering these conditions in the light of the acts subsequently performed
by the corporation in connection with the proceeds of the insurance policies, considered said
conditions null and void, or at most not written because in its pinion their non-fulfillment was
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due to a deliberate desistance of the corporation and not to lack of funds to redeem the
preferred shares of the National Development Company. The conclusions arrived at by the
trial court on this point are as follows:
Fourth. that the condition mentioned in the donation is null and void because it
depends on the exclusive will of the donor, in accordance with the provisions of
Article 1115 of the Old Civil Code.
Fifth. That if the condition is valid, its non-fulfillment is due to the desistance of the
defendant company from obeying and doing the wishes and mandate of the majority
of the stockholders.
Sixth. That the non-payment of the debt in favor of the National Development
Company is due to the lack of funds, nor to lack of authority, but to the desire of the
President of the corporation to preserve and continue the Government participation
in the company.
To this views of the trial court, we fail to agree. There are many factors we can
consider why the failure to immediately redeem the preferred shares issued to the National
Development Company as desired by the minor children of the late Enrico Pirovano cannot or
should not be attributed to a mere desire on the part of the corporation to delay the
redemption, or to prejudice the interest of the minors, but rather to protect the interest of
the corporation itself. One of them is the text of the very resolution approved by the National
Development Company on February 18, 1949 which prescribed the terms and conditions
under which it expressed its conformity to the conversion of the bonded indebtedness into
preferred shares of stock. The text of the resolution above mentioned reads:
Resolved: That the outstanding bonded indebtedness of the Dela Rama Steamship
Co., Inc., in the approximate amount of P3,260,855.77 be converted into non-voting
preferred shares of stock of said company, said shares to bear a fixed dividend of 6
percent per annum which shall be cumulative and redeemable within 15 years. Said
shares shall be preferred as to assets in the event of liquidation or dissolution of said
company but shall be non-participating.
It is plain from the text of the above resolution that the defendant corporation had 15
years from February 18, 1949, or until 1964, within which to effect the redemption of the
preferred shares issued to the National Development Company. This condition cannot but be
binding and obligatory upon the donees, if they desire to maintain the validity of the
donation, for it is not only the basis upon which the stockholders of the defendant
corporation expressed their willingness to ratify the donation, but it is also by way which its
creditor, the National Development Company, would want it to be. If the defendant
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corporation is given 15 years within which to redeem the preferred shares, and that period
would expire in 1964, one cannot blame the corporation for availing itself of this period if in its
opinion it would redound to its best interest. It cannot therefore be said that the fulfillment of
the condition for the payment of the donation is one that wholly depends on the exclusive
will of the donor, as the lower court has concluded, simply because it failed to meet the
redemption of said shares in her manner desired by the donees. While it may be admitted that
because of the disposition of the assets of the corporation upon the suggestion of its general
manager more than enough funds had been raised to effect the immediate redemption of the
above shares, it is not correct to say that the management has completely failed in its duty to
pay its obligations for, according to the evidence, a substantial portion of the indebtedness
has been paid and only a balance of about P1,805,169.98 was outstanding when the
stockholders of the corporation decided to revoke or cancel the donation. (Exhibit P.)
But there are other good reasons why all the available funds have not been actually
applied to the redemption of the preferred shares, one of them being the "desire of the
president of the corporation to preserve and continue the government participation in the
company" which even the lower court found it to be meritorious, which is one way by which it
could continue receiving the patronage and protection of the government. Another reason is
that the redemption of the shares does not depend on the will of the corporation alone but to
a great extent on the will of a third party, the National Development Company. In fact, as the
evidence shows, this Company had pledged these shares to the Philippine National Bank and
the Rehabilitation Finance Corporation as a security to obtain certain loans to finance the
purchase of certain ships to be built for the use of the company under management contract
entered into between the corporation and the National Development Company, and this was
what prevented the corporation from carrying out its offer to pay the sum P1,956,513.07 on
April 5, 1951. Had this offer been accepted, or favorably acted upon by the National
Development Company, the indebtedness would have been practically liquidated, leaving
outstanding only one certificate worth P217,390.45. Of course, the corporation could have
insisted in redeeming the shares if it wanted to even to the extent of taking a court action if
necessary to force its creditor to relinquish the shares that may be necessary to accomplish
the redemption, but such would be a drastic step which would have not been advisable
considering the policy right along maintained by the corporation to preserve its cordial and
smooth relation with the government. At any rate, whether such attitude be considered as a
mere excuse to justify the delay in effecting the redemption of the shares, or a mere desire on
the part of the corporation to retain in its possession more funds available to attend to other
pressing need as demanded by the interest of the corporation, we fail to see in such an
attitude an improper motive to circumvent the early realization of the desire of the minors to
obtain the immediate payment of the donation which was made dependent upon the
redemption of said shares there being no clear evidence that may justify such design. Anyway,
a great portion of the funds went to the stockholders themselves by way of dividends to
offset, so it appears, the huge advances that the corporation had made to them which were
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entered in the books of the corporation as loans and, therefore, they were invested for their
own benefit. As General Manager Osmea said, "we were first confronted with the problem
of the withdrawals of the family which had to be repaid back to the National Development
Company and one of the most practical solutions to that was to declare dividends and reduce
the amounts of their withdrawals", which then totalled about P3,000,000.
All things considered, we are of the opinion that the finding of the lower court that
the failure of the defendant corporation to comply with the condition of the donation is
merely due to its desistance from obeying the mandate of the majority of the stockholders
and not to lack of funds, or to lack of authority, has no foundation in law or in fact, and,
therefore, its conclusion that because of such desistance that condition should be deemed as
fulfilled and the payment of the donation due and demandable, is not justified. In this respect,
the decision of the lower court should be reversed.
Having reached the foregoing conclusion, we deem it unnecessary to discuss the
other issues raised by the parties in their briefs.
The lower court adjudicated to plaintiff an additional amount equivalent to 20 per
cent of the amount claimed as damages by way of attorney's fees, and in our opinion, this
award can be justified under Article 2208, paragraph 2, of the new Civil Code, which provides:
"When the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest", attorney's fees nay be awarded as
damages. However, the majority believes that this award should be reduced to 10 per cent.
Wherefore, the decision appealed from should be modified as follows: (a) that the
donation made in favor of the children of the late Enrico Pirovano of the proceeds of the
insurance policies taken on his life is valid and binding on the defendant corporation, (b) that
said donation, which amounts to a total of P583,813.59, including interest, as it appears in the
books of the corporation as of August 31, 1951, plus interest thereon at the rate of 5 per cent
per annum from the filing of the complaint, should be paid to the plaintiffs after the
defendant corporation shall have fully redeemed the preferred shares issued to the National
Development Company under the terms and conditions stated in the resolutions of the Board
of Directors of January 6, 1947 and June 24, 1947, as amended by the resolution of the
stockholders adopted on September 13,1949; and (c) defendant shall pay to plaintiffs an
additional amount equivalent to 10 per cent of said amount of P583,813.59 as damages by way
of attorney's fees, and to pay the costs of action.
Paras, C. J., Pablo Bengzon, Padilla, Montemayor, Jugo, Concepcion, and Reyes, J. B. L., concur.
Reyes, A., concurs in the result.
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Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-37331 March 18, 1933
FRED M. HARDEN, J.D. HIGHSMITH, and JOHN C. HART, in their own behalf and in that all
other stockholders of the Balatoc Mining Company, etc., plaintiffs-appellants,
vs.
BENGUET CONSOLIDATED MINING COMPANY, BALATOC MINING COMPANY, H. E. RENZ,
JOHN W. JAUSSERMANN, and A. W. BEAM, defendants-appellees.
CORPORATIONS; MlNING CORPORATION; PROHIBITION AGAINST OWNING INTEREST
IN OTHER MINING CORPORATION; RIGHT OF ACTION.Inasmuch as the Corporation Law
contains, in section 190 (A), provisions fully penalizing the violation of subsection 5 of section
13 of Act No. 1459,which prohibits the acquisition by one mining corporation of any interest
in another,and inasmuch as these provisions have been enacted in the exercise of the
general police powers of the Government, it results that, where one mining corporation
acquires a prohibited interest in another such corporation, the shareholders of the latter
cannot maintain an action to annul the contract by which such interest was acquired. The
remedy must be sought in a criminal proceeding or quo warranto action, under section 190
(A), instituted by the Government. Until thus assailed in a direct proceeding the contract by
which the interest was acquired will be treated as valid, as between the parties.
APPEAL from a judgment of the Court of First Instance of Manila. Goddard, J.
The facts are stated in the opinion of the Court
Gibbs and McDonough and Roman Ozaeta for appellants.
DeWitt, Perkins and Brady for appellees.
Ross, Lawrence and Selph for appellee Balatoc Mining Company.
STREET, J.:
This action was originally instituted in the Court of First Instance of the City of Manila
by F. M. Harden, acting in his own behalf and that of all other stockholders of the Balatoc
Mining Co. who might join in the action and contribute to the expense of the suit. With the
plaintiff Harden two others, J. D. Highsmith and John C. Hart, subsequently associated
themselves. The defendants are the Benguet Consolidated Mining Co., the Balatoc Mining Co.,
H. E. Renz, John W. Haussermann, and A. W. Beam. The principal purpose of the original
action was to annul a certificate covering 600,000 shares of the stock of the Balatoc Mining
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Co., which have been issued to the Benguet Consolidated Mining Co., and to secure to the
Balatoc Mining Co., the restoration of a large sum of money alleged to have been unlawfully
collected by the Benguet Consolidated Mining Co., with legal interest, after deduction
therefrom of the amount expended by the latter company under a contract between the two
companies, bearing date of March 9, 1927. The complaint was afterwards amended so as to
include a prayer for the annulment of this contract. Shortly prior to the institution of this
lawsuit, the Benguet Consolidated Mining Co., transferred to H. E. Renz, as trustee, the
certificate for 600,000 shares of the Balatoc Mining Co. which constitute the principal subject
matter of the action. This was done apparently to facilitate the splitting up to the shares in
the course of the sale or distribution. To prevent this the plaintiffs, upon filing their original
complaint, procured a preliminary injunction restraining the defendants, their agents and
servants, from selling, assigning or transferring the 600,000 shares of the Balatoc Mining Co.,
or any part thereof, and from removing said shares from the Philippine Islands. This explains
the connection of Renz with the case. The other individual defendants are made merely as
officials of the Benguet Consolidated Mining Co. Upon hearing the cause the trial court
dismissed the complaint and dissolved the preliminary injunction, with costs against the
plaintiffs. From this judgment the plaintiffs appealed.
The facts which have given rise this lawsuit are simple, as the financial interests
involve are immense. Briefly told these facts are as follows: The Benguet Consolidated Mining
Co. was organized in June, 1903, as a sociedad anonima in conformity with the provisions of
Spanish law; while the Balatoc Mining Co. was organized in December 1925, as a corporation,
in conformity with the provisions of the Corporation Law (Act No. 1459). Both entities were
organized for the purpose of engaging in the mining of gold in the Philippine Islands, and their
respective properties are located only a few miles apart in the subprovince of Benguet. The
capital stock of the Balatoc Mining Co. consists of one million shares of the par value of one
peso (P1) each.
When the Balatoc Mining Co. was first organized the properties acquired by it were
largely undeveloped; and the original stockholders were unable to supply the means needed
for profitable operation. For this reason, the board of directors of the corporation ordered a
suspension of all work, effective July 31, 1926. In November of the same year a general
meeting of the company's stockholders appointed a committee for the purpose of interesting
outside capital in the mine. Under the authority of this resolution the committee approached
A. W. Beam, then president and general manager of the Benguet Company, to secure the
capital necessary to the development of the Balatoc property. As a result of the negotiations
thus begun, a contract, formally authorized by the management of both companies, was
executed on March 9, 1927, the principal features of which were that the Benguet Company
was to proceed with the development and construct a milling plant for the Balatoc mine, of a
capacity of 100 tons of ore per day, and with an extraction of at least 85 per cent of the gold
content. The Benguet Company also agreed to erect an appropriate power plant, with the
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aerial tramlines and such other surface buildings as might be needed to operate the mine. In
return for this it was agreed that the Benguet Company should receive from the treasurer of
the Balatoc Company shares of a par value of P600,000, in payment for the first P600,000 be
thus advanced to it by the Benguet Company.
The performance of this contract was speedily begun, and by May 31, 1929, the
Benguet Company had spent upon the development the sum of P1,417,952.15. In
compensation for this work a certificate for six hundred thousand shares of the stock of the
Balatoc Company has been delivered to the Benguet Company, and the excess value of the
work in the amount of P817,952.15 has been returned to the Benguet Company in cash.
Meanwhile dividends of the Balatoc Company have been enriching its stockholders, and at the
time of the filing of the complaint the value of its shares had increased in the market from a
nominal valuation to more than eleven pesos per share. While the Benguet Company was
pouring its million and a half into the Balatoc property, the arrangements made between the
two companies appear to have been viewed by the plaintiff Harden with complacency, he
being the owner of many thousands of the shares of the Balatoc Company. But as soon as the
success of the development had become apparent, he began this litigation in which he has
been joined by two others of the eighty shareholders of the Balatoc Company.
Briefly, the legal point upon which the action is planted is that it is unlawful for the
Benguet Company to hold any interest in a mining corporation and that the contract by which
the interest here in question was acquired must be annulled, with the consequent obliteration
of the certificate issued to the Benguet Company and the corresponding enrichment of the
shareholders of the Balatoc Company.
When the Philippine Islands passed to the sovereignty of the United States, in the
attention of the Philippine Commission was early drawn to the fact that there is no entity in
Spanish law exactly corresponding to the notion of the corporation in English and American
law; and in the Philippine Bill, approved July 1, 1902, the Congress of the United States
inserted certain provisions, under the head of Franchises, which were intended to control the
lawmaking power in the Philippine Islands in the matter of granting of franchises, privileges
and concessions. These provisions are found in section 74 and 75 of the Act. The provisions of
section 74 have been superseded by section 28 of the Act of Congress of August 29, 1916, but
in section 75 there is a provision referring to mining corporations, which still remains the law,
as amended. This provisions, in its original form, reads as follows: "... it shall be unlawful for
any member of a corporation engaged in agriculture or mining and for any corporation
organized for any purpose except irrigation to be in any wise interested in any other
corporation engaged in agriculture or in mining."
Under the guidance of this and certain other provisions thus enacted by Congress,
the Philippine Commission entered upon the enactment of a general law authorizing the
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creation of corporations in the Philippine Islands. This rather elaborate piece of legislation is
embodied in what is called our Corporation Law (Act No. 1459 of the Philippine Commission).
The evident purpose of the commission was to introduce the American corporation into the
Philippine Islands as the standard commercial entity and to hasten the day when the sociedad
anonima of the Spanish law would be obsolete. That statute is a sort of codification of
American corporate law.
For the purposes general description only, it may be stated that the sociedad
anonima is something very much like the English joint stock company, with features
resembling those of both the partnership is shown in the fact that sociedad, the generic
component of its name in Spanish, is the same word that is used in that language to designate
other forms of partnership, and in its organization it is constructed along the same general
lines as the ordinary partnership. It is therefore not surprising that for purposes of loose
translation the expression sociedad anonima has not infrequently the other hand, the affinity
of this entity to the American corporation has not escaped notice, and the
expression sociedad anonima is now generally translated by the word corporation. But when
the word corporation is used in the sense of sociedad anonima and close discrimination is
necessary, it should be associated with the Spanish expression sociedad anonima either in a
parenthesis or connected by the word "or". This latter device was adopted in sections 75 and
191 of the Corporation Law.
In drafting the Corporation Law the Philippine Commission inserted bodily, in
subsection (5) of section 13 of that Act (No. 1459) the words which we have already quoted
from section 75 of the Act of Congress of July 1, 1902 (Philippine Bill); and it is of course
obvious that whatever meaning originally attached to this provision in the Act of Congress,
the same significance should be attached to it in section 13 of our Corporation Law.
As it was the intention of our lawmakers to stimulate the introduction of the
American Corporation into Philippine law in the place of the sociedad anonima, it was
necessary to make certain adjustments resulting from the continued co-existence, for a time,
of the two forms of commercial entities. Accordingly, in section 75 of the Corporation Law, a
provision is found making the sociedad anonima subject to the provisions of the Corporation
Law "so far as such provisions may be applicable", and giving to the sociedades
anonimas previously created in the Islands the option to continue business as such or to
reform and organize under the provisions of the Corporation Law. Again, in section 191 of the
Corporation Law, the Code of Commerce is repealed in so far as it relates to sociedades
anonimas. The purpose of the commission in repealing this part of the Code of Commerce was
to compel commercial entities thereafter organized to incorporate under the Corporation
Law, unless they should prefer to adopt some form or other of the partnership. To this
provision was added another to the effect that existing sociedades anonimas, which elected to
continue their business as such, instead of reforming and reorganizing under the Corporation
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Law, should continue to be governed by the laws that were in force prior to the passage of
this Act "in relation to their organization and method of transacting business and to the rights
of members thereof as between themselves, but their relations to the public and public
officials shall be governed by the provisions of this Act."
As already observed, the provision above quoted from section 75 of the Act Congress
of July 1, 1902 (Philippine Bill), generally prohibiting corporations engaged in mining and
members of such from being interested in any other corporation engaged in mining, was
amended by section 7 of Act No. 3518 of the Philippine Legislature, approved by Congress
March 1, 1929. The change in the law effected by this amendment was in the direction of
liberalization. Thus, the inhibition contained in the original provision against members of a
corporation engaged in agriculture or mining from being interested in other corporations
engaged in agriculture or in mining was so modified as merely to prohibit any such member
from holding more than fifteen per centum of the outstanding capital stock of another such
corporation. Moreover, the explicit prohibition against the holding by any corporation (except
for irrigation) of an interest in any other corporation engaged in agriculture or in mining was
so modified as to limit the restriction to corporations organized for the purpose of engaging
in agriculture or in mining.
As originally drawn, our Corporation Law (Act No. 1459) did not contain any
appropriate clause directly penalizing the act of a corporation, a member of a corporation , in
acquiring an interest contrary to paragraph (5) of section 13 of the Act. The Philippine
Legislature undertook to remedy this situation in section 3 of Act No. 2792 of the Philippine
Legislature, approved on February 18, 1919, but this provision was declared invalid by this
court in Government of the Philippine Islands vs. El Hogar Filipino (50 Phil., 399), for lack of an
adequate title to the Act. Subsequently the Legislature reenacted substantially the same
penal provision in section 21 of Act No. 3518, under a title sufficiently broad to comprehend
the subject matter. This part of Act No. 3518 became effective upon approval by the
Governor-General, on December 3, 1928, and it was therefore in full force when the contract
now in question was made.
This provision was inserted as a new section in the Corporation Law, forming section
1990 (A) of said Act as it now stands. Omitting the proviso, which seems not to be pertinent
to the present controversy, said provision reads as follows:
SEC. 190 (A). Penalties. The violation of any of the provisions of this Act and its
amendments not otherwise penalized therein, shall be punished by a fine of not
more than five thousand pesos and by imprisonment for not more than five years, in
the discretion of the court. If the violation is committed by a corporation, the same
shall, upon such violation being proved, be dissolved by quo warranto proceedings
MATABABE FILES
Corporation Law
instituted by the Attorney-General or by any provincial fiscal by order of said
Attorney-General: . . . .
Upon a survey of the facts sketched above it is obvious that there are two
fundamental questions involved in this controversy. The first is whether the plaintiffs can
maintain an action based upon the violation of law supposedly committed by the Benguet
Company in this case. The second is whether, assuming the first question to be answered in
the affirmative, the Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of the United States,
and later by the Philippine Legislature, prohibiting a mining corporation from becoming
interested in another mining corporation. It is obvious that, if the first question be answered
in the negative, it will be unnecessary to consider the second question in this lawsuit.
Upon the first point it is at once obvious that the provision referred to was adopted
by the lawmakers with a sole view to the public policy that should control in the granting of
mining rights. Furthermore, the penalties imposed in what is now section 190 (A) of the
Corporation Law for the violation of the prohibition in question are of such nature that they
can be enforced only by a criminal prosecution or by an action of quo warranto. But these
proceedings can be maintained only by the Attorney-General in representation of the
Government.
What room then is left for the private action which the plaintiffs seek to assert in this
case? The defendant Benguet Company has committed no civil wrong against the plaintiffs,
and if a public wrong has been committed, the directors of the Balatoc Company, and the
plaintiff Harden himself, were the active inducers of the commission of that wrong. The
contract, supposing it to have been unlawful in fact, has been performed on both sides, by
the building of the Balatoc plant by the Benguet Company and the delivery to the latter of the
certificate of 600,000 shares of the Balatoc Company. There is no possibility of really undoing
what has been done. Nobody would suggest the demolition of the mill. The Balatoc Company
is secure in the possession of that improvement, and talk about putting the parties in status
quo ante by restoring the consideration with interest, while the Balatoc Company remains in
possession of what it obtained by the use of that money, does not quite meet the case. Also,
to mulct the Benguet Company in many millions of dollars in favor of individuals who have not
the slightest equitable right to that money in a proposition to which no court can give a ready
assent.
The most plausible presentation of the case of the plaintiffs proceeds on the
assumption that only one of the contracting parties has been guilty of a misdemeanor,
namely, the Benguet Company, and that the other party, the Balatoc Company, is wholly
innocent to participation in that wrong. The plaintiffs would then have us apply the second
paragraph of article 1305 of the Civil Code which declares that an innocent party to an illegal
81
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Corporation Law

contract may recover anything he may have given, while he is not bound to fulfill any promise
he may have made. But, supposing that the first hurdle can be safely vaulted, the general Having shown that the plaintiffs in this case have no right of action against the
remedy supplied in article 1305 of the Civil Code cannot be invoked where an adequate special Benguet Company for the infraction of law supposed to have been committed, we forego cny
remedy is supplied in a special law. It has been so held by this court in Go Chioco vs. discussion of the further question whether a sociedad anonima created under Spanish law,
Martinez (45 Phil., 256, 280), where we refused to apply that article to a case of nullity arising such as the Benguet Company, is a corporation within the meaning of the prohibitory
upon a usurious loan. The reason given for the decision on this point was that the Usury Act, provision already so many times mentioned. That important question should, in our opinion,
as amended, contains all the provisions necessary for the effectuation of its purposes, with be left until it is raised in an action brought by the Government.
the result that the remedy given in article 1305 of the Civil Code is unnecessary. Much more is
that idea applicable to the situation now before us, where the special provisions give ample The judgment which is the subject of his appeal will therefore be affirmed, and it is so
remedies for the enforcement of the law by action in the name of the Government, and ordered, with costs against the appellants.
where no civil wrong has been done to the party here seeking redress.
Avancea, C.J., Villamor, Ostrand, Villa-Real, Abad Santos, Hull, Vickers, Imperial and
The view of the case presented above rest upon considerations arising upon our own Butte, JJ., concur.
statutes; and it would seem to be unnecessary to ransack the American decisions for
analogies pertinent to the case. We may observe, however, that the situation involved is not
unlike that which has frequently arisen in the United States under provisions of the National
Bank Act prohibiting banks organized under that law from holding real property. It has been
uniformly held that a trust deed or mortgaged conveying property of this kind to a bank, by
way of security, is valid until the transaction is assailed in a direct proceeding instituted by the
Government against the bank, and the illegality of such tenure supplies no basis for an action
by the former private owner, or his creditor, to annul the conveyance. (National Bank vs.
Matthews, 98 U. S., 621; Kerfoot vs. Farmers & M. Bank, 218 U. S., 281.) Other analogies point
in the same direction. (South & Ala. R. Ginniss vs. B. & M. Consol. etc. Mining Co., 29 Mont.,
428; Holmes & Griggs Mfg. Co. vs. Holmes & Wessell Metal Co., 127 N. Y., 252; Oelbermann vs.
N. Y. & N. R. Co., 77 Hun., 332.)

Most suggestive perhaps of all the cases in Compaia Azucarera de Carolina vs.
Registrar (19 Porto Rico, 143), for the reason that this case arose under a provision of the
Foraker Act, a law analogous to our Philippine Bill. It appears that the registrar had refused to
register two deeds in favor of the Compaia Azucarera on the ground that the land thereby
conveyed was in excess of the area permitted by law to the company. The Porto Rican court
reversed the ruling of the registrar and ordered the registration of the deeds, saying:

Thus it may be seen that a corporation limited by the law or by its charter has until
the State acts every power and capacity that any other individual capable of
acquiring lands, possesses. The corporation may exercise every act of ownership over
such lands; it may sue in ejectment or unlawful detainer and it may demand specific
performance. It has an absolute title against all the world except the State after a
proper proceeding is begun in a court of law. ... The Attorney General is the exclusive
officer in whom is confided the right to initiate proceedings for escheat or attack the
right of a corporation to hold land.

82

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18062 February 28, 1963
REPUBLIC OF THE PHILIPPINES, plaintiff-appellee,
vs.
ACOJE MINING COMPANY, INC., defendant-appellant.
Corporations; Ultra vires act defined; When corporate acts may be performed outside
the scope of powers expressly con-ferred.While as a rule an ultra vires act is one committed
out-side the object for which a corporation is created as defined by the law of its organization
and therefore beyond the powers conferred upon it by law (19 C.J.S., Section 965, p. 419),
there are however certain corporate acts that may be performed out-side of the scope of the
powers expressly conferred if they are necessary to promote the interest or welfare of the
corporation, such as the establishment, in the case at bar, of a local post office in a mining
camp which is far removed from the postal facilities or means of communications accorded
to- people living in a city or municipality.
Same; Same; Ultra vires act distinguished from illegal act; Enforcement of ultra vires
act on the ground of estoppel.An illegal act is void and cannot be validated, while an ultra
vires act is merely voidable and can be enforced by performance, ratifi-cation or estoppel, or
on equitable grounds. In the present case the validity of the resolution of the Board of
Directors of the corporation accepting full responsibility in connection with funds to be
received by its postmaster, should be upheld on the ground of estoppel.
Same; Assumption of responsibility; Responsibility in pres-ent case that of principal
and not that of guarantor.That the responsibility of the defendant corporation is not just
that of a guarantor but of a principal is clear from the resolution of its Board of Directors in
which the corporation assumed full responsibility for all cash received by the Postmaster.
APPEAL from a decision of the Court of First Instance of Manila. Bocar, J.
The facts are stated in the opinion of the Court.
Office of the Solicitor General for plaintiff-appellee.
Jalandoni & Jamir for defendant-appellant.
BAUTISTA ANGELO, J.:
MATABABE FILES
Corporation Law
On May 17, 1948, the Acoje Mining Company, Inc. wrote the Director of Posts
requesting the opening of a post, telegraph and money order offices at its mining camp at
Sta. Cruz, Zambales, to service its employees and their families that were living in said camp.
Acting on the request, the Director of Posts wrote in reply stating that if aside from free
quarters the company would provide for all essential equipment and assign a responsible
employee to perform the duties of a postmaster without compensation from his office until
such time as funds therefor may be available he would agree to put up the offices requested.
The company in turn replied signifying its willingness to comply with all the requirements
outlined in the letter of the Director of Posts requesting at the same time that it be furnished
with the necessary forms for the early establishment of a post office branch.
On April 11, 1949, the Director of Posts again wrote a letter to the company stating
among other things that "In cases where a post office will be opened under circumstances
similar to the present, it is the policy of this office to have the company assume direct
responsibility for whatever pecuniary loss may be suffered by the Bureau of Posts by reason
of any act of dishonesty, carelessness or negligence on the part of the employee of the
company who is assigned to take charge of the post office," thereby suggesting that a
resolution be adopted by the board of directors of the company expressing conformity to the
above condition relative to the responsibility to be assumed buy it in the event a post office
branch is opened as requested. On September 2, 1949, the company informed the Director of
Posts of the passage by its board of directors of a resolution of the following tenor: "That the
requirement of the Bureau of Posts that the Company should accept full responsibility for all
cash received by the Postmaster be complied with, and that a copy of this resolution be
forwarded to the Bureau of Posts." The letter further states that the company feels that that
resolution fulfills the last condition imposed by the Director of Posts and that, therefore, it
would request that an inspector be sent to the camp for the purpose of acquainting the
postmaster with the details of the operation of the branch office.
The post office branch was opened at the camp on October 13, 1949 with one Hilario
M. Sanchez as postmaster. He is an employee of the company. On May 11, 1954, the
postmaster went on a three-day leave but never returned.
The company immediately informed the officials of the Manila Post Office and the
provincial auditor of Zambales of Sanchez' disappearance with the result that the accounts of
the postmaster were checked and a shortage was found in the amount of P13,867.24.
The several demands made upon the company for the payment of the shortage in
line with the liability it has assumed having failed, the government commenced the present
action on September 10, 1954 before the Court of First Instance of Manila seeking to recover
the amount of Pl3,867.24. The company in its answer denied liability for said amount
contending that the resolution of the board of directors wherein it assumed responsibility for
83

the act of the postmaster is ultra vires, and in any event its liability under said resolution is
only that of a guarantor who answers only after the exhaustion of the properties of the
principal, aside from the fact that the loss claimed by the plaintiff is not supported by the
office record.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this stipulation of facts.
After trial, the court a quo found that, of the amount claimed by plaintiff totalling
P13,867.24, only the sum of P9,515.25 was supported by the evidence, and so it rendered
judgment for the plaintiff only for the amount last mentioned. The court rejected the
contention that the resolution adopted by the company is ultra vires and that the obligation it
has assumed is merely that of a guarantor.
Defendant took the present appeal.
The contention that the resolution adopted by the company dated August 31, 1949 is
ultra vires in the sense that it has no authority to act on a matter which may render the
company liable as a guarantor has no factual or legal basis. In the first place, it should be
noted that the opening of a post office branch at the mining camp of appellant corporation
was undertaken because of a request submitted by it to promote the convenience and
benefit of its employees. The idea did not come from the government, and the Director of
Posts was prevailed upon to agree to the request only after studying the necessity for its
establishment and after imposing upon the company certain requirements intended to
safeguard and protect the interest of the government. Thus, after the company had signified
its willingness to comply with the requirement of the government that it furnish free quarters
and all the essential equipment that may be necessary for the operation of the office
including the assignment of an employee who will perform the duties of a postmaster, the
Director of Posts agreed to the opening of the post office stating that "In cases where a post
office will be opened under circumstances similar to the present, it is the policy of this office
to have the company assume direct responsibility for whatever pecuniary loss may be
suffered by the Bureau of Posts by reason of any act of dishonesty, carelessness or negligence
on the part of the employee of the company who is assigned to take charge of the post
office," and accepting this condition, the company, thru its board of directors, adopted
forthwith a resolution of the following tenor: "That the requirement of the Bureau of Posts
that the company should accept full responsibility for all cash received by the Postmaster, be
complied with, and that a copy of this resolution be forwarded to the Bureau of Posts." On
the basis of the foregoing facts, it is evident that the company cannot now be heard to
complain that it is not liable for the irregularity committed by its employee upon the technical
plea that the resolution approved by its board of directors is ultra vires. The least that can be
said is that it cannot now go back on its plighted word on the ground of estoppel.
MATABABE FILES
Corporation Law
The claim that the resolution adopted by the board of directors of appellant company
is an ultra vires act cannot also be entertained it appearing that the same covers a subject
which concerns the benefit, convenience and welfare of its employees and their families.
While as a rule an ultra vires act is one committed outside the object for which a corporation is
created as defined by the law of its organization and therefore beyond the powers conferred
upon it by law (19 C.J.S., Section 965, p. 419), there are however certain corporate acts that
may be performed outside of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation. Thus, it has been held that
"although not expressly authorized to do so a corporation may become a surety where the
particular transaction is reasonably necessary or proper to the conduct of its business," 1 and
here it is undisputed that the establishment of the local post office is a reasonable and proper
adjunct to the conduct of the business of appellant company. Indeed, such post office is a
vital improvement in the living condition of its employees and laborers who came to settle in
its mining camp which is far removed from the postal facilities or means of communication
accorded to people living in a city or municipality..
Even assuming arguendo that the resolution in question constitutes an ultra vires act,
the same however is not void for it was approved not in contravention of law, customs, public
order or public policy. The term ultra vires should be distinguished from an illegal act for the
former is merely voidable which may be enforced by performance, ratification, or estoppel,
while the latter is void and cannot be validated. 2 It being merely voidable, an ultra vires act
can be enforced or validated if there are equitable grounds for taking such action. Here it is
fair that the resolution be upheld at least on the ground of estoppel. On this point, the
authorities are overwhelming:
The weight of authority in the state courts is to the effect that a transaction
which is merely ultra vires and not malum in se or malum prohibitum, is, if performed
by one party, not void as between the parties to all intents and purposes, and that an
action may be brought directly on the transaction and relief had according to its
terms. (19 C.J.S., Section 976, p. 432, citing Nettles v. Rhett, C.C.A.S.C., 94 F. 2d,
reversing, D.C., 20 F. Supp. 48)
This rule is based on the consideration that as between private corporations,
one party cannot receive the benefits which are embraced in total performance of a
contract made with it by another party and then set up the invalidity of the
transaction as a defense." (London & Lancashire Indemnity Co. of America v.
Fairbanks Steam Shovel Co., 147 N.E. 329, 332, 112 Ohio St. 136.)
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Corporation Law

The defense of ultra vires rests on violation of trust or duty toward

stockholders, and should not be entertained where its allowance will do greater
wrong to innocent parties dealing with corporation..
The acceptance of benefits arising from the performance by the other party may give
rise to an estoppel precluding repudiation of the transaction. (19 C.J.S., Section 976,
p. 433.)

The current of modern authorities favors the rule that where the ultra vires
transaction has been executed by the other party and the corporation has received the
benefit of it, the law interposes an estoppel, and will not permit the validity of the
transaction or contract to be questioned, and this is especially true where there is
nothing in the circumstances to put the other party to the transaction on notice that
the corporation has exceeded its powers in entering into it and has in so doing
overstepped the line of corporate privileges. (19 C.J.S., Section 977, pp. 435-
437, citing Williams v. Peoples Building & Loan Ass'n, 97 S.W. 2d 930, 193 Ark. 118;
Hays v. Galion Gas Light Co., 29 Ohio St. 330)

Neither can we entertain the claim of appellant that its liability is only that of a
guarantor. On this point, we agree with the following comment of the court a quo: "A mere
reading of the resolution of the Board of Directors dated August 31, 1949, upon which the
plaintiff based its claim would show that the responsibility of the defendant company is not
just that of a guarantor. Notice that the phraseology and the terms employed are so clear and
sweeping and that the defendant assumed 'full responsibility for all cash received by the
Postmaster.' Here the responsibility of the defendant is not just that of a guarantor. It is
clearly that of a principal."

WHEREFORE, the decision appealed from is affirmed. No costs.

Bengzon, C.J., Padilla, Labrador, Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala and
Makalintal, JJ. concur.

85

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117847 October 7, 1998
PEOPLE'S AIRCARGO AND WAREHOUSING CO. INC., petitioner,
vs.
COURT OF APPEALS and STEFANI SAO, respondents.
Actions; Appeals; Pleadings and Practice; The Rules of Court specify reversible
errorsnot grave abuse of discretionas grounds for a petition for review under Rule
45.The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its
ground for seeking a reversal of the assailed Decision. Although the Rules of Court specify
reversible errors as grounds for a petition for review under Rule 45, the Court will lay aside
for the nonce this procedural lapse and consider the allegations of grave abuse as
statements of reversible errors of law.
Corporation Law; In the absence of authority from the board of directors, no person,
not even its officers, can validly bind a corporation.The general rule is that, in the absence of
authority from the board of directors, no person, not even its officers, can validly bind a
corporation. A corporation is a juridical person, separate and distinct from its stockholders
and members, having x x x powers, attributes and properties expressly authorized by law or
incident to its existence. Being a juridical entity, a corporation may act through its board of
directors, which exercises almost all corporate powers, lays down all corporate business
policies and is responsible for the efficiency of management, as provided in Section 23 of the
Corporation Code of the Philippines.
Same; The authority of certain individuals to bind the corporation is generally derived
from law, corporate bylaws or authorization from the board, either expressly or impliedly by
habit, custom or acquiescence in the general course of business.Under Sec. 23, Corporation
Code, the power and the responsibility to decide whether the corporation should enter into a
contract that will bind the corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However, just as a natural person may
authorize another to do certain acts for and on his behalf, the board of directors may validly
delegate some of its functions and powers to officers, committees or agents. The authority of
such individuals to bind the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly by habit, custom or acquiescence
in the general course of business.
MATABABE FILES
Corporation Law
Same; It is not the quantity of similar acts which establishes apparent authority, but
the vesting of a corporate officer with the power to bind the corporation.Petitioners
argument is not persuasive. Apparent authority is derived not merely from practice. Its
existence may be ascertained through (1) the general manner in which the corporation holds
out an officer or agent as having the power to act or, in other words, the apparent authority
to act in general, with which it clothes him; or (2) the acquiescence in his acts of a particular
nature, with actual or constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers. It requires presentation of evidence of similar act(s) executed either in
its favor or in favor of other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer with the power to bind the
corporation.
Same; Estoppel; It is familiar doctrine that if a corporation knowingly permits one of
its officers, or any other agent, to act within the scope of an apparent authority, it holds him
out to the public as possessing the power to do those acts, and thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agents authority.Private respondent should not be faulted for believing that
Punsalans conformity to the contract in dispute was also binding on petitioner. It is familiar
doctrine that if a corporation knowingly permits one of its officers, or any other agent, to act
within the scope of an apparent authority, it holds him out to the public as possessing the
power to do those acts; and thus, the corporation will, as against anyone who has in good
faith dealt with it through such agent, be estopped from denying the agents authority.
Same; Even if a certain contract is outside the usual powers of the president, the
corporations ratification of the same and acceptance of benefits make it binding.Private
respondent prepared an operations manual and conducted a seminar for the employees of
petitioner in accordance with their contract. Petitioner accepted the operations manual,
submitted it to the Bureau of Customs and allowed the seminar for its employees. As a result
of its aforementioned actions, petitioner was given by the Bureau of Customs a license to
operate a bonded warehouse. Granting arguendo then that the Second Contract was outside
the usual powers of the president, petitioners ratification of said contract and acceptance of
benefits have made it binding, nonetheless. The enforceability of contracts under Article
1403(2) is ratified by the acceptance of benefits under them under Article 1405.
Same; In the absence of a charter or bylaw provision to the contrary, the president of
a corporation is presumed to have the authority to act within the domain of the general
objectives of its business and within the scope of his or her usual duties.Inasmuch as a
corporate president is often given general supervision and control over corporate operations,
the strict rule that said officer has no inherent power to act for the corporation is slowly
giving way to the realization that such officer has certain limited powers in the transaction of
the usual and ordinary business of the corporation. In the absence of a charter or bylaw
86

provision to the contrary, the president is presumed to have the authority to act within the
domain of the general objectives of its business and within the scope of his or her usual
duties.
Contracts; Evidence; The issue of whether a contract is simulated or real is factual in
nature.The issue of whether the contract is simulated or real is factual in nature, and the
Court eschews factual examination in a petition for review under Rule 45 of the Rules of
Court. This rule, however, admits of exceptions, one of which is a conflict between the factual
findings of the lower and of the appellate courts as in the case at bar.
Same; Words and Phrases; A contract is simulated if the parties do not intend to be
bound at all (absolutely simulated), or if the parties conceal their true agreement (relatively
simulated).A fictitious and simulated agreement lacks consent which is essential to a valid
and enforceable contract. A contract is simulated if the parties do not intend to be bound at
all (absolutely simulated), or if the parties conceal their true agreement (relatively simulated).
Same; Interpretation of Contracts; Contemporaneous and subsequent acts are also
principal factors in the determination of the will of the contracting parties.
Contemporaneous and subsequent acts are also principal factors in the determination of the
will of the contracting parties. The circumstances outlined above do not establish any
intention to simulate the contract in dispute. On the contrary, the legal presumption is always
on the validity of contracts. A corporation, by accepting benefits of a transaction entered into
without authority, has ratified the agreement and is, therefore, bound by it.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
PANGANIBAN, J.:
Contracts entered into by a corporate president without express prior board
approval bind the corporation, when such officers apparent authority is established and when
these contracts are ratified by the corporation.
The Case
This principle is stressed by the Court in rejecting the Petition for Review of the February
28, 1994 Decision and the October 28, 1994 Resolution of the Court of Appeals in CA-GR CV
No. 30670.
In a collection case[1] filed by Stefani Sao against Peoples Aircargo and Warehousing Co.,
Inc., the Regional Trial Court (RTC) of Pasay City, Branch 110, rendered a Decision [2] dated
October 26, 1990, the dispositive portion of which reads: [3]
MATABABE FILES
Corporation Law
WHEREFORE, in light of all the foregoing, judgment is hereby rendered, ordering
[petitioner] to pay [private respondent] the amount of sixty thousand (P60,000.00) pesos
representing payment of [private respondents] services in preparing the manual of
operations and in the conduct of a seminar for [petitioner]. The Counterclaim is hereby
dismissed.
Aggrieved by what he considered a minuscule award of P60,000, private respondent
appealed to the Court of Appeals[4] (CA) which, in its Decision promulgated February 28, 1994,
granted his prayer for P400,000, as follows:[5]
WHEREFORE, PREMISES CONSIDERED, the appealed judgment is hereby MODIFIED in that
[petitioner] is ordered to pay [private respondent] the amount of four hundred thousand
pesos (P400,000.00) representing payment of [private respondents] services in preparing the
manual of operations and in the conduct of a seminar for [petitioner].
As no new ground was raised by petitioner, reconsideration of the above-mentioned
Decision was denied in the Resolution promulgated on October 28, 1994.
The Facts
Petitioner is a domestic corporation, which was organized in the middle of 1986 to
operate a customs bonded warehouse at the old Manila International Airport in Pasay City. [6]
To obtain a license for the corporation from the Bureau of Customs, Antonio Punsalan
Jr., the corporation president, solicited a proposal from private respondent for the
preparation of a feasibility study.[7] Private respondent submitted a letter-proposal dated
October 17, 1986 (First Contract hereafter) to Punsalan, which is reproduced hereunder:[8]
Dear Mr. Punsalan:
With reference to your request for professional engineering consultancy services for
your proposed MIA Warehousing Project may we offer the following outputs and the
corresponding rate and terms of agreement:
====================================
Project Feasibility Study consisting of
Market Study
Technical Study
Financial Feasibility Study
Preparation of pertinent documentation requirements for the
application
=====================================================
The above services will be provided for a fee of [p]esos 350,000.00 payable
according to the following schedule:
87
 MATABABE FILES
Corporation Law

===================================================== President
Fifty percent (50%) .upon confirmation of the agreement
Twenty-five percent (25%)..15 days after the confirmation of the agreement CONFORME & RECEIVED from PAIRCARGO, the
Twenty-five percent (25%)..upon submission of the specified outputs amount of ONE HUNDRED THOUSAND PESOS
The outputs will be completed and submitted within 30 days upon confirmation of (P100,000.00), this 17th day of October,
the agreement and receipt by us of the first fifty percent payment. 1986 as 1st installment payment of the
--------------------------------------------------------------------------------------------- service agreement dated October 13, 1986.
Thank you.
(S)STEFANI C. SAO
Yours truly, CONFORME: (T)STEFANI C. SAO

(S)STEFANI C. SAO (S)ANTONIO C. PUNSALAN, JR.
(T)STEFANI C. SAO (T)ANTONIO C. PUNSALAN, JR.
Consultant for President, PAIRCARGO
Industrial Engineering
Initially, Cheng Yong, the majority stockholder of petitioner, objected to private
respondents offer, as another company priced a similar proposal at only P15,000.[9] However,
Punsalan preferred private respondents services because of the latters membership in the
task force, which was supervising the transition of the Bureau of Customs from the Marcos
government to the Aquino administration.[10]
On October 17, 1986, petitioner, through Punsalan, sent private respondent a letter,
confirming their agreement as follows:
Dear Mr. Sao:
With regard to the services offered by your company in your letter dated 13 October 1986, for
the preparation of the necessary study and documentations to support our Application for
Authority to Operate a public Customs Bonded Warehouse located at the old MIA Compound
in Pasay City, please be informed that our company is willing to hire your services and will pay
the amount of THREE HUNDRED FIFTY THOUSAND PESOS (P350,000.00) as follows:
P100,000.00 - upon signing of the agreement; 150,000.00 - on or before October 31, 1986,
with the favorable Recommendation of the CBW on our application.
100,000.00 - upon receipt of the study in final form.
Very truly yours,
Accordingly, private respondent prepared a feasibility study for petitioner which
eventually paid him the balance of the contract price, although not according to the schedule
agreed upon.[11]
On December 4, 1986, upon Punsalans request, private respondent sent petitioner
another letter-proposal (Second Contract hereafter), which reads:
Peoples Air Cargo & Warehousing Co., Inc. Old MIA Compound, Metro Manila
Attention: Mr. ANTONIO PUN[S]ALAN, JR.
President
Dear Mr. Pun[s]alan:
This is to formalize our proposal for consultancy services to your company the scope of
which is defined in the attached service description.
The total service you have decided to avail xxx would be available upon signing of the
conforme below and would come [in] the amount of FOUR HUNDRED THOUSAND
PESOS (P400,000.00) payable at the schedule defined as follows (with the balance
covered by post-dated cheques):
Downpayment upon signing conforme . . . P80,000.00
15 January 1987 . . . . . . . . . . . . . 53,333.00
30 January 1987 . . . . . . . . . . . . . 53,333.00
15 February 1987 . . . . . . . . . . . . . 53,333.00
28 February 1987 . . . . . . . . . . . . . 53,333.00
15 March1987 . . . . . . . . . . . . . 53,333.00
30 March 1987 . . . . . . . . . . . . . 53,333.00

(S)ANTONIO C. PUNSALAN With this package, you are assured of the highest service quality as our performance
(T)ANTONIO C. PUNSALAN record shows we always deliver no less.

88
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then Commissioner Miriam Defensor-Santiago on March 7, 1988.[15] Meanwhile, Punsalan sold

Thank you very much. his shares in petitioner-corporation and resigned as its president in 1987.[16]

Yours truly, On February 9, 1988, private respondent filed a collection suit against petitioner. He
(S)STEFANI C. SAO alleged that he had prepared an operations manual for petitioner, conducted a seminar-
(T)STEFANI C. SAO workshop for its employees and delivered to it a computer program; but that, despite
Industrial Engineering Consultant demand, petitioner refused to pay him for his services.

CONFORME: Petitioner, in its answer, denied that private respondent had prepared an operations
(S)ANTONIO C. PUNSALAN JR. manual and a computer program or conducted a seminar-workshop for its employees. It
(T)PAIRCARGO CO. INC. further alleged that the letter-agreement was signed by Punsalan without authority, in
collusion with [private respondent] in order to unlawfully get some money from [petitioner],
During the trial, the lower court observed that the Second Contract bore, at the lower and despite his knowledge that a group of employees of the company had been
right portion of the letter, the following notations in pencil: commissioned by the board of directors to prepare an operations manual. [17]

1. Operations Manual
2. Seminar/workshop for your employees
P400,000 - package deal
50% upon completion of seminar/workshop
50% upon approval by the Commissioner
The Manual has already been approved by the Commissioner but payment has not yet
been made."
The lower left corner of the letter also contained the following notations:
1st letter - 4 Dec. 1986
2nd letter - 15 June 1987 with Hinanakit.
On January 10, 1987, Andy Villaceren, vice president of petitioner, received the
operations manual prepared by private respondent. [12] Petitioner submitted said operations
manual to the Bureau of Customs in connection with the formers application to operate a
bonded warehouse; thereafter, in May 1987, the Bureau issued to it a license to operate,
enabling it to become one of the three public customs bonded warehouses at the
international airport.[13] Private respondent also conducted, in the third week of January 1987
in the warehouse of petitioner, a three-day training seminar for the latters employees.[14]
On March 25, 1987, private respondent joined the Bureau of Customs as special assistant
to then Commissioner Alex Padilla, a position he held until he became technical assistant to
The trial court declared the Second Contract unenforceable or simulated. However, since
private respondent had actually prepared the operations manual and conducted a training
seminar for petitioner and its employees, the trial court awarded P60,000 to the former, on
the ground that no one should be unjustly enriched at the expense of another (Article 2142,
Civil Code). The trial court determined the amount in light of the evidence presented by
defendant on the usual charges made by a leading consultancy firm on similar services.[18]
The Ruling of the Court of Appeals
To Respondent Court, the pivotal issue of private respondents appeal was the
enforceability of the Second Contract. It noted that petitioner did not appeal the Decision of
the trial court, implying that it had agreed to pay the P60,000 award. If the contract was valid
and enforceable, then petitioner should be held liable for the full amount stated therein,
not P60,000 as held by the lower court.
Rejecting the finding of the trial court that the December 4, 1986 contract was simulated
or unenforceable, the CA ruled in favor of its validity and enforceability. According to the
Court of Appeals, the evidence on record shows that the president of petitioner-corporation
had entered into the First Contract, which was similar to the Second Contract. Thus, petitioner
had clothed its president with apparent authority to enter into the disputed agreement. As it
had also become the practice of the petitioner-corporation to allow its president to negotiate
and execute contracts necessary to secure its license as a customs bonded warehouse
without prior board approval, the board itself, by its acts and through acquiescence,
practically laid aside the normal requirement of prior express approval. The Second Contract
was declared valid and binding on the petitioner, which was held liable to private respondent
in the full amount of P400,000.

89

Disagreeing with the CA, petitioner lodged this petition before us.[19]
The Issues
Instead of alleging reversible errors, petitioner imputes grave abuse of discretion to the
Court of Appeals, viz.:[20]
I. xxx [I]n ruling that the subject letter-agreement for services was binding on the corporation
simply because it was entered into by its president[;]
II. xxx [I]n ruling that the subject letter-agreement for services was binding on the
corporation notwithstanding the lack of any board authority since it was the purported
practice to allow the president to enter into contracts of said nature (citing one previous
instance of a similar contract)[;] and
III. xxx [I]n ruling that the subject letter-agreement for services was a valid contract and not
merely simulated."
The Court will overlook the lapse of petitioner in alleging grave abuse of discretion as its
ground for seeking a reversal of the assailed Decision. Although the Rules of Court specify
reversible errors as grounds for a petition for review under Rule 45, the Court will lay aside for
the nonce this procedural lapse and consider the allegations of grave abuse as statements of
reversible errors of law.
Petitioner does not contest its liability; it merely disputes the amount of such
accountability. Hence, the resolution of this petition rests on the sole issue of the
enforceability and validity of the Second Contract, more specifically: (1) whether the president
of the petitioner-corporation had apparent authority to bind petitioner to the Second
Contract; and (2) whether the said contract was valid and not merely simulated.
The Courts Ruling
The petition is not meritorious.
First Issue: Apparent Authority of a Corporate President
Petitioner argues that the disputed contract is unenforceable, because Punsalan, its
president, was not authorized by its board of directors to enter into said contract.
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. [21] A corporation is a juridical
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person, separate and distinct from its stockholders and members, having xxx powers,
attributes and properties expressly authorized by law or incident to its existence. [22]
Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management,[23]as provided in Section 23 of the Corporation
Code of the Philippines:
SEC. 23. The Board of Directors or Trustees. -- Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by the board of directors
or trustees x x x.
Under this provision, the power and the responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject to
the articles of incorporation, bylaws, or relevant provisions of law. [24] However, just as a
natural person may authorize another to do certain acts for and on his behalf, the board of
directors may validly delegate some of its functions and powers to officers, committees or
agents. The authority of such individuals to bind the corporation is generally derived from law,
corporate bylaws or authorization from the board, either expressly or impliedly by habit,
custom or acquiescence in the general course of business, viz.: [25]
A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes powers which have been intentionally conferred, and also such powers as, in
the usual course of the particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage, as usually pertaining to
the particular officer or agent, and such apparent powers as the corporation has caused
persons dealing with the officer or agent to believe that it has conferred.
Accordingly, the appellate court ruled in this case that the authority to act for and to
bind a corporation may be presumed from acts of recognition in other instances, wherein the
power was in fact exercised without any objection from its board or shareholders. Petitioner
had previously allowed its president to enter into the First Contract with private respondent
without a board resolution expressly authorizing him; thus, it had clothed its president with
apparent authority to execute the subject contract.
Petitioner rebuts, arguing that a single isolated agreement prior to the subject contract
does not constitute corporate practice, which Webster defines as frequent or customary
action. It cites Board of Liquidators v. Kalaw,[26] in which the practice of NACOCO allowing its
general manager to negotiate and execute contract in its copra trading activities for and on
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its behalf, without prior board approval, was inferred from sixty contracts not one, as in the
present case -- previously entered into by the corporation without such board resolution.
Petitioners argument is not persuasive. Apparent authority is derived not merely from
practice. Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers.[27] It requires presentation of evidence of similar
act(s) executed either in its favor or in favor of other parties.[28] It is not the quantity of similar
acts which establishes apparent authority, but the vesting of a corporate officer with the
power to bind the corporation.
In the case at bar, petitioner, through its president Antonio Punsalan Jr., entered into the
First Contract without first securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus clothing its president with the
power to bind the corporation. The grant of apparent authority to Punsalan is evident in the
testimony of Yong -- senior vice president, treasurer and major stockholder of
petitioner. Testifying on the First Contract, he said:[29]
A: Mr. [Punsalan] told me that he prefer[s] Mr. Sao because Mr. Sao is very influential with
the Collector of Customs[s]. Because the Collector of Custom[s] will be the one to
approve our project study and I objected to that, sir. And I said it [was an exorbitant]
price. And Mr. Punsalan he is the [p]resident, so he [gets] his way.
Q: And so did the company eventually pay this P350,000.00 to Mr. Sao?
A: Yes, sir.
The First Contract was consummated, implemented and paid without a hitch.
Hence, private respondent should not be faulted for believing that Punsalans conformity
to the contract in dispute was also binding on petitioner. It is familiar doctrine that if a
corporation knowingly permits one of its officers, or any other agent, to act within the scope
of an apparent authority, it holds him out to the public as possessing the power to do those
acts; and thus, the corporation will, as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agents authority. [30]
Furthermore, private respondent prepared an operations manual and conducted a
seminar for the employees of petitioner in accordance with their contract. Petitioner
accepted the operations manual, submitted it to the Bureau of Customs and allowed the
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seminar for its employees. As a result of its aforementioned actions, petitioner was given by
the Bureau of Customs a license to operate a bonded warehouse. Granting arguendo then
that the Second Contract was outside the usual powers of the president, petitioners
ratification of said contract and acceptance of benefits have made it binding,
nonetheless. The enforceability of contracts under Article 1403(2) is ratified by the acceptance
of benefits under them under Article 1405.
Inasmuch as a corporate president is often given general supervision and control over
corporate operations, the strict rule that said officer has no inherent power to act for the
corporation is slowly giving way to the realization that such officer has certain limited powers
in the transaction of the usual and ordinary business of the corporation.[31] In the absence of a
charter or bylaw provision to the contrary, the president is presumed to have the authority to
act within the domain of the general objectives of its business and within the scope of his or
her usual duties.[32]
Hence, it has been held in other jurisdictions that the president of a corporation
possesses the power to enter into a contract for the corporation, when the conduct on the
part of both the president and the corporation [shows] that he had been in the habit of acting
in similar matters on behalf of the company and that the company had authorized him so to
act and had recognized, approved and ratified his former and similar actions. [33]Furthermore,
a party dealing with the president of a corporation is entitled to assume that he has the
authority to enter, on behalf of the corporation, into contracts that are within the scope of
the powers of said corporation and that do not violate any statute or rule on public policy.[34]
Second Issue: Alleged Simulation of the First Contract
As an alternative position, petitioner seeks to pare down its liabilities by limiting its
exposure from P400,000 to only P60,000, the amount awarded by the RTC. Petitioner
capitalizes on the badges of fraud cited by the trial court in declaring said contract either
simulated or unenforceable, viz.:
xxx The October 1986 transaction with [private respondent] involved P350,000. The
same was embodied in a letter which bore therein not only the conformity of
[petitioners] then President Punsalan but also drew a letter-confirmation from the latter
for, indeed, he was clothed with authority to enter into the contract after the same was
brought to the attention and consideration of [petitioner]. Not only that, a [down
payment] was made. In the alleged agreement of December 4, 1986 subject of the
present case, the amount is even bigger-P400,000.00. Yet, the alleged letter-agreement
drew no letter of confirmation. And no [down payment] and postdated checks were
given. Until the filing of the present case in February 1988, no written demand for
payment was sent to [petitioner]. [Private respondents] claim that he sent one in
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writing, and one was sent by his counsel who manifested that [h]e was looking for a
copy in [his] files fails in light of his failure to present any such copy. These and the
following considerations, to wit:
1) Despite the fact that no [down payment] and/or postdated checks [partial payments] (as
purportedly stipulated in the alleged contract) [was given, private respondent] went ahead
with the services[;]
2) [There was a delay in the filing of the present suit, more than a year after [private
respondent] allegedly completed his services or eight months after the alleged last verbal
demand for payment made on Punsalan in June 1987;
3) Does not Punsalans writing allegedly in June 1987 on the alleged letter-agreement of your
employees[,] when it should have been our employees, as he was then still connected with
[petitioner], indicate that the letter-agreement was signed by Punsalan when he was no
longer connected with [petitioner] or, as claimed by [petitioner], that Punsalan signed it
without [petitioners] authority and must have been done in collusion with plaintiff in order to
unlawfully get some money from [petitioner]?
4) If, as [private respondent] claims, the letter was returned by Punsalan after affixing
thereon his conformity, how come xxx when Punsalan allegedly visited [private respondent]
in his office at the Bureau of Customs, in June 1987, Punsalan brought (again?) the letter (with
the pencil [notation] at the left bottom portion allegedly already written)?
5) How come xxx [private respondent] did not even keep a copy of the alleged service
contract allegedly attached to the letter-agreement?
6) Was not the letter-agreement a mere draft, it bearing the corrections made by Punsalan of
his name (the letter n is inserted before the last letter o in Antonio) and of the spelling of his
family name (Punsalan, not Punzalan)?
7) Why was not Punsalan impleaded in the case?
The issue of whether the contract is simulated or real is factual in nature, and the Court
eschews factual examination in a petition for review under Rule 45 of the Rules of
Court.[35] This rule, however, admits of exceptions, one of which is a conflict between the
factual findings of the lower and of the appellate courts[36] as in the case at bar.
After judicious deliberation, the Court agrees with the appellate court that the alleged
badges of fraud mentioned earlier have not affected in any manner the perfection of the
Second Contract or proved the alleged simulation thereof. First, the lack of payment (whether
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Corporation Law
down, partial or full payment), even after completion of private respondents obligations,
imports only a defect in the performance of the contract on the part of petitioner. Second, the
delay in the filing of action was not fatal to private respondents cause. Despite the lapse of
one year after private respondent completed his services or eight months after the alleged
last demand forpayment in June 1987, the action was still filed within the allowable period,
considering that an action based on a written contract prescribes only after ten years from
the time the right of action accrues.[37] Third, a misspelling in the contract does not establish
vitiation of consent, cause or object of the contract. Fourth, a confirmation letter is not an
essential element of a contract; neither is it necessary to perfect one. Fifth, private
respondents failure to implead the corporate president does not establish collusion between
them. Petitioner could have easily filed a third-party claim against Punsalan if it believed that it
had recourse against the latter.Lastly, the mere fact that the contract price was six times the
alleged going rate does not invalidate it.[38] In short, these badges do not establish simulation
of said contract.
A fictitious and simulated agreement lacks consent which is essential to a valid and
enforceable contract.[39] A contract is simulated if the parties do not intend to be bound at all
(absolutely simulated),[40] or if the parties conceal their true agreement (relatively
simulated).[41] In the case at bar, petitioner received from private respondent a letter-offer
containing the terms of the former, including a stipulation of the consideration for the latters
services. Punsalans conformity, as well as the receipt and use of the operations manual,
shows petitioners consent to or, at the very least, ratification of the contract. To repeat,
petitioner even submitted the manual to the Bureau of Customs and allowed private
respondent to conduct the seminar for its employees. Private respondent heard no objection
from the petitioner, until he claimed payment for the services he had rendered.
Contemporaneous and subsequent acts are also principal factors in the determination of
the will of the contracting parties.[42] The circumstances outlined above do not establish any
intention to simulate the contract in dispute. On the contrary, the legal presumption is always
on the validity of contracts. A corporation, by accepting benefits of a transaction entered into
without authority, has ratified the agreement and is, therefore, bound by it. [43]
WHEREFORE, the petition is hereby DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Davide, Jr. (Chairman), Bellosillo, Vitug, and Quisumbing, JJ., concur.
92

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-48237 June 30, 1987
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. RONALDO B. ZAMORA, PRESIDENTIAL ASSISTANT FOR LEGAL AFFAIRS, THE HON.
SECRETARY OF LABOR, and MADRIGAL CENTRAL OFFICE EMPLOYEES UNION, respondents.
G.R. No. L-49023 June 30, 1987
MADRIGAL & COMPANY, INC., petitioner,
vs.
HON. MINISTER OF LABOR and MADRIGAL CENTRAL OFFICE EMPLOYEES
UNION, respondents.
Evidence; Findings of administrative agencies are accorded not only respect but even
finality.As a general rule, the findings of administrative agencies are accorded not only
respect but even finality. This is especially true with respect to the Department of Labor,
which performs not only a statutory function but carries out a Constitutional mandate as well.
Our jurisdiction, as a rule, is confined to cases of grave abuse of discretion. But for certiorari
to lie, there must be such arbitrary and whimsical exercise of power, or that discretion was
exercised despotically.
Labor Law; Dividends received by the company are corporate earnings arising from
corporate investment.The petitioner would, however, have us believe that it in fact
sustained losses. Whatever profits it earned, so it claims were in the nature of dividends
declared on its shareholdings in other companies in the earning of which the employees had
no participation whatsoever. Cash dividends, according to it, are the absolute property of
the stockholders and cannot be made available for disposition if only to meet the employees
economic demands. There is no merit in this contention. We agree with the National Labor
Relations Commission that [t]he dividends received by the company are corporate earnings
arising from corporate investment. Indeed, as found by the Commission, the petitioner had
entered such earnings in its financial statements as profits, which it would not have done if
they were not in fact profits. Moreover, it is incorrect to say that such profitsin the form of
dividendsare beyond the reach of the petitioners creditors since the petitioner had
received them as compensation for its management services in favor of the companies it
managed as a shareholder thereof. As such shareholder. the dividends paid to it were its own
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Corporation Law
money, which may then be available for wage increments. It is not a case of a corporation
distributing dividends in favor of its stockholders, in which case, such dividends would be the
absolute property of the stockholders and hence, out of reach by creditors of the
corporation. Here, the petitioner was acting as stockholder itself, and in that case, the right to
a share in such dividends, by way of salary increases, may not be denied its employees.
Same; Unfair Labor Practice; Reduction of capital to evade employees demand for
salary adjustments, mass lay-off of employees under the guise of retrenchment policy
constitute unfair labor practice.Accordingly, this court is convinced that the petitioners
capital reduction efforts were, to begin with, a subterfuge, a deception as it were, to
camouflage the fact that it had been making profits, and consequently, to justify the mass lay
off in its employee ranks, especially of union members. They were nothing but a premature
and plain distribution of corporate assets to obviate a just sharing to labor of the vast profits
obtained by its joint efforts with capital through the years. Surely, we can neither
countenance nor condone this. It is an unfair labor practice. As we observed in Peoples Bank
and Trust Company v. Peoples Bank and Trust Co. Employees Union: xxx xxx xxx As has been
held by this Court in Insular Lumber Company vs. CA, et al., L-23875, August 29, 1969, 29 SCRA
371, retrenchment can only be availed of if the company is losing or meeting financial reverses
in its operation, which certainly is not the case at bar. Undisputed is the fact, that the Bank at
no time incurred losses. As a matter of fact. the net earnings of the Bank would be in the
average of P2,000,000.00 a year from 1960 to 1969 and, during this period of nine (9) years,
the Bank continuously declared dividends to its stockholders. Thus the mass layoff or
dismissal of the 65 employees under the guise of retrenchment policy of the Bank is a lame
excuse and a veritable smoke-screen of its scheme to bust the Union and thus unduly disturb
the employment tenure of the employees concerned, which act is certainly an unfair labor
practice.
PETITIONS for certiorari and prohibition to review the decision of the Secretary of Labor.
The facts are stated in the opinion of the Court.
SARMIENTO, J.:
These are two petitions for certiorari and prohibition filed by the petitioner, the
Madrigal & Co., Inc. The facts are undisputed.
The petitioner was engaged, among several other corporate objectives, in the
management of Rizal Cement Co., Inc.1 Admittedly, the petitioner and Rizal Cement Co., Inc.
are sister companies.2 Both are owned by the same or practically the same stockholders.3 On
December 28, 1973, the respondent, the Madrigal Central Office Employees Union, sought for
the renewal of its collective bargaining agreement with the petitioner, which was due to
expire on February 28, 1974.4 Specifically, it proposed a wage increase of P200.00 a month, an
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allowance of P100.00 a month, and other economic benefits.5 The petitioner, however,
requested for a deferment in the negotiations.
On July 29, 1974, by an alleged resolution of its stockholders, the petitioner reduced its capital
stock from 765,000 shares to 267,366 shares.6 This was effected through the distribution of
the marketable securities owned by the petitioner to its stockholders in exchange for their
shares in an equivalent amount in the corporation.7
On August 22, 1975, by yet another alleged stockholders' action, the petitioner
reduced its authorized capitalization from 267,366 shares to 110,085 shares, again, through
the same scheme.8
After the petitioner's failure to sit down with the respondent union, the latter, on
August 28, 1974, commenced Case No. LR-5415 with the National Labor Relations Commission
on a complaint for unfair labor practice.9 In due time, the petitioner filed its position
paper, 10 alleging operational losses. Pending the resolution of Case No. LR-5415, the
petitioner, in a letter dated November 17, 1975, 11 informed the Secretary of Labor that Rizal
Cement Co., Inc., "from which it derives income" 12 "as the General Manager or Agent" 13 had
"ceased operating temporarily." 14 "In addition, "because of the desire of the stockholders to
phase out the operations of the Madrigal & Co., Inc. due to lack of business incentives and
prospects, and in order to prevent further losses," 15it had to reduce its capital stock on two
occasions "As the situation, therefore, now stands, the Madrigal & Co., Inc. is without
substantial income to speak of, necessitating a reorganization, by way of retrenchment, of its
employees and operations." 16 The petitioner then requested that it "be allowed to effect said
reorganization gradually considering all the circumstances, by phasing out in at least three (3)
stages, or in a manner the Company deems just, equitable and convenient to all concerned,
about which your good office will be apprised accordingly." 17 The letter, however, was not
verified and neither was it accompanied by the proper supporting papers. For this reason, the
Department of Labor took no action on the petitioner's request.
On January 19, 1976, the labor arbiter rendered a decision 18 granting, among other
things, a general wage increase of P200.00 a month beginning March 1, 1974 plus a monthly
living allowance of P100.00 monthly in favor of the petitioner's employees. The arbiter
specifically found that the petitioner "had been making substantial profits in its
operation" 19 since 1972 through 1975. The petitioner appealed.
On January 29, 1976, the petitioner applied for clearance to terminate the services of
a number of employees pursuant supposedly to its retrenchment program. On February 3,
1976, the petitioner applied for clearance to terminate 18 employees more. 20 On the same
date, the respondent union went to the Regional Office (No. IV) of the Department of Labor
(NLRC Case No. R04-2-1432-76) to complain of illegal lockout against the petitioner. 21Acting
on this complaint, the Secretary of 22 Labor, in a decision dated December 14, 1976, 22 found
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the dismissals "to be contrary to law" 23 and ordered the petitioner to reinstate some 40
employees, 37 of them with backwages. 24 The petitioner then moved for reconsideration,
which the Acting Labor Secretary, Amado Inciong, denied. 25
Thereafter, the petitioner filed an appeal to the Office of the President. The
respondent, the Presidential Assistant on Legal Affairs, affirmed with modification the Labor
Department's decision, thus:
xxx xxx xxx
1. Eliseo Dizon, Eugenio Evangelista and Benjamin Victorio are excluded from the
order of reinstatement.
2. Rogelio Meneses and Roberto Taladro who appear to have voluntarily retired and
paid their retirement pay, their cases are left to the judgment of the Secretary of
Labor who is in a better position to assess appellant's allegation as to their
retirement.
3. The rest are hereby reinstated with six (6) months backwages, except Aleli
Contreras, Teresita Eusebio and Norma Parlade who are to be reinstated without
backwages.
SO ORDERED. 26
xxx xxx xxx
On May 15, 1978, the petitioner came to this court. (G.R. No. 48237.)
Meanwhile, on May 25, 1977, the National Labor Relations Commission rendered a decision
affirming the labor arbiter's judgment in Case No. LR-5415. 27 The petitioner appealed to the
Secretary of Labor. On June 9, 1978, the Secretary of Labor dismissed the appeal. 28 Following
these successive reversals, the petitioner came anew to this court. (G.R. No. 49023.)
By our resolution dated October 9, 1978, we consolidated G.R. No. 48237 with G.R.
No. 49023. 29 We likewise issued temporary restraining orders. 30
In G.R. No. 48237, the petitioner argues, that.
xxx xxx xxx
I. SAID RESPONDENTS ERRED IN HOLDING THAT THERE WAS NO VALID COMPLIANCE WITH
THE CLEARANCE REQUIREMENT.
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II. SAID RESPONDENTS ERRED IN NOT HOLDING THAT THERE IS NO LOCKOUT HERE IN LEGAL
CONTEMPLATION, MUCH LESS FOR UNION-BUSTING PURPOSES.
III. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN ORDERING THE REINSTATEMENT OF
THE REST OF AFFECTED MEMBERS OF RESPONDENT UNION WITH SIX (6) MONTHS
BACKWAGES, EXCEPT ALELI CONTRERAS, TERESITA EUSEBIO AND NORMA PARLADE WHO
ARE TO BE REINSTATED WITHOUT BACKWAGES.
IV. RESPONDENT PRESIDENTIAL ASSISTANT ERRED IN LEAVING TO THE JUDGMENT OF
RESPONDENT SECRETARY THE CASES OF ROGELIO MENESES AND ROBERTO TALADRO WHO
HAD VOLUNTARILY RETIRED AND PAID THEIR RETIREMENT PAY.31
xxx xxx xxx
while in G.R. No. 49023, it submits that:
xxx xxx xxx
1. RESPONDENT MINISTER ERRED IN AFFIRMING THE DECISION EN BANC OF THE
NATIONAL LABOR RELATIONS COMMISSION DESPITE CLEAR INDICATIONS IN THE RECORD
THAT THE AWARD WAS PREMATURE IN THE ABSENCE OF A DEADLOCK IN NEGOTIATION
AND THE FAILURE ON THE PART OF THE LABOR ARBITER TO RESOLVE THE MAIN IF NOT
ONLY ISSUE OF REFUSAL TO BARGAIN, THEREBY DEPRIVING PETITIONER OF ITS RIGHT TO
DUE PROCESS.
2. ASSUMING ARGUENDO THAT THERE WAS A DEADLOCK IN NEGOTIATION,
RESPONDENT MINISTER ERRED NEVERTHELESS IN NOT FINDING THAT THE ECONOMIC
BENEFITS GRANTED IN THE FORM OF SALARY INCREASES ARE UNFAIR AND VIOLATIVE OF
THE MANDATORY GUIDELINES PRESCRIBED UNDER PRESIDENTIAL DECREE NO. 525 AND
IGNORING THE UNDISPUTED FACT THAT PETITIONER HAD VIRTUALLY CEASED OPERATIONS
AFTER HAVING TWICE DECREASED ITS CAPITAL STOCKS AND, THEREFORE, NOT FINANCIALLY
CAPABLE TO ABSORB SUCH AWARD OF BENEFITS. 32
xxx xxx xxx
There is no merit in these two (2) petitions.
As a general rule, the findings of administrative agencies are accorded not only
respect but even finality. 33 This is especially true with respect to the Department of Labor,
which performs not only a statutory function but carries out a Constitutional mandate as
well. 34 Our jurisdiction, as a rule, is confined to cases of grave abuse of discretion. 35 But for
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certiorari to lie, there must be such arbitrary and whimsical exercise of power, or that
discretion was exercised despotically. 36
In no way can the questioned decisions be seen as arbitrary. The decisions
themselves show why.
Anent Case No. R04-2-1432-76 (G.R. No. 48237), we are satisfied with the correctness
of the respondent Presidential Assistant for Legal Affairs' findings.
We quote:
xxx xxx xxx
In urging reversal of the appealed decision, appellant contends that (1) its
letter dated November 17, 1975, constitute "substantial compliance with the
clearance requirement to terminate;" and (2) individual appellees' dismissal had no
relation to any union activities, but was the result of an honest-to-goodness
retrenchment policy occasioned by loss of income due to cessation of operation.
We find the first contention to be without merit. Aside from the fact that the
controversial letter was unverified, with not even a single document submitted in
support thereof, the same failed to specify the individual employees to be affected
by the intended retrenchment. Not only this, but the letter is so vague and indefinite
regarding the manner of effecting appellant's retrenchment plan as to provide the
Secretary of (sic) a reasonable basis on which to determine whether the request for
retrenchment was valid or otherwise, and whether the mechanics in giving effect
thereto was just or unjust to the employees concerned. In fact, to be clearly implied
from the letter is that the implementary measures needed to give effect to the
intended retrenchment are yet to be thought of or concretized in the indefinite
future, measures about which the office of the Secretary "will be apprised
accordingly." All these, and more, as correctly found by the Acting Secretary, cannot
but show that the letter is insufficient in form and substance to constitute a valid
compliance with the clearance requirement. That being so, it matters little whether
or not complainant union or any of its members failed to interpose any opposition
thereto.
It cannot be over-emphasized that the purpose in requiring a prior clearance
by the Secretary of Labor, in cases of shutdown or dismissal of employees, is to
afford said official ample opportunity to examine and determine the reasonableness
of the request. This is made imperative in order to give meaning and substance to the
constitutional mandate that the State must "afford protection to labor," and
95

guarantee their "security of tenure." Indeed, the rules require that the application for
clearance be filed ten (10) days before the intended shutdown or dismissal, serving a
copy thereof to the employees affected in order that the latter may register their
own individual objections against the grant of the clearance. But how could this
requirement of notice to the employees have been complied with, when, as observed
by the Acting Secretary in his modificatory decision dated June 30, 1977 "the latter of
November 17, 1975 does not even state definitely the employees involved" upon
whom service could be made.
With respect to appellant's second contention, we agree with the Acting Secretary's
findings that individual appellee's dismissal was an offshoot of the union's demand
for a renegotiation of the then validly existing collective bargaining Agreement.
xxx xxx xxx
The pattern of appellant's acts after the decision of the Labor Arbiter in Case
No. LR-5415 has convinced us that its sole objective was to render moot and
academic the desire of the union to exercise its right to bargain collectively with
management, especially so when it is considered in the light of the fact that under
the said decision the demand by the union for wage increase and allowances was
granted. What renders appellant's motive suspect was its haste in terminating the
services of individual appellees, without waiting the outcome of its appeal in Case
No. LR-5415. The amount involved by its offer to pay double separation could very
well have been used to pay the salaries of those employees whose services were
sought to be terminated, until the resolution of its appeal with the NLRC, since
anyway, if its planned retrenchment is found to be justifiable and done in good faith,
its only liability is to answer for the separation pay provided by law. By and large,
therefore, we agree with the Acting Secretary that, under the circumstances
obtaining in this case, "respondent's action [was] a systematic and deliberate
attempt to get rid of complainants because of their union activities.
We now come to the individual cases of Aleli Contreras, Teresita Eusebio and
Norma Parlade. It is appellant's claim that these three (3) should not be reinstated
inasmuch as they have abandoned their work by their continued absences, and
moreover in the case of Contreras, she failed to oppose the application for clearance
filed against her on October 24, 1975. However, appellant's payrolls for December 16-
31, 1975, January 1-15, 1976 and January 16-31, 1976, show that the three (3) were "on
leave without pay." As correctly appreciated by the Acting Secretary, these "payrolls
prove, first, that "leave" has been granted to these employees, and, second, that it is
a practice in the company to grant "leaves without pay" without loss of employment
status, to those who have exhausted their authorized leaves." As regards, Norma
Parlade, the records show that she "truly incurred illness and actually underwent
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surgery in Oct., 1975." As to Aleli Contreras, there is no showing that the Secretary of
Labor or appellant ever acted on the clearance. If we were to follow the logic of
appellant, Contreras should not have been included in the application for clearance
filed on Feb. 3, 1976. The fact that she was included shows that up to that time, she
was still considered as a regular employee. It was for these reasons, coupled with the
length of service that these employees have rendered appellant, that the Acting
Secretary ordered their reinstatement but without backwages. 37
xxx xxx xxx
With respect Lo Case No. LR-5415 (G.R. No. 49023), we are likewise content with the findings
of the National Labor Relations Commission. Thus:
xxx xxx xxx
Appellant now points that the only issue certified to compulsory arbitration
is "refusal to bargain" and it is, therefore, premature to dictate the terms of the CBA
on the assumption that there was already a deadlock in negotiation. Appellant
further contends that, assuming there was deadlock in negotiation, the economic
benefits granted are unreasonable and violative of the guideline prescribed by P.D.
525.
On the other hand, it is the union's stance that its economic demands are
justified by, the persistent increase in the cost of living and the substantial earnings
of the company from 1971 to 1975.
It bears to stress that although the union's petition was precipitated by the
company's refusal to bargain, there are glaring circumstances pointing out that the
parties also submitted "deadlock" to arbitration. The petition itself is couched in
general terms, praying for arbitration of the union's "dispute" with the respondent
concerning proposed changes in the collective bargaining agreement." It is
supported with a copy of the proposed changes which just goes to show that the
union, aside from the issue concerning respondent's refusal to bargain, sought
determination of the merit of its proposals. On the part of the appellant company, it
pleaded financial incapacity to absorb the proposed economic benefits during the
initial stage of the proceedings below. Even the evidence and arguments proferred
below by both parties are relevant to deadlock issue. In the face of these factual
environment, it is our view that the Labor Arbiter below did not commit a reversible
error in rendering judgment on the proposed CBA changes. At any rate, the minimum
requirements of due process was satisfied because as heretofore stated, the
96

appellant was given Opportunity, and had in fact, presented evidence and argument
in avoidance of the proposed CBA changes.
We do not also subscribe to appellant's argument that by reducing its
capital, it is made evident that it is phasing out its operations. On the contrary,
whatever may be the reason behind such reductions, it is indicative of an intention to
keep the company a going concern. So much so that until now almost four (4) years
later, it is still very much in existence and operational as before.
We now come to the question concerning the equitableness of the
economic benefits granted below. It requires no evidence to show that the
employees concerned deserve some degree of upliftment due to the unabated
increase in the cost of living especially in Metro Manila. Of course the company would
like us to believe that it is losing and is therefore not financially capable of improving
the present CBA to favor its employees. In support of such assertion, the company
points that the profits reflected in its yearly Statement of Income and Expenses are
dividends from security holdings. We, however, reject as puerile its suggestion to
dissociate the dividends it received from security holdings on the pretext that they
belong exclusively to its stockholders. The dividends received by the company are
corporate earnings arising from corporate investment which no doubt are attended
to by the employees involved in this proceedings. Otherwise. it would not have been
reflected as part of profits in the company's yearly financial statements. In
determining the reasonableness of the economic grants below, we have, therefore,
scrutinized the company's Statement of Income and Expenses from 1972 to 1975 and
after equating the welfare of the employees with the substantial earnings of the
company, we find the award to be predicated on valid justifications.
The salary increase we herein sanction is also in keeping with the rational
that made imperative the enactment of the Termination Pay Law since in case the
respondent company really closes down, the employees will receive higher
separation pay or retirement benefits to tide them over while seeking another
employment. 38
What clearly emerges from the recorded facts is that the petitioner, awash with
profits from its business operations but confronted with the demand of the union for wage
increases, decided to evade its responsibility towards the employees by a devised capital
reduction. While the reduction in capital stock created an apparent need for retrenchment, it
was, by all indications, just a mask for the purge of union members, who, by then, had
agitated for wage increases. In the face of the petitioner company's piling profits, the
unionists had the right to demand for such salary adjustments.
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That the petitioner made quite handsome profits is clear from the records. The labor
arbiter stated in his decision in the collective agreement case (Case No. LR-5415):
xxx xxx xxx
A clear scrutiny of the financial reports of the respondent [herein petitioner]
reveals that it had been making substantial profits in the operation.
In 1972, when it still had 765,000 common shares, of which 305,000 were unissued
and 459,000 outstanding capitalized at P16,830,000.00, the respondent made a net
profit of P2,403,211.58. Its total assets were P70,821,317.81.
In 1973, based on the same capitalization, its profit increased to
P2,724,465.33. Its total assets increased to P83,240,473.73.
In 1974, although its capitalization was reduced from P16,830,000.00 to
P11,230,459.36, its profits were further increased to P2,922,349.70. Its assets were
P78,842,175.75.
The reduction in its assets by P4,398,297.98 was due to the fact that its
capital stock was reduced by the amount of P5,599,540.54.
In 1975, for the period of only six months, the respondent reported a net profit of
P547,414.72, which when added to the surplus of P5,591.214.19, makes a total surplus
of P6,138,628.91 as of June 30, 1975. 39
xxx xxx xxx
The petitioner would, however, have us believe that it in fact sustained losses.
Whatever profits it earned, so it claims were in the nature of dividends "declared on its
shareholdings in other companies in the earning of which the employees had no participation
whatsoever." 40 "Cash dividends," according to it, "are the absolute property of the
stockholders and cannot be made available for disposition if only to meet the employees'
economic demands." 41
There is no merit in this contention. We agree with the National Labor Relations
Commission that "[t]he dividends received by the company are corporate earnings arising
from corporate investment." 42 Indeed, as found by the Commission, the petitioner had
entered such earnings in its financial statements as profits, which it would not have done if
they were not in fact profits. 43
Moreover, it is incorrect to say that such profits in the form of dividends are
beyond the reach of the petitioner's creditors since the petitioner had received them as
97

compensation for its management services in favor of the companies it managed as a
shareholder thereof. As such shareholder, the dividends paid to it were its own money, which
may then be available for wage increments. It is not a case of a corporation distributing
dividends in favor of its stockholders, in which case, such dividends would be the absolute
property of the stockholders and hence, out of reach by creditors of the corporation. Here,
the petitioner was acting as stockholder itself, and in that case, the right to a share in such
dividends, by way of salary increases, may not be denied its employees.
Accordingly, this court is convinced that the petitioner's capital reduction efforts
were, to begin with, a subterfuge, a deception as it were, to camouflage the fact that it had
been making profits, and consequently, to justify the mass layoff in its employee ranks,
especially of union members. They were nothing but a premature and plain distribution of
corporate assets to obviate a just sharing to labor of the vast profits obtained by its joint
efforts with capital through the years. Surely, we can neither countenance nor condone this.
It is an unfair labor practice.
As we observed in People's Bank and Trust Company v. People's Bank and Trust Co.
Employees Union: 44
xxx xxx xxx
As has been held by this Court in Insular Lumber Company vs. CA, et al., L-
23875, August 29, 1969, 29 SCRA 371, retrenchment can only be availed of if the
company is losing or meeting financial reverses in its operation, which certainly is not
the case at bar. Undisputed is the fact, that the Bank "at no time incurred losses. " As
a matter of fact, "the net earnings of the Bank would be in the average of
P2,000,000.00 a year from 1960 to 1969 and, during this period of nine (9) years, the
Bank continuously declared dividends to its stockholders." Thus the mass lay-off or
dismissal of the 65 employees under the guise of retrenchment policy of the Bank is a
lame excuse and a veritable smoke-screen of its scheme to bust the Union and thus
unduly disturb the employment tenure of the employees concerned, which act is
certainly an unfair labor practice. 45
Yet, at the same tune, the petitioner would claim that "the phasing out of its
operations which brought about the retrenchment of the affected employees was mainly
dictated be the necessity of its stockholders in their capacity as heirs of the late Don Vicente
Madrigal to partition the estate left by him." 46 It must be noted, however, that the labor
cases were tried on the theory of losses the petitioner was supposed to have incurred to
justify retrenchment. The petitioner cannot change its theory in the Supreme Court.
Moreover, there is nothing in the records that will substantiate this claim. But what is more
important is the fact that it is not impossible to partition the Madrigal estate assuming that
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the estate is up for partition without the petitioner's business closing shop and inevitably,
without the petitioner laying off its employees.
As regards the question whether or not the petitioner's letter dated November 17,
1975 47 was in substantial compliance with legal clearance requirements, suffice it to state that
apart from the Secretary of Labor's valid observation that the same "did not constitute a
sufficient clearance as contemplated by law, " 48 the factual circumstances show that the
letter in question was itself a part of the "systematic and deliberate attempt to get rid of [the
union members] because of their union activities." 49 Hence, whether or not the said letter
complied with the legal formalities is beside the point since under the circumstances,
retrenchment was, in all events, unjustified. Parenthetically, the clearance required under
Presidential Decree No. 850 has been done away with by Batas Blg. 130, approved on August
21, 1981.
During the pendency of these petitions, the petitioner submitted manifestations to
the effect that certain employees have accepted retirement benefits pursuant to its
retrenchment scheme. 50 This is a matter of defense that should be raised before the National
Labor Relations Commission.
To do away with the protracted process of determining the earnings acquired by the
employees as a result of ad interim employment, and to erase any doubt as to the amount of
backwages due them, this court, in line with the precedent set in Mercury Drug Co., Inc. v.
Court of Industrial Relations, 51 affirmed in a long line of decisions that came later, 52 hereby
fixes the amount of backwages at three (3) years pay reckoned at the increased rates decreed
by the labor arbiter in Case No. LR-5415 without deduction or qualification.
WHEREFORE, the petitions are hereby DISMISSED. Subject to the modification as to
the amount of backwages hereby awarded, the challenged decisions are AFFIRMED. The
temporary restraining orders are LIFTED. With costs against the petitioner.
This decision is IMMEDIATELY EXECUTORY.
SO ORDERED.
98

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 117897 May 14, 1997
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES &
EXCHANGE COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
Actions; Judgments; Res Judicata; Bar by Prior Judgment; Conclusiveness of Judgment;
Words and Phrases; Section 49, Rule 39 of the Revised Rules of Court lays down the dual
aspects of res judicata in actions in personam.Section 49, Rule 39 of the Revised Rules of
Court lays down the dual aspects of res judicata in actions in personam, to wit: Effect of
judgment.The effect of a judgment or final order rendered by a court or judge of the
Philippines, having jurisdiction to pronounce the judgment or order, may be as follows: xxx
xxx xxx (b) In other cases the judgment or order is, with respect to the matter directly
adjudged or as to any other matter that could have been raised in relation thereto, conclusive
between the parties and their successors in interest by title subsequent to the
commencement of the action or special proceeding, litigating for the same thing and under
the same title and in the same capacity; (c) In any other litigation between the same parties or
their succes sors in interest, that only is deemed to have been adjudged in a former judgment
which appears upon its face to have been so adjudged, or which was actually and necessarily
included therein or necessary thereto. Section 49(b) enunciates the first concept of res
judicata known as bar by prior judgment, whereas , Section 49(c) is referred to as
conclusiveness of judgment.
Same; Same; Same; Same; Same; Same; There is bar by former judgment when,
between the first case where the judgment was rendered, and the second case where the
judgment is invoked, there is identity of parties, subject matter and cause of action while
there is conclusiveness of judgment where there is only identity of parties but there is no
identity of cause of action, the judgment being conclusive in the second case only as to those
matters actually and directly controverted and determined, and not as to matters merely
involved therein.There is bar by former judgment when, between the first case where the
judgment was rendered, and the s econd case where such judgment is invoked, there is
identity of parties, subject matter and cause of action. When the three identities are present,
the judgment on the merits rendered in the first constitutes an absolute bar to the
subsequent action. But where between the first case wherein judgment is rendered and the
second case wherein such judgment is invoked, there is only identity of parties but there is no
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identity of cause of action, the judgment is conclusive in the s econd case, only as to those
matters actually and directly controverted and determined, and not as to matters merely
involved therein. This is what is termed conclusiveness of judgment.
Same; Same; Same; Same; Same; Intervention; A party-in-intervention cannot be
considered a principal in a prior case for purposes of applying the principle of res judicata since
the contrary goes against the true import of the action of intervention as a m ere subsidiary
proceeding without an independent life apart from the principal action as well as the intrinsic
character of the intervenor as a mere subordinate party in the main case whose right may be
said to be only in aid of the right of the original party.Neither of these concepts of res
judicata find relevant application in the case at bench. While there may be identity of subject
matter (IDP property) in both cases, there is no identity of parties. The principal parties in G.R.
No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private
respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was
only made an ancillary party in G.R. No. 107751 as intervenor. It was never originally a principal
party thereto. it must be noted that intervention is not an independent action, but is merely
collateral, accessory, or ancillary to the principal action. It is just an interlocutory proceeding
dependent on or subsidiary to the case between the original parties. Indeed, The IDP-Tamano
Group cannot be considered a principal party in G.R. No. 107751 for purposes of applying the
principle of res judicata since the contrary goes against the true import of the action of
intervention as a mere subsidiary proceeding without an independent life apart from the
principal action as well as the intrinsic character of the intervenor as a mere subordinate party
in the main case whose right may be said to be only in aid of the right of the original party. It is
only in the present case, actually, where the IDP-Tamano Group became a principal party, as
petitioner, with the Iglesia Ni Cristo, as private res pondent. Clearly, there is no identity of
parties in both cases.
Same; Same; Same; Same; Same; Corporation Law; A juridical person can not be
considered essentially a formal party to a case where it was not duly represented by its
legitimate governing board.In this connection, although it is true that Civil Case No. Q-90-
6937, which gave rise to G.R. No. 107751, was entitled, Iglesia Ni Kristo, Plaintiff v. Islamic
Directorate of the Philippines, Defendant, the IDP can not be considered essentially a formal
party thereto for the simple reason that it was not duly represented by a legitimate Board of
Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for
Specific Performance with Damages, a mere action in personam , did not become final and
executory insofar as the true IDP is concerned since petitioner corporation, for want of
legitimate representation, was effectively deprived of its day in court in said case. Res inter
alios judicatae nullum aliis praejudicium faciunt. Matters adjudged in a cause do not prejudice
those who were not parties to it. Elsewise put, no person (natural or juridical) shall be
affected by a proceeding to which he is a stranger.
99

Same; Same; Same; Same; Same; While it is true that the principle of res judicata is a
fundamental component of our judicial system, it should be disregarded if its rigid application
would involve the sacrifice of justice to technicality.In any case, while it is true that the
principle of res judicata is a fundamental component of our judicial system, it should be
disregarded if its rigid application would involve the sacrifice of justice to technicality.
Corporation Law; Jurisdiction; Securities and Exchange Commission; The SEC has the
unquestionable authority to pass upon the issue as to who among the different contending
groups is the legitimate governing board of a corporate body.There can be no question as to
the authority of the SEC to pass upon the issue as to who among the different contending
groups is the legitimate Board of Trustees of the IDP since this is a matter properly falling
within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of
Presidential Decree No. 902-A: Section 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or associations , who are the
grantees of primary franchises and/or a license or permit issued by the government to
operate in the Philippines x x x x x x. x x x x x x x x x Section 5. In addition to the regulatory
and adjudicative functions of the Securities and Exchange Commission over corpora ti ons ,
partnerships and other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to hear and decide
cases involving: x x x x x x x x x c) Controversies in the selection or appointment of directors,
trustees, officers, or managers of such corporations, partnerships or associations. x x x.
Same; Contracts; Sales; Where a corporate body never gave its consent, thru a
legitimate governing board, to a deed of absolute sale, the subject sale is void and produces no
effect whatsoever.Premises considered, all acts carried out by the Carpizo Board,
particularly the sale of the Tandang Sora property, allegedly in the name of the IDP, have to
be struck down for having been done without the consent of the IDP thru a legitimate Board
of Trustees. Article 1318 of the New Civil Code lays down the essential requisites of contracts:
There is no contract unless the following requisites concur: (1) Consent of the contracting
parties; (2) Object certain which is the subject matter of the contract; (3) Cause of the
obligation which is established. All these elements must be present to constitute a valid
contract. For, where even one is absent, the contract is void. As succinctly put by Tolentino,
consent is essential for the existence of a contract, and where it is wanting, the contract is
non-existent. In this case, the IDP, owner of the subject parcels of land, never gave its
consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale executed
in favor of INC. This is, therefore, a case not only of vitiated consent, but one where consent
on the part of one of the supposed contracting parties is totally wanting. Ineluctably, the
subject sale is void and produces no effect whatsoever.
Same; Same; Same; For the sale of the only property of a corporation to be valid, the
majority vote of the legitimate board, concurred in by the vote of at least 2/3 of the bona fide
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m embers of the corporation, should be obtained.The Tandang Sora property, it appears
from the records, constitutes the only property of the IDP. Hence, its sale to a third-party is a
sale or disposition of all the corporate property and assets of I DP falling squarely within the
contemplation of the foregoing section. For the sale to be valid, the m a jorit y vot e of the
legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide
members of the corporation should have been obtained. These twin requirements were not
met as the Carpizo Group which voted to sell the Tandang Sora property was a fake Board of
Trustees , and those whose names and s ignatures were affixed by the Carpizo Group
together with the sham Board Resolution authorizing the negotiation for the sale were, from
all indications, not bona fide members of the IDP as they were ma de to appear to be.
Apparently, there are only fifteen (15) official members of the petitioner corporation including
the eight (8) members of the Board of Trustees.
Same; Same; Same; Securities and Exchange Commission; Remand of Cases; No end of
substantial justice will be served if the Supreme Court reverses the SECs conclusion and
remand the case to the regular courts for further litigation over an issue which is already
determinable based on what is in the records.The resolution of the question as to whether
or not the SEC had jurisdiction to declare the subject sale null and void is rendered moot and
academic by the inherent nullity of the highly dubious sale due to lack of consent of the I DP,
owner of the subject property. No end of substantial justice will be served if we revers e the
SECs conclusion on the matter, and remand the case to the regular courts for further
litigation over an issue which is already determinable based on what we have in the records.
Land Titles; Under the Torrens System of Registration, the minimum requirement for
one to be a good faith buyer for value is that the vendee at least sees the owners duplicate
copy of the title and relies upon the same.Furthermore, the Court observes that the INC
bought the questioned property from the Carpizo Group without even seeing the owners
duplicate copy of the titles covering the property. This is very strange considering that the
subject lot is a large piece of real property in Quezon City worth millions , and that under the
Torrens System of Registration, the minimum requirement for one to be a good faith buyer
for value is that the vendee at least sees the owners duplicate copy of the title and relies
upon the same. The private respondent, presumably knowledgeable on the aforesaid
workings of the Torrens System, did not take heed of this and nevertheless went through
with the sale with undue haste. The unexplained eagerness of INC to buy this valuable piece
of land in Quezon City without even being presented with the owners copy of the titles casts
very serious doubt on the rightfulness of its position as vendee in the transaction.
PETITION for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court. Islamic Directorate of the Phils. vs.
Court of Appeals, 272 SCRA 454, G.R. No. 117897 May 14, 1997
100

HERMOSISIMA, JR., J.:
The subject of this petition for review is the Decision of the public respondent Court
of Appeals, 1 dated October 28, 1994, setting aside the portion of the Decision of the
Securities and Exchange Commission (SEC, for short) in SEC Case No. 4012 which declared null
and void the sale of two (2) parcels of land in Quezon City covered by the Deed of Absolute
Sale entered into by and between private respondent Iglesia Ni Cristo (INC, for short) and the
Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).
The following facts appear of record.
Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all
Muslim major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and
incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of
which is to establish an Islamic Center in Quezon City for the construction of a "Mosque
(prayer place), Madrasah (Arabic School), and other religious infrastructures" so as to
facilitate the effective practice of Islamic faith in the area. 2
Towards this end, that is, in the same year, the Libyan government donated money to
the IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the
Islamic populace. The land, with an area of 49,652 square meters, was covered by two titles:
Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both registered
in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following per
Article 6 of its Articles of Incorporation:
Senator Mamintal Tamano 5
Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar 6
According to the petitioner, in 1972, after the purchase of the land by the Libyan
government in the name of IDP, Martial Law was declared by the late President Ferdinand
Marcos. Most of the members of the 1971 Board of Trustees like Senators Mamintal Tamano,
Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman flew to the Middle
East to escape political persecution.
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Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer
Farouk Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas.
Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC, in a
suit between these two contending groups, came out with a Decision in SEC Case No. 2687
declaring the election of both the Carpizo Group and the Abbas Group as IDP board members
to be null and void.
The dispositive portion of the SEC Decision reads:
WHEREFORE, judgment is hereby rendered declaring the elections of
both the petitioners 7 and respondents 8 as null and void for being violative of
the Articles of Incorporation of petitioner corporation. With the nullification of
the election of the respondents, the approved by-laws which they certified to
this Commission as members of the Board of Trustees must necessarily be
likewise declared null and void. However, before any election of the members
of the Board of Trustees could be conducted, there must be an approved by-
laws to govern the internal government of the association including the
conduct of election. And since the election of both petitioners and
respondents have been declared null and void, a vacuum is created as to
who should adopt the by-laws and certify its adoption. To remedy this
unfortunate situation that the association has found itself in, the members
of the petitioning corporation are hereby authorized to prepare and adopt
their by-laws for submission to the Commission. Once approved, an election
of the members of the Board of Trustees shall immediately be called
pursuant to the approved by-laws.
SO ORDERED. 9
Neither group, however, took the necessary steps prescribed by the SEC in its
October 3, 1986 Decision, and, thus, no valid election of the members of the Board of Trustees
of IDP was ever called. Although the Carpizo Group 10 attempted to submit a set of by-laws,
the SEC found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat, those who
prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering the
adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of the
Board of Trustee of IDP, the Carpizo Group caused to be signed an alleged Board
Resolution 11 of the IDP, authorizing the sale of the subject two parcels of land to the private
respondent INC for a consideration of P22,343,400.00, which sale was evidenced by a Deed of
Absolute Sale 12 dated April 20, 1989.
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On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator
Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC
Case No. 4012, seeking to declare null and void the Deed of Absolute Sale signed by the
Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate Board
of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed
in its favor, filed an action for Specific Performance with Damages against the vendor, Carpizo
Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as Civil Case No.
Q-90-6937, to compel said group to clear the property of squatters and deliver complete and
full physical possession thereof to INC. Likewise, INC filed a motion in the same case to
compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of Deeds of
Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and RT-26520 covering the
aforementioned two parcels of land, so that the sale in INC's favor may be registered and new
titles issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two
parcels of land executed in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-
Sampaco claimed to be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-
6937 averring, inter alia:
xxx xxx xxx
2. That the Intervenor has filed a case before the Securities and Exchange
Commission (SEC) against Mr. Farouk Carpizo, et. al., who, through false
schemes and machinations, succeeded in executing the Deed of Sale
between the IDP and the Iglesia Ni Kristo (plaintiff in the instant case) and
which Deed of Sale is the subject of the case at bar;
3. That the said case before the SEC is docketed as Case No. 04012, the main
issue of which is whether or not the aforesaid Deed of Sale between IDP and
the Iglesia ni Kristo is null and void, hence, Intervenor's legal interest in the
instant case. A copy of the said case is hereto attached as Annex "A";
4. That, furthermore, Intervenor herein is the duly constituted body which
can lawfully and legally represent the Islamic Directorate of the Philippines;
xxx xxx xxx 13
Private respondent INC opposed the motion arguing, inter alia, that the issue sought
to be litigated by way of intervention is an intra-corporate dispute which falls under the
jurisdiction of the SEC. 14
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Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied
petitioner's motion to intervene on the ground of lack of juridical personality of the IDP-
Tamano Group and that the issues being raised by way of intervention are intra-corporate in
nature, jurisdiction thereto properly pertaining to the SEC. 15
Apprised of the pendency of SEC Case No. 4012 involving the controverted status of
the IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on
September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the IDP-
Carpizo Group to comply with its obligation under the Deed of Sale of clearing the subject lots
of squatters and of delivering the actual possession thereof to INC. 16
Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to
Civil Case No. Q-90-6937, treated INC as the rightful owner of the real properties and disposed
as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or
surrender to plaintiff 17 the owner's copy of RT-26521 (170567) and RT-26520
(176616) in open court for the registration of the Deed of Absolute Sale in
the latter's name and the annotation of the mortgage executed in her favor
by herein defendant Islamic Directorate of the Philippines on the new
transfer certificate of title to be issued to plaintiff.
SO ORDERED. 18
On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to
deliver the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to
the Register of Deeds of Quezon City for the purposes stated in the Order of March 2, 1992." 19
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari,
docketed as CA-G.R No. SP-27973, assailing the foregoing Orders of Judge Reyes. The
appellate court dismissed her petition on October 28, 1992. 20
Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed
as G.R. No. 107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case
No. 4012 in this wise:
1. Declaring the by-laws submitted by the respondents 21 as unauthorized,
and hence, null and void.
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2. Declaring the sale of the two (2) parcels of land in Quezon City covered by
the Deed of Absolute Sale entered into by Iglesia ni Kristo and the Islamic
Directorate of the Philippines, Inc. 22 null and void;
3. Declaring the election of the Board of Directors, 23 of the corporation from
1986 to 1991 as null and void;
4. Declaring the acceptance of the respondents, except Farouk Carpizo and
Musnib Buat, as members of the IDP null and void.
No pronouncement as to cost.
SO ORDERED. 24
Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in
SEC Case No. 4012, but the same was denied on account of the fact that the decision of the
case had become final and executory, no appeal having been taken therefrom. 25
INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of
a special civil action for certiorari, docketed as CA-G.R SP No. 33295. On October 28, 1994, the
court a quo promulgated a Decision in CA-G.R. SP No. 33295 granting INC's petition. The
portion of the SEC Decision in SEC Case No. 4012 which declared the sale of the two (2) lots in
question to INC as void was ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated
December 21, 1994, submitting that the Court of Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches. 26
While the above petition was pending, however, the Supreme Court rendered
judgment in G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated
June 1, 1995, denied the Ligon petition and affirmed the October 28, 1992 Decision of the
Court of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes
compelling mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. RT-26521
(170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of
Absolute Sale in INC's favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would like to point
out that our disposition in G.R. No. 107751 entitled, "Ligon v. Court of Appeals," promulgated
on June 1, 1995, in no wise constitutes res judicata such that the petition under consideration
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would be barred if it were the ease. Quite the contrary, the requisites or res judicata do not
obtain in the case at bench.
Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in
actions in personam, to wit:
Effect of judgment. The effect of a judgment or final order rendered by a
court or judge of the Philippines, having jurisdiction to pronounce the
judgment or order, may be as follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with respect to the
matter directly adjudged or as to any other matter that could have been
raised in relation thereto, conclusive between the parties and their
successors in interest by title subsequent to the commencement of the
action or special proceeding, litigating for the same thing and under the
same title and in the same capacity;
(c) In any other litigation between the same parties or their
successors in interest, that only is deemed to have been adjudged in a
former judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary thereto.
Section 49(b) enunciates the first concept of res judicata known as "bar by prior
judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment."
There is "bar by former judgment" when, between the first case where the judgment
was rendered, and the second case where such judgment is invoked, there is identity of
parties, subject matter and cause of action. When the three identities are present, the
judgment on the merits rendered in the first constitutes an absolute bar to the subsequent
action. But where between the first case wherein judgment is rendered and the second case
wherein such judgment is invoked, there is only identity of parties but there is no identity of
cause of action, the judgment is conclusive in the second case, only as to those matters
actually and directly controverted and determined, and not as to matters merely involved
therein. This is what is termed "conclusiveness of judgment." 27
Neither of these concepts of res judicata find relevant application in the case at
bench. While there may be identity of subject matter (IDP property) in both cases, there is no
identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P. Ligon, as
petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as represented by the 1971
Board of Trustees or the Tamano Group, was only made an ancillary party in G.R. No. 107751 as
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intervenor. 28 It was never originally a principal party thereto. It must be noted that
intervention is not an independent action, but is merely collateral, accessory, or ancillary to
the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the
case between the original
parties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No.
107751 for purposes of applying the principle of res judicata since the contrary goes against
the true import of the action of intervention as a mere subsidiary proceeding without an
independent life apart from the principal action as well as the intrinsic character of the
intervenor as a mere subordinate party in the main case whose right may be said to be only in
aid of the right of the original party. 30 It is only in the present case, actually, where the IDP-
Tamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as private
respondent. Clearly, there is no identity of parties in both cases.
In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to
G.R. No. 107751, was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines,
Defendant," 31 the IDP can not be considered essentially a formal party thereto for the simple
reason that it was not duly represented by a legitimate Board of Trustees in that case. As a
necessary consequence, Civil Case No. Q-90-6937, a case for Specific Performance with
Damages, a mere action in personam, did not become final and executory insofar as the true
IDP is concerned since petitioner corporation, for want of legitimate representation, was
effectively deprived of its day in court in said case. Res inter alios judicatae nullum allis
praejudicium faciunt. Matters adjudged in a cause do not prejudice those who were not
parties to it. 32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding
to which he is a stranger. 33
Granting arguendo, that IDP may be considered a principal party in Ligon, res
judicata as a "bar by former judgment" will still not set in on the ground that the cause of
action in the two cases are different. The cause of action in G.R. No. 107751 is the surrender of
the owner's duplicate copy of the transfer certificates of title to the rightful possessor
thereof, whereas the cause of action in the present case is the validity of the Carpizo Group-
INC Deed of Absolute Sale.
Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for
the reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC
sale may only be deemed incidental to the resolution of the primary issue posed in said case
which is: Who between Ligon and INC has the better right of possession over the owner's
duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be considered
determinative and conclusive on the matter of the validity of the sale for this particular issue
was not the principal thrust of Ligon. To rule otherwise would be to cause grave and
irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of
Trustees.
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In any case, while it is true that the principle of res judicata is a fundamental
component of our judicial system, it should be disregarded if its rigid application would
involve the sacrifice of justice to technicality. 34
The main question though in this petition is: Did the Court of Appeals commit
reversible error in setting aside that portion of the SEC's Decision in SEC Case No. 4012 which
declared the sale of two (2) parcels of land in Quezon City between the IDP-Carpizo Group and
private respondent INC null and void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to pass upon the issue as to
who among the different contending groups is the legitimate Board of Trustees of the IDP
since this is a matter properly falling within the original and exclusive jurisdiction of the SEC by
virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control
over all corporations, partnership or associations, who are the grantees of
primary franchises and/or a license or permit issued by the government to
operate in the Philippines . . . .
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships and
other forms of associations registered with it as expressly granted under
existing laws and decrees, it shall have original and exclusive jurisdiction to
hear and decide cases involving:
xxx xxx xxx
c) Controversies in the selection or appointment of directors, trustees, officers,
or managers of such corporations, partnerships or associations. . . . .
If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it
can also declare who is not the legitimate IDP Board. This is precisely what the SEC
did in SEC Case No. 4012 when it adjudged the election of the Carpizo Group to the
IDP Board of Trustees to be null and
void. 35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-
Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group is
104

bereft of any authority whatsoever to bind IDP in any kind of transaction including
the sale or disposition of ID property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the
opportunity to pass upon the status of the Carpizo Group. As far back as October 3, 1986, the
SEC, in Case No. 2687, 36 in a suit between the Carpizo Group and the Abbas Group, already
declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP Board as
null and void for being violative of the Articles of Incorporation. 37 Nothing thus becomes
more settled than that the IDP-Carpizo Group with whom private respondent INC contracted
is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of
the Tandang Sora property, allegedly in the name of the IDP, have to be struck down for
having been done without the consent of the IDP thru a legitimate Board of Trustees. Article
1318 of the New Civil Code lays down the essential requisites of contracts:
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For, where
even one is absent, the contract is void. As succinctly put by Tolentino, consent is
essential for the existence of a contract, and where it is wanting, the contract is non-
existent. 38 In this case, the IDP, owner of the subject parcels of land, never gave its
consent, thru a legitimate Board of Trustees, to the disputed Deed of Absolute Sale
executed in favor of INC. This is, therefore, a case not only of vitiated consent, but
one where consent on the part of one of the supposed contracting parties is totally
wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the
Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to the
disposition of all or substantially all assets of the corporation:
Sec. 40. Sale or other disposition of assets. Subject to the provisions of
existing laws on illegal combinations and monopolies, a corporation may, by
a majority vote of its board of directors or trustees, sell, lease, exchange,
mortgage, pledge or otherwise dispose of all or substantially all of its property
and assets, including its goodwill, upon terms and conditions and for such
consideration, which may be money, stocks, bonds or other instruments for
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the payment of money or other property or consideration, as its board of
directors or trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding
capital stock; or in case of non-stock corporation, by the vote of at least two-
thirds (2/3) of the members, in a stockholders' or members' meeting duly called
for the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member at
his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may exercise
his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all
the corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the purpose
for which it was incorporated.
xxx xxx xxx
The Tandang Sora property, it appears from the records, constitutes the only
property of the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate
property and assets of IDP falling squarely within the contemplation of the foregoing section.
For the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by
the vote of at least 2/3 of the bona fide members of the corporation should have been
obtained. These twin requirements were not met as the Carpizo Group which voted to sell the
Tandang Sora property was a fake Board of Trustees, and those whose names and signatures
were affixed by the Carpizo Group together with the sham Board Resolution authorizing the
negotiation for the sale were, from all indications, not bona fide members of the IDP as they
were made to appear to be.
Apparently, there are only fifteen (15) official members of the petitioner corporation
including the eight (8) members of the Board of Trustees. 39
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and
private respondent INC was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to nullify the
sale for being made outside of its jurisdiction, the same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had jurisdiction to
declare the subject sale null and void is rendered moot and academic by the inherent nullity of
the highly dubious sale due to lack of consent of the IDP, owner of the subject property. No
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end of substantial justice will be served if we reverse the SEC's conclusion on the matter, and the same was actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo
remand the case to the regular courts for further litigation over an issue which is already and his group for the amount of money paid.
determinable based on what we have in the records.
SO ORDERED.
It is unfortunate that private respondent INC opposed the motion for intervention
filed by the 1971 Board of Trustees in Civil Case. No. Q-90-6937, a case for Specific
Performance with Damages between INC and the Carpizo Group on the subject Deed of
Absolute Sale. The legitimate IDP Board could have been granted ample opportunity before
the regional trial court to shed light on the true status of the Carpizo Board and settled the
matter as to the validity of the sale then and there. But INC, wanting to acquire the property
at all costs and threatened by the participation of the legitimate IDP Board in the civil suit,
argued for the denial of the motion averring, inter alia, that the issue sought to be litigated by
the movant is intra-corporate in nature and outside the jurisdiction of the regional trial
court. 40 As a result, the motion for intervention was denied. When the Decision in SEC Case
No. 4012 came out nullifying the sale, INC came forward, this time, quibbling over the issue
that it is the regional trial court, and not the SEC, which has jurisdiction to rule on the validity
of the sale. INC is here trifling with the courts. We cannot put a premium on this clever legal
maneuverings of private respondent which, if countenanced, would result in a failure of
justice.

Furthermore, the Court observes that the INC bought the questioned property from
the Carpizo Group without even seeing the owner's duplicate copy of the titles covering the
property. This is very strange considering that the subject lot is a large piece of real property
in Quezon City worth millions, and that under the Torrens System of Registration, the
minimum requirement for one to be a good faith buyer for value is that the vendee at least
sees the owner's duplicate copy of the title and relies upon the same. 41 The private
respondent, presumably knowledgeable on the aforesaid workings of the Torrens System, did
not take heed of this and nevertheless went through with the sale with undue haste. The
unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even
being presented with the owner's copy of the titles casts very serious doubt on the
rightfulness of its position as vendee in the transaction.

WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court
of Appeals dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the
Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED.
The Register of Deeds of Quezon City is hereby ordered to cancel the registration of the Deed
of Absolute Sale in the name of respondent Iglesia Ni Cristo, if one has already been made. If
new titles have been issued in the name of Iglesia Ni Cristo, the Register of Deeds is hereby
ordered to cancel the same, and issue new ones in the name of petitioner Islamic Directorate
of the Philippines. Petitioner corporation is ordered to return to private respondent whatever
amount has been initially paid by INC as consideration for the property with legal interest, if

106

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-17504 & L-17506 February 28, 1969
RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS and PATRIA
SALAS, heirs of Magdalena Salas, as stockholders on their own behalf and for the benefit of
the Ma-ao Sugar Central Co., Inc., and other stockholders thereof who may wish to join in
this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S. ARANETA,
ROMUALDO M. ARANETA, and RAMON A. YULO, defendants-appellants.
Corporation Law; Investment of corporate funds in another corporation; When not
violative of Section of the Corporation Law.Plaintiffs-appellants contend that the
investment of corporate funds by defendants-appellants in another corporation constitutes a
violation of section of the Corporation Law. The Supreme Court held that such an act, if
done pursuance of the corporate purpose, does not need the approval of the stockholders;
but when the purchase of shares of another corporation is done solely for investment and not
to accomplish the purpose of its incorporation, the vote of approval of the stockholders is
necessary, and further states that when purpose or purposes as stated in its articles of
incorporation, the approval of the stockholders is not necessary. (Guevara, Philippine Corp.
Law, 1967 ed., p. 89).
Counterclaims; Dismissal; When justified.The defendants counterclaim on the
allegation that the complaint of plaintiff was premature, improper, malicious and that the
language is unnecessarily vituperative, abusive and insulting cannot be sustained in the case
at bar. On the contrary, the lower court found otherwise, as could be gleaned from the
decision. With respect to the allegation that the complaint was abusive and insulting, there is
no finding that plaintiff had been actuated by bad faith, nor is there anything in the complaint
essentially libelous especially as the rule is that allegations in pleadings where relevant, are
privileged even though they may not be clearly proved afterwards.
Corporation Law; Investment of corporation for other corporations not similar with its
business; Deemed proper by Section 17 of the Corporation Law.The lower courts order
refraining the appellant corporation from making investment in other companies whose
purpose is not connected with the sugar central business should be reversed. This is because
section 17 of the Corporation Law allows a corporation to invest its funds in any other
corporation or business, or for any purpose other than the main purpose for which it was
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organized, provided that its board of directors has been so authorized by the affirmative
vote of stockholders holding shares entitling them to exercise at least two-thirds of the
voting power.
APPEAL from a judgment of the Court of First Instance of Manila. Gatmaitan, J.
The facts are stated in the opinion of the Court. De la Rama vs. Ma-ao Sugar
Central Co., Inc., 27 SCRA 247, Nos. L-17504 February 28, 1969
San Juan, Africa and Benedicto for plaintiffs-appellants.
Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October 20, 1953, in the
Court of First Instance of Manila by four minority stockholders against the Ma-ao Sugar
Central Co., Inc. and J. Amado Araneta and three other directors of the corporation.
The complaint comprising the period November, 1946 to October, 1952, stated five
causes of action, to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing
irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3) for
alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages and
attorney's fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his
individual co-defendants be ordered to render an accounting of all transactions made and
carried out by them for defendant corporation, and "to collect, produce and/or pay to the
defendant corporation the outstanding balance of the amounts so diverted and still unpaid to
defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and be
ordered to pay to the defendant corporation "whatever amounts may be recovered by the
plaintiffs in Civil Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central Co.'"; to
return to the defendant corporation all amounts withdrawn by way of discretionary funds or
backpay, and to account for the difference between the corporation's crop loan accounts
payable and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net
assets be distributed to the stockholders; and
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Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to pay the
sum of P300,000.00 by way of compensatory, moral and exemplary damages and for
expenses of litigation, including attorney's fees and costs of the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of
receivership.
In their answer originally filed on December 1, 1953, and amended on February 1, 1955,
defendants denied "the allegations regarding the supposed gross mismanagement,
fraudulent use and diversion of corporate funds, disregard of corporate requirements, abuse
of trust and violation of fiduciary relationship, etc., supposed to have been discovered by
plaintiffs, all of which are nothing but gratuitous, unwarranted, exaggerated and distorted
conclusions not supported by plain and specific facts and transactions alleged in the
complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the
complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an
"earnest, not simulated effort" to exhaust first their remedies within the corporation before
filing their complaint; (3) that no actual loss had been suffered by the defendant corporation
on account of the transactions questioned by plaintiffs; (4) that the payments by the debtors
of all amounts due to the defendant corporation constituted a full, sufficient and adequate
remedy for the grievances alleged in the complaint and (5) that the dissolution and/or
receivership of the defendant corporation would violate and impair the obligation of existing
contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among
others, that the complaint was premature, improper and malicious, and that the language
used was "unnecessarily vituperative abusive and insulting, particularly against defendant J.
Amado Araneta who appears to be the main target of their hatred." Wherefore, the
defendant sought to recover "compensation for damages, actual, moral, exemplary and
corrective, including reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later supplemented by an Order
resolving defendants' Motion for Reconsideration), the dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns J.
Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount of P46,270.00
with 8% interest from the date of the filing of this complaint, plus the costs; the Court
reiterates the preliminary injunction restraining the Ma-ao Sugar Central Co., Inc.
management to give any loans or advances to its officers and orders that this
injunction be as it is hereby made, permanent; and orders it to refrain from making
investments in Acoje Mining, Mabuhay Printing, and any other company whose
purpose is not connected with the Sugar Central business; costs of plaintiffs to be
borne by the Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
Before taking up the errors respectively, assigned by the parties, we should state that
the following findings of the Lower Court on the commission of corporate irregularities by the
defendants have not been questioned by the defendants:
1. Failure to hold stockholders' meetings regularly. No stockholders' meetings were
held in 1947, 1950 and 1951;
2. Irregularities in the keeping of the books. Untrue entries were made in the books
which could not simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining,
P7,000.00. The investments were made not in pursuance of the corporate purpose
and without the requisite authority of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which, according to
the defendants, had been fully paid), in violation of the by-laws of the corporation
which prohibits any director from borrowing money from the corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:
J. Amado Araneta & Co. P243,415.62
Luzon Industrial Corp. 585,918.17
Associated Sugar 463,860.36
General Securities 86,743.65
Bacolod Murcia 501,030.61
Central Azucarera del Danao 97,884.42
Talisay-Silay 4,365.90
The Court found that sums were taken out of the funds of the Ma-ao Sugar Central
Co., Inc. and delivered to these affiliated companies, and vice versa, without the approval of
the Ma-ao Board of Directors, in violation of Sec. III, Art. 6-A of the by-laws.

108

The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:
I.
THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE
FUNDS OF THE MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER
PROCESSING CO., INC. WAS NOT A VIOLATION OF SEC. 17- OF THE CORPORATION
LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL CO.,
INC. WAS INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS
COMMITTED AGAINST PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE
INSUFFICIENT FOR THE DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as
appellants are as follows:
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants
admit having invested P655,000.00 in shares of stock of this company but that this
was ratified by the Board of Directors in Resolutions 60 and 80, Exhibits "R" and "R-
2"; more than that, defendants contend that since said company was engaged in the
manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar either to
manufacture sugar bags or invest in another corporation engaged in said
manufacture, and they quote authorities for the purpose, pp. 28-31, memorandum;
the Court is persuaded to believe that the defendants on this point are correct,
because while Sec. 17-1/2 of the Corporation Law provides that:
No corporation organized under this act shall invest its funds in any
other corporation or business or for any purpose other than the main
purpose for which it was organized unless its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding
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Corporation Law
shares in the corporation entitling them to exercise at least two-thirds of the
voting power on such proposal at the stockholders' meeting called for the
purpose.
the Court is convinced that that law should be understood to mean as the
authorities state, that it is prohibited to the Corporation to invest in shares of
another corporation unless such an investment is authorized by two-thirds of the
voting power of the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing corporation because
surely there is more logic in the stand that if the investment is made in a corporation
whose business is important to the investing corporation and would aid it in its
purpose, to require authority of the stockholders would be to unduly curtail the
Power of the Board of Directors; the only trouble here is that the investment was
made without any previous authority of the Board of Directors but was only ratified
afterwards; this of course would have the effect of legalizing the unauthorized act
but it is an indication of the manner in which corporate business is transacted by the
Ma-ao Sugar administration, the fact that off and on, there would be passed by the
Board of Directors, resolutions ratifying all acts previously done by the management,
e.g. resolutions passed on February 25, 1947, and February 25, 1952, by the Board of
Directors as set forth in the affidavit of Isidro T. Dunca p. 127, etc. Vol. 1. (Decision, pp.
239-241 of Record on Appeal.)
xxx xxx xxx
(2) "On the other hand, the Court has noted against plaintiffs that their
contention that Ma-ao Sugar is on the verge of bankruptcy has not been clearly
shown; against this are Exh. C to Exh. C-3 perhaps the best proof that insolvency is
still far is that this action was filed in 1953 and almost seven years have passed since
then without the company apparently getting worse than it was before; ..."
(Decision, pp. 243-244, supra.)
xxx xxx xxx
(3) "As to the crop loan anomalies in that instead of giving unto the planters
the entire amount alloted for that, the Central withheld a certain portion for their
own use, as can be seen in Appendix A of Exh. C-1, while the theory of plaintiffs is that
since between the amount of P3,791,551.78 the crop loan account payable, and the
amount of P1,708,488.22, the crop loan receivable, there is a difference of
P2,083,063.56, this would indicate that this latter sum had been used by the Central
itself for its own purposes; on the other hand, defendants contend that the first
amount did not represent the totality of the crop loans obtained from the Bank for
109

the purpose of relending to the planters, but that it included the Central's own credit
line on its 40% share in the standing crop; and that this irregularity amounts to a
grievance by plaintiffs as planters and not as stockholders, the Court must find that
as to this count, there is really reason to find that said anomaly is not a clear basis for
the derivative suit, first, because plaintiffs' evidence is not very sufficient to prove
clearly the alleged diversion in the face of defendants' defense; there should have
been a showing that the Central had no authority to make the diversion; and
secondly, if the anomaly existed, there is ground to hold with defendants that it was
an anomaly pernicious not to the Central but to the planters; it was not even
pernicious to the stockholders.
appellants are as follows:
Going to the discriminatory acts of J. Amado Araneta, namely, manipulation
of cane allotments, withholding of molasses and alcohol shares, withholding of
trucking allowance, formation of rival planters associations, refusal to deal with
legitimate planters group, Exh. S; the Court notices that as to the failure to provide
hauling transportation, this in a way is corroborated by Exh. 7, that part containing
the decision of the Court of First Instance of Manila, civil 20122, Francisco Rodriguez v.
Ma-ao Sugar; for the reason, however, that even if these were true, those grievances
were grievances of plaintiffs as planters and not as stockholders just as the
grievance as to the crop loans already adverted to, this Court will find insufficient
merit on this count. (Decision, pp. 230-231, supra.)
xxx xxx xxx
(4) "...; for the Court must admit its limitations and confess that it cannot pretend to
know better than the Board in matters where the Board has not transgressed any
positive statute or by-law especially where as here, there is the circumstance that
presumably, an impartial representative in the Board of Directors, the one from
the Philippine National Bank, against whom apparently plaintiffs have no quarrel,
does not appear to have made any protest against the same; the net result will be to
hold that the culpable acts proved are not enough to secure a dissolution; the Court
will only order the correction of abuses, proved as already mentioned; nor will the
Court grant any more damages one way or the other. (Decision, p. 244, supra.)
On the other hand, the errors assigned in the appeal of the defendants as appellants
are as follows:
I.
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Corporation Law
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO
SUGAR CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST FROM
THE DATE OF FILING OF THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE
DEFENDANTS, PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN
THE COUNTERCLAIM OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants as
(1) "As to the alleged juggling of books in that the personal account of J. Amado
Araneta of P46,270.00 was closed on October 31, 1947 by charges transferred to
loans receivable nor was interest paid on this amount, the Court finds that this is
related to charge No. 1, namely, the granting of personal loans to J. Amado Araneta;
it is really true that according to the books, and as admitted by defendants, J. Amado
Araneta secured personal loans; in 1947, the cash advance to him was P132,082.00
(Exh. A); the Court has no doubt that this was against the By-Laws which provided
that:
The Directors shall not in any case borrow money from the Company. (Sec.
III, Art. 7);
the Court therefore finds this count to be duly proved; worse, the Court also
finds that as plaintiffs contend, while the books of the Corporation would show that
the last balance of P46,270.00 was written off as paid, as testified to by Auditor Mr.
Sanchez, the payment appeared to be nothing more than a transfer of his loan
receivable account, stated otherwise, the item was only transferred from the
personal account to the loan receivable account, so that again the Court considers
established the juggling of the books; and then again, it is also true that the loans
were secured without any interest and while it is true that in the Directors' meeting
of 21 October, 1953, it was resolved to collect 8%, the Court does not see how such a
unilateral action of the Board could bind the borrowers. Be it stated that defendants
have presented in evidence Exh. 5 photostatic copy of the page in loan receivable
and it is sought to be proved that J. Amado Araneta's debt was totally paid on 31
October, 1953; to the Court, in the absence of definite primary proof of actual
payment having found out that there had already been a juggling of books, it cannot
just believe that the amount had been paid as noted in the books. (Decision, pp. 233-
235 of Record on Appeal.)
110

(2) "With respect to the second point in the motion for reconsideration to
the effect that the Court did not make any findings of fact on the counterclaim of
defendants, although the Court did not say that in so many words, the Court takes it
that its findings of fact on pages 17 to 21 of its decision were enough to justify a
dismissal of the counterclaim, because the counterclaims were based on the fact that
the complaint was premature, improper, malicious and that the language is
unnecessarily vituperative abusive and insulting; but the Court has not found that the
complaint is premature; nor has the Court found that the complaint was malicious;
these findings can be gleaned from the decision with respect to the allegation that
the complaint was abusive and insulting, the Court does not concur; for it has not
seen anything in the evidence that would justify a finding that plaintiffs and been
actuated by bad faith, nor is there anything in the complaint essentially libelous;
especially as the rule is that allegations in pleading where relevant, are privileged
even though they may not clearly proved afterwards; so that the Court has not seen
any merit in the counterclaims; and the Court had believed that the decision already
carried with it the implication of the dismissal of the counterclaims, but if that is not
enough, the Court makes its position clear on this matter in this order, and clarifies
that it has dismissed the counterclaims of defendant; ..." (Order of September 3,
1960, pp. 248-249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs
as appellants, it appears to us that the Lower Court was correct in its appreciation (1) that the
evidence presented did not show that the defendant Ma-ao Sugar Company was insolvent (2)
that the alleged discriminatory acts committed by the defendant Central against the planters
were not a proper subject of derivative suit, but, at most, constituted a cause of action of the
individual planters; and (3) that the acts of mismanagement complained of and proved do not
justify a dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to be determined
from an inventory of the assets and their value, as well as a consideration of the
liabilities.... But the mere impairment of capital stock alone does not establish
insolvency there being other evidence as to the corporation being a going concern with
sufficient assets. Also, the excess of liabilities over assets does not establish insolvency,
when other assets are available. (Fletcher Cyc. of the Law of Private Corporations, Vol.
15A, 1938 Ed pp. 34-37; Emphasis supplied).
But relief by dissolution will be awarded in such cases only where no other
adequate remedy is available, and is not available where the rights of the
stockholders can be, or are, protected in some other way. (16 Fletcher Cyc.
Corporations, 1942 Ed., pp. 812-813, citing "Thwing v. McDonald", 134 Minn. 148, 156
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Corporation Law
N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v. Bank of St.
Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants, contending
that the investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation
(the Philippine Fiber Processing Co., Inc.) constitutes a violation of Sec. 17- of the
Corporation Law, deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through
its President, J. Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the
Philippine Fiber Processing Co. Inc., that payments on the subscription were made on
September 20, 1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on March 6, 1952,
for P100,000.00; that at the time the first two payments were made there was no board
resolution authorizing the investment; and that it was only on November 26, 1951, that the
President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board of Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc.,
owned by Luzon Industrial, corporation were transferred on May 31, 1952, to the defendant
Ma-ao Sugar Central Co., Inc., with a valuation of P355,000.00 on the basis of P1.00 par value
per share. Again the "investment" was made without prior board resolution, the authorizing
resolution having been subsequentIy approved only on June 4, 1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board
Resolutions are valid, the transaction, is still wanting in legality, no resolution having been
approved by the affirmative vote of stockholders holding shares in the corporation entitling
them to exercise at least two-thirds of the voting power, as required in Sec. 17- of the
Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17- of the
Corporation Law, provides:
No corporation organized under this act shall invest its funds in any other
corporation or business, or for any purpose other than the main purpose for which it
was organized, unless its board of directors has been so authorized in a resolution by
the affirmative vote of stockholders holding shares in the corporation entitling them
to exercise at least two-thirds of the voting power on such proposal at a
stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the
Corporation Law, which provides:
111

SEC. 13. Every corporation has the power:
xxx xxx xxx
(9) To enter into any obligation or contract essential to the proper administration of
its corporate affairs or necessary for the proper transaction of the business or
accomplishment of the purpose for which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its
purpose as stated in the articles of incorporation, to acquire, hold, mortgage, pledge
or dispose of shares, bonds, securities and other evidences of indebtedness of any
domestic or foreign corporation.
A reading of the two afore-quoted provisions shows that there is need for
interpretation of the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th edition,
Professor Sulpicio S. Guevara of the University of the Philippines, College of Law, a well-
known authority in commercial law, reconciled these two apparently conflicting legal
provisions, as follows:
j. Power to acquire or dispose of shares or securities. A private corporation,
in order to accomplish its purpose as stated in its articles of incorporation, and
subject to the limitations imposed by the Corporation Law, has the power to acquire,
hold, mortgage, pledge or dispose of shares, bonds, securities, and other evidences
of indebtedness of any domestic or foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not need the approval of the stockholders;
but when the purchase of shares of another corporation is done solely for investment
and not to accomplish the purpose of its incorporation, the vote of approval of the
stockholders is necessary. In any case, the purchase of such shares or securities must
be subject to the limitations established by the Corporation Law; namely, (a) that no
agricultural or mining corporation shall in anywise be interested in any other
agricultural or mining corporation; or (b) that a non-agricultural or non-mining
corporation shall be restricted to own not more than 15% of the voting stock of any
agricultural or mining corporation; and (c) that such holdings shall be solely for
investment and not for the purpose of bringing about a monopoly in any line of
commerce or combination in restraint of trade. (The Philippine Corporation Law by
Sulpicio S. Guevara, 1967 Ed., p. 89.) (Emphasis ours.)
40. Power to invest corporate funds. A private corporation has the power
to invest its corporate funds in any other corporation or business, or for any purpose
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Corporation Law
other than the main purpose for which it was organized, provided that 'its board of
directors has been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders' meeting called
for that purpose,' and provided further, that no agricultural or mining corporation
shall in anywise be interested in any other agricultural or mining corporation. When
the investment is necessary to accomplish its purpose or purposes as stated in it articles
of incorporation, the approval of the stockholders is not necessary. (Id., p. 108.)
(Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in
question does not fall under the purview of Sec. 17- of the Corporation Law.
With respect to the defendants' assignment of errors, the second (referring to the
counterclaim) is clearly without merit. As the Lower Court aptly ruled in its Order of
September 3, 1960 (resolving the defendants' Motion for Reconsideration) the findings of
fact were enough to justify a dismissal of the counterclaim, "because the counterclaims were
based on the fact that the complaint was premature, improper, malicious and that the
language is unnecessarily vituperative abusive and insulting; but the Court has not found that
the complaint is premature; nor has the Court found that the complaint was malicious; these
findings can be gleaned from the decision; with respect to the allegation that the complaint
was abusive and insulting, the Court does not concur; for it has not seen anything in the
evidence that would justify a finding that plaintiffs had been actuated by bad faith, nor is
there anything in the complaint essentially libelous especially as the rule is that allegations in
pleadings where relevant, are privileged even though they may not be clearly proved
afterwards; ..."
As regards defendants' first assignment of error, referring to the status of the
account of J. Amado Araneta in the amount of P46,270.00, this Court likewise agrees with the
finding of the Lower Court that Exhibit 5, photostatic copy of the page on loans receivable
does not constitute definite primary proof of actual payment, particularly in this case where
there is evidence that the account in question was transferred from one account to another.
There is no better substitute for an official receipt and a cancelled check as evidence of
payment.
In the judgment, the lower court ordered the management of the Ma-ao Sugar
Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing and
any other company whose purpose is not connected with the sugar central business." This
portion of the decision should be reversed because, Sec. 17- of the Corporation Law allows a
112
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corporation to "invest its fund in any other corporation or business, or for any purpose other
than the main purpose for which it was organized," provided that its board of directors has
been so authorized by the affirmative vote of stockholders holding shares entitling them to
exercise at least two-thirds of the voting power.

IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao
Sugar Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay
Printing, and any other: company whose purpose is not connected with the sugar central
business," is reversed. The other parts of the judgment are, affirmed. No special
pronouncement as to costs.

Concepcion, C.J., Reyes, J.B.L., Dizon, Zaldivar, Castro, Fernando and Barredo, JJ., concur.
Makalintal, Sanchez and Teehankee, JJ., took no part.

113

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-21601 December 28, 1968
NIELSON & COMPANY, INC., plaintiff-appellant,
vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.
Pleading and practice; Appeal; Change of theory on appeal not allowable.It is the
rule, and the settled doctrine, that a party cannot change his theory on appealthat is, that a
party cannot raise in the appellate court any question of law or of fact that was not raised in
the court below or which was not within the issue made by the parties in their pleadings (Sec.
19, Rule 49, old Rules of Court; Sec. 18 of Revised Rules of Court; Hautea v. Magallon, L-20345,
Nov. 28, 1964; Northern Motors, Inc. v. Prince Line, L-13884, Feb. 29, 1960; American Express
Co. v. Natividad, 46 Phil. 207; Agoncillo v. Javier, 38 Phil. 424; Molina v. Somes, 24 Phil. 49).
Civil Law; Contracts; "Agency" and "lease of service" compared and distinguished.In
both agency and lease of services one of the parties binds himself to render some service to
the other party. Agency, however, is distinguished from lease of work or services in that the
basis of agency is representation, while in the lease of work or services the basis is
employment. The lessor of services does not represent his employer, while the agent
represents his principal. Agency is a preparatory contract, as agency "does not stop with the
agency because the purpose is to enter into other contracts." The most characteristic feature
of an agency relationship is the agent's power to bring about business relations between his
principal and third persons. "The agent is destined to execute juridical acts (creation,
modification or extinction of relations with .third parties). Lease of services contemplate only
material (non-juridical) acts." (Reyes & Puno, An Outline of Philippine Civil Law, Vol. V, p. 277).
Same; Obligations and contracts; Moratorium law; Republic Act No. 342 not applicable
to debts contracted during the war.Republic Act No. 342 does not apply to debts contracted
during the war and did not lift the moratorium in relation thereto (Uy v. Kalaw Katigbak, L-
1830, Dec. 31, 1949; Sison v. Mirasol, L-4711, Oct. 3, 1952; Compaia Maritima v. Court of
Appeals, L-14949, May 30, 1960). Said Rep. Act No. 342, however, modified Executive Order
No. 32 as to pre-war debts, making the protection available only to debtors who had war
damage claims (Sison v. Mirasol, L-4711, Oct. 3, 1952, cited in Abraham, et al. v. Intestate Estate
of Ysmael, et al., L-16741, Jan. 31, 1962).
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Corporation Law
Corporation law; Shares of stock; Consideration for which shares of stock may be
issued; A share of stock coming from stock dividends declared cannot be issued to one who is
not a stockholder of a corporation.From the provision of Section 16 of the Corporation Law,
the consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3)
undistributed profits. Shares of stock are given the special name "stock dividends" only if they
are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or
property then those shares do not fall under the category of "stock dividends". A corporation
may legally issue shares of stock in consideration of services rendered to it by a person not a
stockholder, or in payment of its indebtedness. It is the shares of stock ,that are originally
issued by the corporation and forming part of the capital that can be exchanged for cash or
services rendered, or property; that is, if the corporation has original shares of stock unsold or
unsubscribed, either coming from the original capitalization or f rom the increased
capitalization. Those shares of stock may be issued to a person who is not a stockholder, or to
a person already a stockholder in exchange for services rendered or for cash or property. But
a share of stock coming from stock dividends declared cannot be issued to one who is not a
stockholder of a corporation.
Under Section 16 of the Corporation Law stock dividends can not be issued to a
person who is not a stockholder in payment of services rendered.
Same; "Stock dividend"; "Dividend"; Concept and nature.A "stock dividend" is any
dividend payable in shares of stock of the corporation declaring or authorizing such dividend.
It is, as what the term itself implies, a distribution of the shares of stock of the corporation
among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in
shares of stock instead of cash, and is properly payable only out of surplus profits (Sec. 16,
Corporation Law). So, a stock dividend is actually two things: (1) a dividend, and (2) the
enforced use of the dividend money to purchase additional shares of stock at par. (Words and
Phrases, p. 270). When a corporation issues stock dividends, it shows that the corporation's
accumulated profits have been capitalized instead of distributed to the stockholders or
retained as surplus available for distribution, in money or kind, should opportunity offer. Far
from being a realization of profits for the stockholder, it tends rather ,to postpone said
realization, in ,that the fund represented by the new stock has been transferred from surplus
to assets and no longer available for actual distribution (Fisher v. Trinidad, 43 Phil. 973). Thus,
it is apparent that stock dividends are issued only to stockholders. This is so because only
stockholders are entitled to dividends. They are the only ones who have a right to a
proportional share in that part of the surplus which is declared as dividends. A stock dividend
really adds nothing to the interest of the stockholder; the proportional interest of each
stockholder remains the same (Towne v. Eisner, 62 L. Ed. 372). If a stockholder is deprived of
his stock dividendsand this happens if the shares of stock f orming part of the stock
dividends are issued to a nonstockholderthen the proportion of the stockholder's interest
changes radically. Stock dividends are civil fruits of the original investment, and to the owners
114

of the shares belong the civil fruits (Art. 441, Civil Code). The term "dividend" both in the
technical sense and its ordinary acceptation, is that part or portion of the profits of the
enterprise which the corporation, by its governing agents, sets apart for ratable division
among the holders of the capital stock. It means the fund actually set aside, and declared by
the directors of the corporation as a dividend, and duly ordered by the directory, or by the
stockholders, at a corporate meeting, to be divided or distributed among the stockholders
according to their respective interests (7 Thompson on Corporations 134135).
MOTION FOR RECONSIDERATION of a Supreme Court decision.
The facts are stated in the resolution of the Court.
RESOLUTION
ZALDIVAR, J.:
Lepanto seeks the reconsideration of the decision rendered on December 17, 1966.
The motion for reconsideration is based on two sets of grounds the first set consisting of
four principal grounds, and the second set consisting of five alternative grounds, as follows:
Principal Grounds:
1. The court erred in overlooking and failing to apply the proper law applicable to the
agency or management contract in question, namely, Article 1733 of the Old Civil
Code (Article 1920 of the new), by virtue of which said agency was effectively
revoked and terminated in 1945 when, as stated in paragraph 20 of the complaint,
"defendant voluntarily ... prevented plaintiff from resuming management and
operation of said mining properties."
2. The court erred in holding that paragraph II of the management contract (Exhibit
C) suspended the period of said contract.
3. The court erred in reversing the ruling of the trial judge, based on well-settled
jurisprudence of this Supreme Court, that the management agreement was only
suspended but not extended on account of the war.
4. The court erred in reversing the finding of the trial judge that Nielson's action had
prescribed, but considering only the first claim and ignoring the prescriptibility of the
other claims.
Alternative Grounds:
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5. The court erred in holding that the period of suspension of the contract on account
of the war lasted from February 1942 to June 26, 1948.
6. Assuming arguendo that Nielson is entitled to any relief, the court erred in
awarding as damages (a) 10% of the cash dividends declared and paid in December,
1941; (b) the management fee of P2,500.00 for the month of January, 1942; and (c)
the full contract price for the extended period of sixty months, since these damages
were neither demanded nor proved and, in any case, not allowable under the general
law of damages.
7. Assuming arguendo that appellant is entitled to any relief, the court erred in
ordering appellee to issue and deliver to appellant shares of stock together with
fruits thereof.
8. The court erred in awarding to appellant an undetermined amount of shares of
stock and/or cash, which award cannot be ascertained and executed without further
litigation.
9. The court erred in rendering judgment for attorney's fees.
We are going to dwell on these grounds in the order they are presented.
1. In its first principal ground Lepanto claims that its own counsel and this Court had
overlooked the real nature of the management contract entered into by and between
Lepanto and Nielson, and the law that is applicable on said contract. Lepanto now asserts for
the first time and this is done in a motion for reconsideration - that the management contract
in question is a contract of agency such that it has the right to revoke and terminate the said
contract, as it did terminate the same, under the law of agency, and particularly pursuant to
Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code).
We have taken note that Lepanto is advancing a new theory. We have carefully
examined the pleadings filed by Lepanto in the lower court, its memorandum and its brief on
appeal, and never did it assert the theory that it has the right to terminate the management
contract because that contract is one of agency which it could terminate at will. While it is
true that in its ninth and tenth special affirmative defenses, in its answer in the court below,
Lepanto pleaded that it had the right to terminate the management contract in question, that
plea of its right to terminate was not based upon the ground that the relation between
Lepanto and Nielson was that of principal and agent but upon the ground that Nielson had
allegedly not complied with certain terms of the management contract. If Lepanto had
thought of considering the management contract as one of agency it could have amended its
answer by stating exactly its position. It could have asserted its theory of agency in its
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memorandum for the lower court and in its brief on appeal. This, Lepanto did not do. It is the
rule, and the settled doctrine of this Court, that a party cannot change his theory on appeal
that is, that a party cannot raise in the appellate court any question of law or of fact that was
not raised in the court below or which was not within the issue made by the parties in their
pleadings (Section 19, Rule 49 of the old Rules of Court, and also Section 18 of the new Rules
of Court; Hautea vs. Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince
Line, L-13884, February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs.
Javier, 38 Phil. 424 and Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to assert its new theory at this very late stage
of the proceedings, this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is one of
agency because: (1) Nielson was to manage and operate the mining properties and mill on
behalf, and for the account, of Lepanto; and (2) Nielson was authorized to represent Lepanto
in entering, on Lepanto's behalf, into contracts for the hiring of laborers, purchase of
supplies, and the sale and marketing of the ores mined. All these, Lepanto claims, show that
Nielson was, by the terms of the contract, destined to execute juridical acts not on its own
behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto "at all
times". Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that
an agency is revocable at the will of the principal (Article 1733 of the Old Civil Code),
regardless of any term or period stipulated in the contract, and it was in pursuance of that
right that Lepanto terminated the contract in 1945 when it took over and assumed exclusive
management of the work previously entrusted to Nielson under the contract. Lepanto finally
maintains that Nielson as an agent is not entitled to damages since the law gives to the
principal the right to terminate the agency at will.
Because of Lepanto's new theory We consider it necessary to determine
the nature of the management contract whether it is a contract of agency or a contract of
lease of services. Incidentally, we have noted that the lower court, in the decision appealed
from, considered the management contract as a contract of lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
By the contract of agency, one person binds himself to render some service or do
something for the account or at the request of another.
Article 1544, defining contract of lease of service, provides:
In a lease of work or services, one of the parties binds himself to make or construct
something or to render a service to the other for a price certain.
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In both agency and lease of services one of the parties binds himself to render some
service to the other party. Agency, however, is distinguished from lease of work or services in
that the basis of agency is representation, while in the lease of work or services the basis is
employment. The lessor of services does not represent his employer, while the agent
represents his principal. Manresa, in his "Commentarios al Codigo Civil Espaol" (1931, Tomo
IX, pp. 372-373), points out that the element of representation distinguishes agency from
lease of services, as follows:
Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y cuantos textos legales
citamos en las concordancias, expresan claramente esta idea de la representacion,
"hacer alguna cosa por cuenta o encargo de otra" dice nuestro Codigo; "poder de
hacer alguna cosa para el mandante o en su nombre" dice el Codigo de Napoleon, y
en tales palabras aparece vivo y luminoso el concepto y la teoria de la representacion,
tan fecunda en ensenanzas, que a su sola luz es como se explican las diferencias que
separan el mandato del arrendamiento de servicios, de los contratos inominados, del
consejo y de la gestion de negocios.
En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja,
en verdad, para el dueno que remunera la labor, pero ni se le representa ni se obra en
su nombre....
On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of
the new Civil Code has defined the contract of agency in more explicit terms, as follows:
By the contract of agency a person binds himself to render some service or
to do something in representation or on behalf of another, with the consent or
authority of the latter.
There is another obvious distinction between agency and lease of services. Agency is
a preparatory contract, as agency "does not stop with the agency because the purpose is to
enter into other contracts." The most characteristic feature of an agency relationship is the
agent's power to bring about business relations between his principal and third persons. "The
agent is destined to execute juridical acts (creation, modification or extinction of relations
with third parties). Lease of services contemplate only material (non-juridical) acts." (Reyes
and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277).
In the light of the interpretations we have mentioned in the foregoing paragraphs let
us now determine the nature of the management contract in question. Under the contract,
Nielson had agreed, for a period of five years, with the right to renew for a like period, to
explore, develop and operate the mining claims of Lepanto, and to mine, or mine and mill,
such pay ore as may be found therein and to market the metallic products recovered
therefrom which may prove to be marketable, as well as to render for Lepanto other services
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specified in the contract. We gather from the contract that the work undertaken by Nielson
was to take complete charge subject at all times to the general control of the Board of
Directors of Lepanto, of the exploration and development of the mining claims, of the hiring
of a sufficient and competent staff and of sufficient and capable laborers, of the prospecting
and development of the mine, of the erection and operation of the mill, and of the
benefication and marketing of the minerals found on the mining properties; and in carrying
out said obligation Nielson should proceed diligently and in accordance with the best mining
practice. In connection with its work Nielson was to submit reports, maps, plans and
recommendations with respect to the operation and development of the mining properties,
make recommendations and plans on the erection or enlargement of any existing mill,
dispatch mining engineers and technicians to the mining properties as from time to time may
reasonably be required to investigate and make recommendations without cost or expense to
Lepanto. Nielson was also to "act as purchasing agent of supplies, equipment and other
necessary purchases by Lepanto, provided, however, that no purchase shall be made without
the prior approval of Lepanto; and provided further, that no commission shall be claimed or
retained by Nielson on such purchase"; and "to submit all requisition for supplies, all
constricts and arrangement with engineers, and staff and all matters requiring the
expenditures of money, present or future, for prior approval by Lepanto; and also to make
contracts subject to the prior approve of Lepanto for the sale and marketing of the minerals
mined from said properties, when said products are in a suitable condition for marketing."1
It thus appears that the principal and paramount undertaking of Nielson under the
management contract was the operation and development of the mine and the operation of
the mill. All the other undertakings mentioned in the contract are necessary or incidental to
the principal undertaking these other undertakings being dependent upon the work on the
development of the mine and the operation of the mill. In the performance of this principal
undertaking Nielson was not in any way executing juridical acts for Lepanto, destined to
create, modify or extinguish business relations between Lepanto and third persons. In other
words, in performing its principal undertaking Nielson was not acting as an agent of Lepanto,
in the sense that the term agent is interpreted under the law of agency, but as one who was
performing material acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act as
purchasing agent of supplies and enter into contracts regarding the sale of mineral, but the
contract also provides that Nielson could not make any purchase, or sell the minerals, without
the prior approval of Lepanto. It is clear, therefore, that even in these cases Nielson could not
execute juridical acts which would bind Lepanto without first securing the approval of
Lepanto. Nielson, then, was to act only as an intermediary, not as an agent.
Lepanto contends that the management contract in question being one of agency it
had the right to terminate the contract at will pursuant to the provision of Article 1733 of the
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old Civil Code. We find, however, a proviso in the management contract which militates
against this stand of Lepanto. Paragraph XI of the contract provides:
Both parties to this agreement fully recognize that the terms of this
Agreement are made possible only because of the faith or confidence that the
Officials of each company have in the other; therefore, in order to assure that such
confidence and faith shall abide and continue, NIELSON agrees that LEPANTO may
cancel this Agreement at any time upon ninety (90) days written notice, in the event
that NIELSON for any reason whatsoever, except acts of God, strike and other causes
beyond its control, shall cease to prosecute the operation and development of the
properties herein described, in good faith and in accordance with approved mining
practice.
It is thus seen, from the above-quoted provision of paragraph XI of the management
contract, that Lepanto could not terminate the agreement at will. Lepanto could terminate or
cancel the agreement by giving notice of termination ninety days in advance only in the event
that Nielson should prosecute in bad faith and not in accordance with approved mining
practice the operation and development of the mining properties of Lepanto. Lepanto could
not terminate the agreement if Nielson should cease to prosecute the operation and
development of the mining properties by reason of acts of God, strike and other causes
beyond the control of Nielson.
The phrase "Both parties to this agreement fully recognize that the terms of this
agreement are made possible only because of the faith and confidence of the officials of each
company have in the other" in paragraph XI of the management contract does not qualify the
relation between Lepanto and Nielson as that of principal and agent based on trust and
confidence, such that the contractual relation may be terminated by the principal at any time
that the principal loses trust and confidence in the agent. Rather, that phrase simply implies
the circumstance that brought about the execution of the management contract. Thus, in the
annual report for 19362, submitted by Mr. C. A. Dewit, President of Lepanto, to its
stockholders, under date of March 15, 1937, we read the following:
To the stockholders
xxx xxx xxx
The incorporation of our Company was effected as a result of negotiations
with Messrs. Nielson & Co., Inc., and an offer by these gentlemen to Messrs. C. I.
Cookes and V. L. Lednicky, dated August 11, 1936, reading as follows:
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Messrs. Cookes and Lednicky,
Present
Re: Mankayan Copper Mines
GENTLEMEN:
After an examination of your property by our engineers, we have decided to
offer as we hereby offer to underwrite the entire issue of stock of a
corporation to be formed for the purpose of taking over said properties, said
corporation to have an authorized capital of P1,750,000.00, of which
P700,000.00 will be issued in escrow to the claim-owners in exchange for
their claims, and the balance of P1,050,000.00 we will sell to the public at par
or take ourselves.
The arrangement will be under the following conditions:
1. The subscriptions for cash shall be payable 50% at time of subscription and
the balance subject to the call of the Board of Directors of the proposed
corporation.
2. We shall have an underwriting and brokerage commission of 10% of the
P1,050,000.00 to be sold for cash to the public, said commission to be
payable from the first payment of 50% on each subscription.
3. We will bear the cost of preparing and mailing any prospectus that may be
required, but no such prospectus will be sent out until the text thereof has
been first approved by the Board of Directors of the proposed corporation.
4. That after the organization of the corporation, all operating contract be
entered into between ourselves and said corporation, under the terms which
the property will be developed and mined and a mill erected, under our
supervision, our compensation to be P2,000.00 per month until the property
is put on a profitable basis and P2,500.00 per month plus 10% of the net
profits for a period of five years thereafter.
5. That we shall have the option to renew said operating contract for an
additional period of five years, on the same basis as the original contract,
upon the expiration thereof.
It is understood that the development and mining operations on said
property, and the erection of the mill thereon, and the expenditures
therefor shall be subject to the general control of the Board of Directors of
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the proposed corporation, and, in case you accept this proposition, that a
detailed operating contract will be entered into, covering the relationships
between the parties.
Yours very truly,
(Sgd.) L. R. Nielson
Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson &
Co., took subscriptions for One Million Fifty Thousand Pesos (P1,050,000.00) in
shares of our Company and their underwriting and brokerage commission has been
paid. More than fifty per cent of these subscriptions have been paid to the Company
in cash. The claim owners have transferred their claims to the Corporation, but the
P700,000.00 in stock which they are to receive therefor, is as yet held in escrow.
Immediately upon the formation of the Corporation Messrs. Nielson & Co.,
assumed the Management of the property under the control of the Board of
Directors. A modification in the Management Contract was made with the consent of
all the then stockholders, in virtue of which the compensation of Messrs. Nielson &
Co., was increased to P2,500.00 per month when mill construction began. The formal
Management Contract was not entered into until January 30, 1937.
xxx xxx xxx
Manila, March 15, 1937
(Sgd.) C. A. DeWitt President
We can gather from the foregoing statements in the annual report for 1936, and from
the provision of paragraph XI of the Management contract, that the employment by Lepanto
of Nielson to operate and manage its mines was principally in consideration of the know-how
and technical services that Nielson offered Lepanto. The contract thus entered into pursuant
to the offer made by Nielson and accepted by Lepanto was a "detailed operating contract". It
was not a contract of agency. Nowhere in the record is it shown that Lepanto considered
Nielson as its agent and that Lepanto terminated the management contract because it had
lost its trust and confidence in Nielson.
The contention of Lepanto that it had terminated the management contract in 1945,
following the liberation of the mines from Japanese control, because the relation between it
and Nielson was one of agency and as such it could terminate the agency at will, is, therefore,
untenable. On the other hand, it can be said that, in asserting that it had terminated or
cancelled the management contract in 1945, Lepanto had thereby violated the express terms
of the management contract. The management contract was renewed to last until January 31,
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1947, so that the contract had yet almost two years to go upon the liberation of the mines
in 1945. There is no showing that Nielson had ceased to prosecute the operation and
development of the mines in good faith and in accordance with approved mining practice
which would warrant the termination of the contract upon ninety days written notice. In fact
there was no such written notice of termination. It is an admitted fact that Nielson ceased to
operate and develop the mines because of the war a cause beyond the control of Nielson.
Indeed, if the management contract in question was intended to create a relationship of
principal and agent between Lepanto and Nielson, paragraph XI of the contract should not
have been inserted because, as provided in Article 1733 of the old Civil Code, agency is
essentially revocable at the will of the principal that means, with or without cause. But
precisely said paragraph XI was inserted in the management contract to provide for the cause
for its revocation. The provision of paragraph XI must be given effect.
In the construction of an instrument where there are several provisions or
particulars, such a construction is, if possible, to be adopted as will give effect to all, 3 and if
some stipulation of any contract should admit of several meanings, it shall be understood as
bearing that import which is most adequate to render it effectual. 4
It is Our considered view that by express stipulation of the parties, the management
contract in question is not revocable at the will of Lepanto. We rule that this management
contract is not a contract of agency as defined in Article 1709 of the old Civil Code, but a
contract of lease of services as defined in Article 1544 of the same Code. This contract can not
be unilaterally revoked by Lepanto.
The first ground of the motion for reconsideration should, therefore, be brushed aside.
2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto
maintains that this Court erred, in holding that paragraph 11 of the management contract
suspended the period of said contract, in holding that the agreement was not only suspended
but was extended on account of the war, and in holding that the period of suspension on
account of the war lasted from February, 1942 to June 26, 1948. We are going to discuss these
three grounds together because they are interrelated.
In our decision we have dwelt lengthily on the points that the management contract
was suspended because of the war, and that the period of the contract was extended for a
period equivalent to the time when Nielson was unable to perform the work of mining and
milling because of the adverse effects of the war on the work of mining and milling.
It is the contention of Lepanto that the happening of those events, and the effects of
those events, simply suspended the performance of the obligations by either party in the
contract, but did not suspend the period of the contract, much less extended the period of
the contract.
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We have conscientiously considered the arguments of Lepanto in support of these
three grounds, but We are not persuaded to reconsider the rulings that We made in Our
decision.
We want to say a little more on these points, however. Paragraph II of the
management contract provides as follows:
In the event of inundation, flooding of the mine, typhoon, earthquake or any
other force majeure, war, insurrection, civil commotion, organized strike, riot, fire,
injury to the machinery or other event or cause reasonably beyond the control of
NIELSON and which adversely affects the work of mining and milling; NIELSON shall
report such fact to LEPANTO and without liability or breach of the terms of this
Agreement, the same shall remain in suspense, wholly or partially during the terms of
such inability. (Emphasis supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that upon the
happening of any of the events enumerated therein, which adversely affects the work of
mining and milling, the agreement is deemed suspended for as long as Nielson is unable to
perform its work of mining and milling because of the adverse effects of the happening of the
event on the work of mining and milling. During the period when the adverse effects on the
work of mining and milling exist, neither party in the contract would be held liable for non-
compliance of its obligation under the contract. In other words, the operation of the contract
is suspended for as long as the adverse effects of the happening of any of those events had
impeded or obstructed the work of mining and milling. An analysis of the phraseology of the
above-quoted paragraph II of the management contract readily supports the conclusion that
it is the agreement, or the contract, that is suspended. The phrase "the same" can refer to no
other than the term "Agreement" which immediately precedes it. The "Agreement" may be
wholly or partially suspended, and this situation will depend on whether the event wholly or
partially affected adversely the work of mining and milling. In the instant case, the war had
adversely affected and wholly at that the work of mining and milling. We have clearly
stated in Our decision the circumstances brought about by the war which caused the whole or
total suspension of the agreement or of the management contract.
LEPANTO itself admits that the management contract was suspended.
We quote from the brief of LEPANTO:
Probably, what Nielson meant was, it was prevented by Lepanto to assume again the
management of the mine in 1945, at the precise time when defendant was at the
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feverish phase of rehabilitation and although the contract had already been
suspended. (Lepanto's Brief, p. 9).
... it was impossible, as a result of the destruction of the mine, for the plaintiff to
manage and operate the same and because, as provided in the agreement, the
contract was suspended by reason of the war (Lepanto's Brief, pp. 9-10).
Clause II, by its terms, is clear that the contract is suspended in case fortuitous event
or force majeure, such as war, adversely affects the work of mining and milling.
(Lepanto's Brief, p. 49).
Lepanto is correct when it said that the obligations under the contract were
suspended upon the happening of any of the events enumerated in paragraph II of the
management contract. Indeed, those obligations were suspended because the contract itself
was suspended. When we talk of a contract that has been suspended we certainly mean that
the contract temporarily ceased to be operative, and the contract becomes operative again
upon the happening of a condition or when a situation obtains which warrants the
termination of the suspension of the contract.
In Our decision We pointed out that the agreement in the management contract
would be suspended when two conditions concur, namely: (1) the happening of the event
constituting a force majeure that was reasonably beyond the control of Nielson, and (2) that
the event constituting the force majeure adversely affected the work of mining and milling.
The suspension, therefore, would last not only while the event constituting the force majeure
continued to occur but also for as long as the adverse effects of the force majeure on the
work of mining and milling had not been eliminated. Under the management contract the
happening alone of the event constituting the force majeure which did not affect adversely
the work of mining and milling would not suspend the period of the contract. It is only when
the two conditions concur that the period of the agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the original mill,
the original power plant, the supplies and equipment, and all installations at the Mankayan
mines of Lepanto, were destroyed upon order of the United States Army, to prevent their
utilization by the enemy. It is not denied that for the duration of the war Nielson could not
undertake the work of mining and milling. When the mines were liberated from the enemy in
August, 1945, the condition of the mines, the mill, the power plant and other installations, was
not the same as in February 1942 when they were ordered destroyed by the US army.
Certainly, upon the liberation of the mines from the enemy, the work of mining and milling
could not be undertaken by Nielson under the same favorable circumstances that obtained
before February 1942. The work of mining and milling, as undertaken by Nielson in January,
1942, could not be resumed by Nielson soon after liberation because of the adverse effects of
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the war, and this situation continued until June of 1948. Hence, the suspension of the
management contract did not end upon the liberation of the mines in August, 1945. The mines
and the mill and the installations, laid waste by the ravages of war, had to be reconstructed
and rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse effects
of the war on the work of mining and milling had ended, because it was on that date that the
operation of the mines and the mill was resumed. The period of suspension should, therefore,
be reckoned from February 1942 until June 26, 1948, because it was during this period that the
war and the adverse effects of the war on the work of mining and milling had lasted. The
mines and the installations had to be rehabilitated because of the adverse effects of the war.
The work of rehabilitation started soon after the liberation of the mines in August, 1945 and
lasted until June 26, 1948 when, as stated in Lepanto's annual report to its stockholders for
the year 1948, "June 28, 1948 marked the official return to operation of this company at its
properties at Mankayan, Mountain Province, Philippines" (Exh. F-1).
Lepanto would argue that if the management contract was suspended at all the
suspension should cease in August of 1945, contending that the effects of the war should
cease upon the liberation of the mines from the enemy. This contention cannot be sustained,
because the period of rehabilitation was still a period when the physical effects of the war
the destruction of the mines and of all the mining installations adversely affected, and
made impossible, the work of mining and milling. Hence, the period of the reconstruction and
rehabilitation of the mines and the installations must be counted as part of the period of
suspension of the contract.
Lepanto claims that it would not be unfair to end the period of suspension upon the
liberation of the mines because soon after the liberation of the mines Nielson insisted to
resume the management work, and that Nielson was under obligation to reconstruct the mill
in the same way that it was under obligation to construct the mill in 1937. This contention is
untenable. It is true that Nielson insisted to resume its management work after liberation, but
this was only for the purpose of restoring the mines, the mill, and other installations to their
operating and producing condition as of February 1942 when they were ordered destroyed. It
is not shown by any evidence in the record, that Nielson had agreed, or would have agreed,
that the period of suspension of the contract would end upon the liberation of the mines. This
is so because, as found by this Court, the intention of the parties in the management contract,
and as understood by them, the management contract was suspended for as long as the
adverse effects of the force majeure on the work of mining and milling had not been
removed, and the contract would be extended for as long as it was suspended. Under the
management contract Nielson had the obligation to erect and operate the mill, but not to
erect or reconstruct the mill in case of its destruction by force majeure.
It is the considered view of this court that it would not be fair to Nielson to consider
the suspension of the contract as terminated upon the liberation of the mines because then
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Nielson would be placed in a situation whereby it would have to suffer the adverse effects of
the war on the work of mining and milling. The evidence shows that as of January 1942 the
operation of the mines under the management of Nielson was already under beneficial
conditions, so much so that dividends were already declared by Lepanto for the years 1939,
1940 and 1941. To make the management contract immediately operative after the liberation
of the mines from the Japanese, at the time when the mines and all its installations were laid
waste as a result of the war, would be to place Nielson in a situation whereby it would lose all
the benefits of what it had accomplished in placing the Lepanto mines in profitable operation
before the outbreak of the war in December, 1941. The record shows that Nielson started its
management operation way back in 1936, even before the management contract was entered
into. As early as August 1936 Nielson negotiated with Messrs. C. I. Cookes and V. L. Lednicky
for the operation of the Mankayan mines and it was the result of those negotiations that
Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto, and that
after the formation of the corporation (Lepanto) Nielson immediately assumed the
management of the mining properties of Lepanto. It was not until January 30, 1937 when the
management contract in question was entered into between Lepanto and Nielson (Exhibit A).
A contract for the management and operation of mines calls for a speculative and risky
venture on the part of the manager-operator. The manager-operator invests its technical
know-how, undertakes back-breaking efforts and tremendous spade-work, so to say, in the
first years of its management and operation of the mines, in the expectation that the
investment and the efforts employed might be rewarded later with success. This expected
success may never come. This had happened in the very case of the Mankayan mines where,
as recounted by Mr. Lednicky of Lepanto, various persons and entities of different
nationalities, including Lednicky himself, invested all their money and failed. The manager-
operator may not strike sufficient ore in the first, second, third, or fourth year of the
management contract, or he may not strike ore even until the end of the fifth year. Unless the
manager-operator strikes sufficient quantity of ore he cannot expect profits or reward for his
investment and efforts. In the case of Nielson, its corps of competent engineers, geologists,
and technicians begun working on the Mankayan mines of Lepanto since the latter part of
1936, and continued their work without success and profit through 1937, 1938, and the earlier
part of 1939. It was only in December of 1939 when the efforts of Nielson started to be
rewarded when Lepanto realized profits and the first dividends were declared. From that time
on Nielson could expect profit to come to it as in fact Lepanto declared dividends for 1940
and 1941 if the development and operation of the mines and the mill would continue
unhampered. The operation, and the expected profits, however, would still be subject to
hazards due to the occurrence of fortuitous events, fires, earthquakes, strikes, war, etc.,
constituting force majeure, which would result in the destruction of the mines and the mill.
One of these diverse causes, or one after the other, may consume the whole period of the
contract, and if it should happen that way the manager-operator would reap no profit to
compensate for the first years of spade-work and investment of efforts and know-how.
Hence, in fairness to the manager-operator, so that he may not be deprived of the benefits of
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the work he had accomplished, the force majeure clause is incorporated as a standard clause
in contracts for the management and operation of mines.
The nature of the contract for the management and operation of mines justifies the
interpretation of the force majeure clause, that a period equal to the period of suspension
due to force majeure should be added to the original term of the contract by way of an
extension. We, therefore, reiterate the ruling in Our decision that the management contract
in the instant case was suspended from February, 1942 to June 26, 1948, and that from the
latter date the contract had yet five years to go.
3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court
erred in reversing the finding of the trial court that Nielson's action has prescribed, by
considering only the first claim and ignoring the prescriptibility of the other claims.
This ground of the motion for reconsideration has no merit.
In Our decision We stated that the claims of Nielson are based on a written
document, and, as such, the cause of action prescribes in ten years. 5 Inasmuch as there are
different claims which accrued on different dates the prescriptive periods for all the claims are
not the same. The claims of Nielson that have been awarded by this Court are itemized in the
dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson's compensation in the
sum of P17,500.00, which is equivalent to 10% of the cash dividends declared by Lepanto in
December, 1941. As we have stated in Our decision, this claim accrued on December 31, 1941,
and the right to commence an action thereon started on January 1, 1942. We declared that the
action on this claim did not prescribe although the complaint was filed on February 6, 1958
or after a lapse of 16 years, 1 month and 5 days because of the operation of the moratorium
law.
We declared that under the applicable decisions of this Court 6 the moratorium period
of 8 years, 2 months and 8 days should be deducted from the period that had elapsed since
the accrual of the cause of action to the date of the filing of the complaint, so that there is a
period of less than 8 years to be reckoned for the purpose of prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945,
which provides as follows:
Enforcement of payments of all debts and other monetary
obligations payable in the Philippines, except debts and other monetary obligations
entered into in any area after declaration by Presidential Proclamation that such area
has been freed from enemy occupation and control, is temporarily suspended
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pending action by the Commonwealth Government. (41 O.G. 56-57; Emphasis
supplied)
Executive Order No. 32 covered all debts and monetary obligation contracted before
the war (or before December 8, 1941) and those contracted subsequent to December 8, 1941
and during the Japanese occupation. Republic Act No. 342, approved on July 26, 1948, lifted
the moratorium provided for in Executive Order No. 32 on pre-war (or pre-December 8, 1941)
debts of debtors who had not filed war damage claims with the United States War Damage
Commission. In other words, after the effectivity of Republic Act No. 342, the debt
moratorium was limited: (1) to debts and other monetary obligations which were contracted
after December 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or pre-
December 8, 1941) debts and other monetary obligations where the debtors filed war damage
claims. That was the situation up to May 18, 1953 when this Court declared Republic Act No.
342 unconstitutional.7 It has been held by this Court, however, that from March 10, 1945 when
Executive Order No. 32 was issued, to May 18, 1953 when Republic Act No. 342 was declared
unconstitutional or a period of 8 years, 2 months and 8 days the debt moratorium was in
force, and had the effect of suspending the period of prescription. 8
Lepanto is wrong when in its motion for reconsideration it claims that the
moratorium provided for in Executive Order No. 32 was continued by Republic Act No. 342
"only with respect to debtors of pre-war obligations or those incurred prior to December 8,
1941," and that "the moratorium was lifted and terminated with respect to obligations
incurred after December 8, 1941."9
This Court has held that Republic Act No. 342 does not apply to debts contracted
during the war and did not lift the moratorium in relations thereto. 10 In the case of Abraham,
et al. vs. Intestate Estate of Juan C. Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
Respondents, however, contend that Republic Act No. 342, which took
effect on July 26, 1948, lifted the moratorium on debts contracted during the
Japanese occupation. The court has already held that Republic Act No. 342 did not lift
the moratorium on debts contracted during the war (Uy vs. Kalaw Katigbak, G.R. No.
L-1830, Dec. 31, 1949) but modified Executive Order No. 32 as to pre-war debts,
making the protection available only to debtors who had war damage claims (Sison v.
Mirasol, G.R. No. L-4711, Oct. 3, 1952).
We therefore reiterate the ruling in Our decision that the claim involved in the first
item awarded to Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of action of
the claim involved in the first item in the award also holds true with respect to
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the second item in the award, which refers to Nielson's claim for management fee of
P2,500.00 for January, 1942. Lepanto admits that this second item, like the first, is a monetary
obligation. The right of action of Nielson regarding this claim accrued on January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is
not applicable. That is the reason why in Our decision We did not discuss the question of
prescription regarding these items. The claims of Nielson involved in these items are based on
the management contract, and Nielson's cause of action regarding these claims prescribes in
ten years. Corollary to Our ruling that the management contract was suspended from
February, 1942 until June 26, 1948, and that the contract was extended for five years from
June 26, 1948, the right of action of Nielson to claim for what is due to it during that period of
extension accrued during the period from June 26, 1948 till the end of the five-year extension
period or until June 26, 1953. And so, even if We reckon June 26, 1948 as the starting date of
the ten-year period in connection with the prescriptibility of the claims involved in items 3, 4,
5, 6 and 7 of the awards in the decision, it is obvious that when the complaint was filed on
February 6, 1958 the ten-year prescriptive period had not yet lapsed.
In Our decision We have also ruled that the right of action of Nielson against Lepanto
had not prescribed because of the arbitration clause in the Management contract. We are
satisfied that there is evidence that Nielson had asked for arbitration, and an arbitration
committee had been constituted. The arbitration committee, however, failed to bring about
any settlement of the differences between Nielson and Lepanto. On June 25, 1957 counsel for
Lepanto definitely advised Nielson that they were not entertaining any claim of Nielson.
The complaint in this case was filed on February 6, 1958.
4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this
Court "erred in awarding as damages (a) 10% of the cash dividends declared and paid in
December, 1941; (b) the management fee of P2,500.00 for the month of January 1942; and (c)
the full contract price for the extended period of 60 months, since the damages were never
demanded nor proved and, in any case, not allowable under the general law on damages."
We have stated in Our decision that the original agreement in the management
contract regarding the compensation of Nielson was modified, such that instead of receiving
a monthly compensation of P2,500.00 plus 10% of the net profits from the operation of the
properties for the preceding month,11 Nielson would receive a compensation of P2,500.00 a
month, plus (1) 10% of the dividends declared and paid, when and as paid, during the period of
the contract, and at the end of each year, (2) 10% of any depletion reserve that may be set up,
and (3) 10% of any amount expended during the year out of surplus earnings for capital
account.
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It is shown that in December, 1941, cash dividends amounting to P175,000.00 was
declared by Lepanto.12Nielson, therefore, should receive the equivalent of 10% of this amount,
or the sum of P17,500.00. We have found that this amount was not paid to Nielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of page 127
of its cash disbursement book, allegedly for 1941, in an effort to show that this amount of
P17,500.00 had been paid to Nielson. It appears, however, in this photographic copy of page
127 of the cash disbursement book that the sum of P17,500.00 was entered on October 29 as
"surplus a/c Nielson & Co. Inc." The entry does not make any reference to dividends or
participation of Nielson in the profits. On the other hand, in the photographic copy of page 89
of the 1941 cash disbursement book, also attached to the motion for reconsideration, there is
an entry for P17,500.00 on April 23, 1941 which states "Accts. Pay. Particip. Nielson & Co. Inc."
This entry for April 23, 1941 may really be the participation of Nielson in the profits based on
dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not stated
that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that
dividends were declared in December 1941. We cannot entertain this piece of evidence for
several reasons: (1) because this evidence was not presented during the trial in the court
below; (2) there is no showing that this piece of evidence is newly discovered and that
Lepanto was not in possession of said evidence when this case was being tried in the court
below; and (3) according to Exhibit L cash dividends of P175,000.00 were declared in
December, 1941, and so the sum of P17,500.00 which appears to have been paid to Nielson in
October 1941 could not be payment of the equivalent of 10% of the cash dividends that were
later declared in December, 1941.
As regards the management fee of Nielson corresponding to January, 1942, in the
sum of P2,500.00, We have also found that Nielson is entitled to be paid this amount, and that
this amount was not paid by Lepanto to Nielson. Whereas, Lepanto was able to prove that it
had paid the management fees of Nielson for November and December, 1941, 13 it was not able
to present any evidence to show that the management fee of P2,500.00 for January, 1942 had
been paid.
It having been declared in Our decision, as well as in this resolution, that the
management contract had been extended for 5 years, or sixty months, from June 27, 1948 to
June 26, 1953, and that the cause of action of Nielson to claim for its compensation during
that period of extension had not prescribed, it follows that Nielson should be awarded the
management fees during the whole period of extension, plus the 10% of the value of the
dividends declared during the said period of extension, the 10% of the depletion reserve that
was set up, and the 10% of any amount expended out of surplus earnings for capital account.
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5. In the seventh ground of its motion for reconsideration, Lepanto maintains that
this Court erred in ordering Lepanto to issue and deliver to Nielson shares of stock together
with fruits thereof.
In Our decision, We declared that pursuant to the modified agreement regarding the
compensation of Nielson which provides, among others, that Nielson would receive 10% of
any dividends declared and paid, when and as paid, Nielson should be paid 10% of the stock
dividends declared by Lepanto during the period of extension of the contract.
It is not denied that on November 28, 1949, Lepanto declared stock dividends worth
P1,000,000.00; and on August 22, 1950, it declared stock dividends worth P2,000,000.00). In
other words, during the period of extension Lepanto had declared stock dividends worth
P3,000,000.00. We held in Our decision that Nielson is entitled to receive l0% of the stock
dividends declared, or shares of stock worth P300,000.00 at the par value of P0.10 per share.
We ordered Lepanto to issue and deliver to Nielson those shares of stocks as well as all the
fruits or dividends that accrued to said shares.
In its motion for reconsideration, Lepanto contends that the payment to Nielson of
stock dividends as compensation for its services under the management contract is a violation
of the Corporation Law, and that it was not, and it could not be, the intention of Lepanto and
Nielson as contracting parties that the services of Nielson should be paid in shares of
stock taken out of stock dividends declared by Lepanto. We have assiduously considered the
arguments adduced by Lepanto in support of its contention, as well as the answer of Nielson
in this connection, and We have arrived at the conclusion that there is merit in the contention
of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:
No corporation organized under this Act shall create or issue bills, notes or
other evidence of debt, for circulation as money, and no corporation shall issue stock
or bonds except in exchange for actual cash paid to the corporation or for: (1)
property actually received by it at a fair valuation equal to the par or issued value of
the stock or bonds so issued; and in case of disagreement as to their value, the same
shall be presumed to be the assessed value or the value appearing in invoices or
other commercial documents, as the case may be; and the burden or proof that the
real present value of the property is greater than the assessed value or value
appearing in invoices or other commercial documents, as the case may be, shall be
upon the corporation, or for (2) profits earned by it but not distributed among its
stockholders or members; Provided, however, That no stock or bond dividend shall be
issued without the approval of stockholders representing not less than two-thirds of
123

all stock then outstanding and entitled to vote at a general meeting of the
corporation or at a special meeting duly called for the purpose.
xxx xxx xxx
No corporation shall make or declare any dividend except from the surplus
profits arising from its business, or divide or distribute its capital stock or property
other than actual profits among its members or stockholders until after the payment
of its debts and the termination of its existence by limitation or lawful
dissolution: Provided, That banking, savings and loan, and trust corporations may
receive deposits and issue certificates of deposit, checks, drafts, and bills of
exchange, and the like in the transaction of the ordinary business of banking, savings
and loan, and trust corporations. (As amended by Act No. 2792, and Act No. 3518;
Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the
consideration for which shares of stock may be issued are: (1) cash; (2) property; and (3)
undistributed profits. Shares of stock are given the special name "stock dividends" only if they
are issued in lieu of undistributed profits. If shares of stocks are issued in exchange of cash or
property then those shares do not fall under the category of "stock dividends". A corporation
may legally issue shares of stock in consideration of services rendered to it by a person not a
stockholder, or in payment of its indebtedness. A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property, because services is
equivalent to property.14 Likewise a share of stock issued in payment of indebtedness is
equivalent to issuing a stock in exchange for cash. But a share of stock thus issued should be
part of the original capital stock of the corporation upon its organization, or part of the stocks
issued when the increase of the capitalization of a corporation is properly authorized. In other
words, it is the shares of stock that are originally issued by the corporation and forming part
of the capital that can be exchanged for cash or services rendered, or property; that is, if the
corporation has original shares of stock unsold or unsubscribed, either coming from the
original capitalization or from the increased capitalization. Those shares of stock may be
issued to a person who is not a stockholder, or to a person already a stockholder in exchange
for services rendered or for cash or property. But a share of stock coming from stock
dividends declared cannot be issued to one who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation
declaring or authorizing such dividend. It is, what the term itself implies, a distribution of the
shares of stock of the corporation among the stockholders as dividends. A stock dividend of a
corporation is a dividend paid in shares of stock instead of cash, and is properly payable only
out of surplus profits.15 So, a stock dividend is actually two things: (1) a dividend, and (2) the
enforced use of the dividend money to purchase additional shares of stock at par. 16 When a
corporation issues stock dividends, it shows that the corporation's accumulated profits have
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Corporation Law
been capitalized instead of distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from being a realization of profits
for the stockholder, it tends rather to postpone said realization, in that the fund represented
by the new stock has been transferred from surplus to assets and no longer available for
actual distribution.17 Thus, it is apparent that stock dividends are issued only to stockholders.
This is so because only stockholders are entitled to dividends. They are the only ones who
have a right to a proportional share in that part of the surplus which is declared as dividends.
A stock dividend really adds nothing to the interest of the stockholder; the proportional
interest of each stockholder remains the same.18If a stockholder is deprived of his stock
dividends - and this happens if the shares of stock forming part of the stock dividends are
issued to a non-stockholder then the proportion of the stockholder's interest changes
radically. Stock dividends are civil fruits of the original investment, and to the owners of the
shares belong the civil fruits.19
The term "dividend" both in the technical sense and its ordinary acceptation, is that
part or portion of the profits of the enterprise which the corporation, by its governing agents,
sets apart for ratable division among the holders of the capital stock. It means the fund
actually set aside, and declared by the directors of the corporation as dividends and duly
ordered by the director, or by the stockholders at a corporate meeting, to be divided or
distributed among the stockholders according to their respective interests. 20
It is Our considered view, therefore, that under Section 16 of the Corporation Law
stock dividends can not be issued to a person who is not a stockholder in payment of services
rendered. And so, in the case at bar Nielson can not be paid in shares of stock which form part
of the stock dividends of Lepanto for services it rendered under the management contract.
We sustain the contention of Lepanto that the understanding between Lepanto and Nielson
was simply to make the cash value of the stock dividends declared as the basis for
determining the amount of compensation that should be paid to Nielson, in the proportion of
10% of the cash value of the stock dividends declared. And this conclusion of Ours finds
support in the record.
We had adverted to in Our decision that in 1940 there was some dispute between
Lepanto and Nielson regarding the application and interpretation of certain provisions of the
original contract particularly with regard to the 10% participation of Nielson in the net profits,
so that some adjustments had to be made. In the minutes of the meeting of the Board of
Directors of Lepanto on August 21, 1940, We read the following:
The Chairman stated that he believed that it would be better to tie the
computation of the 10% participation of Nielson & Company, Inc. to the dividend,
because Nielson will then be able to definitely compute its net participation by the
amount of the dividends declared. In addition to the dividend, we have been setting
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up a depletion reserve and it does not seem fair to burden the 10% participation of
Nielson with the depletion reserve, as the depletion reserve should not be
considered as an operating expense. After a prolonged discussion, upon motion duly
made and seconded, it was
RESOLVED, That the President, be, and he hereby is, authorized to enter into
an agreement with Nielson & Company, Inc., modifying Paragraph V of management
contract of January 30, 1937, effective January 1, 1940, in such a way that Nielson &
Company, Inc. shall receive 10% of any dividends declared and paid, when and as paid
during the period of the contract and at the end of each year, 10% of any depletion
reserve that may be set up and 10% of any amount expended during the year out of
surplus earnings for capital account. (Emphasis supplied.)
From the sentence, "The Chairman stated that he believed that it would be better to
tie the computation of the 10% participation of Nielson & Company, Inc., to the dividend,
because Nielson will then be able to definitely compute its net participation by the amount of
the dividends declared" the idea is conveyed that the intention of Lepanto, as expressed by
its Chairman C. A. DeWitt, was to make the value of the dividends declared whether the
dividends were in cash or in stock as the basis for determining the amount of
compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the
dividends so declared. It does not mean, however, that the compensation of Nielson would
be taken from the amount actually declared as cash dividend to be distributed to the
stockholder, nor from the shares of stocks to be issued to the stockholders as stock
dividends, but from the other assets or funds of the corporation which are not burdened by
the dividends thus declared. In other words, if, for example, cash dividends of P300,000.00
are declared, Nielson would be entitled to a compensation of P30,000.00, but this P30,000.00
should not be taken from the P300,000.00 to be distributed as cash dividends to the
stockholders but from some other funds or assets of the corporation which are not included
in the amount to answer for the cash dividends thus declared. This is so because if the
P30,000.00 would be taken out from the P300,000.00 declared as cash dividends, then the
stockholders would not be getting P300,000.00 as dividends but only P270,000.00. There
would be a dilution of the dividend that corresponds to each share of stock held by the
stockholders. Similarly, if there were stock dividends worth one million pesos that were
declared, which means an issuance of ten million shares at the par value of ten centavos per
share, it does not mean that Nielson would be given 100,000 shares. It only means that
Nielson should be given the equivalent of 10% of the aggregate cash value of those shares
issued as stock dividends. That this was the understanding of Nielson itself is borne out by the
fact that in its appeal brief Nielson urged that it should be paid "P300,000.00 being 10% of the
P3,000,000.00 stock dividends declared on November 28, 1949 and August 20, 1950...." 21
We, therefore, reconsider that part of Our decision which declares that Nielson is
entitled to shares of stock worth P300,000.00 based on the stock dividends declared on
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Corporation Law
November 28, 1949 and on August 20, 1950, together with all the fruits accruing thereto.
Instead, We declare that Nielson is entitled to payment by Lepanto of P300,000.00 in cash,
which is equivalent to 10% of the money value of the stock dividends worth P3,000,000.00
which were declared on November 28, 1949 and on August 20, 1950, with interest thereon at
the rate of 6% from February 6, 1958.
6. In the eighth ground of its motion for reconsideration Lepanto maintains that this
Court erred in awarding to Nielson an undetermined amount of shares of stock and/or cash,
which award can not be ascertained and executed without further litigation.
In view of Our ruling in this resolution that Nielson is not entitled to receive shares of
stock as stock dividends in payment of its compensation under the management contract, We
do not consider it necessary to discuss this ground of the motion for reconsideration. The
awards in the present case are all reduced to specific sums of money.
7. In the ninth ground of its motion for reconsideration Lepanto maintains that this
Court erred in rendering judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of this Court. In Our
decision We have stated the reason why the award of P50,000.00 for attorney's fees is
considered by this Court as reasonable.
Accordingly, We resolve to modify the decision that We rendered on December 17,
1966, in the sense that instead of awarding Nielson shares of stock worth P300,000.00 at the
par value of ten centavos (P0.10) per share based on the stock dividends declared by Lepanto
on November 28, 1949 and August 20, 1950, together with their fruits, Nielson should be
awarded the sum of P300,000.00 which is an amount equivalent to 10% of the cash value of
the stock dividends thus declared, as part of the compensation due Nielson under the
management contract. The dispositive portion of the decision should, therefore, be amended,
to read as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of
the court a quo and enter in lieu thereof another, ordering the appellee Lepanto to pay the
appellant Nielson the different amounts as specified hereinbelow:
(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash
dividends of December, 1941, with legal interest thereon from the date of the filing of the
complaint;
(2) Two thousand five hundred pesos (P2,500.00) as management fee for January 1942, with
legal interest thereon from the date of the filing of the complaint;
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(3) One hundred fifty thousand pesos (P150,000.00), representing management fees for the
sixty-month period of extension of the management contract, with legal interest thereon
from the date of the filing of the complaint;

(4) One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash
dividends declared during the period of extension of the management contract, with legal
interest thereon from the date of the filing of the complaint;
(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the
stock dividends declared on November 28, 1949 and August 20, 1950, with legal interest
thereon from the date of the filing of the complaint;

(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos
(P53,928.88), equivalent to 10% of the depletion reserve set up during the period of extension,
with legal interest thereon from the date of the filing of the complaint;

(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos
(P694,364.76), equivalent to 10% of the expenses for capital account during the period of
extension, with legal interest thereon from the date of the filing of the complaint;

(8) Fifty thousand pesos (P50,000.00) as attorney's fees; and

(9) The costs.

It is so ordered.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez and Castro, JJ., concur.
Fernando, Capistrano, Teehankee and Barredo, JJ., took no part

126

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. L-56655 July 25, 1983
DATU TAGORANAO BENITO, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION and JAMIATUL PHILIPPINE-AL ISLAMIA,
INC., respondents.
Corporation Law; No stockholders meeting or approval is necessary for issuance of
unsubscribed portion of capital stock.As aptly stated by the Securities and Exchange
Commission in its decision: x x x the questioned issuance of the unsubscribed portion of the
capital stock worth P110,980.00 is not invalid even if assuming that it was made without
notice to the stockholders as claimed by petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders meeting is necessary to
consider it because additional issuance of shares of stocks does not need approval of the
stockholders. The by-laws of the corporation itself states that the Board of Trustees shall, in
accordance with law, provide for the issue and transfer of shares of stock of the Institute and
shall prescribe the form of the certificate of stock of the Institute (Art. V, Sec. 1).
Same; A stockholder enjoys no pre-emptive right to buy unissued shares of originally
authorized capital stock.Petitioner bewails the fact that in view of the lack of notice to him
of such subsequent issuance, he was not able to exercise his right of pre-emption over the
unissued shares. However, the general rule is that pre-emptive right is recognized only with
respect to new issue of shares, and not with respect to additional issues of originally
authorized shares. This is on the theory that when a corporation at its inception offers its first
shares, it is presumed to have offered all of those which it is authorized to issue. An original
subscriber is deemed to have taken his shares knowing that they form a definite
proportionate part of the whole number of authorized shares. When the shares left
unsubscribed are later reoffered, he cannot therefore claim a dilution of interest. (Campos
and Lopez-Campos Selected Notes and Cases on Corporation Law, p. 855, citing Yasik V.
Wachtel, 25 Del. Ch. 247, 17A. 2d 308 (1941). (pp. 33-34, Rollo)
Same; Administrative Law; Findings of fact of an administrative tribunal, i.e.,
stockholders were notified of the cannot be deemed to have waived his pre-emptive right to
buy additional shares of stock, are binding on courts.Well-settled is the rule that the findings
of facts of administrative bodies will not be interfered with by the courts in the absence of
grave abuse of discretion on the part of said agencies, or unless the aforementioned findings
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Corporation Law
are not supported by substantial evidence. (Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long
string of cases, the Supreme Court has consistently adhered to the rule that decisions of
administrative officers are not to be disturbed by the courts except when the former have
acted without or in excess of their jurisdiction or with grave abuse of discretion (Sichangco vs.
Board of Commissioners of Immigration, 94 SCRA 61).
PETITION to review the decision of the Securities and Exchange Commission.
The facts are stated in the opinion of the Court.
Datu Tagoranao Benito vs. Securities & Exchange Commission, 123 SCRA 722, No. L-56655 July
25, 1983
The Solicitor General for respondent.
Tacod D. Macaraya for private respondent.
RELOVA, J.:
On February 6, 1959, the Articles of Incorporation of respondent Jamiatul Philippine-
Al Islamia, Inc. (originally Kamilol Islam Institute, Inc.) were filed with the Securities and
Exchange Commission (SEC) and were approved on December 14, 1962. The corporation had
an authorized capital stock of P200,000.00 divided into 20,000 shares at a par value of P10.00
each. Of the authorized capital stock, 8,058 shares worth P80,580.00 were subscribed and
fully paid for. Herein petitioner Datu Tagoranao Benito subscribed to 460 shares worth
P4,600.00.
On October 28, 1975, the respondent corporation filed a certificate of increase of its
capital stock from P200,000.00 to P1,000,000.00. It was shown in said certificate that
P191,560.00 worth of shares were represented in the stockholders' meeting held on
November 25, 1975 at which time the increase was approved. Thus, P110,980.00 worth of
shares were subsequently issued by the corporation from the unissued portion of the
authorized capital stock of P200,000.00. Of the increased capital stock of P1,000,000.00,
P160,000.00 worth of shares were subscribed by Mrs. Fatima A. Ramos, Mrs. Tarhata A.
Lucman and Mrs. Moki-in Alonto.
On November 18, 1976, petitioner Datu Tagoranao filed with respondent Securities
and Exchange Commission a petition alleging that the additional issue (worth P110,980.00) of
previously subscribed shares of the corporation was made in violation of his pre-emptive right
to said additional issue and that the increase in the authorized capital stock of the corporation
from P200,000.00 to P1,000,000.00 was illegal considering that the stockholders of record
127

were not notified of the meeting wherein the proposed increase was in the agenda. Petitioner
prayed that the additional issue of shares of previously authorized capital stock as well as the
shares issued from the increase in capital stock of respondent corporation be cancelled; that
the secretary of respondent corporation be ordered to register the 2,540 shares acquired by
him (petitioner) from Domocao Alonto and Moki-in Alonto; and that the corporation be
ordered to render an accounting of funds to the stockholders.
In their answer, respondents denied the material allegations of the petition and, by
way of special defense, claimed that petitioner has no cause of action and that the stock
certificates covering the shares alleged to have been sold to petitioner were only given to him
as collateral for the loan of Domocao Alonto and Moki-in Alonto.
On July 11, 1980, Hearing Officer Ledor E. Macalalag of the Securities and Exchange
Commission, after due proceedings, rendered a decision which was affirmed by the
Commission En Banc during its executive session held on March 9, 1981, as follows:
RESOLVED, That the decision of the hearing Officer in SEC Case No.
1392, dated July 11, 1980, the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing considerations, this
Commission hereby rules:
(a) That the issuance by the corporation of its unissued
shares was validly made and was not subject to the pre-
emptive rights of stockholders, including the petitioner,
herein;
(b) That there is no sufficient legal basis to set aside the
certificate issued by this Commission authorizing the
increase in capital stock of respondent corporation from
P200,000.00 to Pl,000,000.00. Considering, however, that
petitioner has not waived his pre-emptive right to subscribe
to the increased capitalization, respondent corporation is
hereby directed to allow petitioner to subscribe thereto, at
par value, proportionate to his present shareholdings,
adding thereto the 2,540 shares transferred to him by Mr.
Domocao Alonto and Mrs. Moki-in Alonto;
(c) To direct as it hereby directs, the respondent
corporation to immediately cancel Certificates of Stock
Nos. 216, 223, 302, all in the name of Domocao Alonto, and
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Certificate of Stock No. 217, in the name of Moki-in Alonto,
upon their presentation by the petitioner and to issue new
certificates corresponding thereto in the name of petitioner
herein;
(d) To direct, as it hereby directs, respondent corporation
to religiously comply with the requirement of filing annual
financial statements under pain of a more drastic action;
(e) To declare, as it hereby declares, as irregular, the
election of the nine (9) members of the Board of Trustees
of respondent corporation on October 30, 1976, for which
reason, respondent corporation is hereby ordered to call a
stockholders' meeting to elect a new set of five (5)
members of the Board of Trustees, unless in the meantime
the said number is accordingly increased and the
requirement of law to make such increase effective have
been complied with. It is understood that the said
stockholders' meeting be called within thirty (30) days from
the time petitioner shall have subscribed to the increased
capitalization.'
be, as the same is hereby AFFIRMED, the same being in accordance with law
and the facts of the case. (pp. 28-29, Reno)
Hence, this petition for review by way of appeal from the aforementioned decision of
the Securities and Exchange Commission, petitioner contending that (1) the issuance of the
11,098 shares without the consent of the stockholders or of the Board of Directors, and in the
absence of consideration, is null and void; (2) the increase in the authorized capital stock from
P200,000.00 to P1,000,000.00 without the consent or express waiver of the stockholders, is
null and void; (3) he is entitled to attorneys' fees, damages and expenses of litigation in filing
this suit against the directors of respondent corporation.
We are not persuaded. As aptly stated by the Securities and Exchange Commission in
its decision:
xxx xxx xxx
... the questioned issuance of the unsubscribed portion of the capital stock
worth P110,980.00 is ' not invalid even if assuming that it was made without
notice to the stockholders as claimed by petitioner. The power to issue
128

shares of stocks in a corporation is lodged in the board of directors and no
stockholders' meeting is necessary to consider it because additional issuance
of shares of stocks does not need approval of the stockholders. The by-laws
of the corporation itself states that 'the Board of Trustees shall, in
accordance with law, provide for the issue and transfer of shares of stock of
the Institute and shall prescribe the form of the certificate of stock of the
Institute. (Art. V, Sec. 1).
Petitioner bewails the fact that in view of the lack of notice to him
of such subsequent issuance, he was not able to exercise his right of pre-
emption over the unissued shares. However, the general rule is that pre-
emptive right is recognized only with respect to new issue of shares, and not
with respect to additional issues of originally authorized shares. This is on
the theory that when a corporation at its inception offers its first shares, it is
presumed to have offered all of those which it is authorized to issue. An
original subscriber is deemed to have taken his shares knowing that they
form a definite proportionate part of the whole number of authorized
shares. When the shares left unsubscribed are later re-offered, he cannot
therefore claim a dilution of interest. (Campos and Lopez-Campos Selected
Notes and Cases on Corporation Law, p. 855, citing Yasik V. Wachtel 25 Del.
Ch. 247,17A. 2d 308 (1941). (pp. 33-34, Rollo)
With respect to the claim that the increase in the authorized capital stock was
without the consent, expressed or implied, of the stockholders, it was the finding of the
Securities and Exchange Commission that a stockholders' meeting was held on November
25,1975, presided over by Mr. Ahmad Domocao Alonto, Chairman of the Board of Trustees
and, among the many items taken up then were the change of name of the corporation from
Kamilol Islam Institute Inc. to Jamiatul Philippine-Al Islamia, Inc., the increase of its capital
stock from P200,000.00 to P1,000,000.00, and the increase of the number of its Board of
Trustees from five to nine. "Despite the insistence of petitioner, this Commission is inclined to
believe that there was a stockholders' meeting on November 25, 1975 which approved the
increase. The petitioner had not sufficiently overcome the evidence of respondents that such
meeting was in fact held. What petitioner successfully proved, however, was the fact that he
was not notified of said meeting and that he never attended the same as he was out of the
country at the time. The documentary evidence of petitioner conclusively proved that he was
attending the Mecca pilgrimage when the meeting was held on November 25, 1975. (Exhs. 'Q',
'Q-14', 'R', 'S' and 'S-l'). While petitioner doubts the authenticity of the alleged minutes of the
proceedings (Exh. '4'), the Commission notes with significance that said minutes contain
numerous details of various items taken up therein that would negate any claim that it was
not authentic. Another thing that petitioner was able to disprove was the allegation in the
certificate of increase (Exh. 'E-l') that all stockholders who did not subscribe to the increase of
capital stock have waived their pre-emptive right to do so. As far as the petitioner is
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Corporation Law
concerned, he had not waived his pre-emptive right to subscribe as he could not have done so
for the reason that he was not present at the meeting and had not executed a waiver,
thereof. Not having waived such right and for reasons of equity, he may still be allowed to
subscribe to the increased capital stock proportionate to his present shareholdings." (pp. 36-
37, Rollo)
Well-settled is the rule that the findings of facts of administrative bodies will not be
interfered with by the courts in the absence of grave abuse of discretion on the part of said
agencies, or unless the aforementioned findings are not supported by substantial evidence.
(Gokongwei, Jr. vs. SEC, 97 SCRA 78). In a long string of cases, the Supreme Court has
consistently adhered to the rule that decisions of administrative officers are not to be
disturbed by the courts except when the former have acted without or in excess of their
jurisdiction or with grave abuse of discretion (Sichangco vs. Board of Commissioners of
Immigration, 94 SCRA 61). Thus, in the case of Deluao vs. Casteel ( L-21906, Dec. 24, 1968, 26
SCRA 475, 496, citing Pajo vs. Ago, et al., L-15414, June 30, 1960) and Genitano vs. Secretary of
Agriculture and Natural Resources, et al. (L-2ll67, March 31, 1966), the Supreme Court held that:
... Findings of fact by an administrative board or official, following a hearing,
are binding upon the courts and win not be disturbed except where the
board or official has gone beyond his statutory authority, exercised
unconstitutional powers or clearly acted arbitrarily and without regard to his
duty or with grave abuse of discretion. ...
ACCORDINGLY, this petition is hereby dismissed for lack of merit.
SO ORDERED.
Plana, Escolin and Gutierrez, Jr., JJ., concur.
Teehankee, J., concurs in the result.
Melencio-Herrera and Vasquez, JJ., are on leave.
129

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 76801 August 11, 1995
LOPEZ REALTY, INC., AND ASUNCION LOPEZ GONZALES, petitioners,
vs.
FLORENTINA FONTECHA, ET AL., AND THE NATIONAL LABOR RELATIONS
COMMISSION, respondents.
Actions; Pleadings and Practice; Appeals; It is well settled that questions not raised in
the lower courts cannot be raised for the first time on appeal.Indeed, it would be offensive
to the basic rules of fair play and justice to allow petitioners to raise questions which have not
been passed upon by the labor arbiter and the public respondent NLRC. It is well settled that
questions not raised in the lower courts cannot be raised for the first time on appeal. Hence,
petitioners may not invoke any other ground, other than those it specified at the labor arbiter
level, to impugn the validity of the subject resolutions.
Corporation Law; A corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general law.The
general rule is that a corporation, through its board of directors, should act in the manner and
within the formalities, if any, prescribed by its charter or by the general law. Thus, directors
must act as a body in a meeting called pursuant to the law or the corporations by-laws,
otherwise, any action taken therein may be questioned by any objecting director or
shareholder.
Same; An action of the board of directors during a meeting, which was illegal for lack
of notice, may be ratified either expressly, by the action of the directors in subsequent legal
meeting, or impliedly, by the corporations subsequent course of conduct.Be that as it may,
jurisprudence tells us that an action of the board of directors during a meeting, which was
illegal for lack of notice, may be ratified either expressly, by the action of the directors in
subsequent legal meeting, or impliedly, by the corporations subsequent course of conduct.
Same; Ultra Vires Acts; Words and Phrases; In legal parlance, ultra vires act refers PUNO, J.:
to one which is not within the corporate powers conferred by the Corporation Code or articles
of incorporation or not necessary or incidental in the exercise of the powers so conferred.
Assuming,arguendo, that there was no notice given to Asuncion Lopez Gonzales during the
special meetings held on August 17, 1981 and September 1, 1981, it is erroneous to state that
the resolutions passed by the board during the said meetings were ultra vires. In legal
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Corporation Law
parlance, ultra vires act refers to one which is not within the corporate powers conferred
by the Corporation Code or articles of incorporation or not necessary or incidental in the
exercise of the powers so conferred.
Same; Same; Providing gratuity pay for its employees is one of the express powers of
the corporation under the Corporation Code.The assailed resolutions before us cover a
subject which concerns the benefit and welfare of the companys employees. To stress,
providing gratuity pay for its employees is one of the express powers of the corporation
under the Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to
avoid any liability arising from the issuance of the subject resolutions.
Same; Section 28 1/2 of the Corporation Law (now Section 40 of the Corporation Code)
requiring authorization of the stockholders of record for action taken by the board of directors
applies to the sale, lease, exchange or disposition of all or substantially all of the corporations
assets.Petitioners try to convince us that the subject resolutions had no force and effect in
view of the non-approval thereof during the Annual Stockholders Meeting held on March 1,
1982. To strengthen their position, petitioners cite section 28 1/2 of the Corporation Law
(Section 40 of the Corporation Code). We are not persuaded. The cited provision is not
applicable to the case at bench as it refers to the sale, lease, exchange or disposition of all or
substantially all of the corporations assets, including its goodwill. In such a case, the action
taken by the board of directors requires the authorization of the stockholders on record.
Same; Where the stockholders of petitioner, except for one, also sit as members of the
board of directors, it will be illogical and superfluous to require the stockholders approval of
certain resolutions adopted by the board of directors.It will be observed that, except for
Arturo Lopez, the stockholders of petitioner corporation also sit as members of the board of
directors. Under the circumstances in field, it will be illogical and superfluous to require the
stockholders approval of the subject resolutions. Thus, even without the stockholders
approval of the subject resolutions, petitioners are still liable to pay private respondents
gratuity pay.
SPECIAL CIVIL ACTION in the Supreme Court. Certiorari.
The facts are stated in the opinion of the Court.
The controversy at bench arose from a complaint filed by private
respondents, 1 namely, Florentina Fontecha, Mila Refuerzo, Marcial Mamaril, Perfecto
Bautista, Edward Mamaril, Marissa Pascual and Allan Pimentel, against their employer Lopez
Realty Incorporated (petitioner) and its majority stockholder, Asuncion Lopez Gonzales, for
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alleged non-payment of their gratuity pay and other benefits. 2 The case was docketed as Benjamin Bernardino, and Leo Rivera, convened a special meeting and passed a
NLRC-NCR Case No. 2-2176-82. resolution which reads:
Lopez Realty, Inc., is a corporation engaged in real estate business, while petitioner Asuncion
Lopez Gonzales is one of its majority shareholders. Her interest in the company vis-a-vis the Resolved, as it is hereby resolved that the gratuity (pay) of the employees be
other shareholders is as follows: given as follows:

1 Asuncion Lopez Gonzales 7831 shares (a) Those who will be laid off be given the full amount of gratuity;
2 Teresita Lopez Marquez 7830 shares
(b) Those who will be retained will receive 25% of their gratuity (pay) due on
3 Arturo F. Lopez 7830 shares September 1, 1981, and another 25% on January 1, 1982, and 50% to be retained
4 Rosendo de Leon 4 shares by the office in the meantime. (emphasis supplied)
5 Benjamin Bernardino 1 share
6 Leo Rivera 1 share Private respondents were the retained employees of petitioner corporation.
In a letter, dated August 31, 1981, private respondents requested for the full payment
of their gratuity pay. Their request was granted in a special meeting held on
Except for Arturo F. Lopez, the rest of the shareholders also sit as members
September 1, 1981. The relevant, portion of the minutes of the said board meeting
of the Board of Directors.
reads:
As found by the Labor arbiter. 3 sometime in 1978, Arturo Lopez submitted a
In view of the request of the employees contained in the letter
proposal relative to the distribution of certain assets of petitioner corporation among
dated August 31, 1981, it was also decided that, all those remaining
its three (3) main shareholders. The proposal had three (3) aspects, viz: (1) the sale of
employees will receive another 25% (of their gratuity) on or before October
assets of the company to pay for its obligations; (2) the transfer of certain assets of
15, 1981 and another 25% on or before the end of November, 1981 of their
the company to its three (3) main shareholders, while some other assets shall remain
respective gratuity.
with the company; and (3) the reduction of employees with provision for their gratuity
pay. The proposal was deliberated upon and approved in a special meeting of the
At that, time, however, petitioner Asuncion Lopez Gonzales was still abroad.
board of directors held on April 17, 1978.
Allegedly, while she was still out of the country, she sent a cablegram to the
corporation, objecting to certain matters taken up by the board in her absence, such
It appears that petitioner corporation approved two (2) resolutions
as the sale of some of the assets of the corporation. Upon her return, she flied a
providing for the gratuity pay of its employees, viz: (a) Resolution No. 6, Series of 1980,
derivative suit with the Securities and Exchange Commission (SEC) against majority
passed by the stockholders in a special meeting held on September 8, 1980, resolving
shareholder Arturo F. Lopez.
to set aside, twice a year, a certain sum of money for the gratuity pay of
its retiring employees and to create a Gratuity Fund for the said contingency; and
Notwithstanding the "corporate squabble" between petitioner Asuncion
(b) Resolution No. 10, Series of 1980, setting aside the amount of P157,750.00 as
Lopez Gonzales and Arturo Lopez, the first two (2) installments of the gratuity pay of
Gratuity Fund covering the period from 1950 up to 1980.
private respondents Florentina Fontecha, Mila Refuerzo, Marcial Mamaril and
Perfecto Bautista were paid by petitioner corporation.
Meanwhile, on July 28, 1981, board member and majority stockholder
Teresita Lopez Marquez died.
Also, petitioner corporation had prepared the cash vouchers and checks for
the third installments of gratuity pay of said private respondents (Florentina
On August 17, 1981, except for Asuncion Lopez Gonzales who was then
Fontecha, Mila Refuerzo, Marcial Mamaril and Perfecto Bautista). For some reason,
abroad, the remaining members of the Board of Directors, namely: Rosendo de Leon,
said vouchers were cancelled by petitioner Asuncion Lopez Gonzales.

131

Likewise, the first, second and third installments of gratuity pay of the rest
of private respondents, particularly, Edward Mamaril, Marissa Pascual and Allan
Pimentel, were prepared but cancelled by petitioner Asuncion Lopez Gonzales.
Despite private respondents' repeated demands for their gratuity pay, corporation
refused to pay the same. 4
On July 23, 1984, Labor Arbiter Raymundo R. Valenzuela rendered judgment in favor
of private respondents. 5
Petitioners appealed the adverse ruling of the Labor arbiter to public
respondent National Labor Relations Commission. The appeal focused on the alleged
non-ratification and non-approval of the assailed August 17, 1981 and September 1,
1981 Board Resolutions during the Annual Stockholders' Meeting held on March 1,
1982. Petitioners further insisted that the payment of the gratuity to some of the
private respondents was a mere "mistake" on the part of petitioner corporation
since, pursuant to Resolution No. 6, dated September 8, 1980, and Resolution No. 10,
dated October 6, 1980, said gratuity pay should be given only upon the employees'
retirement.
On November 20, 1985, public respondent, through its Second Division,
dismissed the appeal for lack of merit, the pertinent portion of which states: 6
We cannot agree with the contention of respondents (petitioners') that the
Labor Arbiter a quo committed abuse of discretion in his decision.
Respondents' (petitioners') contention that, the two (2) resolutions dated 17
August 1981 and 1 September 1981 . . . which were not approved in the
annual stockholders meeting had no force and effect, deserves scant
consideration. The records show that the stockholders did not revoke nor
nullify these resolutions granting gratuities to complainants.
On record, it appears that the said resolutions arose from the
legitimate creation of the Board of Directors who steered the corporate
affairs of the corporation. . . .
Respondents' (petitioners') allegation that the three (3)
complainants, Mila E. Refuerzo, Marissa S. Pascual and Edward Mamaril, who
had resigned after filing the complaint on February 8, 1982, were precluded
to (sic) receive gratuity because the said resolutions referred to
only retiring employee could not be given credence. A reading of Resolutions
dated 17 August 1981 and 1 September 1981 disclosed that there were periods
mentioned for the payment of complainants' gratuities. This disproves
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respondents' argument allowing gratuities upon retirement of employees.
Additionally, the proposed distribution of assets (Exh. C-1) filed by Mr. Arturo
F. Lopez also made mention of gratuity pay, " . . . (wherein) an employee who
desires to resign from the LRI will be given the gratuity pay he or she earned."
(Emphasis supplied) Let us be reminded, too, that the complainants'
resignation was not voluntary but it was pressurized (sic) due to "power
struggle" which was evident between Arturo Lopez and Asuncion Gonzales.
The respondents' (petitioners') contention of a mistake to have
been committed in granting the first two (2) installments of gratuities to
complainants Perfecto Bautista, Florentina Fontecha, Marcial Mamaril and
Mila Refuerzo, (has) no legal leg to stand on. The record is bereft of any
evidence that the Board of Directors had passed a resolution nor is there any
minutes of whatever nature proving mistakes in the award of damages (sic).
With regard to the award of service incentive leave and others, the
Commission finds no cogent reason to disturb the appealed decision.
We affirm.
WHEREFORE, let the appealed decision be, as it is hereby, AFFIRMED and let
the instant appeal (be) dismissed for lack of merit.
SO ORDERED.
Petitioners reconsidered. 7 In their motion for reconsideration, petitioners
assailed the validity of the board resolutions passed on August 17, 1981 and
September 1, 1981, respectively, and claimed, for the first time, that petitioner
Asuncion Lopez Gonzales was not notified of the special board meetings held on said
dates. The motion for reconsideration was denied by the Second Division on July 24,
1986.
On September 4, 1986, petitioners filed another motion for reconsideration. Again,
the motion was denied by public respondent in a Minute Resolution dated November
19, 1986. 8
Hence, the petition. As prayed for, we issued a Temporary Restraining
Order, 9 enjoining public respondent from enforcing or executing the Resolution,
dated November 20, 1986 (sic), in NLRC-NCR-2-2176-82. 10
The sole issue is whether or not public respondent acted with grave abuse
of discretion in holding that private respondents are entitled to receive their
132

gratuity pay under the assailed board resolutions dated August 17, 1951 and
September 1, 1981.
Petitioners contend that the board resolutions passed on August 17, 1981 and
September 1, 1981, granting gratuity pay to their retained employees, are ultra
vires on the ground that petitioner Asuncion Lopez Gonzales was not duly notified of
the said special meetings. They aver, further, that said board resolutions were not
ratified by the stockholders of the corporation pursuant to Section 28 1/2 of the
Corporation Law (Section 40 of the Corporation Code). They also insist that the
gratuity pay must be given only to the retiring employees, to the exclusion of the
retained employees or those who voluntarily resigned from their posts.
At the outset, we note that petitioners allegation on lack of notice to
petitioner Asuncion Lopez Gonzales was raised for the first time in the in their motion
for reconsideration filed before public respondent National Labor Relations
Commission, or after said public respondent had affirmed the decision of the labor
arbiter. To stress, in their appeal before the NLRC, petitioners never raised the issue
of lack of notice to Asuncion Lopez Gonzales. The appeal dealt with (a) the failure of
the stockholders to ratify the assailed resolutions and (b) the alleged "mistake"
committed by petitioner corporation in giving the gratuity pay to some of its
employees who are yet to retire from employment.
In their comment, 11 private respondents maintain that the new ground of
lack of notice was not raised before the labor arbiter, hence, petitioners are barred
from raising the same on appeal. Private respondents claim, further, that such failure
on the part of petitioners, had deprived them the opportunity to present evidence
that, in a subsequent special board meeting held on September 29, 1981, the subject
resolution dated September 1, 1981, was unanimously approved by the board of
directors of petitioner corporation, including petitioner Asuncion Lopez Gonzales. 12
Indeed, it would be offensive to the basic rules of fair play and justice to
allow petitioners to raise questions which have not been passed upon by the labor
arbiter and the public respondent NLRC. It is well settled that questions not raised in
the lower courts cannot, be raised for the first time on appeal. 13 Hence, petitioners
may not invoke any other ground, other than those it specified at the labor arbiter
level, to impugn the validity of the subject resolutions.
We now come to petitioners' argument that the resolutions passed by the
board of directors during the special meetings on August 1, 1981, and September 1,
1981, were ultra vires for lack of notice.
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The general rule is that a corporation, through its board of directors, should
act in the manner and within the formalities, if any, prescribed by its charter or by the
general law. 14 Thus, directors must act as a body in a meeting called pursuant to the
law or the corporation's by-laws, otherwise, any action taken therein may be
questioned by any objecting director or shareholder. 15
Be that as it may, jurisprudence 16 tells us that an action of the board of
directors during a meeting, which was illegal for lack of notice, may be ratified either
expressly, by the action of the directors in subsequent legal meeting, or impliedly, by
the corporation's subsequent course of conduct. Thus, in one case, 17 it was held:
. . . In 2 Fletcher, Cyclopedia of the Law of Private Corporations (Perm. Ed.)
sec. 429, at page 290, it is stated:
Thus, acts of directors at a meeting which was illegal
because of want of notice may be ratified by the directors
at a subsequent legal meeting, or by the corporations
course of conduct
...
Fletcher, supra, further states in sec. 762, at page 1073-1074:
Ratification by directors may be by an express resolution or
vote to that effect, or it may be implied from adoption of
the act, acceptance or acquiescence. Ratification may be
effected by a resolution or vote of the board of directors
expressly ratifying previous acts either of corporate officers
or agents; but it is not necessary, ordinarily, to show a
meeting and formal action by the board of directors in
order to establish a ratification.
In American Casualty Co., v. Dakota Tractor and Equipment Co., 234 F. Supp.
606, 611 (D.N.D. 1964), the court stated:
Moreover, the unauthorized acts of an officer of a
corporation may be ratified by the corporation by conduct
implying approval and adoption of the act in question. Such
ratification may be express or may be inferred from silence
and inaction.
In the case at bench, it was established that petitioner corporation did not
issue any resolution revoking nor nullifying the board resolutions granting gratuity
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pay to private respondents. Instead, they paid the gratuity pay, particularly, the first
two (2) installments thereof, of private respondents Florentina Fontecha, Mila
Refuerzo, Marcial Mamaril and Perfecto Bautista.
Despite the alleged lack of notice to petitioner Asuncion Lopez Gonzales at
that time the assailed resolutions were passed, we can glean from the records that
she was aware of the corporation's obligation under the said resolutions. More
importantly, she acquiesced thereto. As pointed out by private respondents,
petitioner Asuncion Lopez Gonzales affixed her signature on Cash Voucher Nos. 81-
10-510 and 81-10-506, both dated October 15, 1981, evidencing the 2nd installment of
the gratuity pay of private respondents Mila Refuerzo and Florentina Fontecha. 18
We hold, therefore, that the conduct of petitioners after the passage of
resolutions dated August, 17, 1951 and September 1, 1981, had estopped them from
assailing the validity of said board resolutions.
Assuming, arguendo, that there was no notice given to Asuncion Lopez
Gonzalez during the special meetings held on August 17, 1981 and September 1, 1981,
it is erroneous to state that the resolutions passed by the board during the said
meetings were ultra vires. In legal parlance, "ultra vires" act refers to one which is not
within the corporate powers conferred by the Corporation Code or articles of
incorporation or not necessary or incidental in the exercise of the powers so
conferred. 19
The assailed resolutions before us cover a subject which concerns the
benefit and welfare of the company's employees. To stress, providing gratuity pay
for its employees is one of the express powers of the corporation under the
Corporation Code, hence, petitioners cannot invoke the doctrine of ultra vires to
avoid any liability arising from the issuance the subject resolutions. 20
Petitioners try to convince us that the subject resolutions had no force and
effect in view of the non-approval thereof during the Annual Stockholders' Meeting
held on March 1, 1982. To strengthen their position, petitioners cite section 28 1/2 of
the Corporation Law (Section 40 of the Corporation Code). We are not persuaded.
The cited provision is not applicable to the case at bench as it refers to the
sale, lease, exchange or disposition of all or substantially all of the corporation's
assets, including its goodwill. In such a case, the action taken by the board of
directors requires the authorization of the stockholders on record.
It will be observed that, except far Arturo Lopez, the stockholders of
petitioner corporation also sit as members of the board of directors. Under the
circumstances in field, it will be illogical and superfluous to require the stockholders'
approval of the subject resolutions. Thus, even without the stockholders' approval of
the subject resolutions, petitioners are still liable to pay private respondents' gratuity
pay.
IN VIEW WHEREOF, the instant petition is DISMISSED for lack of merit and
the temporary restraining order we issued on February 9, 1987 is LIFTED. Accordingly,
the assailed resolution of the National Labor Relations Commission in NLRC-NCR-
2176-82 is AFFIRMED. This decision is immediately executory. Costs against
petitioners.
SO ORDERED.
Narvasa, C.J., Regalado, Mendoza and Francisco, JJ., concur.

We reject petitioners' allegation that private respondents, namely, Mila

Refuerzo, Marissa Pascual and Edward Mamaril who resigned from petitioner
corporation after the filing of the case, are precluded from receiving their gratuity
pay. Pursuant to board resolutions dated August 17, 1981 and September 1, 1981,
respectively, petitioner corporation obliged itself to give the gratuity pay of its
retained employees in four (4) installments: on September 1, 1981; October 15, 1981;
November, 1981; and January 1, 1982. Hence, at the time the aforenamed private
respondents tendered their resignation, the aforementioned private respondents
were already entitled to receive their gratuity pay.

134

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 125778 June 10, 2003
INTER-ASIA INVESTMENTS INDUSTRIES, INC., Petitioner,
vs.
COURT OF APPEALS and ASIA INDUSTRIES, INC., Respondents.
Corporation Law; An officer of a corporation who is authorized to purchase the stock
of another corporation has the implied power to perform all other obligations arising
therefrom such as payment of the shares of stock.As correctly argued by private
respondent, an officer of a corporation who is authorized to purchase the stock of another
corporation has the implied power to perform all other obligations arising therefrom, such as
payment of the shares of stock. By allowing its president to sign the Agreement on its behalf,
petitioner clothed him with apparent capacity to perform all acts which are expressly,
impliedly and inherently stated therein.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
DECISION
CARPIO-MORALES, J.:
The present petition for review on certiorari assails the Court of Appeals Decision1 of
January 25, 1996 and Resolution2 of July 11, 1996.
The material facts of the case are as follows:
On September 1, 1978, Inter-Asia Industries, Inc. (petitioner), by a Stock Purchase
Agreement3 (the Agreement), sold to Asia Industries, Inc. (private respondent) for and in
consideration of the sum of P19,500,000.00 all its right, title and interest in and to all the
outstanding shares of stock of FARMACOR, INC. (FARMACOR). 4 The Agreement was signed
by Leonides P. Gonzales and Jesus J. Vergara, presidents of petitioner and private
respondent, respectively.5
Under paragraph 7 of the Agreement, petitioner as seller made warranties and
representations among which were "(iv.) [t]he audited financial statements of FARMACOR at
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and for the year ended December 31, 1977... and the audited financial statements of
FARMACOR as of September 30, 1978 being prepared by S[ycip,] G[orres,] V[elayo and Co.]...
fairly present or will present the financial position of FARMACOR and the results of its
operations as of said respective dates; said financial statements show or will show all liabilities
and commitments of FARMACOR, direct or contingent, as of said respective dates . . ."; and
"(v.) [t]he Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be
Twelve Million Pesos (P12,000,000.00)."6
The Agreement was later amended with respect to the "Closing Date," originally set
up at 10:00 a.m. of September 30, 1978, which was moved to October 31, 1978, and to the
mode of payment of the purchase price.7
The Agreement, as amended, provided that pending submission by SGV of FARMACORs
audited financial statements as of October 31, 1978, private respondent may retain the sum of
P7,500,000.00 out of the stipulated purchase price of P19,500,000.00; that from this retained
amount of P7,500,000.00, private respondent may deduct any shortfall on the Minimum
Guaranteed Net Worth of P12,000,000.00;8 and that if the amount retained is not sufficient to
make up for the deficiency in the Minimum Guaranteed Net Worth, petitioner shall pay the
difference within 5 days from date of receipt of the audited financial statements.9
Respondent paid petitioner a total amount of P 12,000,000.00: P5,000,000.00 upon
the signing of the Agreement, and P7,000,000.00 on November 2, 1978. 10
From the STATEMENT OF INCOME AND DEFICIT attached to the financial
report11 dated November 28, 1978 submitted by SGV, it appears that FARMACOR had, for the
ten months ended October 31, 1978, a deficit of P11,244,225.00. 12 Since the stockholders
equity amounted to P10,000,000.00, FARMACOR had a net worth deficiency of P1,244,225.00.
The guaranteed net worth shortfall thus amounted to P13,244,225.00 after adding the net
worth deficiency of P1,244,225.00 to the Minimum Guaranteed Net Worth of P12,000,000.00.
The adjusted contract price, therefore, amounted to P6,225,775.00 which is the
difference between the contract price of P19,500,000.00 and the shortfall in the guaranteed
net worth of P13,224,225.00. Private respondent having already paid petitioner
P12,000,000.00, it was entitled to a refund of P5,744,225.00.
Petitioner thereafter proposed, by letter13 of January 24, 1980, signed by its
president, that private respondents claim for refund be reduced to P4,093,993.00, it
promising to pay the cost of the Northern Cotabato Industries, Inc. (NOCOSII)
superstructures in the amount of P759,570.00. To the proposal respondent agreed.
Petitioner, however, weiched on its promise. Petitioners total liability thus stood at
P4,853,503.00 (P4,093,993.00 plus P759,570.00)14 exclusive of interest.15
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On April 5, 1983, private respondent filed a complaint16 against petitioner with the
Regional Trial Court of Makati, one of two causes of action of which was for the recovery of
above-said amount of P4,853,503.0017 plus interest.
Denying private respondents claim, petitioner countered that private respondent failed to
pay the balance of the purchase price and accordingly set up a counterclaim.
Finding for private respondent, the trial court rendered on November 27, 1991 a
Decision,18 the dispositive portion of which reads:
WHEREFORE, judgment is rendered in favor of plaintiff and against defendant (a) ordering
the latter to pay to the former the sum of P4,853,503.00 19 plus interest thereon at the legal
rate from the filing of the complaint until fully paid, the sum of P30,000.00 as attorneys fees
and the costs of suit; and (b) dismissing the counterclaim.
SO ORDERED.
On appeal to the Court of Appeals, petitioner raised the following errors:
THE TRIAL COURT ERRED IN HOLDING THE DEFENDANT LIABLE UNDER THE FIRST
CAUSE OF ACTION PLEADED BY THE PLAINTIFF.
THE TRIAL COURT ERRED IN AWARDING ATTORNEYS FEES AND IN DISMISSING THE
COUNTERCLAIM.
THE TRIAL COURT ERRED IN RENDERING JUDGMENT IN FAVOR OF THE PLAINTIFF,
THE ALLEGED BREACH OF WARRANTIES AND REPRESENTATION NOT HAVING BEEN
SHOWN, MUCH LESS ESTABLISHED BY THE PLAINTIFF.20
By Decision of January 25, 1996, the Court of Appeals affirmed the trial courts
decision. Petitioners motion for reconsideration of the decision having been denied by the
Court of Appeals by Resolution of July 11, 1996, the present petition for review on certiorari
was filed, assigning the following errors:
I the corporate powers of all corporations formed under this Code shall be exercised, all
THE RESPONDENT COURT ERRED IN NOT HOLDING THAT THE LETTER OF THE PRESIDENT OF
THE PETITIONER IS NOT BINDING ON THE PETITIONER BEING ULTRA VIRES
II
THE LETTER CAN NOT BE AN ADMISSION AND WAIVER OF THE PETITIONER AS A
CORPORATION.
III
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THE RESPONDENT COURT ERRED IN NOT DECLARING THAT THERE IS NO BREACH OF
WARRANTIES AND REPRESENTATION AS ALLEGED BY THE PRIVATE RESPONDENT.
IV
THE RESPONDENT COURT ERRED IN ORDERING THE PETITIONER TO PAY ATTORNEYS FEES
AND IN SUSTAINING THE DISMISSAL OF THE COUNTERCLAIM.18 (Underscoring in the
original)
Petitioner argues that the January 24, 1980 letter-proposal (for the reduction of
private respondents claim for refund upon petitioners promise to pay the cost of NOCOSII
superstructures in the amount of P759,570.00) which was signed by its president has no legal
force and effect against it as it was not authorized by its board of directors, it citing the
Corporation Law which provides that unless the act of the president is authorized by the
board of directors, the same is not binding on it.
This Court is not persuaded.
The January 24, 1980 letter signed by petitioners president is valid and binding. The
case of Peoples Aircargo and Warehousing Co., Inc. v. Court of Appeals 19 instructs:
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. A corporation is a juridical
person, separate and distinct from its stockholders and members, "having x x x powers,
attributes and properties expressly authorized by law or incident to its existence."
Being a juridical entity, a corporation may act through its board of directors, which
exercises almost all corporate powers, lays down all corporate business policies and is
responsible for the efficiency of management, as provided in Section 23 of the Corporation
Code of the Philippines:
SEC. 23. The Board of Directors or Trustees. - Unless otherwise provided in this Code,
business conducted and all property of such corporations controlled and held by the board of
directors or trustees x x x.
Under this provision, the power and responsibility to decide whether the corporation
should enter into a contract that will bind the corporation is lodged in the board, subject to
the articles of incorporation, bylaws, or relevant provisions of law. However, just as a natural
person may authorize another to do certain acts for and on his behalf, the board of directors
may validly delegate some of its functions and powers to officers, committees or
agents. The authority of such individuals to bind the corporation is generally derived from
136

law, corporate bylaws or authorization from the board, either expressly or impliedly by
habit, custom or acquiescence in the general course of business, viz:
A corporate officer or agent may represent and bind the corporation in transactions
with third persons to the extent that [the] authority to do so has been conferred upon him,
and this includes powers as, in the usual course of the particular business, are incidental to, or
may be implied from, the powers intentionally conferred, powers added by custom and
usage, as usually pertaining to the particular officer or agent, and such apparent powers as
the corporation has caused person dealing with the officer or agent to believe that it has
conferred.
xxx
[A]pparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words the apparent authority to act in general,
with which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the scope of his ordinary
powers. It requires presentation of evidence of similar act(s) executed either in its favor or
in favor of other parties. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of
a corporate officer with power to bind the corporation.
x x x (Emphasis and underscoring supplied)
As correctly argued by private respondent, an officer of a corporation who is
authorized to purchase the stock of another corporation has the implied power to perform all
other obligations arising therefrom, such as payment of the shares of stock. By allowing its
president to sign the Agreement on its behalf, petitioner clothed him with apparent capacity
to perform all acts which are expressly, impliedly and inherently stated therein. 21
Petitioner further argues that when the Agreement was executed on September 1,
1978, its financial statements were extensively examined and accepted as correct by private
respondent, hence, it cannot later be disproved "by resorting to some scheme such as future
financial auditing;"22 and that it should not be bound by the SGV Report because it is self-
serving and biased, SGV having been hired solely by private respondent, and the alleged
shortfall of FARMACOR occurred only after the execution of the Agreement.
This Court is not persuaded either.
The pertinent provisions of the Agreement read:
7. Warranties and Representations - (a) SELLER warrants and represents as follows:
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xxx
(iv) The audited financial statements of FARMACOR as at and for the year ended December
31, 1977 and
the audited financial statements of FARMACOR as at September 30, 1978 being prepared by
SGV pursuant toparagraph 6(b) fairly present or will present the financial position of FARM
ACOR and the results of its operations as of said respective dates; said financial statements
show or will show all liabilities and commitments of FARMACOR, direct or contingent, as of
said respective dates; and the receivables set forth in said financial statements are fully due
and collectible, free and clear of any set-offs, defenses, claims and other impediments to their
collectibility.
(v) The Minimum Guaranteed Net Worth of FARMACOR as of September 30, 1978 shall be
Twelve Million Pesos (P12,000,000.00), Philippine Currency.
x x x (Underscoring in the original; emphasis supplied)23
True, private respondent accepted as correct the financial statements submitted to it
when the Agreement was executed on September 1, 1978. But petitioner expressly warranted
that the SGV Reports "fairly present or will present the financial position of FARMACOR." By
such warranty, petitioner is estopped from claiming that the SGV Reports are self-serving and
biased.1wphi1
As to the claim that the shortfall occurred after the execution of the Agreement, the
declaration of Emmanuel de Asis, supervisor in the Accounting Division of SGV and head of
the team which conducted the auditing of FARMACOR, that the period covered by the audit
was from January to October 1978 shows that the period before the Agreement was entered
into (on September 1, 1978) was covered.24
As to petitioners assigned error on the award of attorneys fees which, it argues, is
bereft of factual, legal and equitable justification, this Court finds the same well-taken.
On the matter of attorneys fees, it is an accepted doctrine that the award thereof as
an item of damages is the exception rather than the rule, and counsels fees are not to be
awarded every time a party wins a suit. The power of the court to award
attorneys fees under Article 2208 of the Civil Code demands
factual, legal and equitable justification, without which the award is
a conclusion without a premise, its basis being improperly left
to speculation and conjecture. In all events, the court must explicitly state in the text of the
decision, and not only in the decretal portion thereof, the legal reason for the award of
attorneys fees.25
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x x x (Emphasis and underscoring supplied; citations omitted)

WHEREFORE, the instant petition is PARTLY GRANTED. The assailed decision of the
Court of Appeals affirming that of the trial court is modified in that the award of attorneys
fees in favor of private respondent is deleted. The decision is affirmed in other respects.

SO ORDERED.

Puno, (Chairman), Panganiban, Sandoval-Gutierrez, and Corona, JJ., concur.

138

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 166862 December 20, 2006
MANILA METAL CONTAINER CORPORATION, petitioner,
REYNALDO C. TOLENTINO, intervenor,
vs.
PHILIPPINE NATIONAL BANK, respondent,
DMCI-PROJECT DEVELOPERS, INC., intervenor.
Contracts; Requisites; Contracts are perfected by mere consent which is manifested by
the meeting of the offer and the acceptance upon the thing and the cause which are to
constitute the contract.A contract is a meeting of minds between two persons whereby one
binds himself, with respect to the other, to give something or to render some service. Under
Article 1318 of the New Civil Code, there is no contract unless the following requisites concur:
(1) Consent of the contracting parties; (2) Object certain which is the subject matter of the
contract; (3) Cause of the obligation which is established. Contracts are perfected by mere
consent which is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract. Once perfected, they bind other
contracting parties and the obligations arising therefrom have the form of law between the
parties and should be complied with in good faith. The parties are bound not only to the
fulfillment of what has been expressly stipulated but also to the consequences which,
according to their nature, may be in keeping with good faith, usage and law.
Same; Sales; A definite agreement as to the price is an essential element of a binding
agreement to sell personal or real property because it seriously affects the rights and
obligations of the parties; When the contract of sale is not perfected, it cannot, as an
independent source of obligation, serve as a binding juridical relation between the parties.By
the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent. The absence of any of the essential elements will negate the
existence of a perfected contract of sale. As the Court ruled in Boston Bank of the Philippines
v. Manalo, 482 SCRA 108 (2006): A definite agreement as to the price is an essential element
of a binding agreement to sell personal or real property because it seriously affects the rights
and obligations of the parties. Price is an essential element in the formation of a binding and
enforceable contract of sale. The fixing of the price can never be left to the decision of one of
the contracting parties. But a price fixed by one of the contracting parties, if accepted by the
other, gives rise to a perfected sale. A contract of sale is consensual in nature and is perfected
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upon mere meeting of the minds. When there is merely an offer by one party without
acceptance of the other, there is no contract. When the contract of sale is not perfected, it
cannot, as an independent source of obligation, serve as a binding juridical relation between
the parties.
Same; Same; Stages of a Contract of Sale.In San Miguel Properties Philippines, Inc.
v. Huang, 336 SCRA 737 (2000), the Court ruled that the stages of a contract of sale are as
follows: (1) negotiation, covering the period from the time the prospective contracting parties
indicate interest in the contract to the time the contract is perfected; (2) perfection, which
takes place upon the concurrence of the essential elements of the sale which are the meeting
of the minds of the parties as to the object of the contract and upon the price; and (3)
consummation, which begins when the parties perform their respective undertakings under
the contract of sale, culminating in the extinguishment thereof.
Same; Same; Same; To convert an offer into a contract, the acceptance must be
absolute and must not qualify the terms of the offerit must be plain, unequivocal,
unconditional and without variance of any sort from the proposal.A negotiation is formally
initiated by an offer, which, however, must be certain. At any time prior to the perfection of
the contract, either negotiating party may stop the negotiation. At this stage, the offer may
be withdrawn; the withdrawal is effective immediately after its manifestation. To convert the
offer into a contract, the acceptance must be absolute and must not qualify the terms of the
offer; it must be plain, unequivocal, unconditional and without variance of any sort from the
proposal.
Same; Same; Same; A counter-offer is considered in law, a rejection of the original
offer and an attempt to end the negotiation between the parties on a different basis.A
qualified acceptance or one that involves a new proposal constitutes a counter-offer and a
rejection of the original offer. A counter-offer is considered in law, a rejection of the original
offer and an attempt to end the negotiation between the parties on a different basis.
Consequently, when something is desired which is not exactly what is proposed in the offer,
such acceptance is not sufficient to guarantee consent because any modification or variation
from the terms of the offer annuls the offer. The acceptance must be identical in all respects
with that of the offer so as to produce consent or meeting of the minds.
Same; Same; Corporation Law; Board of Directors; Contracts or acts of a corporation
must be made either by the board of directors or by a corporate agent duly authorized by the
boardabsent such valid delegation/authorization, the rule is that the declarations of an
individual director relating to the affairs of the corporation, but not in the course of, or
connected with the performance of authorized duties of such director, are held not binding
on the corporation.There is no evidence that the SAMD was authorized by respondents
Board of Directors to accept petitioners offer and sell the property for P1,574,560.47. Any
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acceptance by the SAMD of petitioners offer would not bind respondent. As this Court ruled
in AF Realty Development, Inc. vs. Diesehuan Freight Services, Inc., 373 SCRA 385 (2002):
Section 23 of the Corporation Code expressly provides that the corporate powers of all
corporations shall be exercised by the board of directors. Just as a natural person may
authorize another to do certain acts in his behalf, so may the board of directors of a
corporation validly delegate some of its functions to individual officers or agents appointed
by it. Thus, contracts or acts of a corporation must be made either by the board of directors
or by a corporate agent duly authorized by the board. Absent such valid
delegation/authorization, the rule is that the declarations of an individual director relating to
the affairs of the corporation, but not in the course of, or connected with the performance of
authorized duties of such director, are held not binding on the corporation.
Same; Same; Earnest Money; Absent proof of the concurrence of all the essential
elements of a contract of sale, the giving of earnest money cannot establish the existence of a
perfected contract of sale.The P725,000.00 was merely a deposit to be applied as part of
the purchase price of the property, in the event that respondent would approve the
recommendation of SAMD for respondent to accept petitioners offer to purchase the
property for P1,574,560.47. Unless and until the respondent accepted the offer on these
terms, no perfected contract of sale would arise. Absent proof of the concurrence of all the
essential elements of a contract of sale, the giving of earnest money cannot establish the
existence of a perfected contract of sale.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court Manila Metal Container Corporation
vs. Philippine National Bank, 511 SCRA 444, G.R. No. 166862 December 20, 2006
DECISION
CALLEJO, SR., J.:
Before us is a petition for review on certiorari of the Decision1 of the Court of Appeals (CA) in
CA-G.R. No. 46153 which affirmed the decision2 of the Regional Trial Court (RTC), Branch 71,
Pasig City, in Civil Case No. 58551, and its Resolution 3 denying the motion for reconsideration
filed by petitioner Manila Metal Container Corporation (MMCC).
The Antecedents
Petitioner was the owner of a 8,015 square meter parcel of land located in
Mandaluyong (now a City), Metro Manila. The property was covered by Transfer Certificate of
Title (TCT) No. 332098 of the Registry of Deeds of Rizal. To secure a P900,000.00 loan it had
obtained from respondent Philippine National Bank (PNB), petitioner executed a real estate
mortgage over the lot. Respondent PNB later granted petitioner a new credit accommodation
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of P1,000,000.00; and, on November 16, 1973, petitioner executed an Amendment 4 of Real
Estate Mortgage over its property. On March 31, 1981, petitioner secured another loan
of P653,000.00 from respondent PNB, payable in quarterly installments of P32,650.00, plus
interests and other charges.5
On August 5, 1982, respondent PNB filed a petition for extrajudicial foreclosure of the
real estate mortgage and sought to have the property sold at public auction for P911,532.21,
petitioner's outstanding obligation to respondent PNB as of June 30, 1982, 6 plus interests and
attorney's fees.
After due notice and publication, the property was sold at public auction on
September 28, 1982 where respondent PNB was declared the winning bidder
for P1,000,000.00. The Certificate of Sale 7 issued in its favor was registered with the Office of
the Register of Deeds of Rizal, and was annotated at the dorsal portion of the title on
February 17, 1983. Thus, the period to redeem the property was to expire on February 17,
1984.
Petitioner sent a letter dated August 25, 1983 to respondent PNB, requesting that it
be granted an extension of time to redeem/repurchase the property. 8 In its reply dated
August 30, 1983, respondent PNB informed petitioner that the request had been referred to
its Pasay City Branch for appropriate action and recommendation.9
In a letter10 dated February 10, 1984, petitioner reiterated its request for a one year
extension from February 17, 1984 within which to redeem/repurchase the property on
installment basis. It reiterated its request to repurchase the property on
installment.11 Meanwhile, some PNB Pasay City Branch personnel informed petitioner that as a
matter of policy, the bank does not accept "partial redemption." 12
Since petitioner failed to redeem the property, the Register of Deeds cancelled TCT
No. 32098 on June 1, 1984, and issued a new title in favor of respondent PNB. 13 Petitioner's
offers had not yet been acted upon by respondent PNB.
Meanwhile, the Special Assets Management Department (SAMD) had prepared a
statement of account, and as of June 25, 1984 petitioner's obligation amounted
to P1,574,560.47. This included the bid price of P1,056,924.50, interest, advances of insurance
premiums, advances on realty taxes, registration expenses, miscellaneous expenses and
publication cost.14 When apprised of the statement of account, petitioner
remitted P725,000.00 to respondent PNB as "deposit to repurchase," and Official Receipt No.
978191 was issued to it.15
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In the meantime, the SAMD recommended to the management of respondent PNB
that petitioner be allowed to repurchase the property for P1,574,560.00. In a letter dated
November 14, 1984, the PNB management informed petitioner that it was rejecting the offer
and the recommendation of the SAMD. It was suggested that petitioner purchase the
property for P2,660,000.00, its minimum market value. Respondent PNB gave petitioner until
December 15, 1984 to act on the proposal; otherwise, its P725,000.00 deposit would be
returned and the property would be sold to other interested buyers. 16
Petitioner, however, did not agree to respondent PNB's proposal. Instead, it wrote
another letter dated December 12, 1984 requesting for a reconsideration. Respondent PNB
replied in a letter dated December 28, 1984, wherein it reiterated its proposal that petitioner
purchase the property for P2,660,000.00. PNB again informed petitioner that it would return
the deposit should petitioner desire to withdraw its offer to purchase the property. 17 On
February 25, 1985, petitioner, through counsel, requested that PNB reconsider its letter dated
December 28, 1984. Petitioner declared that it had already agreed to the SAMD's offer to
purchase the property for P1,574,560.47, and that was why it had paid P725,000.00. Petitioner
warned respondent PNB that it would seek judicial recourse should PNB insist on the
position.18
On June 4, 1985, respondent PNB informed petitioner that the PNB Board of
Directors had accepted petitioner's offer to purchase the property, but for P1,931,389.53 in
cash less the P725,000.00 already deposited with it.19 On page two of the letter was a space
above the typewritten name of petitioner's President, Pablo Gabriel, where he was to affix his
signature. However, Pablo Gabriel did not conform to the letter but merely indicated therein
that he had received it.20 Petitioner did not respond, so PNB requested petitioner in a letter
dated June 30, 1988 to submit an amended offer to repurchase.
Petitioner rejected respondent's proposal in a letter dated July 14, 1988. It
maintained that respondent PNB had agreed to sell the property for P1,574,560.47, and that
since its P725,000.00 downpayment had been accepted, respondent PNB was proscribed
from increasing the purchase price of the property.21 Petitioner averred that it had a net
balance payable in the amount of P643,452.34. Respondent PNB, however, rejected
petitioner's offer to pay the balance of P643,452.34 in a letter dated August 1, 1989.22
On August 28, 1989, petitioner filed a complaint against respondent PNB for
"Annulment of Mortgage and Mortgage Foreclosure, Delivery of Title, or Specific
Performance with Damages." To support its cause of action for specific performance, it
alleged the following:
34. As early as June 25, 1984, PNB had accepted the down payment from Manila
Metal in the substantial amount of P725,000.00 for the redemption/repurchase price
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of P1,574,560.47 as approved by its SMAD and considering the reliance made by
Manila Metal and the long time that has elapsed, the approval of the higher
management of the Bank to confirm the agreement of its SMAD is clearly a
potestative condition which cannot legally prejudice Manila Metal which has acted
and relied on the approval of SMAD. The Bank cannot take advantage of a condition
which is entirely dependent upon its own will after accepting and benefiting from the
substantial payment made by Manila Metal.
35. PNB approved the repurchase price of P1,574,560.47 for which it
accepted P725,000.00 from Manila Metal. PNB cannot take advantage of its own
delay and long inaction in demanding a higher amount based on unilateral
computation of interest rate without the consent of Manila Metal.
Petitioner later filed an amended complaint and supported its claim for damages with
the following arguments:
36. That in order to protect itself against the wrongful and malicious acts of the
defendant Bank, plaintiff is constrained to engage the services of counsel at an
agreed fee of P50,000.00 and to incur litigation expenses of at least P30,000.00,
which the defendant PNB should be condemned to pay the plaintiff Manila Metal.
37. That by reason of the wrongful and malicious actuations of defendant PNB,
plaintiff Manila Metal suffered besmirched reputation for which defendant PNB is
liable for moral damages of at least P50,000.00.
38. That for the wrongful and malicious act of defendant PNB which are highly
reprehensible, exemplary damages should be awarded in favor of the plaintiff by way
of example or correction for the public good of at least P30,000.00.23
Petitioner prayed that, after due proceedings, judgment be rendered in its favor, thus:
a) Declaring the Amended Real Estate Mortgage (Annex "A") null and void and
without any legal force and effect.
b) Declaring defendant's acts of extra-judicially foreclosing the mortgage over
plaintiff's property and setting it for auction sale null and void.
c) Ordering the defendant Register of Deeds to cancel the new title issued in the
name of PNB (TCT NO. 43792) covering the property described in paragraph 4 of the
Complaint, to reinstate TCT No. 37025 in the name of Manila Metal and to cancel the
141

annotation of the mortgage in question at the back of the TCT No. 37025 described in
paragraph 4 of this Complaint.
d) Ordering the defendant PNB to return and/or deliver physical possession of the
TCT No. 37025described in paragraph 4 of this Complaint to the plaintiff Manila
Metal.
e) Ordering the defendant PNB to pay the plaintiff Manila Metal's actual damages,
moral and exemplary damages in the aggregate amount of not less than P80,000.00
as may be warranted by the evidence and fixed by this Honorable Court in the
exercise of its sound discretion, and attorney's fees of P50,000.00 and litigation
expenses of at least P30,000.00 as may be proved during the trial, and costs of suit.
Plaintiff likewise prays for such further reliefs which may be deemed just and
equitable in the premises.24
In its Answer to the complaint, respondent PNB averred, as a special and affirmative
defense, that it had acquired ownership over the property after the period to redeem had
elapsed. It claimed that no contract of sale was perfected between it and petitioner after the
period to redeem the property had expired.
During pre-trial, the parties agreed to submit the case for decision, based on their stipulation
of facts.25 The parties agreed to limit the issues to the following:
1. Whether or not the June 4, 1985 letter of the defendant approving/accepting
plaintiff's offer to purchase the property is still valid and legally enforceable.
2. Whether or not the plaintiff has waived its right to purchase the property when it
failed to conform with the conditions set forth by the defendant in its letter dated
June 4, 1985.
3. Whether or not there is a perfected contract of sale between the parties. 26
While the case was pending, respondent PNB demanded, on September 20, 1989,
that petitioner vacate the property within 15 days from notice, 27 but petitioners refused to do
so.
On March 18, 1993, petitioner offered to repurchase the property
for P3,500,000.00.28 The offer was however rejected by respondent PNB, in a letter dated
April 13, 1993. According to it, the prevailing market value of the property was
approximately P30,000,000.00, and as a matter of policy, it could not sell the property for less
than its market value.29 On June 21, 1993, petitioner offered to purchase the property
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for P4,250,000.00 in cash.30The offer was again rejected by respondent PNB on September 13,
1993.31
On May 31, 1994, the trial court rendered judgment dismissing the amended
complaint and respondent PNB's counterclaim. It ordered respondent PNB to refund
the P725,000.00 deposit petitioner had made.32 The trial court ruled that there was no
perfected contract of sale between the parties; hence, petitioner had no cause of action for
specific performance against respondent. The trial court declared that respondent had
rejected petitioner's offer to repurchase the property. Petitioner, in turn, rejected the terms
and conditions contained in the June 4, 1985 letter of the SAMD. While petitioner had offered
to repurchase the property per its letter of July 14, 1988, the amount of P643,422.34 was way
below the P1,206,389.53 which respondent PNB had demanded. It further declared that
the P725,000.00 remitted by petitioner to respondent PNB on June 4, 1985 was a "deposit,"
and not a downpayment or earnest money.
On appeal to the CA, petitioner made the following allegations:
I
THE LOWER COURT ERRED IN RULING THAT DEFENDANT-APPELLEE'S LETTER
DATED 4 JUNE 1985 APPROVING/ACCEPTING PLAINTIFF-APPELLANT'S OFFER TO
PURCHASE THE SUBJECT PROPERTY IS NOT VALID AND ENFORCEABLE.
II
THE LOWER COURT ERRED IN RULING THAT THERE WAS NO PERFECTED CONTRACT
OF SALE BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE.
III
THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLLANT WAIVED ITS
RIGHT TO PURCHASE THE SUBJECT PROPERTY WHEN IT FAILED TO CONFORM WITH
CONDITIONS SET FORTH BY DEFENDANT-APPELLEE IN ITS LETTER DATED 4 JUNE
1985.
IV
THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT IT WAS THE
DEFENDANT-APPELLEE WHICH RENDERED IT DIFFICULT IF NOT IMPOSSIBLE FOR
PLAINTIFF-APPELLANT TO COMPLETE THE BALANCE OF THEIR PURCHASE PRICE.
V
THE LOWER COURT ERRED IN DISREGARDING THE FACT THAT THERE WAS NO VALID
RESCISSION OR CANCELLATION OF SUBJECT CONTRACT OF REPURCHASE.
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VI
THE LOWER COURT ERRED IN DECLARING THAT PLAINTIFF FAILED AND REFUSED TO
SUBMIT THE AMENDED REPURCHASE OFFER.
VII
THE LOWER COURT ERRED IN DISMISSING THE AMENDED COMPLAINT OF
PLAINTIFF-APPELLANT.
VIII
THE LOWER COURT ERRED IN NOT AWARDING PLAINTIFF-APPELLANT ACTUAL,
MORAL AND EXEMPLARY DAMAGES, ATTOTRNEY'S FEES AND LITIGATION
EXPENSES.33
Meanwhile, on June 17, 1993, petitioner's Board of Directors approved Resolution No.
3-004, where it waived, assigned and transferred its rights over the property covered by TCT
No. 33099 and TCT No. 37025 in favor of Bayani Gabriel, one of its Directors. 34 Thereafter,
Bayani Gabriel executed a Deed of Assignment over 51% of the ownership and management of
the property in favor of Reynaldo Tolentino, who later moved for leave to intervene as
plaintiff-appellant. On July 14, 1993, the CA issued a resolution granting the motion,35 and
likewise granted the motion of Reynaldo Tolentino substituting petitioner MMCC, as plaintiff-
appellant, and his motion to withdraw as intervenor.36
The CA rendered judgment on May 11, 2000 affirming the decision of the RTC. 37 It
declared that petitioner obviously never agreed to the selling price proposed by respondent
PNB (P1,931,389.53) since petitioner had kept on insisting that the selling price should be
lowered to P1,574,560.47. Clearly therefore, there was no meeting of the minds between the
parties as to the price or consideration of the sale.
The CA ratiocinated that petitioner's original offer to purchase the subject property
had not been accepted by respondent PNB. In fact, it made a counter-offer through its June 4,
1985 letter specifically on the selling price; petitioner did not agree to the counter-offer; and
the negotiations did not prosper. Moreover, petitioner did not pay the balance of the
purchase price within the sixty-day period set in the June 4, 1985 letter of respondent PNB.
Consequently, there was no perfected contract of sale, and as such, there was no contract to
rescind.
According to the appellate court, the claim for damages and the counterclaim were
correctly dismissed by the court a quo for no evidence was presented to support it.
Respondent PNB's letter dated June 30, 1988 cannot revive the failed negotiations between
the parties. Respondent PNB merely asked petitioner to submit an amended offer to
repurchase. While petitioner reiterated its request for a lower selling price and that the
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balance of the repurchase be reduced, however, respondent rejected the proposal in a letter
dated August 1, 1989.
Petitioner filed a motion for reconsideration, which the CA likewise denied.
Thus, petitioner filed the instant petition for review on certiorari, alleging that:
I. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT
THERE IS NO PERFECTED CONTRACT OF SALE BETWEEN THE PETITIONER AND
RESPONDENT.
II. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT
THE AMOUNT OF PHP725,000.00 PAID BY THE PETITIONER IS NOT AN EARNEST
MONEY.
III. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT
THE FAILURE OF THE PETITIONER-APPELLANT TO SIGNIFY ITS CONFORMITY TO THE
TERMS CONTAINED IN PNB'S JUNE 4, 1985 LETTER MEANS THAT THERE WAS NO
VALID AND LEGALLY ENFORCEABLE CONTRACT OF SALE BETWEEN THE PARTIES.
IV. THE COURT OF APPEALS ERRED ON A QUESTION OF LAW THAT NON-PAYMENT
OF THE PETITIONER-APPELLANT OF THE BALANCE OF THE OFFERED PRICE IN THE
LETTER OF PNB DATED JUNE 4, 1985, WITHIN SIXTY (60) DAYS FROM NOTICE OF
APPROVAL CONSTITUTES NO VALID AND LEGALLY ENFORCEABLE CONTRACT OF
SALE BETWEEN THE PARTIES.
V. THE COURT OF APPEALS SERIOUSLY ERRED WHEN IT HELD THAT THE LETTERS OF
PETITIONER-APPELLANT DATED MARCH 18, 1993 AND JUNE 21, 1993, OFFERING TO
BUY THE SUBJECT PROPERTY AT DIFFERENT AMOUNT WERE PROOF THAT THERE IS
NO PERFECTED CONTRACT OF SALE.38
The threshold issue is whether or not petitioner and respondent PNB had entered
into a perfected contract for petitioner to repurchase the property from respondent.
Petitioner maintains that it had accepted respondent's offer made through the
SAMD, to sell the property for P1,574,560.00. When the acceptance was made in its letter
dated June 25, 1984; it then deposited P725,000.00 with the SAMD as partial payment,
evidenced by Receipt No. 978194 which respondent had issued. Petitioner avers that the
SAMD's acceptance of the deposit amounted to an acceptance of its offer to repurchase.
Moreover, as gleaned from the letter of SAMD dated June 4, 1985, the PNB Board of Directors
had approved petitioner's offer to purchase the property. It claims that this was the
suspensive condition, the fulfillment of which gave rise to the contract.
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Respondent could no longer unilaterally withdraw its offer to sell the property
for P1,574,560.47, since the acceptance of the offer resulted in a perfected contract of sale; it
was obliged to remit to respondent the balance of the original purchase price
of P1,574,560.47, while respondent was obliged to transfer ownership and deliver the
property to petitioner, conformably with Article 1159 of the New Civil Code.
Petitioner posits that respondent was proscribed from increasing the interest rate
after it had accepted respondent's offer to sell the property for P1,574,560.00. Consequently,
respondent could no longer validly make a counter-offer of P1,931,789.88 for the purchase of
the property. It likewise maintains that, although the P725,000.00 was considered as "deposit
for the repurchase of the property" in the receipt issued by the SAMD, the amount
constitutes earnest money as contemplated in Article 1482 of the New Civil Code. Petitioner
cites the rulings of this Court in Villonco v. Bormaheco39 and Topacio v. Court of Appeals.40
Petitioner avers that its failure to append its conformity to the June 4, 1984 letter of
respondent and its failure to pay the balance of the price as fixed by respondent within the
60-day period from notice was to protest respondent's breach of its obligation to petitioner.
It did not amount to a rejection of respondent's offer to sell the property since respondent
was merely seeking to enforce its right to pay the balance of P1,570,564.47. In any event,
respondent had the option either to accept the balance of the offered price or to cause the
rescission of the contract.
Petitioner's letters dated March 18, 1993 and June 21, 1993 to respondent during the
pendency of the case in the RTC were merely to compromise the pending lawsuit, they did
not constitute separate offers to repurchase the property. Such offer to compromise should
not be taken against it, in accordance with Section 27, Rule 130 of the Revised Rules of Court.
For its part, respondent contends that the parties never graduated from the
"negotiation stage" as they could not agree on the amount of the repurchase price of the
property. All that transpired was an exchange of proposals and counter-proposals, nothing
more. It insists that a definite agreement on the amount and manner of payment of the price
are essential elements in the formation of a binding and enforceable contract of sale. There
was no such agreement in this case. Primarily, the concept of "suspensive condition" signifies
a future and uncertain event upon the fulfillment of which the obligation becomes effective.
It clearly presupposes the existence of a valid and binding agreement, the effectivity of which
is subordinated to its fulfillment. Since there is no perfected contract in the first place, there is
no basis for the application of the principles governing "suspensive conditions."
According to respondent, the Statement of Account prepared by SAMD as of June
25, 1984 cannot be classified as a counter-offer; it is simply a recital of its total monetary
claims against petitioner. Moreover, the amount stated therein could not likewise be
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Corporation Law
considered as the counter-offer since as admitted by petitioner, it was only recommendation
which was subject to approval of the PNB Board of Directors.
Neither can the receipt by the SAMD of P725,000.00 be regarded as evidence of a
perfected sale contract. As gleaned from the parties' Stipulation of Facts during the
proceedings in the court a quo, the amount is merely an acknowledgment of the receipt
of P725,000.00 as deposit to repurchase the property. The deposit of P725,000.00 was
accepted by respondent on the condition that the purchase price would still be approved by
its Board of Directors. Respondent maintains that its acceptance of the amount was qualified
by that condition, thus not absolute. Pending such approval, it cannot be legally claimed that
respondent is already bound by any contract of sale with petitioner.
According to respondent, petitioner knew that the SAMD has no capacity to bind respondent
and that its authority is limited to administering, managing and preserving the properties and
other special assets of PNB. The SAMD does not have the power to sell, encumber, dispose
of, or otherwise alienate the assets, since the power to do so must emanate from its Board of
Directors. The SAMD was not authorized by respondent's Board to enter into contracts of
sale with third persons involving corporate assets. There is absolutely nothing on record that
respondent authorized the SAMD, or made it appear to petitioner that it represented itself as
having such authority.
Respondent reiterates that SAMD had informed petitioner that its offer to
repurchase had been approved by the Board subject to the condition, among others, "that
the selling price shall be the total bank's claim as of documentation date x x x payable in cash
(P725,000.00 already deposited) within 60 days from notice of approval." A new Statement of
Account was attached therein indicating the total bank's claim to be P1,931,389.53 less
deposit of P725,000.00, or P1,206,389.00. Furthermore, while respondent's Board of Directors
accepted petitioner's offer to repurchase the property, the acceptance was qualified, in that it
required a higher sale price and subject to specified terms and conditions enumerated
therein. This qualified acceptance was in effect a counter-offer, necessitating petitioner's
acceptance in return.
The Ruling of the Court
The ruling of the appellate court that there was no perfected contract of sale
between the parties on June 4, 1985 is correct.
A contract is a meeting of minds between two persons whereby one binds himself,
with respect to the other, to give something or to render some service. 41 Under Article 1318 of
the New Civil Code, there is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
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(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
Contracts are perfected by mere consent which is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to constitute the
contract.42 Once perfected, they bind other contracting parties and the obligations arising
therefrom have the form of law between the parties and should be complied with in good
faith. The parties are bound not only to the fulfillment of what has been expressly stipulated
but also to the consequences which, according to their nature, may be in keeping with good
faith, usage and law.43
By the contract of sale, one of the contracting parties obligates himself to transfer
the ownership of and deliver a determinate thing, and the other to pay therefor a price
certain in money or its equivalent.44 The absence of any of the essential elements will negate
the existence of a perfected contract of sale. As the Court ruled in Boston Bank of the
Philippines v. Manalo:45
A definite agreement as to the price is an essential element of a binding
agreement to sell personal or real property because it seriously affects the rights and
obligations of the parties. Price is an essential element in the formation of a binding
and enforceable contract of sale. The fixing of the price can never be left to the
decision of one of the contracting parties. But a price fixed by one of the contracting
parties, if accepted by the other, gives rise to a perfected sale.46
A contract of sale is consensual in nature and is perfected upon mere meeting of the
minds. When there is merely an offer by one party without acceptance of the other, there is
no contract.47 When the contract of sale is not perfected, it cannot, as an independent source
of obligation, serve as a binding juridical relation between the parties. 48
In San Miguel Properties Philippines, Inc. v. Huang,49 the Court ruled that the stages of
a contract of sale are as follows: (1) negotiation, covering the period from the time the
prospective contracting parties indicate interest in the contract to the time the contract is
perfected; (2) perfection, which takes place upon the concurrence of the essential elements
of the sale which are the meeting of the minds of the parties as to the object of the contract
and upon the price; and (3) consummation, which begins when the parties perform their
respective undertakings under the contract of sale, culminating in the extinguishment
thereof.
A negotiation is formally initiated by an offer, which, however, must be certain. 50 At
any time prior to the perfection of the contract, either negotiating party may stop the
negotiation. At this stage, the offer may be withdrawn; the withdrawal is effective
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immediately after its manifestation. To convert the offer into a contract, the acceptance must
be absolute and must not qualify the terms of the offer; it must be plain, unequivocal,
unconditional and without variance of any sort from the proposal. In Adelfa Properties, Inc. v.
Court of Appeals,51 the Court ruled that:
x x x The rule is that except where a formal acceptance is so required, although the
acceptance must be affirmatively and clearly made and must be evidenced by some
acts or conduct communicated to the offeror, it may be shown by acts, conduct, or
words of the accepting party that clearly manifest a present intention or
determination to accept the offer to buy or sell. Thus, acceptance may be shown by
the acts, conduct, or words of a party recognizing the existence of the contract of
sale.52
A qualified acceptance or one that involves a new proposal constitutes a counter-
offer and a rejection of the original offer. A counter-offer is considered in law, a rejection of
the original offer and an attempt to end the negotiation between the parties on a different
basis.53 Consequently, when something is desired which is not exactly what is proposed in the
offer, such acceptance is not sufficient to guarantee consent because any modification or
variation from the terms of the offer annuls the offer.54 The acceptance must be identical in all
respects with that of the offer so as to produce consent or meeting of the minds.
In this case, petitioner had until February 17, 1984 within which to redeem the property.
However, since it lacked the resources, it requested for more time to redeem/repurchase the
property under such terms and conditions agreed upon by the parties. 55 The request, which
was made through a letter dated August 25, 1983, was referred to the respondent's main
branch for appropriate action.56 Before respondent could act on the request, petitioner again
wrote respondent as follows:
1. Upon approval of our request, we will pay your goodselves ONE HUNDRED & FIFTY
THOUSAND PESOS (P150,000.00);
2. Within six months from date of approval of our request, we will pay another FOUR
HUNDRED FIFTY THOUSAND PESOS (P450,000.00); and
3. The remaining balance together with the interest and other expenses that will be
incurred will be paid within the last six months of the one year grave period
requested for.57
When the petitioner was told that respondent did not allow "partial
redemption,"58 it sent a letter to respondent's President reiterating its offer to purchase the
property.59 There was no response to petitioner's letters dated February 10 and 15, 1984.
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The statement of account prepared by the SAMD stating that the net claim of
respondent as of June 25, 1984 was P1,574,560.47 cannot be considered an unqualified
acceptance to petitioner's offer to purchase the property. The statement is but a
computation of the amount which petitioner was obliged to pay in case respondent would
later agree to sell the property, including interests, advances on insurance premium, advances
on realty taxes, publication cost, registration expenses and miscellaneous expenses.
There is no evidence that the SAMD was authorized by respondent's Board of
Directors to accept petitioner's offer and sell the property for P1,574,560.47. Any acceptance
by the SAMD of petitioner's offer would not bind respondent. As this Court ruled in AF Realty
Development, Inc. vs. Diesehuan Freight Services, Inc.:60
Section 23 of the Corporation Code expressly provides that the corporate powers of
all corporations shall be exercised by the board of directors. Just as a natural person
may authorize another to do certain acts in his behalf, so may the board of directors
of a corporation validly delegate some of its functions to individual officers or agents
appointed by it. Thus, contracts or acts of a corporation must be made either by the
board of directors or by a corporate agent duly authorized by the board. Absent such
valid delegation/authorization, the rule is that the declarations of an individual
director relating to the affairs of the corporation, but not in the course of, or
connected with the performance of authorized duties of such director, are held not
binding on the corporation.
Thus, a corporation can only execute its powers and transact its business through its
Board of Directors and through its officers and agents when authorized by a board resolution
or its by-laws.61
It appears that the SAMD had prepared a recommendation for respondent to accept
petitioner's offer to repurchase the property even beyond the one-year period; it
recommended that petitioner be allowed to redeem the property and pay P1,574,560.00 as
the purchase price. Respondent later approved the recommendation that the property be
sold to petitioner. But instead of the P1,574,560.47 recommended by the SAMD and to which
petitioner had previously conformed, respondent set the purchase price at P2,660,000.00. In
fine, respondent's acceptance of petitioner's offer was qualified, hence can be at most
considered as a counter-offer. If petitioner had accepted this counter-offer, a perfected
contract of sale would have arisen; as it turns out, however, petitioner merely sought to have
the counter-offer reconsidered. This request for reconsideration would later be rejected by
respondent.
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We do not agree with petitioner's contention that the P725,000.00 it had remitted
to respondent was "earnest money" which could be considered as proof of the perfection of
a contract of sale under Article 1482 of the New Civil Code. The provision reads:
ART. 1482. Whenever earnest money is given in a contract of sale, it shall be
considered as part of the price and as proof of the perfection of the contract.
This contention is likewise negated by the stipulation of facts which the parties
entered into in the trial court:
8. On June 8, 1984, the Special Assets Management Department (SAMD) of PNB
prepared an updated Statement of Account showing MMCC's total liability to PNB as
of June 25, 1984 to be P1,574,560.47 and recommended this amount as the
repurchase price of the subject property.
9. On June 25, 1984, MMCC paid P725,000.00 to PNB as deposit to repurchase the
property. The deposit of P725,000 was accepted by PNB on the condition that the
purchase price is still subject to the approval of the PNB Board.62
Thus, the P725,000.00 was merely a deposit to be applied as part of the purchase
price of the property, in the event that respondent would approve the recommendation of
SAMD for respondent to accept petitioner's offer to purchase the property for P1,574,560.47.
Unless and until the respondent accepted the offer on these terms, no perfected contract of
sale would arise. Absent proof of the concurrence of all the essential elements of a contract
of sale, the giving of earnest money cannot establish the existence of a perfected contract of
sale.63
It appears that, per its letter to petitioner dated June 4, 1985, the respondent had
decided to accept the offer to purchase the property for P1,931,389.53. However, this
amounted to an amendment of respondent's qualified acceptance, or an amended counter-
offer, because while the respondent lowered the purchase price, it still declared that its
acceptance was subject to the following terms and conditions:
1. That the selling price shall be the total Bank's claim as of documentation date (pls.
see attached statement of account as of 5-31-85), payable in cash (P725,000.00
already deposited) within sixty (60) days from notice of approval;
2. The Bank sells only whatever rights, interests and participation it may have in the
property and you are charged with full knowledge of the nature and extent of said
rights, interests and participation and waive your right to warranty against eviction.
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3. All taxes and other government imposts due or to become due on the property, as
well as expenses including costs of documents and science stamps, transfer fees,
etc., to be incurred in connection with the execution and registration of all covering
documents shall be borne by you;

4. That you shall undertake at your own expense and account the ejectment of the
occupants of the property subject of the sale, if there are any;

5. That upon your failure to pay the balance of the purchase price within sixty (60)
days from receipt of advice accepting your offer, your deposit shall be forfeited and
the Bank is thenceforth authorized to sell the property to other interested parties.

6. That the sale shall be subject to such other terms and conditions that the Legal
Department may impose to protect the interest of the Bank.64

It appears that although respondent requested petitioner to conform to its amended

counter-offer, petitioner refused and instead requested respondent to reconsider its
amended counter-offer. Petitioner's request was ultimately rejected and respondent offered
to refund its P725,000.00 deposit.

In sum, then, there was no perfected contract of sale between petitioner and
respondent over the subject property.

IN LIGHT OF ALL THE FOREGOING, the petition is DENIED.

The assailed decision is AFFIRMED. Costs against petitioner Manila Metal Container
Corporation.

SO ORDERED.

147

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 161886 March 16, 2007
FILIPINAS PORT SERVICES, INC., represented by stockholders, ELIODORO C. CRUZ and
MINDANAO TERMINAL AND BROKERAGE SERVICES, INC., Petitioners,
vs.
VICTORIANO S. GO, ARSENIO LOPEZ CHUA, EDGAR C. TRINIDAD, HERMENEGILDO M.
TRINIDAD, JESUS SYBICO, MARY JEAN D. CO, HENRY CHUA, JOSELITO S. JAYME, ERNESTO S.
JAYME, and ELIEZER B. DE JESUS, Respondents.
Corporation Law; Section 23 of the Corporation Code explicitly provides that unless
otherwise provided therein, the corporate powers of all corporations formed under the Code
shall be exercised, all business conducted and all property of the corporation shall be
controlled and held by a board of directors.The governing body of a corporation is its board
of directors. Section 23 of the Corporation Code explicitly provides that unless otherwise
provided therein, the corporate powers of all corporations formed under the Code shall be
exercised, all business conducted and all property of the corporation shall be controlled and
held by a board of directors. Thus, with the exception only of some powers expressly granted
by law to stockholders (or members, in case of non-stock corporations), the board of
directors (or trustees, in case of non-stock corporations) has the sole authority to determine
policies, enter into contracts, and conduct the ordinary business of the corporation within the
scope of its charter, i.e., its articles of incorporation, by-laws and relevant provisions of law.
Verily, the authority of the board of directors is restricted to the management of the regular
business affairs of the corporation, unless more extensive power is expressly conferred.
Same; The raison dtre behind the conferment of corporate powers on the board of
directors is not lost on the Courtindeed, the concentration in the board of the powers of
control of corporate business and of appointment of corporate officers and managers is
necessary for efficiency in any large organization.The raison dtre behind the conferment
of corporate powers on the board of directors is not lost on the Court. Indeed, the
concentration in the board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for efficiency in any large
organization. Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate organization is for
the stockholders to choose the directors who shall control and supervise the conduct of
corporate business.
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Same; Notwithstanding the silence of Filports bylaws on the matter, we cannot rule
that the creation of the executive committee by the board of directors is illegal or unlawful.
Notwithstanding the silence of Filports bylaws on the matter, we cannot rule that the
creation of the executive committee by the board of directors is illegal or unlawful. One
reason is the absence of a showing as to the true nature and functions of said executive
committee considering that the executive committee, referred to in Section 35 of the
Corporation Code which is as powerful as the board of directors and in effect acting for the
board itself, should be distinguished from other committees which are within the competency
of the board to create at anytime and whose actions require ratification and confirmation by
the board. Another reason is that, ratiocinated by both the two (2) courts below, the Board of
Directors has the power to create positions not provided for in Filports bylaws since the
board is the cor-porations governing body, clearly upholding the power of its board to
exercise its prerogatives in managing the business affairs of the corporation.
Same; If the cause of the losses is merely error in judgment, not amounting to bad
faith or negligence, directors and/or officers are not liable.If the cause of the losses is merely
error in business judgment, not amounting to bad faith or negligence, directors and/or
officers are not liable. For them to be held accountable, the mismanagement and the
resulting losses on account thereof are not the only matters to be proven; it is likewise
necessary to show that the direc-tors and/or officers acted in bad faith and with malice in
doing the assailed acts. Bad faith does not simply connote bad judgment or negligence; it
imports a dishonest purpose or some moral obliquity and conscious doing of a wrong, a
breach of a known duty through some motive or interest or ill-will partaking of the nature of
fraud. We have searched the records and nowhere do we find a dishonest purpose or
some moral obliquity, or conscious doing of a wrong on the part of the respondents that
partakes of the nature of fraud.
Same; Management Prerogatives; The determination of the necessity for additional
offices and/or positions in a corporation is a management prerogative which courts are not
wont to review in the absence of any proof that such prerogative was exercised in bad faith or
with malice.The determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the absence
of any proof that such prerogative was exercised in bad faith or with malice.
Same; Under the Corporation Code, where a corporation is an injured party, its power
to sue is lodged with its board of directors or trustees.Under the Corporation Code, where a
corporation is an injured party, its power to sue is lodged with its board of directors or
trustees. But an individual stockholder may be permitted to institute a derivative suit in behalf
of the corporation in order to protect or vindicate corporate rights whenever the officials of
the corporation refuse to sue, or when a demand upon them to file the necessary action
would be futile because they are the ones to be sued, or because they hold control of the
148

corporation. In such actions, the corporation is the real party-in-interest while the suing
stockholder, in behalf of the corporation, is only a nominal party.
Same; Derivative Suits; Since the ones to be sued are the directors/officers of the
corporation itself, a stockholder, like petitioner Cruz, may validly institute a derivative suit to
vindicate the alleged corporate injury, in which case Cruz is only a nominal party while Filport is
the real party-in-interest.The action below is principally for damages resulting from alleged
mismanagement of the affairs of Filport by its directors/officers, it being alleged that the acts
of mismanagement are detrimental to the interests of Filport. Thus, the injury complained of
primarily pertains to the corporation so that the suit for relief should be by the corporation.
However, since the ones to be sued are the directors/officers of the corporation itself, a
stockholder, like petitioner Cruz, may validly institute a derivative suit to vindicate the
alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real
party-in-interest. For sure, in the prayer portion of petitioners petition before the SEC, the
reliefs prayed were asked to be made in favor of Filport.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
DECISION
GARCIA, J.:
Assailed and sought to be set aside in this petition for review on certiorari is the
Decision1 dated 19 January 2004 of the Court of Appeals (CA) in CA-G.R. CV No. 73827,
reversing an earlier decision of the Regional Trial Court (RTC) of Davao City and accordingly
dismissing the derivative suit instituted by petitioner Eliodoro C. Cruz for and in behalf of the
stockholders of co-petitioner Filipinas Port Services, Inc. (Filport, hereafter).
The case is actually an intra-corporate dispute involving Filport, a domestic
corporation engaged in stevedoring services with principal office in Davao City. It was initially
instituted with the Securities and Exchange Commission (SEC) where the case hibernated and
remained unresolved for several years until it was overtaken by the enactment into law, on 19
July 2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities Regulation
Code. From the SEC and consistent with R.A. No. 8799, the case was transferred to the RTC of
Manila, Branch 14, sitting as a corporate court. Subsequently, upon respondents motion, the
case eventually landed at the RTC of Davao City where it was docketed as Civil Case No.
28,552-2001. RTC-Davao City, Branch 10, ruled in favor of the petitioners prompting
respondents to go to the CA in CA-G.R. CV No. 73827. This time, the respondents prevailed,
hence, this petition for review by the petitioners.
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The relevant facts:
On 4 September 1992, petitioner Eliodoro C. Cruz, Filports president from 1968 until
he lost his bid for reelection as Filports president during the general stockholders meeting in
1991, wrote a letter2 to the corporations Board of Directors questioning the boards creation
of the following positions with a monthly remuneration of P13,050.00 each, and the election
thereto of certain members of the board, to wit:
Asst. Vice-President for Corporate Planning - Edgar C. Trinidad (Director)
Asst. Vice-President for Operations - Eliezer B. de Jesus (Director)
Asst. Vice-President for Finance - Mary Jean D. Co (Director)
Asst. Vice-President for Administration - Henry Chua (Director)
Special Asst. to the Chairman - Arsenio Lopez Chua (Director)
Special Asst. to the President - Fortunato V. de Castro
In his aforesaid letter, Cruz requested the board to take necessary action/actions to
recover from those elected to the aforementioned positions the salaries they have received.
On 15 September 1992, the board met and took up Cruzs letter. The records do not
show what specific action/actions the board had taken on the letter. Evidently, whatever
action/actions the board took did not sit well with Cruz.
On 14 June 1993, Cruz, purportedly in representation of Filport and its stockholders,
among which is herein co-petitioner Mindanao Terminal and Brokerage Services, Inc.
(Minterbro), filed with the SEC a petition3 which he describes as a derivative suit against the
herein respondents who were then the incumbent members of Filports Board of Directors,
for alleged acts of mismanagement detrimental to the interest of the corporation and its
shareholders at large, namely:
1. creation of an executive committee in 1991 composed of seven (7) members of the
board with compensation of P500.00 for each member per meeting, an office which,
to Cruz, is not provided for in the by-laws of the corporation and whose function
merely duplicates those of the President and General Manager;
2. increase in the emoluments of the Chairman, Vice-President, Treasurer and
Assistant General Manager which increases are greatly disproportionate to the
volume and character of the work of the directors holding said positions;
3. re-creation of the positions of Assistant Vice-Presidents (AVPs) for Corporate
Planning, Operations, Finance and Administration, and the election thereto of board
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members Edgar C. Trinidad, Eliezer de Jesus, Mary Jean D. Co and Henry Chua,
respectively; and
4. creation of the additional positions of Special Assistants to the President and the
Board Chairman, with Fortunato V. de Castro and Arsenio Lopez Chua elected to the
same, the directors elected/appointed thereto not doing any work to deserve the
monthly remuneration of P13,050.00 each.
In the same petition, docketed as SEC Case No. 06-93-4491, Cruz alleged that despite
demands made upon the respondent members of the board of directors to desist from
creating the positions in question and to account for the amounts incurred in creating the
same, the demands were unheeded. Cruz thus prayed that the respondent members of the
board of directors be made to pay Filport, jointly and severally, the sums of money variedly
representing the damages incurred as a result of the creation of the offices/positions
complained of and the aggregate amount of the questioned increased salaries.
In their common Answer with Counterclaim,4 the respondents denied the allegations
of mismanagement and materially averred as follows:
1. the creation of the executive committee and the grant of per diems for the
attendance of each member are allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer
and Assistant General Manager were well within the financial capacity of the
corporation and well-deserved by the officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations, Finance and
Administration were already in existence during the tenure of Cruz as president of
the corporation, and were merely recreated by the Board, adding that all those
appointed to said positions of Assistant Vice Presidents, as well as the additional
position of Special Assistants to the Chairman and the President, rendered services to
deserve their compensation.
In the same Answer, respondents further averred that Cruz and his co-petitioner
Minterbro, while admittedly stockholders of Filport, have no authority nor standing to bring
the so-called "derivative suit" for and in behalf of the corporation; that respondent Mary Jean
D. Co has already ceased to be a corporate director and so with Fortunato V. de Castro, one of
those holding an assailed position; and that no demand to cease and desist from further
committing the acts complained of was made upon the board. By way of affirmative
defenses, respondents asserted that (1) the petition is not duly verified by petitioner Filport
which is the real party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to
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exhaust remedies for redress within the corporation before bringing the suit; and (3) the
petition does not show that the stockholders bringing the suit are joined as nominal parties.
In support of their counterclaim, respondents averred that Cruz filed the alleged derivative
suit in bad faith and purely for harassment purposes on account of his non-reelection to the
board in the 1991 general stockholders meeting.
As earlier narrated, the derivative suit (SEC Case No. 06-93-4491) hibernated with the
SEC for a long period of time. With the enactment of R.A. No. 8799, the case was first turned
over to the RTC of Manila, Branch 14, sitting as a corporate court. Thereafter, on respondents
motion, it was eventually transferred to the RTC of Davao City whereat it was docketed as
Civil Case No. 28,552-2001 and raffled to Branch 10 thereof.
On 10 December 2001, RTC-Davao City rendered its decision5 in the case. Even as it
found that (1) Filports Board of Directors has the power to create positions not provided for
in the by-laws of the corporation since the board is the governing body; and (2) the increases
in the salaries of the board chairman, vice-president, treasurer and assistant general manager
are reasonable, the trial court nonetheless rendered judgment against the respondents by
ordering the directors holding the positions of Assistant Vice President for Corporate
Planning, Special Assistant to the President and Special Assistant to the Board Chairman to
refund to the corporation the salaries they have received as such officers "considering that
Filipinas Port Services is not a big corporation requiring multiple executive positions" and that
said positions "were just created for accommodation." We quote the fallo of the trial courts
decision.
WHEREFORE, judgment is rendered ordering:
Edgar C. Trinidad under the third and fourth causes of action to restore to the
corporation the total amount of salaries he received as assistant vice president for corporate
planning; and likewise ordering Fortunato V. de Castro and Arsenio Lopez Chua under the
fourth cause of action to restore to the corporation the salaries they each received as special
assistants respectively to the president and board chairman. In case of insolvency of any or all
of them, the members of the board who created their positions are subsidiarily liable.
The counter claim is dismissed.
From the adverse decision of the trial court, herein respondents went on appeal to
the CA in CA-G.R. CV No. 73827.
In its decision6 of 19 January 2004, the CA, taking exceptions to the findings of the
trial court that the creation of the positions of Assistant Vice President for Corporate
Planning, Special Assistant to the President and Special Assistant to the Board Chairman was
merely for accommodation purposes, granted the respondents appeal, reversed and set
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aside the appealed decision of the trial court and accordingly dismissed the so-called
derivative suit filed by Cruz, et al., thus:
IN VIEW OF ALL THE FOREGOING, the instant appeal is GRANTED, the challenged
decision is REVERSED and SET ASIDE, and a new one entered DISMISSING Civil Case No.
28,552-2001 with no pronouncement as to costs.
SO ORDERED.
Intrigued, and quite understandably, by the fact that, in its decision, the CA, before
proceeding to address the merits of the appeal, prefaced its disposition with the statement
reading "[T]he appeal is bereft of merit,"7 thereby contradicting the very fallo of its own
decision and the discussions made in the body thereof, respondents filed with the appellate
court a Motion For Nunc Pro Tunc Order,8 thereunder praying that the phrase "[T]he appeal is
bereft of merit," be corrected to read "[T]he appeal is impressed with merit." In its
resolution9 of 23 April 2004, the CA granted the respondents motion and accordingly
effected the desired correction.
Hence, petitioners present recourse.
Petitioners assigned four (4) errors allegedly committed by the CA. For clarity, we
shall formulate the issues as follows:
1. Whether the CA erred in holding that Filports Board of Directors acted within its
powers in creating the executive committee and the positions of AVPs for Corporate
Planning, Operations, Finance and Administration, and those of the Special Assistants
to the President and the Board Chairman, each with corresponding remuneration,
and in increasing the salaries of the positions of Board Chairman, Vice-President,
Treasurer and Assistant General Manager; and
2. Whether the CA erred in finding that no evidence exists to prove that (a) the
positions of AVP for Corporate Planning, Special Assistant to the President and
Special Assistant to the Board Chairman were created merely for accommodation,
and (b) the salaries/emoluments corresponding to said positions were actually paid
to and received by the directors appointed thereto.
For their part, respondents, aside from questioning the propriety of the instant
petition as the same allegedly raises only questions of fact and not of law, also put in issue the
purported derivative nature of the main suit initiated by petitioner Eliodoro C. Cruz allegedly
in representation of and in behalf of Filport and its stockholders.
The petition is bereft of merit.
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It is axiomatic that in petitions for review on certiorari under Rule 45 of the Rules of
Court, only questions of law may be raised and passed upon by the Court. Factual findings of
the CA are binding and conclusive and will not be reviewed or disturbed on appeal. 10 Of
course, the rule is not cast in stone; it admits of certain exceptions, such as when the findings
of fact of the appellate court are at variance with those of the trial court,11 as here. For this
reason, and for a proper and complete resolution of the case, we shall delve into the records
and reexamine the same.
The governing body of a corporation is its board of directors. Section 23 of the
Corporation Code12 explicitly provides that unless otherwise provided therein, the corporate
powers of all corporations formed under the Code shall be exercised, all business conducted
and all property of the corporation shall be controlled and held by a board of directors. Thus,
with the exception only of some powers expressly granted by law to stockholders (or
members, in case of non-stock corporations), the board of directors (or trustees, in case of
non-stock corporations) has the sole authority to determine policies, enter into contracts, and
conduct the ordinary business of the corporation within the scope of its charter, i.e., its
articles of incorporation, by-laws and relevant provisions of law. Verily, the authority of the
board of directors is restricted to the management of the regular business affairs of the
corporation, unless more extensive power is expressly conferred.
The raison detre behind the conferment of corporate powers on the board of
directors is not lost on the Court. Indeed, the concentration in the board of the powers of
control of corporate business and of appointment of corporate officers and managers is
necessary for efficiency in any large organization. Stockholders are too numerous, scattered
and unfamiliar with the business of a corporation to conduct its business directly. And so the
plan of corporate organization is for the stockholders to choose the directors who shall
control and supervise the conduct of corporate business. 13
In the present case, the boards creation of the positions of Assistant Vice Presidents
for Corporate Planning, Operations, Finance and Administration, and those of the Special
Assistants to the President and the Board Chairman, was in accordance with the regular
business operations of Filport as it is authorized to do so by the corporations by-laws,
pursuant to the Corporation Code.
The election of officers of a corporation is provided for under Section 25 of the Code
which reads:
Sec. 25. Corporate officers, quorum. Immediately after their election, the directors
of a corporation must formally organize by the election of a president, who shall be a director,
a treasurer who may or may not be a director, a secretary who shall be a resident and citizen
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of the Philippines, and such other officers as may be provided for in the by-laws. (Emphasis
supplied.)
In turn, the amended Bylaws of Filport14 provides the following:
Officers of the corporation, as provided for by the by-laws, shall be elected by the
board of directors at their first meeting after the election of Directors. xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-
President, a Secretary, a Treasurer, a General Manager and such other officers as the Board of
Directors may from time to time provide, and these officers shall be elected to hold office
until their successors are elected and qualified. (Emphasis supplied.)
Likewise, the fixing of the corresponding remuneration for the positions in question
is provided for in the same by-laws of the corporation, viz:
xxx The Board of Directors shall fix the compensation of the officers and agents of the
corporation. (Emphasis supplied.)
Unfortunately, the bylaws of the corporation are silent as to the creation by its board
of directors of an executive committee. Under Section 35 15 of the Corporation Code, the
creation of an executive committee must be provided for in the bylaws of the corporation.
Notwithstanding the silence of Filports bylaws on the matter, we cannot rule that
the creation of the executive committee by the board of directors is illegal or unlawful. One
reason is the absence of a showing as to the true nature and functions of said executive
committee considering that the "executive committee," referred to in Section 35 of the
Corporation Code which is as powerful as the board of directors and in effect acting for the
board itself, should be distinguished from other committees which are within the competency
of the board to create at anytime and whose actions require ratification and confirmation by
the board.16 Another reason is that, ratiocinated by both the two (2) courts below, the Board
of Directors has the power to create positions not provided for in Filports bylaws since the
board is the corporations governing body, clearly upholding the power of its board to
exercise its prerogatives in managing the business affairs of the corporation.
As well, it may not be amiss to point out that, as testified to and admitted by
petitioner Cruz himself, it was during his incumbency as Filport president that the executive
committee in question was created, and that he was even the one who moved for the
creation of the positions of the AVPs for Operations, Finance and Administration. By his
acquiescence and/or ratification of the creation of the aforesaid offices, Cruz is virtually
precluded from suing to declare such acts of the board as invalid or illegal. And it makes no
difference that he sues in behalf of himself and of the other stockholders. Indeed, as his voice
was not heard in protest when he was still Filports president, raising a hue and cry only now
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leads to the inevitable conclusion that he did so out of spite and resentment for his non-
reelection as president of the corporation.
With regard to the increased emoluments of the Board Chairman, Vice-President,
Treasurer and Assistant General Manager which are supposedly disproportionate to the
volume and nature of their work, the Court, after a judicious scrutiny of the increase vis--vis
the value of the services rendered to the corporation by the officers concerned, agrees with
the findings of both the trial and appellate courts as to the reasonableness and fairness
thereof.
Continuing, petitioners contend that the CA did not appreciate their evidence as to
the alleged acts of mismanagement by the then incumbent board. A perusal of the records,
however, reveals that petitioners merely relied on the testimony of Cruz in support of their
bold claim of mismanagement. To the mind of the Court, Cruz testimony on the matter of
mismanagement is bereft of any foundation. As it were, his testimony consists merely of
insinuations of alleged wrongdoings on the part of the board. Without more, petitioners
posture of mismanagement must fall and with it goes their prayer to hold the respondents
liable therefor.
But even assuming, in gratia argumenti, that there was mismanagement resulting to
corporate damages and/or business losses, still the respondents may not be held liable in the
absence, as here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not amounting to bad
faith or negligence, directors and/or officers are not liable.17 For them to be held accountable,
the mismanagement and the resulting losses on account thereof are not the only matters to
be proven; it is likewise necessary to show that the directors and/or officers acted in bad faith
and with malice in doing the assailed acts. Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of a
wrong, a breach of a known duty through some motive or interest or ill-will partaking of the
nature of fraud.18 We have searched the records and nowhere do we find a "dishonest
purpose" or "some moral obliquity," or "conscious doing of a wrong" on the part of the
respondents that "partakes of the nature of fraud."
We thus extend concurrence to the following findings of the CA, affirmatory of those
of the trial court:
xxx As a matter of fact, it was during the term of appellee Cruz, as president and
director, that the executive committee was created. What is more, it was appellee himself
who moved for the creation of the positions of assistant vice presidents for operations, for
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finance, and for administration. He should not be heard to complain thereafter for similar
corporate acts.
The increase in the salaries of the board chairman, president, treasurer, and assistant
general manager are indeed reasonable enough in view of the responsibilities assigned to
them, and the special knowledge required, to be able to effectively discharge their respective
functions and duties.
Surely, factual findings of trial courts, especially when affirmed by the CA, are binding and
conclusive on this Court.
There is, however, a factual matter over which the CA and the trial court parted ways.
We refer to the accommodation angle.
The trial court was with petitioner Cruz in saying that the creation of the positions of the
three (3) AVPs for Corporate Planning, Special Assistant to the President and Special Assistant
to the Board Chairman, each with a salary of P13,050.00 a month, was merely for
accommodation purposes considering that Filport is not a big corporation requiring multiple
executive positions. Hence, the trial courts order for said officers to return the amounts they
received as compensation.
On the other hand, the CA took issue with the trial court and ruled that Cruzs
accommodation theory is not based on facts and without any evidentiary substantiation.
We concur with the line of the appellate court. For truly, aside from Cruzs bare and
self-serving testimony, no other evidence was presented to show the fact of
"accommodation." By itself, the testimony of Cruz is not enough to support his claim that
accommodation was the underlying factor behind the creation of the aforementioned three
(3) positions.
It is elementary in procedural law that bare allegations do not constitute evidence
adequate to support a conclusion. It is basic in the rule of evidence that he who alleges a fact
bears the burden of proving it by the quantum of proof required. Bare allegations,
unsubstantiated by evidence, are not equivalent to proof under the Rules of Court. 19 The
party having the burden of proof must establish his case by a preponderance of evidence. 20
Besides, the determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the absence
of any proof that such prerogative was exercised in bad faith or with malice.
Indeed, it would be an improper judicial intrusion into the internal affairs of Filport
were the Court to determine the propriety or impropriety of the creation of offices therein
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and the grant of salary increases to officers thereof. Such are corporate and/or business
decisions which only the corporations Board of Directors can determine.
So it is that in Philippine Stock Exchange, Inc. v. CA,21 the Court unequivocally held:
Questions of policy or of management are left solely to the honest decision of the
board as the business manager of the corporation, and the court is without authority to
substitute its judgment for that of the board, and as long as it acts in good faith and in the
exercise of honest judgment in the interest of the corporation, its orders are not reviewable
by the courts.
In a last-ditch attempt to salvage their cause, petitioners assert that the CA went
beyond the issues raised in the court of origin when it ruled on the absence of receipt of
actual payment of the salaries/emoluments pertaining to the positions of Assistant Vice-
President for Corporate Planning, Special Assistant to the Board Chairman and Special
Assistant to the President. Petitioners insist that the issue of nonpayment was never raised by
the respondents before the trial court, as in fact, the latter allegedly admitted the same in
their Answer With Counterclaim.
We are not persuaded.
By claiming that Filport suffered damages because the directors appointed to the
assailed positions are not doing anything to deserve their compensation, petitioners are
saddled with the burden of proving that salaries were actually paid. Since the trial court, in
effect, found that the petitioners successfully proved payment of the salaries when it directed
the reimbursements of the same, respondents necessarily have to raise the issue on appeal.
And the CA rightly resolved the issue when it found that no evidence of actual payment of the
salaries in question was actually adduced. Respondents alleged admission of the fact of
payment cannot be inferred from a reading of the pertinent portions of the parties
respective initiatory pleadings. Respondents allegations in their Answer With Counterclaim
that the officers corresponding to the positions created "performed the work called for in
their positions" or "deserve their compensation," cannot be interpreted to mean that they
were "actually paid" such compensation. Directly put, the averment that "one deserves ones
compensation" does not necessarily carry the implication that "such compensation was
actually remitted or received." And because payment was not duly proven, there is no
evidentiary or factual basis for the trial court to direct respondents to make reimbursements
thereof to the corporation.
This brings us to the respondents claim that the case filed by the petitioners before
the SEC, which eventually landed in RTC-Davao City as Civil Case No. 28,552-2001, is not a
derivative suit, as maintained by the petitioners.
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We sustain the petitioners.
Under the Corporation Code, where a corporation is an injured party, its power to sue
is lodged with its board of directors or trustees. But an individual stockholder may be
permitted to institute a derivative suit in behalf of the corporation in order to protect or
vindicate corporate rights whenever the officials of the corporation refuse to sue, or when a
demand upon them to file the necessary action would be futile because they are the ones to
be sued, or because they hold control of the corporation. 22 In such actions, the corporation is
the real party-in-interest while the suing stockholder, in behalf of the corporation, is only a
nominal party.23
Here, the action below is principally for damages resulting from alleged
mismanagement of the affairs of Filport by its directors/officers, it being alleged that the acts
of mismanagement are detrimental to the interests of Filport. Thus, the injury complained of
primarily pertains to the corporation so that the suit for relief should be by the corporation.
However, since the ones to be sued are the directors/officers of the corporation itself, a
stockholder, like petitioner Cruz, may validly institute a "derivative suit" to vindicate the
alleged corporate injury, in which case Cruz is only a nominal party while Filport is the real
party-in-interest. For sure, in the prayer portion of petitioners petition before the SEC, the
reliefs prayed were asked to be made in favor of Filport.
within the corporation itself the redress for his grievances, or actions in conformity to his
wishes, nonetheless, where the corporation is under the complete control of the principal
defendants, as here, there is no necessity of making a demand upon the directors. The reason
is obvious: a demand upon the board to institute an action and prosecute the same effectively
would have been useless and an exercise in futility. In fine, we rule and so hold that the
petition filed with the SEC at the instance of Cruz, which ultimately found its way to the RTC
of Davao City as Civil Case No. 28,552-2001, is a derivative suit of which Cruz has the necessary
legal standing to institute.
WHEREFORE, the petition is DENIED and the challenged decision of the CA is
AFFIRMED in all respects.
No pronouncement as to costs.
SO ORDERED.

Besides, the requisites before a derivative suit can be filed by a stockholder are
present in this case, to wit:

a) the party bringing suit should be a shareholder as of the time of the act or
transaction complained of, the number of his shares not being material;

b) he has tried to exhaust intra-corporate remedies, i.e., has made a demand on the
board of directors for the appropriate relief but the latter has failed or refused to
heed his plea; and
c) the cause of action actually devolves on the corporation, the wrongdoing or harm
having been, or being caused to the corporation and not to the particular
stockholder bringing the suit.24

Indisputably, petitioner Cruz (1) is a stockholder of Filport; (2) he sought without

success to have its board of directors remedy what he perceived as wrong when he wrote a
letter requesting the board to do the necessary action in his complaint; and (3) the alleged
wrong was in truth a wrong against the stockholders of the corporation generally, and not
against Cruz or Minterbro, in particular. In the end, it is Filport, not Cruz which directly stands
to benefit from the suit. And while it is true that the complaining stockholder must show to
the satisfaction of the court that he has exhausted all the means within his reach to attain

154

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43413 August 31, 1937
HIGINIO ANGELES, JOSE E. LARA and AGUEDO BERNABE,
as stockholders for an in behalf and for the benefit of the corporation, Paraaque Rice Mill,
Inc. and the other stockholders who may desire to join, plaintiffs-appellees,
vs.
TEODORICO B. SANTOS, ESTANISLAO MAYUGA, APOLONIO PASCUAL, and BASILISA
RODRIGUEZ, defendant-appellants.
1. CORPORATIONS; BOARD OF DIRECTORS; TRUSTEESHIP.There is ample evidence in
the present case to show that the defendants have been guilty of breach of trust as directors
of the corporation and the lower court so found. The board of directors of a corporation is a
creation of the stockholders and controls and directs the affairs of the corporation by
delegation of the stockholders. But the board of directors, or the majority thereof, in drawing
to themselves the powers of the corporation, occupies a position of trusteeship in relation to
the minority of the stock in the sense that the board should exercise good faith, care and
diligence in the administration of the affairs of the corporation and should protect not only
the interests of the majority but also those of the minority of the stock.
2. ID.; ID.; ACTION FOR THE PROTECTION OF THE RIGHTS OF THE MINORITY
STOCKHOLDERS.Where a majority of the board of directors wastes or dissipates the funds
of the corporation or fraudulently disposes of its properties, or performs ultra vires acts, the
court, in the exercise of its equity jurisdiction, and upon showing that intracorporate remedy
is unavailing, will entertain a suit filed by the minority members of the board of directors, for
and in behalf of the corporation, to prevent waste and dissipation and the commission of
illegal acts and otherwise redress the injuries of the minority stockholders against the
wrongdoing of the majority. The action in such a case is said to be brought derivatively in
behalf of the corporation to protect the rights of the minority stockholders thereof (7 R. C. L.,
pars. 293 and 294, and authorities therein cited; 13 Fletcher, Cyc. of Corp., pars. 593, et seq.,
and authorities therein cited).
3. ID. ; ID. ; ID.It is well settled in this jurisdiction that where corporate directors are
guilty of a breach of trustnot of mere error of judgment or abuse of discretionand
intracorporate remedy is futile or useless, a stockholder may institute a suit in behalf of
himself and other stockholders and for the benefit of the corporation, to bring about a
redress of the wrong inflicted directly upon the corporation and indirectly upon the
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stockholders. An illustration of a suit of this kind is found in the case of Pascual vs. Del Saz
Orozco (19 Phil., 82), decided by this court as early as 1911. In that case, the Banco Espaol-
Filipino suffered heavy losses due to fraudulent connivance between a depositor and an
employee of the bank, which losses, it was contended, could have been avoided if the
president and directors had been more vigilant in the administration of the affairs of the bank.
The stockholders constituting the minority brought a suit in behalf of the bank against the
directors to recover damages, and this over the objection of the majority of the stockholders
and the directors. This court held that the suit could properly be maintained.
4. ID. ; ID. ; ID. ; RECEIVERSHIP.The action having been properly brought and by the
lower court entertained it was within its power, upon proper showing, to appoint a receiver
of the corporation pendente lite (secs. 173, 174, et seq. Code of Civil Procedure). The
appointment of a receiver upon application of the minority stockholders is a power to be
exercised with great caution. But this does not mean that the rights of the minority
stockholders may be entirely disregarded, and where the necessity has arisen, the
appointment of a receiver for a corporation is a matter resting largely in the sound discretion
of the trial court. Counsel for appellants argue that the appointment of a receiver pendente
lite in the present case has deprived the corporation, Paraaque Rice Mill, Inc. of its property
without due process of law, But it is too plain to require argument that the receiver was
precisely appointed to preserve the properties of the corporation. The receivership in this
case shall continue until a new board of directors shall have been elected and constituted in
accordance with law and the by-laws of the corporation.
5. ID.; ID.; ACCOUNTING.The lower court in its decision not only orders the
defendant S to account for the properties and funds of the corporation, but it also and at the
same time adjudges him to pay an undetermined amount which is made to depend upon the
result of such accounting. The accounting order was probably intended by the lower court to
be filed with it in this proceeding. This requirement will delay the final disposition of the case
and we are of the opinion that this accounting should better be filed with the new board of
directors whose election has been ordered by the lower court. The decision of the lower court
in this respect is therefore modified so that the defendant S shall render a complete
accounting of all the corporate properties and funds that may have come to his possession
during the period mentioned in the judgment of the lower court to the new board of directors
to be elected by the stockholders.
6.ID.; ID.; ELECTION AND REMOVAL OF THE DIRECTORS OF A CORPORATION.The
Corporation Law, as amended, in sections 29 to 34, provide for the election and removal of
the directors of a corporation. Our Corporation Law (Act No. 1459, as amended), does not
confer expressly upon the courts the power to remove a director of a corporation. In some
jurisdictions, statutes expressly provide a more or less summary method for the confirmation
of the election and for the amotion of the directors of a corporation. This is true in New York,
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New Jersey, Virginia and other states of the American Union. There are abundant authorities,
however, which hold that if the court has acquired jurisdiction to appoint a receiver because
of the mismanagement of directors these may thereafter be removed and others appointed
in their place by the court in the exercise of its equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn.
sec. 358, pp. 118 and 119). In the present case, however, the properties and assets of the
corporation being amply protected by the appointment of a receiver and in view of the
statutory provisions above referred to, we are of the opinion that the removal of the directors
is, under the circumstances, unnecessary and unwarranted.
APPEAL from a judgment of the Court of First Instance of Rizal. Zandueta, J.
The facts are stated in the opinion of the court
P. Masalin and A. Sta. Maria for appellants.
Eulogio P. Revilla and Barrera and Reyes for appellees.
LAUREL, J.:
The plaintiff and the defenant aree all stockholders and member of the board of
directors of the "Paraaque Rice Mill, Inc., "a corporation organized for the purpose of
operating a rice mill in the municipality of Paraaque, Province of Rizal. On September 6, 1932,
a complaint entitle "Higinio Angeles, Jose de Lara, Aguedo Bernabe, as stockholders, for and
in behalf of the corporation, Paraaque Rice Mill, Inc., and other stockholders of said
corporation who may desire to join, plaintiff, vs. Teodorico B. Santos, Estanislao Mayuga,
Apolonio Pascual, and Basilisa Rodriguez, defendant was filed with the Court of First Instance
of Rizal. After formal allegation relative to age and residence of the parties and the due
incorporation of the Paraaque Rice Mill, Inc., the complaint avers subtantially the following:
(a) That the plaintiffs are stockholders and constitute the minority and the defendants are
also stockholers and constitute the majority of the board of directors of the Paraaque Rice
Mill, Inc.; (b) that at an extraordinary meeting held on February 21, 1932, the stockholders
appointed an investigation committee of which the plaintiff Jose de Lara was chairman and
the stockholers Dionisio Tomas and Aguedo Bernabe were members, to investigate and
determine the properties, operations, and losses of the corporation as shown in the auditor's
report corresponding to the year 1931, but the defendants, particularly Teodorico B. Santos,
who was the president of the corporation, denied access to the properties, books and record
of the corporation which were in their possession (c) That the defendant Teodorico B. Santos,
in violation of the by-laws of the corporation, had taken possession of the books, vouchers,
and corporate records as well as of the funds and income of the Paraaque Rice Mill, Inc., all
of which, according to the by-laws, should be under the exclusive control and possession of
the secretary-treasurer, the plaintiff Aguedo Bernabe; (d) That the said Teodorico B. Santos,
had appropriated to his own benefit properties, funds, and income of the corporation in the
sum of P10,000; (e) that Teodoro B. Santos, for the purpose of illegally controlling the affairs
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of the corporation, refuse to sign and issue the corresponding certificate of stock for the 600
fully paid-up share of the plaintiff, Higinio Angeles, of the total value of P15,000; ( f ) that
notwithstanding written requests made in conformity with the by-laws of the corporation of
three members of the board of directors who are holders of more than one-third of the
subscribed capital stock of the corporation, the defendant Teodorico B. Santos as president
of the corporation refuse to call a meeting of the board of directors and of the stockholers;
(g) that in violation of the by-laws of the corporation, the defendant who constitute the
majority of the board of directors refused to hold ordinary monthly meetings of the board
since March, 19332; (h) that Teodorico B. Santos as president of the corporation, in
connivance with his
co-defendants, was disposing of the properties and records of the corporation without
authority from the board of directors or the stockholders of the corporation and without
making any report of his acts to the said board of directors or to any other officer of the
corporation, and that, to prevent any interferrence with or examination of his arbitrary acts,
he arbitrarily suspended plaintiff Jose de Lara from the office of general manager to which
office the latter had been lawfully elected by the stockholders; and (i) that the corporation
had gained about P4,000 during the first half of the year 1932, but that because of the illegal
and arbitrary acts of the defendants not only the funds but also the books and records of the
corporation are in danger of disappearing.
The complaint prays: (a) That after the filing of the bond in an amount to be fixed by
the court, Melchor de Lara of Paraaque, Rizal, be appointed receiver of the properties, funds
and business of the Paraaque Rice Mill, Inc., as well as the books and record thereof, with
authority to continue the business of the corporation; (b) that the defendant Teodorico B.
Santos be ordered to render a detailed accounting of the properties, funds and income of the
corporation from the year 1927 to date; (c) that the said defendant be required to pay to the
corporation the amount of P10,000 and other amounts which may be found due to the said
corporation as damages or for my other cause, (d) that said defendant be ordered to sign the
certificate of stock subscribed to and paid by the plaintiff Higinio Angeles; and (e) that the
members of the board of directors of the Paraaque Rice Mill, Inc., be removed and an
exrtraodinary meeting of the stockholders called for the purpose of electing a new board of
directors.
On the date of the filling of the complaint, September 6, 1932, the court issue an ex
parte order of receivership appointing Melchor de Lara as receiver of the corporation upon
the filling of a bond of P1,000 by the plaintiffs-appellees. The bond of the receiver was fixed at
P4,000.
Upon an urgent motion of the defendants-appellants setting forth the reasons why
Melchor de Lara should not have been appointed receiver, and upon agreement of the
parties, the trial court, by order of September 13, 1932, appointed Benigno Agco, as receiver,
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in lieu of Melchor de Lara. About a month after, or on October 14, 1932, the court, after
considering the memoranda filed by both parties revoked its order appointing Agco as
receiver.
On July 12, 1933, the defendants-appellants presented their amended answer to the
complaint, containing a general and specific denial, and alleging as special defense that the
defendant Teodorico B. Santos refused to sign the certificate of stock in favor of the plaintiff
Higinio Angeles for 600 shares valued at P15,00, because the board of directors decided to
give Higinio Angeles only 320 shares of stock worth P8,000. The answer contains a counter-
claim for P5,000 alleged illegal and malicious procurement by the plaintiffs of an ex
parte order of receivership. Damages in the amount of P2,000 are also alleged to have been
suffered by the defendants by reason of the failure of the plaintiffs to present their
grievances to the Board of directors before going to court. The amended answer sets forth,
furthermore, a cross-complaint against the plaintiffs, and in behalf of the Paraaque Rice Mill,
Inc., based on the alleged failure of the plaintiff Higinio Angeles to render a report of his
administration of the corporation from February 14 to June 30, 1928, during which time the
corporation is alleged to have accrued earnings of approximately P3,000. In both the counter
claim and cross-complaint Paraaque Rice Mill, Inc. is joined as party defendant.
On July 24, 1934, the plaintiffs-appellees renewed their petition for the appointment
of a receiver pendente lite alleging, among other things, that defendant Teodorico B. Santos
was using the funds of the corporation for purely personal ends; that said Teodorico B. Santos
was managing to the interest of the Corporation and its stockholders; that said defendant did
not render any account of his management or for the condition of the business of the
corporation; that since 1932 said defendant called no meeting of the board of directors or of
the stockholders thus enabling him to continue holding, without any election, the position of
present and, finally, that of manager; and that, without the knowledge and consent of the
stockholders and of the board of directors, the said defendant installed a small rice mill for
converting rice husk into "tiqui-tiqui", the income of which was never turned over or reported
to the treasurer of the corporation.
The defendant-appellants objected to the petition for the appointment of a receiver
on the ground, among others, that the court had no jurisdiction over the Paraaque Rice Mill,
Inc., because it had not been include as party defendant in this case and that, therefore the
court could not properly appoint a receiver of the corporation pendente lite.
After hearing both parties, the trial court by order of October 31, 1934, appointed
Emilio Figueroa, as receiver of the corporation, after giving a bond in the amount of P2,000.
An urgent for the reconsideration of this order filed by counsel for the defendant-appellant
on November 3, 1934, was denied by the court on November 7, 1934.
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On November 8, 1934, the trial court, having heard the case on its merits rendered a
decision, the dispositive part of which is as follows:
Por todo lo expuesto el Juzgado fall este asunto:
1. Ordenando al demandado Teodorico B. Santos a rendircuenta ellada de las
propiedads, fondos e ingresos dela corporacion Paraaque Rice Mill, Inc., de el ao
1931 hasta la fecha;
2. Condenando a dicho demandado a pagar a la corporacion Paraaque Rice Mill, Inc.,
cualesquiera cantida o cantidades que resultate en deber a dicha corporacion; de
acuerdo con dicha rendicion de cuentas;
3. Declarando al demanante Higinio M. Angeles con derecho a tener expedido a su
nombre 600 acciones por valor par de P15,000.
4. Destituyendo a los demandados de su cargo como directores e la corporacion
hasta la nueva eleccion por los accionistas que se convocara una vez firme esta
sentencia; y
5. Condenando a los demandados a pagar las costas.
On November 21, 1934, the defendants-appellants, moved for reconsideration of the
decision and at the same time prayed for the dismissal of the case, because of defect of
parties defendant.
On December 6, 1934, the Paraaque Rice Mill, Inc., thru counsel for the defendants,
entered a special appearance for the sole purpose of objecting to the order of the court of
October 31, 1934, appointing a receiver, on the ground that the Paraaque Rice Mill, Inc., was
not a party to the proceedings. And on December 8, 1934, the defendants excepted to the
decision of the trial court and moved for a new trial on the ground that the evidence
presented was insufficient to justify the decision and that said decision was contrary to law.
The motions for reconsideration and new trial and the special appearance were, by separate
orders bearing date of December 19, 1934, denied by the trial court. The case was finally
elevated to this court by bill of exceptions.
The defendants-appellants submit the following assignment of errors:
1. The lower court erred in holding that it has jurisdiction to appoint a receiver o the
corporation, "Paraaque Rice Mill, Inc.," on October 31, 1934.
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2. The lower court erred in overruling the motion of the defendants the include the
defendant corporation as party defendant and in holding that it is not a necessary
party.
3. The lower court erred in not granting a motion for a new trial because there is a
defect of party defendant.
4. The lower court erred in not dismissing the case because a necessary defendant
was not made a party in the case.
5. The lower court erred in ordering the defendant Teodorico B. Santos to render a
detailed accounting of the properties, funds and income of the corporation
"Paraaque Rice Mill, Inc.," from the year 1931 to this date.
6. The lower court erred in condemning the defendant Teodorico B. Santos to pay
the corporation whatever sum or sums which may be found owing to said
corporation, in accordance with the said accounting to be one by him.
7. The lower court erred in ordering the destitution of the defendants from their
office as members of the board of directors of the corporation, until the new election
of the stockholders which shall be held once the decision has become final.
8. The lower court erred in declaring that Higino Angeles is entitled to have in his
name 600 shares of stock of the par value of P15,000.
9. The lower court erred in overruling and denying appellants' motion for the
reconsideration and the dismissal of the case dated November 21, 1934.
10. The lower court erred in denying the motion of these appellants for new trial.
In their discussion of the first, second, third, and fourth assignment of error, the
defendants-appellants vigorously assert that the Paraaque Rice Mill, Inc., is a necessary party
in this case, and that not having been made a party, the trial court was without jurisdiction to
appoint a receiver and should have dismissed the case.
There is ample evidence in the present case to show that the defendants have been
guilty of breach of trust as directors of the corporation and the lower court so found. The
board of directors of a corporation is a creation of the stockholders and controls and directs
the affairs of the corporation by allegation of the stockholers. But the board of directors, or
the majority thereof, in drawing to themselves the power of the corporation, occupies a
position of trusteeship in relation to the minority of the stock in the sense that the board
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should exercise good faith, care and diligence in the administration of the affairs of the
corporation and should protect not only the interest of the majority but also those of the
minority of the stock. Where a majority of the board of directors wastes or dissipates the
funds of the corporation or fraudulently disposes of its properties, or performs ultra
vires acts, the court, in the exercise of its equity jurisdiction, and upon showing that
intracorporate remedy is unavailing, will entertain a suit filed by the minority members of the
board of directors, for and in behalf of the corporation, to prevent waste and dissipation and
the commission of illegal acts and otherwise redress the injuries of the minority stockholders
against the wrongdoing of the majority. The action in such a case is said to be brought
derivatively in behalf of the corporation to protect the rights of the minority stockholers
thereof (7 R. C. L., pars. 293 and 294, and authority therein cited; 13 Fletcher, Cyc. of Corp.,
pars. 593, et seq., an authorities therein cite).
It is well settled in this jurisdiction that where corporate directors are guilty of a
breach of trust not of mere error of judgment or abuse of discretion and intracorporate
remedy is futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
inflicted directly upon the corporation and indirectly upon the stockholers. An illustration of a
suit of this kind is found in the case of Pascual vs. Del Sanz Orozco (19 Phil., 82), decided by this
court as early as 1911. In that case, the Banco Espaol-Filipino suffered heavy losses due to
fraudulent connivance between a depositor and an employee of the bank, which losses, it
was contened, could have been avoided if the president and directors has been more vigilant
in the administration of the affairs of the bank. The stockholers constituting the minority
brought a suit in behalf of the bank against the directors to recover damages, and this over
the objection of the majority of the stockholers and the directors. This court held that the suit
properly be maintained.
The contention of the defendants in the case at bar that the Paraaque Rice Mill, Inc.,
should have been brought in as necessary party and the action maintained in its name and in
its behalf directly states the general rule, but not the exception recognize by this court in the
case of Everrett vs. Asia Banking Corporation (49 Phil., 512, 527). In that case, upon invocation
of the general rule by the appellees there, this court said:
Invoking the well-known rule that shareholers cannot ordinarily sue in equity
to redress wrong done to the corporation, but that the action must be brought by
the board of directors, the appellees argue and the court below held that the
corporation Teal & Company is a necessary party plaintiff and that the plaintiff
stockholder, not having made any demand on the board to bring the action, are not
the proper parties plaintiff. But, like most rules, the rule in question has its
exceptions. It is alleged in the complaint and, consequently, admitted through the
demurrer that the corporation Teal & Company is under the complete control of the
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principal defendants in the case, and, in these circumstances it is obvious that a
demand upon the board of directors to institute action and prosecute the same
effectively would have been useless, and the law does not require litigants to
perform useless acts. (Exchange Bank of Wewoka vs. Bailey, 29 Okla., 246; Fleming
and Hewins vs. Black Warrior Copper Co., 15 Ariz., 1; Wickersham vs. Crittenen, 106
Cal., 329; Glem vs. Kittanning Brewing Co., 259 Pa., 510; Hawes vs. Contra Costa Water
Company, 104 U.S., 450.)
The action having been properly brought and by the lower court entertained it was
within its power, upon proper showing, to appoint a receiver of the corporation pendente
lite (secs. 173, 174, et seq. Code of Civil Procedure). The appointment of a receiver upon
application of the minority stockholers is power to be exercised with great caution. But this
does not mean that right of the minority stockholers may be entirely disregarded, and where
the necessity has arisen, the appointment of a receiver for a corporation is a matter resting
largely in the sound discretion of the trial court. Counsel for appellants argue that the
appointment of a receiver pendente lite in the present case has deprived the corporation,
Paraaque Rice Mill, Inc., of property without due process of law. But it is too plain to require
argument that the receiver was precisely appointed to preserve the properties of the
corporation. The receivership in this case shall continue until a new board of directors shall
have been elected and the corporation.
The first, second, third, and fourth assignments of error are, therefore, overruled.
The appellants contend in their fifth and sixth assignments of error that lower court
erred in ordering the defendant, Tedorico B. Santos, to render a detailed accounting of the
properties, funds and income of the corporation, Paraaque Rice Mill., Inc., from the year 1931
and in condemning him to pay "the corporation whatever sum or sums which may be found
owing to said corporation, in accordance with said accounting to be done by him." We note
that the lower court in its decision not only orders the defendant Santos to account for the
properties and funds of the corporation, but it also and at the same time adjudges him to pay
an undermine amount which is made to depend upon the result of such accounting. The
accounting order was probably intended by the lower court to be file with it in this
proceeding. This requirement will delay the final disposition of the case and we are of the
opinion that this accounting should better be filed with the new board of directors whose
election has been ordered by the lower court. The decision of the lower court in this respect is
therefore modified so that the defendant Santos shall render a complete accounting of all the
corporate properties and funds that may have come to his possession during the period
mentioned in the jugment of the lower court to the new board of director to be elected by
the stockholders.
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Corporation Law
In the seventh assignment of error, the appellants contend that the lower court
erred in ordering the removal of the defendants from their offices as members of the board
of directors of the corporation. The Corporation Law, as amended, in section 29 to 34, provide
for the election and removal of the directors of a corporation. Our Corporation Law (Act No.
1459, as amended), does not confer expressly upon the court the power to remove a director
of a corporation. In some jurisdictions, statutes expressly provide a more or less summary
method for the confirmation of the election and for the a motion of the directors of a
corporation. This is true in New York, New Jersey, Virginia and other states of the American
Union. There are abundant authorities, however, which hold that if the court has acquire
jurisdiction to appoint a receiver because of the mismanagement of directors these may
thereafter be remove and others appointed in their place by the court in the exercise of its
equity jurisdiction (2 Fletcher, Cyc. of Corp., ftn. sec. 358, pp. 18 an 119). In the present case,
however, the properties and assets of the corporation being amply protected by the
appointment of a receiver and view of the statutory provisions above referred to, we are of
the opinion that the removal of the directors is, under the circumstances, unnecessary and
unwarranted. The seventh assignment of error is, therefore, sustained.
Under the eighth assignment of error, the appellants argue that the lower court
erred in deciding that the plaintiff Higinio Angeles is entitled to the issuance in his name of a
certificate covering 600 shares of stock of the total par value of P15,000. A review of the
evidence, oral and documentary, relative to the number of shares of stock to which Higinio
Angeles is entitled, shows that Higinio Angeles brought in P15,000 party in money and party in
property, for 600 shares of stock. The very articles of incorporation signed by all the
incorporators, among whom are the defendants, show that Higinio Angeles paid P5,600 on
account of his subscription amounting to P10,000. The amount of P5,600 is the value of
Angeles' cinematograph building in Bacoor, Cavite, which he transferred to the municipality
of Paraaque where the same was reconstructed for the use of the corporation. The receipts
signed by the Philippine Engineering Company and the testimony of Higinio Angeles and
Aguedo Bernabe (secretary-treasurer of the corporation) show that Higinio Angeles paid with
his own funds the sum of P2,750 to the Philippine Engineering Co., as part of the purchase
price of the ricemill bought for the corporation. Angeles paid a further sum of P2,397.99 to
the Philippine Engineering Company. It also appears that for the installation of the Rice Mill,
the construction of camarin, and the cement paving (cementacion) of the whole area of
two camarines, and for the excavation of a well for the use of the rice mill the plaintiff Higinio
Angeles paid with his own funds the amount of P7,431.47. Adding all these sums together we
have a total of P18, 179.46. At a meeting of the board of directors on December 27, 1931, which
meeting was convoked by Angeles, it seemed to have been agreed that Angeles was to be
given shares of stock of the total par value of P15,000. Angeles wanted to have P16,000 worth
of stock to his credit for having made the disbursements mentioned above, but he finally
agreed to accept 600 share worth only P15,000. The certificate of stock, however, was not
issued as disagreement arose between him and the defendant Santos. We, therefore, find no
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error in the decision of the lower court ordering the issuance of a certificate for 600 shares of
stock of the total par value of P15,000 to Higinio Angeles.

It is unnecessary to consider the ninth and tenth assignments of error.

In view of the foregoing, we hold:

(1) That the action in the present case was properly instituted by the plaintiff as
stockholders for and in behalf of the corporation Paraaque Rice Mill, Inc., and other
stockholders of the said corporation;
(2) That the lower court committed no reveiwable error in appointing a receiver of
the corporation pendente lite;

(3) That the lower court committed no error in ordering an election of the new board
of directors, which election shall be held within thirty days from the date this decision
becomes final;

(4) That Teodorico B. Santos shall render an accounting of all the properties, funds
and income of the corporation which may have come into his possession to the new
board of directors;

(5) That the receiver, Emilio Figueroa, shall continue in office until the election and
qualification of the members of the new board of directors;

(6) That upon the constitution of the new board of directors, the said receiver shall
turn over all the properties of the corporation in his possession to the corporation, or
such person or persons as may be duly authorized by it; and.

(7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock
at the par value of P15,000 and the lower court committed no error in ordering the
issuance of the corresponding certificate of stock.

On June 10, 1937, counsel for the plaintiff-appellees filed a motion making it appear of
record that Higinio Angeles, one of the plaintiffs and appellees, died on May 4, 1937 and that
one of his daughters, Maura Angeles y Reyes, had been granted letters of administration as
evidenced by the document attached to the motion as Exhibit A, and praying that said Maura
Angeles y Reyes be substituted as one of the plaintiffs and appellees in lieu of Higinio Angeles,
deceased. This motion is hereby granted.

Defendant-appellants shall pay the costs in both instances. So ordered.

Avancea, C.J., Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.

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Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 153468 August 17, 2006
PAUL LEE TAN, ANDREW LIUSON, ESTHER WONG, STEPHEN CO, JAMES TAN, JUDITH TAN,
ERNESTO TANCHI JR., EDWIN NGO, VIRGINIA KHOO, SABINO PADILLA JR., EDUARDO P.
LIZARES and GRACE CHRISTIAN HIGH SCHOOL, Petitioners,
vs.
PAUL SYCIP and MERRITTO LIM, Respondents.
Actions; Pleadings and Practice; Forum Shopping; The need for proper verification and
certification against forum shopping are aimed at assuring the truthfulness and correctness of
the allegations in the Petition and at discouraging forum shopping.The Petition before the
CA was initially flawed, because the Verification and Certification of Non-Forum Shopping
were signed by only one, not by all, of the petitioners; further, it failed to show proof that the
signatory was authorized to sign on behalf of all of them. Subsequently, however, petitioners
submitted a Special Power of Attorney, at-testing that Atty. Padilla was authorized to file the
action on their behalf. In the interest of substantial justice, this initial procedural lapse may be
excused. There appears to be no intention to circumvent the need for proper verification and
certification, which are aimed at assuring the truthfulness and correctness of the allegations
in the Petition for Review and at discouraging forum shopping. More important, the
substantial merits of petitioners case and the purely legal question involved in the Petition
should be considered special circumstances or compelling reasons that justify an exception to
the strict requirements of the verification and the certification of non-forum shopping.
Corporation Law; Acts of management pertain to the board of directors, and those of
ownership, to the stockholders or members.Under the Corporation Code, stockholders or
members periodically elect the board of directors or trustees, who are charged with the
management of the corporation. The board, in turn, periodically elects officers to carry out
management functions on a day-to-day basis. As owners, though, the stockholders or
members have residual powers over fundamental and major corporate changes. While
stockholders and members (in some instances) are entitled to receive profits, the
management and direction of the corporation are lodged with their representatives and
agentsthe board of directors or trustees. In other words, acts of management pertain to
the board; and those of ownership, to the stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of the stockholders or members.
Same; One of the most important rights of a qualified shareholder or member is the
right to voteeither personally or by proxyfor the directors or trustees who are to manage
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Corporation Law
the corporate affairs.Conformably with the foregoing principles, one of the most important
rights of a qualified shareholder or member is the right to voteeither personally or by
proxyfor the directors or trustees who are to manage the corporate affairs. The right to
choose the persons who will direct, manage and operate the corporation is significant,
because it is the main way in which a stockholder can have a voice in the management of
corporate affairs, or in which a member in a nonstock corporation can have a say on how the
purposes and goals of the corporation may be achieved. Once the directors or trustees are
elected, the stockholders or members relinquish corporate powers to the board in
accordance with law.
Same; Quorum; In stock corporations, the presence of a quorum is ascertained and
counted on the basis of the outstanding capital stock.In stock corporations, the presence of
a quorum is ascertained and counted on the basis of the outstanding capital stock, as defined
by the Code thus: SEC-TION 137. Outstanding capital stock defined.The term outstanding
capital stock as used in this Code, means the total shares of stock issued under binding
subscription agreements to subscribers or stockholders, whether or not fully or partially paid,
except treasury shares.
Same; Same; Only stock actually issued and outstanding may be votedneither the
stockholders nor the corporation can vote or represent shares that have never passed to the
ownership of stockholders, or, having so passed, have again been purchased by the
corporation.The right to vote is inherent in and incidental to the ownership of corporate
stocks. It is settled that unis-sued stocks may not be voted or considered in determining
whether a quorum is present in a stockholders meeting, or whether a requisite proportion of
the stock of the corporation is voted to adopt a certain measure or act. Only stock actually
issued and outstanding may be voted. Under Section 6 of the Corporation Code, each share of
stock is entitled to vote, unless otherwise provided in the articles of incorporation or declared
delinquent under Section 67 of the Code. Neither the stockholders nor the corporation can
vote or represent shares that have never passed to the ownership of stockholders; or, having
so passed, have again been purchased by the corporation. These shares are not to be taken
into consideration in determining majorities. When the law speaks of a given proportion of
the stock, it must be construed to mean the shares that have passed from the corporation,
and that may be voted.
Same; Same; When the principle for determining the quorum for stock corporations is
applied by analogy to nonstock corporations, only those who are actual members with voting
rights should be counted.In nonstock corporations, the voting rights attach to membership.
Members vote as persons, in accordance with the law and the bylaws of the corporation.
Each member shall be entitled to one vote unless so limited, broadened, or denied in the
articles of incorporation or bylaws. We hold that when the principle for determining the
quorum for stock corporations is applied by analogy to non-stock corporations, only those
who are actual members with voting rights should be counted. Under Section 52 of the
161

Corporation Code, the majority of the members representing the actual number of voting
rights, not the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum.
Same; Same; In stock corporations, shareholders may generally transfer their shares;
The determination of whether or not dead members are entitled to exercise their voting
rights (through their executor or administrator), depends on the articles of incorporation or
bylaws.In stock corporations, shareholders may generally transfer their shares. Thus, on the
death of a shareholder, the executor or administrator duly appointed by the Court is vested
with the legal title to the stock and entitled to vote it. Until a settlement and division of the
estate is effected, the stocks of the decedent are held by the administrator or executor. On
the other hand, membership in and all rights arising from a nonstock corporation are personal
and non-transferable, unless the articles of incorporation or the bylaws of the corporation
provide otherwise. In other words, the determination of whether or not dead mem-bers
are entitled to exercise their voting rights (through their executor or administrator), depends
on those articles of incorporation or bylaws.
Same; Same; Dead members who are dropped from the membership roster in the
manner and for the cause provided for in the By-Laws of Grace Christian High School, a
nonstock corporation, are not to be counted in determining the requisite vote in corporate
matters or the requisite quorum.Under the By-Laws of GCHS, membership in the
corporation shall, among others, be terminated by the death of the member. Section 91 of the
Corporation Code further provides that termination extinguishes all the rights of a member of
the corporation, unless otherwise provided in the articles of incorporation or the bylaws.
Applying Section 91 to the present case, we hold that dead members who are dropped from
the membership roster in the manner and for the cause provided for in the By-Laws of GCHS
are not to be counted in determining the requisite vote in corporate matters or the requisite
quorum for the annual members meeting. With 11 remaining members, the quorum in the
present case should be 6. Therefore, there being a quorum, the annual members meeting,
conducted with six members present, was valid.
Same; Same; Words and Phrases; The phrase may be filled in Section 29 of the
Corporation Code shows that the filling of vacancies in the board by the remaining directors or
trustees constituting a quorum is merely permissive, not mandatorycorporations, therefore,
may choose how vacancies in their respective boards may be filled up.Undoubtedly, trustees
may fill vacancies in the board, provided that those remaining still constitute a quorum. The
phrase may be filled in Section 29 shows that the filling of vacancies in the board by the
remaining directors or trustees constituting a quorum is merely permissive, not mandatory.
Corporations, therefore, may choose how vacancies in their respective boards may be filled
upeither by the remaining directors constituting a quorum, or by the stockholders or
members in a regular or special meeting called for the purpose. The By-Laws of GCHS
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prescribed the specific mode of filling up existing vacancies in its board of directors; that is, by
a majority vote of the remaining members of the board.
Same; Same; There is a well-defined distinction between a corporate act to be done by
the board and that by the constituent members of the corpora-tion.While a majority of the
remaining corporate members were present, however, the election of the four trustees
cannot be legally upheld for the obvious reason that it was held in an annual meeting of the
members, not of the board of trustees. We are not unmindful of the fact that the members of
GCHS themselves also constitute the trustees, but we cannot ignore the GCHS bylaw
provision, which specifically prescribes that vacancies in the board must be filled up by the
remaining trustees. In other words, these remaining member-trustees must sit as a board in
order to validly elect the new ones. Indeed, there is a well-defined distinction between a
corporate act to be done by the board and that by the constituent members of the
corporation. The board of trustees must act, not individually or separately, but as a body in a
lawful meeting. On the other hand, in their annual meeting, the members may be represented
by their respective proxies, as in the contested annual members meeting of GCHS.
PETITION for review on certiorari of the resolutions of the Court of Appeals.
DECISION
PANGANIBAN, CJ.:
For stock corporations, the "quorum" referred to in Section 52 of the Corporation
Code is based on the number of outstanding voting stocks. For nonstock corporations, only
those who are actual, living members with voting rights shall be counted in determining the
existence of a quorum during members meetings. Dead members shall not be counted.
The Case
The present Petition for Review on Certiorari [1] under Rule 45 of the Rules of Court
seeks the reversal of the January 23 2 and May 7, 2002, 3 Resolutions of the Court of Appeals
(CA) in CA-GR SP No. 68202. The first assailed Resolution dismissed the appeal filed by
petitioners with the CA. Allegedly, without the proper authorization of the other petitioners,
the Verification and Certification of Non-Forum Shopping were signed by only one of them --
Atty. Sabino Padilla Jr. The second Resolution denied reconsideration.
The Facts
Petitioner Grace Christian High School (GCHS) is a nonstock, non-profit educational
corporation with fifteen (15) regular members, who also constitute the board of
trustees. [4] During the annual members meeting held on April 6, 1998, there were only eleven
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(11) [5] living member-trustees, as four (4) had already died. Out of the eleven, seven
(7) 6 attended the meeting through their respective proxies. The meeting was convened and
chaired by Atty. Sabino Padilla Jr. over the objection of Atty. Antonio C. Pacis, who argued
that there was no quorum. 7 In the meeting, Petitioners Ernesto Tanchi, Edwin Ngo, Virginia
Khoo, and Judith Tan were voted to replace the four deceased member-trustees.
When the controversy reached the Securities and Exchange Commission (SEC), petitioners
maintained that the deceased member-trustees should not be counted in the computation of
the quorum because, upon their death, members automatically lost all their rights (including
the right to vote) and interests in the corporation.
SEC Hearing Officer Malthie G. Militar declared the April 6, 1998 meeting null and void
for lack of quorum. She held that the basis for determining the quorum in a meeting of
members should be their number as specified in the articles of incorporation, not simply the
number of living members. 8 She explained that the qualifying phrase "entitled to vote" in
Section 24 9 of the Corporation Code, which provided the basis for determining a quorum for
the election of directors or trustees, should be read together with Section 89. 10
The hearing officer also opined that Article III (2) 11 of the By-Laws of GCHS, insofar as
it prescribed the mode of filling vacancies in the board of trustees, must be interpreted in
conjunction with Section 29 12 of the Corporation Code. The SEC en banc denied the appeal of
petitioners and affirmed the Decision of the hearing officer in toto.13 It found to be untenable
their contention that the word "members," as used in Section 52 14 of the Corporation Code,
referred only to the living members of a nonstock corporation. 15
As earlier stated, the CA dismissed the appeal of petitioners, because the Verification
and Certification of Non-Forum Shopping had been signed only by Atty. Sabino Padilla Jr. No
Special Power of Attorney had been attached to show his authority to sign for the rest of the
petitioners.
Hence, this Petition. 16
Issues
Petitioners state the issues as follows:
"Petitioners principally pray for the resolution of the legal question of whether or not
in NON-STOCK corporations, dead members should still be counted in determination of
quorum for purposed of conducting the Annual Members Meeting.
"Petitioners have maintained before the courts below that the DEAD members
should no longer be counted in computing quorum primarily on the ground that members
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rights are personal and non-transferable as provided in Sections 90 and 91 of the Corporation
Code of the Philippines.
"The SEC ruled against the petitioners solely on the basis of a 1989 SEC Opinion that
did not even involve a non-stock corporation as petitioner GCHS.
"The Honorable Court of Appeals on the other hand simply refused to resolve this
question and instead dismissed the petition for review on a technicality the failure to timely
submit an SPA from the petitioners authorizing their co-petitioner Padilla, their counsel
and also a petitioner before the Court of Appeals, to sign the petition on behalf of the rest of
the petitioners.
"Petitioners humbly submit that the action of both the SEC and the Court of Appeals
are not in accord with law particularly the pronouncements of this Honorable Court
in Escorpizo v. University of Baguio (306 SCRA 497), Robern Development Corporation v.
Quitain (315 SCRA 150,) and MC Engineering, Inc. v. NLRC, (360 SCRA 183). Due course should
have been given the petition below and the merits of the case decided in petitioners favor." 17
In sum, the issues may be stated simply in this wise: 1) whether the CA erred in
denying the Petition below, on the basis of a defective Verification and Certification; and 2)
whether dead members should still be counted in the determination of the quorum, for
purposes of conducting the annual members meeting.
The Courts Ruling
The present Petition is partly meritorious.
Procedural Issue:
Verification and Certification of Non-Forum Shopping
The Petition before the CA was initially flawed, because the Verification and Certification of
Non-Forum Shopping were signed by only one, not by all, of the petitioners; further, it failed
to show proof that the signatory was authorized to sign on behalf of all of them.
Subsequently, however, petitioners submitted a Special Power of Attorney, attesting that
Atty. Padilla was authorized to file the action on their behalf. 18
In the interest of substantial justice, this initial procedural lapse may be
excused. 19 There appears to be no intention to circumvent the need for proper verification
and certification, which are aimed at assuring the truthfulness and correctness of the
allegations in the Petition for Review and at discouraging forum shopping. 20More important,
the substantial merits of petitioners case and the purely legal question involved in the
163

Petition should be considered special circumstances 21 or compelling reasons that justify an
exception to the strict requirements of the verification and the certification of non-forum
shopping. 22
Main Issue:
Basis for Quorum
Generally, stockholders or members meetings are called for the purpose of electing
directors or trustees 23 and transacting some other business calling for or requiring the action
or consent of the shareholders or members, 24such as the amendment of the articles of
incorporation and bylaws, sale or disposition of all or substantially all corporate assets,
consolidation and merger and the like, or any other business that may properly come before
the meeting.
Under the Corporation Code, stockholders or members periodically elect the board
of directors or trustees, who are charged with the management of the corporation. 25 The
board, in turn, periodically elects officers to carry out management functions on a day-to-day
basis. As owners, though, the stockholders or members have residual powers over
fundamental and major corporate changes.
While stockholders and members (in some instances) are entitled to receive profits,
the management and direction of the corporation are lodged with their representatives and
agents -- the board of directors or trustees.26 In other words, acts of management pertain to
the board; and those of ownership, to the stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of the stockholders or members. 27
Conformably with the foregoing principles, one of the most important rights of a
qualified shareholder or member is the right
to vote -- either personally or by proxy -- for the directors or trustees who are to manage the
corporate affairs. 28The right to choose the persons who will direct, manage and operate the
corporation is significant, because it is the main way in which a stockholder can have a voice in
the management of corporate affairs, or in which a member in a nonstock corporation can
have a say on how the purposes and goals of the corporation may be achieved. 29 Once the
directors or trustees are elected, the stockholders or members relinquish corporate powers
to the board in accordance with law.
In the absence of an express charter or statutory provision to the contrary, the
general rule is that every member of a nonstock corporation, and every legal owner of shares
in a stock corporation, has a right to be present and to vote in all corporate meetings.
Conversely, those who are not stockholders or members have no right to vote. 30Voting may
be expressed personally, or through proxies who vote in their representative
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capacities. 31 Generally, the right to be present and to vote in a meeting is determined by the
time in which the meeting is held. 32
Section 52 of the Corporation Code states:
"Section 52. Quorum in Meetings. Unless otherwise provided for in this Code or in
the by-laws, a quorum shall consist of the stockholders representing a majority of the
outstanding capital stock or a majority of the members in the case of non-stock
corporations."
In stock corporations, the presence of a quorum is ascertained and counted on the
basis of the outstanding capital stock, as defined by the Code thus:
"SECTION 137. Outstanding capital stock defined. The term outstanding capital
stock as used in this Code, means the total shares of stock issued under binding subscription
agreements to subscribers or stockholders, whether or not fully or partially paid, except
treasury shares." (Underscoring supplied)
The Right to Vote in
Stock Corporations
The right to vote is inherent in and incidental to the ownership of corporate
stocks. 33 It is settled that unissued stocks may not be voted or considered in determining
whether a quorum is present in a stockholders meeting, or whether a requisite proportion of
the stock of the corporation is voted to adopt a certain measure or act. Only stock actually
issued and outstanding may be voted. 34 Under Section 6 of the Corporation Code, each share
of stock is entitled to vote, unless otherwise provided in the articles of incorporation or
declared delinquent 35 under Section 67 of the Code.
Neither the stockholders nor the corporation can vote or represent shares that have
never passed to the ownership of stockholders; or, having so passed, have again been
purchased by the corporation. 36 These shares are not to be taken into consideration in
determining majorities. When the law speaks of a
given proportion of the stock, it must be construed to mean the shares that have passed from
the corporation, and that may be voted. 37
Section 6 of the Corporation Code, in part, provides:
"Section 6. Classification of shares. The shares of stock of stock corporations may
be divided into classes or series of shares, or both, any of which classes or series of shares
may have such rights, privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of voting rights except those
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classified and issued as "preferred" or "redeemable" shares, unless otherwise provided in this
Code: Provided, further, that there shall always be a class or series of shares which have
complete voting rights.
xxxxxxxxx
"Where the articles of incorporation provide for non-voting shares in the cases allowed by this
Code, the holders of such shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the
corporation property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another corporation or other
corporations;
7. Investment of corporate funds in another corporation or business in accordance with this
Code; and
8. Dissolution of the corporation.
"Except as provided in the immediately preceding paragraph, the vote necessary to
approve a particular corporate act as provided in this Code shall be deemed to refer only to
stocks with voting rights."
Taken in conjunction with Section 137, the last paragraph of Section 6 shows that the
intention of the lawmakers was to base the quorum mentioned in Section 52 on the number
of outstanding voting stocks. 38
The Right to Vote in
Nonstock Corporations
In nonstock corporations, the voting rights attach to membership. 39 Members vote
as persons, in accordance with the law and the bylaws of the corporation. Each member shall
be entitled to one vote unless so limited, broadened, or denied in the articles of incorporation
or bylaws. 40 We hold that when the principle for determining the quorum for stock
corporations is applied by analogy to nonstock corporations, only those who are actual
members with voting rights should be counted.
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Under Section 52 of the Corporation Code, the majority of the members representing
the actual number of voting rights, not
the number or numerical constant that may originally be specified in the articles of
incorporation, constitutes the quorum. 41
The March 3, 1986 SEC Opinion 42 cited by the hearing officer uses the phrase
"majority vote of the members"; likewise Section 48 of the Corporation Code refers to 50
percent of 94 (the number of registered members of the association mentioned therein) plus
one. The best evidence of who are the present members of the corporation is the
"membership book"; in the case of stock corporations, it is the stock and transfer book. 43
Section 25 of the Code specifically provides that a majority of the directors or
trustees, as fixed in the articles of incorporation, shall constitute a quorum for the transaction
of corporate business (unless the articles of incorporation or the bylaws provide for a greater
majority). If the intention of the lawmakers was to base the quorum in the meetings of
stockholders or members on their absolute number as fixed in the articles of incorporation, it
would have expressly specified so. Otherwise, the only logical conclusion is that the
legislature did not have that intention.
Effect of the Death
of a Member or Shareholder
Having thus determined that the quorum in a members meeting is to be reckoned as
the actual number of members of the corporation, the next question to resolve is what
happens in the event of the death of one of them.
In stock corporations, shareholders may generally transfer their shares. Thus, on the death of
a shareholder, the executor or administrator duly appointed by the Court is vested with the
legal title to the stock and entitled to vote it. Until a settlement and division of the estate is
effected, the stocks of the decedent are held by the administrator or executor. 44
On the other hand, membership in and all rights arising from a nonstock corporation
are personal and non-transferable, unless the articles of incorporation or the bylaws of the
corporation provide otherwise. 45 In other words, the determination of whether or not "dead
members" are entitled to exercise their voting rights (through their executor or
administrator), depends on those articles of incorporation or bylaws.
Under the By-Laws of GCHS, membership in the corporation shall, among others, be
terminated by the death of the member. 46 Section 91 of the Corporation Code further
provides that termination extinguishes all the rights of a member of the corporation, unless
otherwise provided in the articles of incorporation or the bylaws.
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Applying Section 91 to the present case, we hold that dead members who are
dropped from the membership roster in the manner and for the cause provided for in the By-
Laws of GCHS are not to be counted in determining the requisite vote in corporate matters or
the requisite quorum for the annual members meeting. With 11 remaining members, the
quorum in the present case should be 6. Therefore, there being a quorum, the annual
members meeting, conducted with six 47 members present, was valid.
Vacancy in the
Board of Trustees
their annual meeting, the members may be represented by their respective proxies, as in the
contested annual members meeting of GCHS.
WHEREFORE, the Petition is partly GRANTED.The assailed Resolutions of the Court of
Appeals are hereby REVERSED AND SET ASIDE. The remaining members of the board of
trustees of Grace Christian High School (GCHS) may convene and fill up the vacancies in the
board, in accordance with this Decision. No pronouncement as to costs in this instance. SO
ORDERED.

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

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

Undoubtedly, trustees may fill vacancies in the board, provided that those remaining
still constitute a quorum. The phrase "may be filled" in Section 29 shows that the filling of
vacancies in the board by the remaining directors or trustees constituting a quorum is merely
permissive, not mandatory. 48 Corporations, therefore, may choose how vacancies in their
respective boards may be filled up -- either by the remaining directors constituting a quorum,
or by the stockholders or members in a regular or special meeting called for the purpose. 49

The By-Laws of GCHS prescribed the specific mode of filling up existing vacancies in
its board of directors; that is, by a majority vote of the remaining members of the board. 50

While a majority of the remaining corporate members were present, however, the
"election" of the four trustees cannot be legally upheld for the obvious reason that it was
held in an annual meeting of the members, not of the board of trustees. We are not
unmindful of the fact that the members of GCHS themselves also constitute the trustees, but
we cannot ignore the GCHS bylaw provision, which specifically prescribes that vacancies in
the board must be filled up by the remaining trustees. In other words, these remaining
member-trustees must sit as a board in order to validly elect the new ones.

Indeed, there is a well-defined distinction between a corporate act to be done by the

board and that by the constituent members of the corporation. The board of trustees must
act, not individually or separately, but as a body in a lawful meeting. On the other hand, in

166

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18805 August 14, 1967
THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC OF THE
PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED CASIMIRO
GARCIA,3 and LEONOR MOLL, defendants-appellees.
Courts; Judgment; Appeals.An appellate court may base its decision of affirmance
of the judgment below on a point or points ignored by the trial court on which said court was
in error.
Corporations; Three methods of winding up corporate affairs.Accepted in this
jurisdiction are three methods by which a corporation may wind up its affairs: (1) under
Section 3, Rule 104, of the Rules of Court (which superseded Section 66 of the Corporation
Law), whereby, upon voluntary dissolution of a corporation, the court may direct "such
disposition of its assets as justice requires, and may appoint a receiver to collect such assets
and pay the debts of the corporation"; (2) under Section 77 of the Corporation Law, whereby
a corporation whose corporate existence is terminated, "shall nevertheless be continued as a
body corporate for three years after the time when it would have been so dissolved, for the
purpose of prosecuting and defending suits by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and convey its property and to divide its capital stock,
but not for the purpose of continuing the business for which it was established"; and (3)
under Section 78 of the Corporation Law, by virtue of which the corporation, within the three-
year period just mentioned, "is authorized and empowered to convey all of its property to
trustees for the benefit of members, stockholders, creditors, and others interested,"
Board of Liquidators; Trustee for government.By Executive Order No. 372, the
government, the sole stockholder, abolished the National Coconut Corporation (NACOCO)
and placed its assets in the hands of the Board of Liquidators. The Board thus became the
trustee on behalf of the government. It was an express trust. The legal interest became
vested in the trustee, the Board of Liquidators. The beneficial interest remained with the sole
stockholder, the government. The Board took the place of the dissolved government
corporations after the expiration of the statutory three-year period for the liquidation of their
affairs.
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Same; No term for life of Board.No time limit has been tacked to the existence of
the Board of Liquidators and its function of closing the affairs of various government
corporations. Its term of life is not fixed.
Same; Right of Board of Liquidators to proceed as partyplaintiff; Case at bar.At no
time had the government withdrawn the property. or the authority to continue the present
suit, from the Board of Liquidators. Hence, the Board can prosecute this case to its final
conclusion. The provisions of Section 78 of the Corporation Law, the third method of winding
up corporate affairs, find application. The Board has personality to proceed as party-plaintiff
in this case.
Settlement of decedent's estate; Actions; Actions that survive; Executors and
administrators.The actions that survive against a decedent's executors or administrators
are: (1) actions to recover real and personal property from the estate; (2) actions to enforce a
lien thereon; and (3) actions to recover damages for an injury to person or property. A suit to
recover damages, based on the alleged tortious acts of the manager of a government
corporation, survives. It is not a mere money claim that is extinguished upon the death of a
party.
Corporations; Implied authority of corporate officer to enter into contracts.A
corporate officer, entrusted with the general management and control of its business, has
implied authority to make any contract or do any other act which is necessary or appropriate
to the conduct of the ordinary business of the corporation. As such officer, he may, without
any special authority from the Board of Directors, perform all acts of an ordinary nature,
which by usage or necessity are incident to his office, and may bind the corporation by
contracts in matters arising in the usual course of business.
Same; Where similar acts of manager were approved by directors.Where similar
acts have been approved by the directors as a matter of general practice, custom, and policy,
the general manager may bind the company without formal authorization of the board of
directors. In varying language, existence of such authority is established by proof of the
course of business, the usages and practices of the company and by the knowledge which the
board of directors has, or must be presumed to have, of acts and doings of its subordinates in
and about the affairs of the corporation. Where the practice of the corporation has been to
allow its general manager to negotiate and execute contracts in its copra trading activities for
and in Nacoco's behalf without prior board approval, and the board itself, by its acts and
through acquiescence, practically laid aside the by-law requirement of prior approval, the
contracts of the general manager, under the given circumstances, are valid corporate acts.
Same; Ratification by corporation of unauthorized contract of its officers.
Ratification by a corporation of an unauthorized act or contract by its officers or others
167

relates back to the time of the act or contract ratified and is equivalent to original authority.
The corporation and the other party to the transaction are in precisely the same position as if
the act or contract had been authorized at the time. The adoption or ratif ication of a contract
by a corporation is nothing more nor less than the making of an original contract. The theory
of corporate ratification is predicated on the right of a corporation to contract, and any
ratification or adoption is equivalent to a grant of prior authority.
Contracts; Bad faith.Bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty through some motive or interest or ill-will; it
partakes of the nature of fraud.
Damages; Damnum absque injuria.The present case is one of damnum absque
injuria. Conjunction of damage and wrong is here absent. There cannot be an actionable
wrong if either one or the other is wanting.
APPEAL from a judgment of the Court of First Instance of Manila, Enriquez, J.
The facts are stated in the opinion of the Court
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion Reyna,
Montecillo and Belo for defendants-appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the
protection, preservation and development of the coconut industry in the Philippines. On
August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that corporation
the express power "to buy, sell, barter, export, and in any other manner deal in, coconut,
copra, and dessicated coconut, as well as their by-products, and to act as agent, broker or
commission merchant of the producers, dealers or merchants" thereof. The charter
amendment was enacted to stabilize copra prices, to serve coconut producers by securing
advantageous prices for them, to cut down to a minimum, if not altogether eliminate, the
margin of middlemen, mostly aliens.4
General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar
and Casimiro Garcia were members of the Board; defendant Leonor Moll became director
only on December 22, 1947.
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NACOCO, after the passage of Republic Act 5, embarked on copra trading activities.
Amongst the scores of contracts executed by general manager Kalaw are the disputed
contracts, for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per ton, f. o.
b., delivery: August and September, 1947. This contract was later assigned to Louis
Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per long
ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This contract
was also assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton, delivery:
September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per ton,
c.i.f., Los Angeles, California, delivery: November, 1947.
(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for
1,500 long tons, $164,00 per ton, c.i.f., New York, to be
shipped in November, 1947.
(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons,
$154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.
(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton, delivery:
November and December, 1947. This contract was assigned to Pacific Vegetable Co.
(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f.,
Pacific ports, delivery: December, 1947 and January, 1948. This contract was assigned
to Pacific Vegetable Co.
(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f.,
Pacific ports, delivery: January, 1948. This contract was assigned to Pacific Vegetable
Co.
An unhappy chain of events conspired to deter NACOCO from fulfilling these
contracts. Nature supervened. Four devastating typhoons visited the Philippines: the first in
October, the second and third in November, and the fourth in December, 1947. Coconut trees
throughout the country suffered extensive damage. Copra production decreased. Prices
spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export
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facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers
became impossible, financing a problem.
When it became clear that the contracts would be unprofitable, Kalaw submitted
them to the board for approval. It was not until December 22, 1947 when the membership
was completed. Defendant Moll took her oath on that date. A meeting was then held. Kalaw
made a full disclosure of the situation, apprised the board of the impending heavy losses. No
action was taken on the contracts. Neither did the board vote thereon at the meeting of
January 7, 1948 following. Then, on January 11, 1948, President Roxas made a statement that
the NACOCO head did his best to avert the losses, emphasized that government concerns
faced the same risks that confronted private companies, that NACOCO was recouping its
losses, and that Kalaw was to remain in his post. Not long thereafter, that is, on January 30,
1948, the board met again with Kalaw, Bocar, Garcia and Moll in attendance. They
unanimously approved the contracts hereinbefore enumerated.
As was to be expected, NACOCO but partially performed the contracts, as follows:
Buyers Tons Delivered Undelivered
Pacific Vegetable Oil 2,386.45 4,613.55
Spencer Kellog None 1,000
Franklin Baker 1,000 500
Louis Dreyfus 800 2,200
Louis Dreyfus (Adamson contract of July 30, 1947) 1,150 850
Louis Dreyfus (Adamson Contract of August 14, 1947) 1,755 245
TOTALS 7,091.45 9,408.55
The buyers threatened damage suits. Some of the claims were settled, viz: Pacific
Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker Corporation,
P78,210.00; Spencer Kellog & Sons, P159,040.00.
But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court
of First Instance of Manila, upon claims as follows: For the undelivered copra under the July
30 contract (Civil Case 4459); P287,028.00; for the balance on the August 14 contract (Civil
Case 4398), P75,098.63; for that per the September 12 contract reduced to judgment (Civil
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Case 4322, appealed to this Court in L-2829), P447,908.40. These cases culminated in an out-
of-court amicable settlement when the Kalaw management was already out. The corporation
thereunder paid Dreyfus P567,024.52 representing 70% of the total claims. With particular
reference to the Dreyfus claims, NACOCO put up the defenses that: (1) the contracts were
void because Louis Dreyfus & Co. (Overseas) Ltd. did not have license to do business here;
and (2) failure to deliver was due to force majeure, the typhoons. To project the utter
unreasonableness of this compromise, we reproduce in haec verba this finding below:
x x x However, in similar cases brought by the same claimant [Louis Dreyfus
& Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also
involving a claim of P345,654.68 wherein defendant set up same defenses as above,
plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.) Following the
same proportion, the claim of Dreyfus against NACOCO should have been
compromised for only P10,000.00, if at all. Now, why should defendants be held
liable for the large sum paid as compromise by the Board of Liquidators? This is just a
sample to show how unjust it would be to hold defendants liable for the readiness with
which the Board of Liquidators disposed of the NACOCO funds, although there was
much possibility of successfully resisting the claims, or at least settlement for nominal
sums like what happened in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors
Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under Article
1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board members,
including Kalaw, with bad faith and/or breach of trust for having approved the contracts. The
fifth amended complaint, on which this case was tried, was filed on July 2, 1959. Defendants
resisted the action upon defenses hereinafter in this opinion to be discussed.
The lower court came out with a judgment dismissing the complaint without costs as
well as defendants' counterclaims, except that plaintiff was ordered to pay the heirs of
Maximo Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased
Kalaw from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum
of P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided
by, the court below, arrest our attention. On appeal, defendants renew their bid. And this,
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upon established jurisprudence that an appellate court may base its decision of affirmance of
the judgment below on a point or points ignored by the trial court or in which said court was
in error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of
Liquidators has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up
its affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded Section 66 of
the Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court may
direct "such disposition of its assets as justice requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation;" (2) under Section 77 of the Corporation
Law, whereby a corporation whose corporate existence is terminated, "shall nevertheless be
continued as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling
it gradually to settle and close its affairs, to dispose of and convey its property and to divide
its capital stock, but not for the purpose of continuing the business for which it was
established;" and (3) under Section 78 of the Corporation Law, by virtue of which the
corporation, within the three year period just mentioned, "is authorized and empowered to
convey all of its property to trustees for the benefit of members, stockholders, creditors, and
others interested."8
It is defendants' pose that their case comes within the coverage of the second
method. They reason out that suit was commenced in February, 1949; that by Executive Order
372, dated November 24, 1950, NACOCO, together with other government-owned
corporations, was abolished, and the Board of Liquidators was entrusted with the function of
settling and closing its affairs; and that, since the three year period has elapsed, the Board of
Liquidators may not now continue with, and prosecute, the present case to its conclusion,
because Executive Order 372 provides in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut
Corporation, the National Tobacco Corporation, the National Food Producer
Corporation and the former enemy-owned or controlled corporations or
associations, . . . are hereby abolished. The said corporations shall be liquidated in
accordance with law, the provisions of this Order, and/or in such manner as the
President of the Philippines may direct; Provided, however, That each of the said
corporations shall nevertheless be continued as a body corporate for a period of
three (3) years from the effective date of this Executive Order for the purpose of
prosecuting and defending suits by or against it and of enabling the Board of
Liquidators gradually to settle and close its affairs, to dispose of and, convey its
property in the manner hereinafter provided.
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Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be
found impossible within the 3 year period to reduce disputed claims to judgment,
nonetheless, "suits by or against a corporation abate when it ceases to be an entity capable of
suing or being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus
Juris Secundum likewise is authority for the statement that "[t]he dissolution of a corporation
ends its existence so that there must be statutory authority for prolongation of its life even
for purposes of pending litigation"9 and that suit "cannot be continued or revived; nor can a
valid judgment be rendered therein, and a judgment, if rendered, is not only erroneous, but
void and subject to collateral attack." 10 So it is, that abatement of pending actions follows as
a matter of course upon the expiration of the legal period for liquidation, 11 unless the statute
merely requires a commencement of suit within the added time. 12 For, the court cannot
extend the time alloted by statute. 13
We, however, express the view that the executive order abolishing NACOCO and
creating the Board of Liquidators should be examined in context. The proviso in Section 1
of Executive Order 372, whereby the corporate existence of NACOCO was continued for a
period of three years from the effectivity of the order for "the purpose of prosecuting and
defending suits by or against it and of enabling the Board of Liquidators gradually to settle
and close its affairs, to dispose of and convey its property in the manner hereinafter
provided", is to be read not as an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been tacked to the existence of the
Board of Liquidators and its function of closing the affairs of the various government owned
corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various
corporations were abolished, their powers and functions and duties under existing laws were
to be assumed and exercised by the Board of Liquidators. The President thought it best to do
away with the boards of directors of the defunct corporations; at the same time, however,
the President had chosen to see to it that the Board of Liquidators step into the vacuum. And
nowhere in the executive order was there any mention of the lifespan of the Board of
Liquidators. A glance at the other provisions of the executive order buttresses our conclusion.
Thus, liquidation by the Board of Liquidators may, under section 1, proceed in accordance with
law, the provisions of the executive order, "and/or in such manner as the President of the
Philippines may direct." By Section 4, when any property, fund, or project is transferred to any
governmental instrumentality "for administration or continuance of any project," the
necessary funds therefor shall be taken from the corresponding special fund created in
Section 5. Section 5, in turn, talks of special funds established from the "net proceeds of the
liquidation" of the various corporations abolished. And by Section, 7, fifty per centum of the
fees collected from the copra standardization and inspection service shall accrue "to the
special fund created in section 5 hereof for the rehabilitation and development of the coconut
industry." Implicit in all these, is that the term of life of the Board of Liquidators is without
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time limit. Contemporary history gives us the fact that the Board of Liquidators still exists as
an office with officials and numerous employees continuing the job of liquidation and
prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final
determination of the present case is without jurisprudential support. The first judicial test
before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August 16,
1961. In that case, the corporation, already dissolved, commenced suit within the three-year
extended period for liquidation. That suit was for recovery of money advanced to defendant
for the purchase of hemp in behalf of the corporation. She failed to account for that money.
Defendant moved to dismiss, questioned the corporation's capacity to sue. The lower court
ordered plaintiff to include as co-party plaintiff, The Board of Liquidators, to which the
corporation's liquidation was entrusted by Executive Order 372. Plaintiff failed to effect
inclusion. The lower court dismissed the suit. Plaintiff moved to reconsider. Ground:
excusable negligence, in that its counsel prepared the amended complaint, as directed, and
instructed the board's incoming and outgoing correspondence clerk, Mrs. Receda Vda. de
Ocampo, to mail the original thereof to the court and a copy of the same to defendant's
counsel. She mailed the copy to the latter but failed to send the original to the court. This
motion was rejected below. Plaintiff came to this Court on appeal. We there said that "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." We there said that "[o]ur 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." 14 However, these precepts notwithstanding, we, in effect, held in that case that the
Board of Liquidators escapes from the operation thereof for the reason that "[o]bviously, 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." 15 We
accordingly directed the record of said case to be returned to the lower court, with
instructions to admit plaintiff's amended complaint to include, as party plaintiff, the Board of
Liquidators.
Defendants' position is vulnerable to attack from another direction.
By Executive Order 372, the government, the sole stockholder, abolished NACOCO,
and placed its assets in the hands of the Board of Liquidators. The Board of Liquidators thus
became the trustee on behalf of the government. It was an express trust. The legal interest
became vested in the trustee the Board of Liquidators. The beneficial
interest remained with the sole stockholder the government. At no time had the
government withdrawn the property, or the authority to continue the present suit, from the
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Board of Liquidators. If for this reason alone, we cannot stay the hand of the Board of
Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section 78 of
the Corporation Law the third method of winding up corporate affairs find application.
We, accordingly, rule that the Board of Liquidators has personality to proceed as:
party-plaintiff in this case.
2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and
in their nineteenth special defense, that plaintiff's action is personal to the deceased Maximo
M. Kalaw, and may not be deemed to have survived after his death. 18 They say that the
controlling statute is Section 5, Rule 87, of the 1940 Rules of Court. 19 which provides that "[a]ll
claims for money against the decedent, arising from contract, express or implied", must be
filed in the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered
into the questioned contracts without prior approval of the board of directors, to the damage
and prejudice of plaintiff; and is against Kalaw and the other directors for having
subsequently approved the said contracts in bad faith and/or breach of trust." Clearly then,
the present case is not a mere action for the recovery of money nor a claim for money arising
from contract. The suit involves alleged tortious acts. And the action is embraced in suits filed
"to recover damages for an injury to person or property, real or personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30,
1962. There, plaintiffs sought to recover damages from defendant Llemos. The complaint
averred that Llemos had served plaintiff by registered mail with a copy of a petition for a writ
of possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar, with
notice that the same would be submitted to the Samar court on February 23, 1960 at 8:00
a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said court of
Samar from their residence in Manila accompanied by their lawyers, only to discover that no
such petition had been filed; and that defendant Llemos maliciously failed to appear in court,
so that plaintiffs' expenditure and trouble turned out to be in vain, causing them mental
anguish and undue embarrassment. Defendant died before he could answer the complaint.
Upon leave of court, plaintiffs amended their complaint to include the heirs of the deceased.
The heirs moved to dismiss. The court dismissed the complaint on the ground that the legal
representative, and not the heirs, should have been made the party defendant; and that,
anyway, the action being for recovery of money, testate or intestate proceedings should be
initiated and the claim filed therein. This Court, thru Mr. Justice Jose B. L. Reyes, there
declared:
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Plaintiffs argue with considerable cogency that contrasting the correlated provisions
of the Rules of Court, those concerning claims that are barred if not filed in the estate
settlement proceedings (Rule 87, sec. 5) and those defining actions that survive and
may be prosecuted against the executor or administrator (Rule 88, sec. 1), it is
apparent that actions for damages caused by tortious conduct of a defendant (as in
the case at bar) survive the death of the latter. Under Rule 87, section 5, the actions
that are abated by death are: (1) claims for funeral expenses and those for the last
sickness of the decedent; (2) judgments for money; and (3) "all claims for money
against the decedent, arising from contract express or implied." None of these
includes that of the plaintiffs-appellants; for it is not enough that the claim against
the deceased party be for money, but it must arise from "contract express or
implied", and these words (also used by the Rules in connection with attachments
and derived from the common law) were construed in Leung Ben vs. O'Brien, 38 Phil.
182, 189-194,
"to include all purely personal obligations other than those which have their
source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that survive against a
decedent's executors or administrators, and they are: (1) actions to recover real and
personal property from the estate; (2) actions to enforce a lien thereon; and (3)
actions to recover damages for an injury to person or property. The present suit is
one for damages under the last class, it having been held that "injury to property" is
not limited to injuries to specific property, but extends to other wrongs by which
personal estate is injured or diminished (Baker vs. Crandall, 47 Am. Rep. 126; also 171
A.L.R., 1395). To maliciously cause a party to incur unnecessary expenses, as charged
in this case, is certainly injury to that party's property (Javier vs. Araneta, L-4369, Aug.
31, 1953).
The ruling in the preceding case was hammered out of facts comparable to those of
the present. No cogent reason exists why we should break away from the views just
expressed. And, the conclusion remains: Action against the Kalaw heirs and, for the matter,
against the Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly
entered into the controverted contracts without the prior approval of the corporation's
directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter III
thereof, recites, as amongst the duties of the general manager, the obligation: "(b) To
perform or execute on behalf of the Corporation upon prior approval of the Board, all
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contracts necessary and essential to the proper accomplishment for which the Corporation
was organized."
Not of de minimis importance in a proper approach to the problem at hand, is the
nature of a general manager's position in the corporate structure. A rule that has gained
acceptance through the years is that a corporate officer "intrusted with the general
management and control of its business, has implied authority to make any contract or do any
other act which is necessary or appropriate to the conduct of the ordinary business of the
corporation. 21As such officer, "he may, without any special authority from the Board of
Directors perform all acts of an ordinary nature, which by usage or necessity are incident to
his office, and may bind the corporation by contracts in matters arising in the usual course of
business. 22
The problem, therefore, is whether the case at bar is to be taken out of the general
concept of the powers of a general manager, given the cited provision of the NACOCO by-
laws requiring prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express articulation.
Ordinary in this enterprise are copra sales for future delivery. The movement of the market
requires that sales agreements be entered into, even though the goods are not yet in the
hands of the seller. Known in business parlance as forward sales, it is concededly the practice
of the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was
much more conservative than the exporters with big capital. This short-selling was inevitable
at the time in the light of other factors such as availability of vessels, the quantity required
before being accepted for loading, the labor needed to prepare and sack the copra for
market. To NACOCO, forward sales were a necessity. Copra could not stay long in its hands; it
would lose weight, its value decrease. Above all, NACOCO's limited funds necessitated a quick
turnover. Copra contracts then had to be executed on short notice at times within twenty-
four hours. To be appreciated then is the difficulty of calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into copra trading.
Long before the disputed contracts came into being, Kalaw contracted by himself
alone as general manager for forward sales of copra. For the fiscal year ending June 30,
1947, Kalaw signed some 60 such contracts for the sale of copra to divers parties. During that
period, from those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So pleased
was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence, it voted to
grant him a special bonus "in recognition of the signal achievement rendered by him in putting
the Corporation's business on a self-sufficient basis within a few months after assuming
office, despite numerous handicaps and difficulties."
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These previous contract it should be stressed, were signed by Kalaw without prior
authority from the board. Said contracts were known all along to the board members.
Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously,
NACOCO board met the difficulties attendant to forward sales by leaving the adoption of
means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's
general manager and submitted to the board after their consummation, not before. These
agreements were not Kalaw's alone. One at least was executed by a predecessor way back in
1940, soon after NACOCO was chartered. It was a contract of lease executed on November 16,
1940 by the then general manager and board chairman, Maximo Rodriguez, and A. Soriano y
Cia., for the lease of a space in Soriano Building On November 14, 1946, NACOCO, thru its
general manager Kalaw, sold 3,000 tons of copra to the Food Ministry, London, thru
Sebastian Palanca. On December 22, 1947, when the controversy over the present contract
cropped up, the board voted to approve a lease contract previously executed between Kalaw
and Fidel Isberto and Ulpiana Isberto covering a warehouse of the latter. On the same date,
the board gave its nod to a contract for renewal of the services of Dr. Manuel L. Roxas. In
fact, also on that date, the board requested Kalaw to report for action all copra
contracts signed by him "at the meeting immediately following the signing of the contracts."
This practice was observed in a later instance when, on January 7, 1948, the board approved
two previous contracts for the sale of 1,000 tons of copra each to a certain "SCAP" and a
certain "GNAPO".
And more. On December 19, 1946, the board resolved to ratify the brokerage
commission of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the
French Government. Such ratification was necessary because, as stated by Kalaw in that same
meeting, "under an existing resolution he is authorized to give a brokerage fee of only 1% on
sales of copra made through brokers." On January 15, 1947, the brokerage fee agreements of
1-1/2% on three export contracts, and 2% on three others, for the sale of copra were approved
by the board with a proviso authorizing the general manager to pay a commission up to the
amount of 1-1/2% "without further action by the Board." On February 5, 1947, the brokerage fee
of 2% of J. Cojuangco & Co. on the sale of 2,000 tons of copra was favorably acted upon by the
board. On March 19, 1947, a 2% brokerage commission was similarly approved by the board for
Pacific Trading Corporation on the sale of 2,000 tons of copra.
It is to be noted in the foregoing cases that only the brokerage fee agreements were
passed upon by the board, not the sales contracts themselves. And even those fee
agreements were submitted only when the commission exceeded the ceiling fixed by the
board.
Knowledge by the board is also discernible from other recorded instances.
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When the board met on May 10, 1947, the directors discussed the copra situation:
There was a slow downward trend but belief was entertained that the nadir might have
already been reached and an improvement in prices was expected. In view thereof, Kalaw
informed the board that "he intends to wait until he has signed contracts to sell before starting
to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions
then current: The copra market appeared to have become fairly steady; it was not expected
that copra prices would again rise very high as in the unprecedented boom during January-
April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a radical rise or
decrease was not indicated by the trends. Kalaw continued to say that "the Corporation has
been closing contracts for the sale of copra generally with a margin of P5.00 to P7.00 per
hundred kilos." 24
We now lift the following excerpts from the minutes of that same board meeting of
July 29, 1947:
521. In connection with the buying and selling of copra the Board inquired whether it
is the practice of the management to close contracts of sale first before buying. The
General Manager replied that this practice is generally followed but that it is not
always possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires that it should not
cease buying even when it does not have actual contracts of sale since the
suspension of buying by the Nacoco will result in middlemen taking advantage of the
temporary inactivity of the Corporation to lower the prices to the detriment of the
producers.
(2) The movement of the market is such that it may not be practical always to wait
for the consummation of contracts of sale before beginning to buy copra.
The General Manager explained that in this connection a certain amount of
speculation is unavoidable. However, he said that the Nacoco is much more
conservative than the other big exporters in this respect. 25
Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general manager may bind
the company without formal authorization of the board of directors. 26 In varying language,
existence of such authority is established, by proof of the course of business, the usage and
practices of the company and by the knowledge which the board of directors has, or must
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be presumed to have, of acts and doings of its subordinates in and about the affairs of the
corporation. 27So also,
x x x authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation, an officer has been
allowed in his official capacity to manage its affairs, his authority to represent the
corporation may be implied from the manner in which he has been permitted by the
directors to manage its business.29
In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and in
NACOCO's behalf without prior board approval. If the by-laws were to be literally followed,
the board should give its stamp of prior approval on all corporate contracts. But that board
itself, by its acts and through acquiescence, practically laid aside the by-law requirement of
prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the
contracts in dispute on January 30, 1948, though it is our (and the lower court's) belief that
ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of
an unauthorized act or contract by its officers or others relates back to the time of the act or
contract ratified, and is equivalent to original authority;" and that " [t]he corporation and the
other party to the transaction are in precisely the same position as if the act or contract had
been authorized at the time." 30 The language of one case is expressive: "The adoption or
ratification of a contract by a corporation is nothing more or less than the making of an
original contract. The theory of corporate ratification is predicated on the right of a
corporation to contract, and any ratification or adoption is equivalent to a grant of prior
authority." 31
Indeed, our law pronounces that "[r]atification cleanses the contract from all its
defects from the moment it was constituted." 32 By corporate confirmation, the contracts
executed by Kalaw are thus purged of whatever vice or defect they may have. 33
In sum, a case is here presented whereunder, even in the face of an express by-law
requirement of prior approval, the law on corporations is not to be held so rigid and inflexible
as to fail to recognize equitable considerations. And, the conclusion inevitably is that the
embattled contracts remain valid.
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5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith and/or
breach of trust" in the board's ratification of the contracts without prior approval of the
board. For, in reality, all that we have on the government's side of the scale is that the board
knew that the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without
need of prior approval. Everybody, including Kalaw himself, thought so, and for a long time.
Doubts were first thrown on the way only when the contracts turned out to be unprofitable
for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes of
the nature of fraud.34 Applying this precept to the given facts herein, we find that there was
no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or
"breach of a known duty," or "Some motive or interest or ill will" that "partakes of the nature
of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal
reasons, or to serve their own private interests, or to pocket money at the expense of the
corporation. 35 We have had occasion to affirm that bad faith contemplates a "state of mind
affirmatively operating with furtive design or with some motive of self-interest or ill will or for
ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662, 669, quotes with
approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the following: "Upon a close
examination of all the reported cases, although there are many dicta not easily reconcilable,
yet I have found no judgment or decree which has held directors to account, except when
they have themselves been personally guilty of some fraud on the corporation, or have
known and connived at some fraud in others, or where such fraud might have been prevented
had they given ordinary attention to their duties. . . ." Plaintiff did not even dare charge its
defendant-directors with any of these malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene
basic dictates of fairness. They did not think of raising their voice in protest against past
contracts which brought in enormous profits to the corporation. By the same token, fair
dealing disagrees with the idea that similar contracts, when unprofitable, should not merit the
same treatment. Profit or loss resulting from business ventures is no justification for turning
one's back on contracts entered into. The truth, then, of the matter is that in the words of
the trial court the ratification of the contracts was "an act of simple justice and fairness to
the general manager and the best interest of the corporation whose prestige would have
been seriously impaired by a rejection by the board of those contracts which proved
disadvantageous." 37
174

The directors are not liable." 38
6. To what then may we trace the damage suffered by NACOCO.
The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing
regions. Result: Copra production was impaired, prices spiralled, warehouses destroyed.
Quick turnovers could not be expected. NACOCO was not alone in this misfortune. The record
discloses that private traders, old, experienced, with bigger facilities, were not spared; also
suffered tremendous losses. Roughly estimated, eleven principal trading concerns did run
losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto, head of the copra
marketing department of NACOCO, observed that from late 1947 to early 1948 "there were
many who lost money in the trade." 39 NACOCO was not immune from such usual business
risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by
Louis Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense and
there vehemently asserted that "as a result of the said typhoons, extensive damage was
caused to the coconut trees in the copra producing regions of the Philippines and according
to estimates of competent authorities, it will take about one year until the coconut producing
regions will be able to produce their normal coconut yield and it will take some time until the
price of copra will reach normal levels;" and that "it had never been the intention of the
contracting parties in entering into the contract in question that, in the event of a sharp rise in
the price of copra in the Philippine market produce by force majeure or by caused beyond
defendant's control, the defendant should buy the copra contracted for at exorbitant prices
far beyond the buying price of the plaintiff under the contract." 40
A high regard for formal judicial admissions made in court pleadings would suffice to
deter us from permitting plaintiff to stray away therefrom, to charge now that the damage
suffered was because of Kalaw's negligence, or for that matter, by reason of the board's
ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its
contractual obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies
spread throughout the islands. It could purchase 2,000 tons of copra a day. The various
contracts involved delivery of but 16,500 tons over a five-month period. Despite the typhoons,
NACOCO was still able to deliver a little short of 50% of the tonnage required under the
contracts.
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As the trial court correctly observed, this is a case of damnum absque injuria.
Conjunction of damage and wrong is here absent. There cannot be an actionable wrong if
either one or the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which
would link Kalaw's acts ratified by the board to a matrix for defraudation of the
government. Kalaw is clear of the stigma of bad faith. Plaintiff's corporate counsel 44 concedes
that Kalaw all along thought that he had authority to enter into the contracts, that he did so
in the best interests of the corporation; that he entered into the contracts in pursuance of an
overall policy to stabilize prices, to free the producers from the clutches of the middlemen.
The prices for which NACOCO contracted in the disputed agreements, were at a level
calculated to produce profits and higher than those prevailing in the local market. Plaintiff's
witness, Barretto, categorically stated that "it would be foolish to think that one would sign
(a) contract when you are going to lose money" and that no contract was executed "at a
price unsafe for the Nacoco." 45 Really, on the basis of prices then prevailing, NACOCO
envisioned a profit of around P752,440.00. 46
Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably
consulted with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager.
The dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected
to predict the coming of unpredictable typhoons. And even as typhoons supervened Kalaw
was not remissed in his duty. He exerted efforts to stave off losses. He asked the Philippine
National Bank to implement its commitment to extend a P400,000.00 loan. The bank did not
release the loan, not even the sum of P200,000.00, which, in October, 1947, was approved by
the bank's board of directors. In frustration, on December 12, 1947, Kalaw turned to the
President, complained about the bank's short-sighted policy. In the end, nothing came out of
the negotiations with the bank. NACOCO eventually faltered in its contractual obligations.
That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence,
would seem to be supported by the fact that even as the contracts were being questioned in
Congress and in the NACOCO board itself, President Roxas defended the actuations of Kalaw.
On December 27, 1947, President Roxas expressed his desire "that the Board of Directors
should reelect Hon. Maximo M. Kalaw as General Manager of the National Coconut
Corporation." 47 And, on January 7, 1948, at a time when the contracts had already been
openly disputed, the board, at its regular meeting, appointed Maximo M. Kalaw as acting
general manager of the corporation.
Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia
Milling Co., Inc., L-15092, May 18, 1962:
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"They (the directors) hold such office charged with the duty to act for the
corporation according to their best judgment, and in so doing they cannot be controlled in
the reasonable exercise and performance of such duty. Whether the business of a corporation
should be operated at a loss during a business depression, or closed down at a smaller loss, is
a purely business and economic problem to be determined by the directors of the
corporation, and not by the court. It is a well known rule of law that questions of policy of
management are left solely to the honest decision of officers and directors of a corporation,
and the court is without authority to substitute its judgment for the judgment of the board of
directors; the board is the business manager of the corporation, and solong as it acts in good
faith its orders are not reviewable by the courts." (Fletcher on Corporations, Vol. 2, p. 390.) 48
Kalaw's good faith, and that of the other directors, clinch the case for defendants. 49

Viewed in the light of the entire record, the judgment under review must be, as it is hereby,
affirmed.

Without costs. So ordered.

Reyes, J.B.L., Makalintal, Bengzon, J.P., Zaldivar, Castro and Angeles, JJ., concur.
Fernando, J., took no part.
Concepcion, C.J. and Dizon, J., are on leave.

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Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 125469 October 27, 1997
PHILIPPINE STOCK EXCHANGE, INC., petitioner,
vs.
THE HONORABLE COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
PUERTO AZUL LAND, INC., respondents.
Corporation Law; Securities and Exchange Commission; Stock Exchanges; The SEC is
the entity with the primary say as to whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange.We affirm that the SEC is the entity
with the primary say as to whether or not securities, including shares of stock of a
corporation, may be traded or not in the stock exchange. This is in line with the SECs mission
to ensure proper compliance with the laws, such as the Revised Securities Act and to regulate
the sale and disposition of securities in the country. As the appellate court explains:
Paramount policy also supports the authority of the public respondent to review petitioners
denial of the listing. Being a stock exchange, the petitioner performs a function that is vital to
the national economy, as the business is affected with public interest. As a matter of fact, it
has often been said that the economy moves on the basis of the rise and fall of stocks being
traded. By its economic power, the petitioner certainly can dictate which and how many users
are allowed to sell securities thru the facilities of a stock exchange, if allowed to interpret its
own rules liberally as it may please. Petitioner can either allow or deny the entry to the market
of securities. To repeat, the monopoly, unless accompanied by control, becomes subject to
abuse; hence, considering public interest, then it should be subject to government
regulation.
Same; Same; Same; Philippine Stock Exchange; The PSEs management prerogatives
are not under the absolute control of the SEC, for the PSE is, after all, a corporation authorized
by its corporate franchise to engage in its proposed and duly approved business.This is not
to say, however, that the PSEs management prerogatives are under the absolute control of
the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to engage in
its proposed and duly approved business. One of the PSEs main concerns, as such, is still the
generation of profit for its stockholders. Moreover, the PSE has all the rights pertaining to
corporations, including the right to sue and be sued, to hold property in its own name, to
enter (or not to enter) into contracts with third persons, and to perform all other legal acts
within its allocated express or implied powers.
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Same; Same; Same; Same; Questions of policy and of management are left to the
honest decision of the officers and directors of a corporation, and the courts are without
authority to substitute their judgment for that of the board of directorsthe board is the
business manager of the corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts.A corporation is but an association of individuals, allowed to
transact under an assumed corporate name, and with a distinct legal personality. In
organizing itself as a collective body, it waives no constitutional immunities and perquisites
appropriate to such a body. As to its corporate and management decisions, therefore, the
state will generally not interfere with the same. Questions of policy and of management are
left to the honest decision of the officers and directors of a corporation, and the courts are
without authority to substitute their judgment for the judgment of the board of directors. The
board is the business manager of the corporation, and so long as it acts in good faith, its
orders are not reviewable by the courts.
Same; Same; Same; Same; Notwithstanding the regulatory power of the SEC over the
PSE, and the resultant authority to reverse the PSEs decision in matters of application for
listing in the market, the SEC may exercise such power only if the PSEs judgment is attended
by bad faith.Thus, notwithstanding the regulatory power of the SEC over the PSE, and the
resultant authority to reverse the PSEs decision in matters of application for listing in the
market, the SEC may exercise such power only if the PSEs judgment is attended by bad faith.
In Board of Liquidators vs. Kalaw, it was held that bad faith does not simply connote bad
judgment or negligence. It imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a known duty through some motive or
interest of ill will, partaking of the nature of fraud.
Same; Same; Same; Same; As the primary market for securities, the PSE had
established its name and goodwill, and it has the right to protect such goodwill by maintaining
a reasonable standard of propriety in the entities who choose to transact through its facilities;
The concept of government absolutism is a thing of the past, and should remain so.Also, as
the primary market for securities, the PSE has established its name and goodwill, and it has
the right to protect such goodwill by maintaining a reasonable standard of propriety in the
entities who choose to transact through its facilities. It was reasonable for the PSE, therefore,
to exercise its judgment in the manner it deems appropriate for its business identity, as long
as no rights are trampled upon, and public welfare is safeguarded. In this connection, it is
proper to observe that the concept of government absolutism is a thing of the past, and
should remain so.
Same; Same; Same; Same; The SEC had acted arbitrarily in arrogating unto itself the
discretion of approving the application for listing of Puerto Azul Land, Inc., since this is a
matter addressed to the sound discretion of the PSE, a corporate entity, whose business
judgments are respected in the absence of bad faith.In any case, for the purpose of
determining whether PSE acted correctly in refusing the application of PALI, the true
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ownership of the properties of PALI need not be determined as an absolute fact. What is
material is that the uncertainty of the properties ownership and alienability exists, and this
puts to question the qualification of PALIs public offering. In sum, the Court finds that the
SEC had acted arbitrarily in arrogating unto itself the discretion of approving the application
for listing in the PSE of the private respondent PALI, since this is a matter addressed to the
sound discretion of the PSE, a corporate entity, whose business judgments are respected in
the absence of bad faith.
Same; Same; Same; The question as to what policy is, or should be relied upon in
approving the registration and sale of securities in the PSE is not for the Supreme Court to
determine, but is left to the sound discretion of the Securities and Exchange Commission.The
question as to what policy is, or should be relied upon in approving the registration and sale
of securities in the PSE is not for the Court to determine, but is left to the sound discretion of
the Securities and Exchange Commission. In mandating the SEC to administer the Revised
Securities Act, and in performing its other functions under pertinent laws, the Revised
Securities Act, under Section 3 thereof, gives the SEC the power to promulgate such rules and
regulations as it may consider appropriate in the public interest for the enforcement of the
said laws. The second paragraph of Section 4 of the said law, on the other hand, provides that
no security, unless exempt by law, shall be issued, endorsed, sold, transferred or in any other
manner conveyed to the public, unless registered in accordance with the rules and regulations
that shall be promulgated in the public interest and for the protection of investors by the
Commission. Presidential Decree No. 902-A, on the other hand, provides that the SEC, as
regulatory agency, has supervision and control over all corporations and over the securities
market as a whole, and as such, is given ample authority in determining appropriate policies.
Same; Same; Same; The absolute reliance on the full disclosure method in the
registration of securities is untenable.A reading of the foregoing grounds reveals the
intention of the lawmakers to make the registration and issuance of securities dependent, to
a certain extent, on the merits of the securities themselves, and of the issuer, to be
determined by the Securities and Exchange Commission. This measure was meant to protect
the interests of the investing public against fraudulent and worthless securities, and the SEC is
mandated by law to safeguard these interests, following the policies and rules therefore
provided. The absolute reliance on the full disclosure method in the registration of securities
is, therefore, untenable. As it is, the Court finds that the private respondent PALI, on at least
two points (Nos. 1 and 5) has failed to support the propriety of the issue of its shares with
unfailing clarity, thereby lending support to the conclusion that the PSE acted correctly in
refusing the listing of PALI in its stock exchange. This does not discount the effectivity of
whatever method the SEC, in the exercise of its vested authority, chooses in setting the
standard for public offerings of corporations wishing to do so. However, the SEC must
recognize and implement the mandate of the law, particularly the Revised Securities Act, the
provisions of which cannot be amended or supplanted by mere administrative issuance.
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PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
TORRES, JR., J.:
The Securities and Exchange Commission is the government agency, under the direct
general supervision of the Office of the President, 1 with the immense task of enforcing the
Revised Securities Act, and all other duties assigned to it by pertinent laws. Among its
inumerable functions, and one of the most important, is the supervision of all corporations,
partnerships or associations, who are grantees of primary franchise and/or a license or permit
issued by the government to operate in the Philippines. 2 Just how far this regulatory
authority extends, particularly, with regard to the Petitioner Philippine Stock Exchange, Inc. is
the issue in the case at bar.
In this Petition for Review on Certiorari, petitioner assails the resolution of the
respondent Court of Appeals, dated June 27, 1996, which affirmed the decision of the
Securities and Exchange Commission ordering the petitioner Philippine Stock Exchange, Inc.
to allow the private respondent Puerto Azul Land, Inc. to be listed in its stock market, thus
paving the way for the public offering of PALI's shares.
The facts of the case are undisputed, and are hereby restated in sum.
The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had sought to
offer its shares to the public in order to raise funds allegedly to develop its properties and pay
its loans with several banking institutions. In January, 1995, PALI was issued a Permit to Sell its
shares to the public by the Securities and Exchange Commission (SEC). To facilitate the
trading of its shares among investors, PALI sought to course the trading of its shares through
the Philippine Stock Exchange, Inc. (PSE), for which purpose it filed with the said stock
exchange an application to list its shares, with supporting documents attached.
On February 8, 1996, the Listing Committee of the PSE, upon a perusal of PALI's
application, recommended to the PSE's Board of Governors the approval of PALI's listing
application.
On February 14, 1996, before it could act upon PALI's application, the Board of
Governors of the PSE received a letter from the heirs of Ferdinand E. Marcos, claiming that
the late President Marcos was the legal and beneficial owner of certain properties forming
part of the Puerto Azul Beach Hotel and Resort Complex which PALI claims to be among its
assets and that the Ternate Development Corporation, which is among the stockholders of
PALI, likewise appears to have been held and continue to be held in trust by one Rebecco
178

Panlilio for then President Marcos and now, effectively for his estate, and requested PALI's
application to be deferred. PALI was requested to comment upon the said letter.
PALI's answer stated that the properties forming part of the Puerto Azul Beach Hotel
and Resort Complex were not claimed by PALI as its assets. On the contrary, the resort is
actually owned by Fantasia Filipina Resort, Inc. and the Puerto Azul Country Club, entities
distinct from PALI. Furthermore, the Ternate Development Corporation owns only 1.20% of
PALI. The Marcoses responded that their claim is not confined to the facilities forming part of
the Puerto Azul Hotel and Resort Complex, thereby implying that they are also asserting legal
and beneficial ownership of other properties titled under the name of PALI.
On February 20, 1996, the PSE wrote Chairman Magtanggol Gunigundo of the
Presidential Commission on Good Government (PCGG) requesting for comments on the
letters of the PALI and the Marcoses. On March 4, 1996, the PSE was informed that the
Marcoses received a Temporary Restraining Order on the same date, enjoining the Marcoses
from, among others, "further impeding, obstructing, delaying or interfering in any manner by
or any means with the consideration, processing and approval by the PSE of the initial public
offering of PALI." The TRO was issued by Judge Martin S. Villarama, Executive Judge of the
RTC of Pasig City in Civil Case No. 65561, pending in Branch 69 thereof.
In its regular meeting held on March 27, 1996, the Board of Governors of the PSE
reached its decision to reject PALI's application, citing the existence of serious claims, issues
and circumstances surrounding PALI's ownership over its assets that adversely affect the
suitability of listing PALI's shares in the stock exchange.
On April 11, 1996, PALI wrote a letter to the SEC addressed to the then Acting
Chairman, Perfecto R. Yasay, Jr., bringing to the SEC's attention the action taken by the PSE in
the application of PALI for the listing of its shares with the PSE, and requesting that the SEC,
in the exercise of its supervisory and regulatory powers over stock exchanges under Section
6(j) of P.D. No. 902-A, review the PSE's action on PALI's listing application and institute such
measures as are just and proper under the circumstances.
On the same date, or on April 11, 1996, the SEC wrote to the PSE, attaching thereto
the letter of PALI and directing the PSE to file its comments thereto within five days from its
receipt and for its authorized representative to appear for an "inquiry" on the matter. On
April 22, 1996, the PSE submitted a letter to the SEC containing its comments to the April 11,
1996 letter of PALI.
On April 24, 1996, the SEC rendered its Order, reversing the PSE's decision. The
dispositive portion of the said order reads:
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Corporation Law
WHEREFORE, premises considered, and invoking the Commissioner's
authority and jurisdiction under Section 3 of the Revised Securities Act, in
conjunction with Section 3, 6(j) and 6(m) of Presidential Decree No. 902-A,
the decision of the Board of Governors of the Philippine Stock Exchange
denying the listing of shares of Puerto Azul Land, Inc., is hereby set aside,
and the PSE is hereby ordered to immediately cause the listing of the PALI
shares in the Exchange, without prejudice to its authority to require PALI to
disclose such other material information it deems necessary for the
protection of the investigating public.
This Order shall take effect immediately.
SO ORDERED.
PSE filed a motion for reconsideration of the said order on April 29, 1996, which was,
however denied by the Commission in its May 9, 1996 Order which states:
WHEREFORE, premises considered, the Commission finds no
compelling reason to reconsider its order dated April 24, 1996, and in the
light of recent developments on the adverse claim against the PALI
properties, PSE should require PALI to submit full disclosure of material facts
and information to protect the investing public. In this regard, PALI is hereby
ordered to amend its registration statements filed with the Commission to
incorporate the full disclosure of these material facts and information.
Dissatisfied with this ruling, the PSE filed with the Court of Appeals on May 17, 1996 a
Petition for Review (with Application for Writ of Preliminary Injunction and Temporary
Restraining Order), assailing the above mentioned orders of the SEC, submitting the following
as errors of the SEC:
I. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE OF
DISCRETION IN ISSUING THE ASSAILED ORDERS WITHOUT
POWER, JURISDICTION, OR AUTHORITY; SEC HAS NO
POWER TO ORDER THE LISTING AND SALE OF SHARES OF
PALI WHOSE ASSETS ARE SEQUESTERED AND TO REVIEW
AND SUBSTITUTE DECISIONS OF PSE ON LISTING
APPLICATIONS;
II. SEC COMMITTED SERIOUS ERROR AND GRAVE ABUSE
OF DISCRETION IN FINDING THAT PSE ACTED IN AN
ARBITRARY AND ABUSIVE MANNER IN DISAPPROVING
PALI'S LISTING APPLICATION;
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III. THE ASSAILED ORDERS OF SEC ARE ILLEGAL AND VOID
FOR ALLOWING FURTHER DISPOSITION OF PROPERTIES IN
CUSTODIA LEGIS AND WHICH FORM PART OF
NAVAL/MILITARY RESERVATION; AND
IV. THE FULL DISCLOSURE OF THE SEC WAS NOT
PROPERLY PROMULGATED AND ITS IMPLEMENTATION
AND APPLICATION IN THIS CASE VIOLATES THE DUE
PROCESS CLAUSE OF THE CONSTITUTION.
On June 4, 1996, PALI filed its Comment to the Petition for Review and subsequently,
a Comment and Motion to Dismiss. On June 10, 1996, PSE fled its Reply to Comment and
Opposition to Motion to Dismiss.
On June 27, 1996, the Court of Appeals promulgated its Resolution dismissing the
PSE's Petition for Review. Hence, this Petition by the PSE.
The appellate court had ruled that the SEC had both jurisdiction and authority to look
into the decision of the petitioner PSE, pursuant to Section 3 3 of the Revised Securities Act in
relation to Section 6(j) and 6(m) 4 of P.D. No. 902-A, and Section 38(b) 5 of the Revised
Securities Act, and for the purpose of ensuring fair administration of the exchange. Both as a
corporation and as a stock exchange, the petitioner is subject to public respondent's
jurisdiction, regulation and control. Accepting the argument that the public respondent has
the authority merely to supervise or regulate, would amount to serious consequences,
considering that the petitioner is a stock exchange whose business is impressed with public
interest. Abuse is not remote if the public respondent is left without any system of control. If
the securities act vested the public respondent with jurisdiction and control over all
corporations; the power to authorize the establishment of stock exchanges; the right to
supervise and regulate the same; and the power to alter and supplement rules of the
exchange in the listing or delisting of securities, then the law certainly granted to the public
respondent the plenary authority over the petitioner; and the power of review necessarily
comes within its authority.
All in all, the court held that PALI complied with all the requirements for public listing,
affirming the SEC's ruling to the effect that:
. . . the Philippine Stock Exchange has acted in an arbitrary and abusive
manner in disapproving the application of PALI for listing of its shares in the
face of the following considerations:
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1. PALI has clearly and admittedly complied with the Listing Rules and full
disclosure requirements of the Exchange;
2. In applying its clear and reasonable standards on the suitability for listing
of shares, PSE has failed to justify why it acted differently on the application
of PALI, as compared to the IPOs of other companies similarly situated that
were allowed listing in the Exchange;
3. It appears that the claims and issues on the title to PALI's properties were
even less serious than the claims against the assets of the other companies
in that, the assertions of the Marcoses that they are owners of the disputed
properties were not substantiated enough to overcome the strength of a
title to properties issued under the Torrens System as evidence of ownership
thereof;
4. No action has been filed in any court of competent jurisdiction seeking to
nullify PALI's ownership over the disputed properties, neither has the
government instituted recovery proceedings against these properties. Yet
the import of PSE's decision in denying PALI's application is that it would be
PALI, not the Marcoses, that must go to court to prove the legality of its
ownership on these properties before its shares can be listed.
In addition, the argument that the PALI properties belong to the Military/Naval
Reservation does not inspire belief. The point is, the PALI properties are now titled. A
property losses its public character the moment it is covered by a title. As a matter of fact, the
titles have long been settled by a final judgment; and the final decree having been registered,
they can no longer be re-opened considering that the one year period has already passed.
Lastly, the determination of what standard to apply in allowing PALI's application for listing,
whether the discretion method or the system of public disclosure adhered to by the SEC,
should be addressed to the Securities Commission, it being the government agency that
exercises both supervisory and regulatory authority over all corporations.
On August 15, 19961 the PSE, after it was granted an extension, filed the instant
Petition for Review on Certiorari, taking exception to the rulings of the SEC and the Court of
Appeals. Respondent PALI filed its Comment to the petition on October 17, 1996. On the same
date, the PCGG filed a Motion for Leave to file a Petition for Intervention. This was followed
up by the PCGG's Petition for Intervention on October 21, 1996. A supplemental Comment was
filed by PALI on October 25, 1997. The Office of the Solicitor General, representing the SEC
and the Court of Appeals, likewise filed its Comment on December 26, 1996. In answer to the
PCGG's motion for leave to file petition for intervention, PALI filed its Comment thereto on
January 17, 1997, whereas the PSE filed its own Comment on January 20, 1997.
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On February 25, 1996, the PSE filed its Consolidated Reply to the comments of
respondent PALI (October 17, 1996) and the Solicitor General (December 26, 1996). On May
16, 1997, PALI filed its Rejoinder to the said consolidated reply of PSE.
PSE submits that the Court of Appeals erred in ruling that the SEC had authority to
order the PSE to list the shares of PALI in the stock exchange. Under presidential decree No.
902-A, the powers of the SEC over stock exchanges are more limited as compared to its
authority over ordinary corporations. In connection with this, the powers of the SEC over
stock exchanges under the Revised Securities Act are specifically enumerated, and these do
not include the power to reverse the decisions of the stock exchange. Authorities are in
abundance even in the United States, from which the country's security policies are
patterned, to the effect of giving the Securities Commission less control over stock
exchanges, which in turn are given more lee-way in making the decision whether or not to
allow corporations to offer their stock to the public through the stock exchange. This is in
accord with the "business judgment rule" whereby the SEC and the courts are barred from
intruding into business judgments of corporations, when the same are made in good faith. the
said rule precludes the reversal of the decision of the PSE to deny PALI's listing application,
absent a showing of bad faith on the part of the PSE. Under the listing rules of the PSE, to
which PALI had previously agreed to comply, the PSE retains the discretion to accept or reject
applications for listing. Thus, even if an issuer has complied with the PSE listing rules and
requirements, PSE retains the discretion to accept or reject the issuer's listing application if
the PSE determines that the listing shall not serve the interests of the investing public.
Moreover, PSE argues that the SEC has no jurisdiction over sequestered
corporations, nor with corporations whose properties are under sequestration. A reading of
Republic of the Philippines vs. Sadiganbayan, G.R. No. 105205, 240 SCRA 376, would reveal that
the properties of PALI, which were derived from the Ternate Development Corporation (TDC)
and the Monte del Sol Development Corporation (MSDC). are under sequestration by the
PCGG, and subject of forfeiture proceedings in the Sandiganbayan. This ruling of the Court is
the "law of the case" between the Republic and TDC and MSDC. It categorically declares that
the assets of these corporations were sequestered by the PCGG on March 10, 1986 and April
4, 1988.
It is, likewise, intimated that the Court of Appeals' sanction that PALI's ownership
over its properties can no longer be questioned, since certificates of title have been issued to
PALI and more than one year has since lapsed, is erroneous and ignores well settled
jurisprudence on land titles. That a certificate of title issued under the Torrens System is a
conclusive evidence of ownership is not an absolute rule and admits certain exceptions. It is
fundamental that forest lands or military reservations are non-alienable. Thus, when a title
covers a forest reserve or a government reservation, such title is void.
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PSE, likewise, assails the SEC's and the Court of Appeals reliance on the alleged policy
of "full disclosure" to uphold the listing of PALI's shares with the PSE, in the absence of a clear
mandate for the effectivity of such policy. As it is, the case records reveal the truth that PALI
did not comply with the listing rules and disclosure requirements. In fact, PALI's documents
supporting its application contained misrepresentations and misleading statements, and
concealed material information. The matter of sequestration of PALI's properties and the fact
that the same form part of military/naval/forest reservations were not reflected in PALI's
application.
It is undeniable that the petitioner PSE is not an ordinary corporation, in that
although it is clothed with the markings of a corporate entity, it functions as the primary
channel through which the vessels of capital trade ply. The PSE's relevance to the continued
operation and filtration of the securities transactions in the country gives it a distinct color of
importance such that government intervention in its affairs becomes justified, if not
necessarily. Indeed, as the only operational stock exchange in the country today, the PSE
enjoys a monopoly of securities transactions, and as such, it yields an immense influence upon
the country's economy.
Due to this special nature of stock exchanges, the country's lawmakers has seen it
wise to give special treatment to the administration and regulation of stock exchanges. 6
These provisions, read together with the general grant of jurisdiction, and right of
supervision and control over all corporations under Sec. 3 of P.D. 902-A, give the SEC the
special mandate to be vigilant in the supervision of the affairs of stock exchanges so that the
interests of the investing public may be fully safeguard.
Section 3 of Presidential Decree 902-A, standing alone, is enough authority to uphold
the SEC's challenged control authority over the petitioner PSE even as it provides that "the
Commission shall have absolute jurisdiction, supervision, and control over all corporations,
partnerships or associations, who are the grantees of primary franchises and/or a license or
permit issued by the government to operate in the Philippines. . ." The SEC's regulatory
authority over private corporations encompasses a wide margin of areas, touching nearly all
of a corporation's concerns. This authority springs from the fact that a corporation owes its
existence to the concession of its corporate franchise from the state.
The SEC's power to look into the subject ruling of the PSE, therefore, may be implied from or
be considered as necessary or incidental to the carrying out of the SEC's express power to
insure fair dealing in securities traded upon a stock exchange or to ensure the fair
administration of such exchange. 7 It is, likewise, observed that the principal function of the
SEC is the supervision and control over corporations, partnerships and associations with the
181

end in view that investment in these entities may be encouraged and protected, and their
activities for the promotion of economic development. 8
Thus, it was in the alleged exercise of this authority that the SEC reversed the
decision of the PSE to deny the application for listing in the stock exchange of the private
respondent PALI. The SEC's action was affirmed by the Court of Appeals.
We affirm that the SEC is the entity with the primary say as to whether or not
securities, including shares of stock of a corporation, may be traded or not in the stock
exchange. This is in line with the SEC's mission to ensure proper compliance with the laws,
such as the Revised Securities Act and to regulate the sale and disposition of securities in the
country. 9 As the appellate court explains:
Paramount policy also supports the authority of the public
respondent to review petitioner's denial of the listing. Being a stock
exchange, the petitioner performs a function that is vital to the national
economy, as the business is affected with public interest. As a matter of fact,
it has often been said that the economy moves on the basis of the rise and
fall of stocks being traded. By its economic power, the petitioner certainly
can dictate which and how many users are allowed to sell securities thru the
facilities of a stock exchange, if allowed to interpret its own rules liberally as
it may please. Petitioner can either allow or deny the entry to the market of
securities. To repeat, the monopoly, unless accompanied by control,
becomes subject to abuse; hence, considering public interest, then it should
be subject to government regulation.
The role of the SEC in our national economy cannot be minimized. The legislature,
through the Revised Securities Act, Presidential Decree No. 902-A, and other pertinent laws,
has entrusted to it the serious responsibility of enforcing all laws affecting corporations and
other forms of associations not otherwise vested in some other government office. 10
This is not to say, however, that the PSE's management prerogatives are under the
absolute control of the SEC. The PSE is, alter all, a corporation authorized by its corporate
franchise to engage in its proposed and duly approved business. One of the PSE's main
concerns, as such, is still the generation of profit for its stockholders. Moreover, the PSE has
all the rights pertaining to corporations, including the right to sue and be sued, to hold
property in its own name, to enter (or not to enter) into contracts with third persons, and to
perform all other legal acts within its allocated express or implied powers.
A corporation is but an association of individuals, allowed to transact under an
assumed corporate name, and with a distinct legal personality. In organizing itself as a
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collective body, it waives no constitutional immunities and perquisites appropriate to such a
body. 11 As to its corporate and management decisions, therefore, the state will generally not
interfere with the same. Questions of policy and of management are left to the honest
decision of the officers and directors of a corporation, and the courts are without authority to
substitute their judgment for the judgment of the board of directors. The board is the
business manager of the corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts. 12
Thus, notwithstanding the regulatory power of the SEC over the PSE, and the
resultant authority to reverse the PSE's decision in matters of application for listing in the
market, the SEC may exercise such power only if the PSE's judgment is attended by bad faith.
In Board of Liquidators vs. Kalaw, 13 it was held that bad faith does not simply connote bad
judgment or negligence. It imports a dishonest purpose or some moral obliquity and
conscious doing of wrong. It means a breach of a known duty through some motive or
interest of ill will, partaking of the nature of fraud.
In reaching its decision to deny the application for listing of PALI, the PSE considered
important facts, which, in the general scheme, brings to serious question the qualification of
PALI to sell its shares to the public through the stock exchange. During the time for receiving
objections to the application, the PSE heard from the representative of the late President
Ferdinand E. Marcos and his family who claim the properties of the private respondent to be
part of the Marcos estate. In time, the PCGG confirmed this claim. In fact, an order of
sequestration has been issued covering the properties of PALI, and suit for reconveyance to
the state has been filed in the Sandiganbayan Court. How the properties were effectively
transferred, despite the sequestration order, from the TDC and MSDC to Rebecco Panlilio, and
to the private respondent PALI, in only a short span of time, are not yet explained to the
Court, but it is clear that such circumstances give rise to serious doubt as to the integrity of
PALI as a stock issuer. The petitioner was in the right when it refused application of PALI, for a
contrary ruling was not to the best interest of the general public. The purpose of the Revised
Securities Act, after all, is to give adequate and effective protection to the investing public
against fraudulent representations, or false promises, and the imposition of worthless
ventures. 14
It is to be observed that the U.S. Securities Act emphasized its avowed protection to
acts detrimental to legitimate business, thus:
The Securities Act, often referred to as the "truth in securities" Act,
was designed not only to provide investors with adequate information upon
which to base their decisions to buy and sell securities, but also to protect
legitimate business seeking to obtain capital through honest presentation
against competition from crooked promoters and to prevent fraud in the
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sale of securities. (Tenth Annual Report, U.S. Securities & Exchange
Commission, p. 14).
As has been pointed out, the effects of such an act are chiefly (1)
prevention of excesses and fraudulent transactions, merely by requirement
of that their details be revealed; (2) placing the market during the early
stages of the offering of a security a body of information, which operating
indirectly through investment services and expert investors, will tend to
produce a more accurate appraisal of a security, . . . Thus, the Commission
may refuse to permit a registration statement to become effective if it
appears on its face to be incomplete or inaccurate in any material respect,
and empower the Commission to issue a stop order suspending the
effectiveness of any registration statement which is found to include any
untrue statement of a material fact or to omit to state any material fact
required to be stated therein or necessary to make the statements therein
not misleading. (Idem).
Also, as the primary market for securities, the PSE has established its name and
goodwill, and it has the right to protect such goodwill by maintaining a reasonable standard
of propriety in the entities who choose to transact through its facilities. It was reasonable for
the PSE, therefore, to exercise its judgment in the manner it deems appropriate for its
business identity, as long as no rights are trampled upon, and public welfare is safeguarded.
In this connection, it is proper to observe that the concept of government absolutism
is a thing of the past, and should remain so.
The observation that the title of PALI over its properties is absolute and can no
longer be assailed is of no moment. At this juncture, there is the claim that the properties
were owned by TDC and MSDC and were transferred in violation of sequestration orders, to
Rebecco Panlilio and later on to PALI, besides the claim of the Marcoses that such properties
belong to the Marcos estate, and were held only in trust by Rebecco Panlilio. It is also alleged
by the petitioner that these properties belong to naval and forest reserves, and therefore
beyond private dominion. If any of these claims is established to be true, the certificates of
title over the subject properties now held by PALI map be disregarded, as it is an established
rule that a registration of a certificate of title does not confer ownership over the properties
described therein to the person named as owner. The inscription in the registry, to be
effective, must be made in good faith. The defense of indefeasibility of a Torrens Title does
not extend to a transferee who takes the certificate of title with notice of a flaw.
In any case, for the purpose of determining whether PSE acted correctly in refusing
the application of PALI, the true ownership of the properties of PALI need not be determined
as an absolute fact. What is material is that the uncertainty of the properties' ownership and
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alienability exists, and this puts to question the qualification of PALI's public offering. In sum,
the Court finds that the SEC had acted arbitrarily in arrogating unto itself the discretion of
approving the application for listing in the PSE of the private respondent PALI, since this is a
matter addressed to the sound discretion of the PSE, a corporation entity, whose business
judgments are respected in the absence of bad faith.
The question as to what policy is, or should be relied upon in approving the
registration and sale of securities in the SEC is not for the Court to determine, but is left to the
sound discretion of the Securities and Exchange Commission. In mandating the SEC to
administer the Revised Securities Act, and in performing its other functions under pertinent
laws, the Revised Securities Act, under Section 3 thereof, gives the SEC the power to
promulgate such rules and regulations as it may consider appropriate in the public interest for
the enforcement of the said laws. The second paragraph of Section 4 of the said law, on the
other hand, provides that no security, unless exempt by law, shall be issued, endorsed, sold,
transferred or in any other manner conveyed to the public, unless registered in accordance
with the rules and regulations that shall be promulgated in the public interest and for the
protection of investors by the Commission. Presidential Decree No. 902-A, on the other hand,
provides that the SEC, as regulatory agency, has supervision and control over all corporations
and over the securities market as a whole, and as such, is given ample authority in
determining appropriate policies. Pursuant to this regulatory authority, the SEC has
manifested that it has adopted the policy of "full material disclosure" where all companies,
listed or applying for listing, are required to divulge truthfully and accurately, all material
information about themselves and the securities they sell, for the protection of the investing
public, and under pain of administrative, criminal and civil sanctions. In connection with this, a
fact is deemed material if it tends to induce or otherwise effect the sale or purchase of its
securities. 15 While the employment of this policy is recognized and sanctioned by the laws,
nonetheless, the Revised Securities Act sets substantial and procedural standards which a
proposed issuer of securities must satisfy. 16 Pertinently, Section 9 of the Revised Securities
Act sets forth the possible Grounds for the Rejection of the registration of a security:
The Commission may reject a registration statement and refuse to issue a
permit to sell the securities included in such registration statement if it finds
that
(1) The registration statement is on its face incomplete or inaccurate in any
material respect or includes any untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; or
(2) The issuer or registrant
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(i) is not solvent or not in sound financial condition;
(ii) has violated or has not complied with the provisions of
this Act, or the rules promulgated pursuant thereto, or any
order of the Commission;
(iii) has failed to comply with any of the applicable
requirements and conditions that the Commission may, in
the public interest and for the protection of investors,
impose before the security can be registered;
(iv) has been engaged or is engaged or is about to engage
in fraudulent transaction;
(v) is in any way dishonest or is not of good repute; or
(vi) does not conduct its business in accordance with law or
is engaged in a business that is illegal or contrary to
government rules and regulations.
(3) The enterprise or the business of the issuer is not shown to be sound or
to be based on sound business principles;
wishing to do so. However, the SEC must recognize and implement the mandate of the law,
particularly the Revised Securities Act, the provisions of which cannot be amended or
supplanted by mere administrative issuance.
In resume, the Court finds that the PSE has acted with justified circumspection,
discounting, therefore, any imputation of arbitrariness and whimsical animation on its part. Its
action in refusing to allow the listing of PALI in the stock exchange is justified by the law and
by the circumstances attendant to this case.
ACCORDINGLY, in view of the foregoing considerations, the Court hereby GRANTS
the Petition for Review on Certiorari. The Decisions of the Court of Appeals and the Securities
and Exchange Commission dated July 27, 1996 and April 24, 1996 respectively, are hereby
REVERSED and SET ASIDE, and a new Judgment is hereby ENTERED, affirming the decision of
the Philippine Stock Exchange to deny the application for listing of the private respondent
Puerto Azul Land, Inc.
SO ORDERED.
Regalado and Puno, JJ., concur.
Mendoza, J., concurs in the result.

(4) An officer, member of the board of directors, or principal stockholder of

the issuer is disqualified to be such officer, director or principal stockholder;
or

(5) The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the prejudice of the
public interest or as a fraud upon the purchasers or investors. (Emphasis Ours)
A reading of the foregoing grounds reveals the intention of the lawmakers to make
the registration and issuance of securities dependent, to a certain extent, on the merits of the
securities themselves, and of the issuer, to be determined by the Securities and Exchange
Commission. This measure was meant to protect the interests of the investing public against
fraudulent and worthless securities, and the SEC is mandated by law to safeguard these
interests, following the policies and rules therefore provided. The absolute reliance on the full
disclosure method in the registration of securities is, therefore, untenable. As it is, the Court
finds that the private respondent PALI, on at least two points (nos. 1 and 5) has failed to
support the propriety of the issue of its shares with unfailing clarity, thereby lending support
to the conclusion that the PSE acted correctly in refusing the listing of PALI in its stock
exchange. This does not discount the effectivity of whatever method the SEC, in the exercise
of its vested authority, chooses in setting the standard for public offerings of corporations

184

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 142435 April 30, 2003
ESTELITA BURGOS LIPAT and ALFREDO LIPAT, petitioners,
vs.
PACIFIC BANKING CORPORATION, REGISTER OF DEEDS, RTC EX-OFFICIO SHERIFF OF
QUEZON CITY and the Heirs of EUGENIO D. TRINIDAD, respondents.
Corporation Law; Piercing the Veil of Corporate Identity; When the corporation is the
mere alter ego or business conduit of a person, the separate personality of the corporation
may be disregarded.A careful reading of the judgment of the RTC and the resolution of the
appellate court show that in finding petitioners mortgaged property liable for the obligations
of BEC, both courts below relied upon the alter ego doctrine or instrumentality rule, rather
than fraud in piercing the veil of corporate fiction. When the corporation is the mere alter ego
or business conduit of a person, the separate personality of the corporation may be
disregarded. This is commonly referred to as the instrumentality rule or the alter ego
doctrine, which the courts have applied in disregarding the separate juridical personality of
corporations. As held in one case, Where one corporation is so organized and controlled and
its affairs are conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the instrumentality may be disregarded. The control
necessary to invoke the rule is not majority or even complete stock control but such
domination of finances, policies and practices that the controlled corporation has, so to
speak, no separate mind, will or existence of its own, and is but a conduit for its principal. x x
x This petition for review on certiorari seeks the reversal of the Decision 1 dated
Same; Estoppel; It is a familiar doctrine that if a corporation knowingly permits one of
its officers or any other agent to act within the scope of an apparent authority, it holds him out
to the public as possessing the power to do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying the
agents authority.In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage
contract by virtue of a special power of attorney executed by Estelita Lipat. Recall that
Teresita Lipat acted as the manager of both BEC and BET and had been deciding business
matters in the absence of Estelita Lipat. Further, the export bills secured by BEC were for the
benefit of Mystical Fashion owned by Estelita Lipat. Hence, Pacific Bank cannot be faulted
for relying on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a
special power of attorney. It is a familiar doctrine that if a corporation knowingly permits one
of its officers or any other agent to act within the scope of an apparent authority, it holds him
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out to the public as possessing the power to do those acts; thus, the corporation will, as
against anyone who has in good faith dealt with it through such agent, be estopped from
denying the agents authority.
Remedial Law; Appeals; Findings of fact of the Court of Appeals are final and
conclusive, and cannot be reviewed on appeal by the Supreme Court, provided they are borne
out by the record or based on substantial evidence.As a general rule, findings of fact of the
Court of Appeals are final and conclusive, and cannot be reviewed on appeal by the Supreme
Court, provided they are borne out by the record or based on substantial evidence.As noted
earlier, BEC merely succeeded BET as petitioners alter ego; hence, petitioners mortgaged
property must be held liable for the subsequent loans and credit lines of BEC.
Same; Same; Basic is the rule that matters not raised in the complaint cannot be raised
for the first time on appeal.On the third and final issue, petitioners assail the decision of the
Court of Appeals for not taking cognizance of the issue on attorneys fees on the ground that
it was raised for the first time on appeal. We find the conclusion of the Court of Appeals to be
in accord with settled jurisprudence. Basic is the rule that matters not raised in the complaint
cannot be raised for the first time on appeal. A close perusal of the complaint yields no
allegations disputing the attorneys fees imposed under the real estate mortgage and
petitioners cannot now allege that they have impliedly disputed the same when they sought
the annulment of the contract.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
QUISUMBING, J.:
October 21, 1999 of the Court of Appeals in CA-G.R. CV No. 41536 which dismissed herein
petitioners' appeal from the Decision2 dated February 10, 1993 of the Regional Trial Court
(RTC) of Quezon City, Branch 84, in Civil Case No. Q-89-4152. The trial court had dismissed
petitioners' complaint for annulment of real estate mortgage and the extra-judicial
foreclosure thereof. Likewise brought for our review is the Resolution 3 dated February 23,
2000 of the Court of Appeals which denied petitioners' motion for reconsideration.
The facts, as culled from records, are as follows:
Petitioners, the spouses Alfredo Lipat and Estelita Burgos Lipat, owned "Bela's
Export Trading" (BET), a single proprietorship with principal office at No. 814 Aurora
Boulevard, Cubao, Quezon City. BET was engaged in the manufacture of garments for
domestic and foreign consumption. The Lipats also owned the "Mystical Fashions" in the
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United States, which sells goods imported from the Philippines through BET. Mrs. Lipat
designated her daughter, Teresita B. Lipat, to manage BET in the Philippines while she was
managing "Mystical Fashions" in the United States.
In order to facilitate the convenient operation of BET, Estelita Lipat executed on
December 14, 1978, a special power of attorney appointing Teresita Lipat as her attorney-in-
fact to obtain loans and other credit accommodations from respondent Pacific Banking
Corporation (Pacific Bank). She likewise authorized Teresita to execute mortgage contracts
on properties owned or co-owned by her as security for the obligations to be extended by
Pacific Bank including any extension or renewal thereof.
Sometime in April 1979, Teresita, by virtue of the special power of attorney, was able
to secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and exported to
"Mystical Fashions" in the United States. As security therefor, the Lipat spouses, as
represented by Teresita, executed a Real Estate Mortgage over their property located at No.
814 Aurora Blvd., Cubao, Quezon City. Said property was likewise made to secure "other
additional or new loans, discounting lines, overdrafts and credit accommodations, of
whatever amount, which the Mortgagor and/or Debtor may subsequently obtain from the
Mortgagee as well as any renewal or extension by the Mortgagor and/or Debtor of the whole
or part of said original, additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the Mortgagor
and/or Debtor owing to the Mortgagee, whether directly, or indirectly, principal or secondary,
as appears in the accounts, books and records of the Mortgagee." 4
On September 5, 1979, BET was incorporated into a family corporation named Bela's
Export Corporation (BEC) in order to facilitate the management of the business. BEC was
engaged in the business of manufacturing and exportation of all kinds of garments of
whatever kind and description5 and utilized the same machineries and equipment previously
used by BET. Its incorporators and directors included the Lipat spouses who owned a
combined 300 shares out of the 420 shares subscribed, Teresita Lipat who owned 20 shares,
and other close relatives and friends of the Lipats.6 Estelita Lipat was named president of BEC,
while Teresita became the vice-president and general manager.
Eventually, the loan was later restructured in the name of BEC and subsequent loans
were obtained by BEC with the corresponding promissory notes duly executed by Teresita on
behalf of the corporation. A letter of credit was also opened by Pacific Bank in favor of A. O.
Knitting Manufacturing Co., Inc., upon the request of BEC after BEC executed the
corresponding trust receipt therefor. Export bills were also executed in favor of Pacific Bank
for additional finances. These transactions were all secured by the real estate mortgage over
the Lipats' property.
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The promissory notes, export bills, and trust receipt eventually became due and
demandable. Unfortunately, BEC defaulted in its payments. After receipt of Pacific Bank's
demand letters, Estelita Lipat went to the office of the bank's liquidator and asked for
additional time to enable her to personally settle BEC's obligations. The bank acceded to her
request but Estelita failed to fulfill her promise.
Consequently, the real estate mortgage was foreclosed and after compliance with
the requirements of the law the mortgaged property was sold at public auction. On January
31, 1989, a certificate of sale was issued to respondent Eugenio D. Trinidad as the highest
bidder.
On November 28, 1989, the spouses Lipat filed before the Quezon City RTC a
complaint for annulment of the real estate mortgage, extrajudicial foreclosure and the
certificate of sale issued over the property against Pacific Bank and Eugenio D. Trinidad. The
complaint, which was docketed as Civil Case No. Q-89-4152, alleged, among others, that the
promissory notes, trust receipt, and export bills were all ultra vires acts of Teresita as they
were executed without the requisite board resolution of the Board of Directors of BEC. The
Lipats also averred that assuming said acts were valid and binding on BEC, the same were the
corporation's sole obligation, it having a personality distinct and separate from spouses Lipat.
It was likewise pointed out that Teresita's authority to secure a loan from Pacific Bank was
specifically limited to Mrs. Lipat's sole use and benefit and that the real estate mortgage was
executed to secure the Lipats' and BET's P583,854.00 loan only.
In their respective answers, Pacific Bank and Trinidad alleged in common that
petitioners Lipat cannot evade payments of the value of the promissory notes, trust receipt,
and export bills with their property because they and the BEC are one and the same, the latter
being a family corporation. Respondent Trinidad further claimed that he was a buyer in good
faith and for value and that petitioners are estopped from denying BEC's existence after
holding themselves out as a corporation.
After trial on the merits, the RTC dismissed the complaint, thus:
WHEREFORE, this Court holds that in view of the facts contained in the
record, the complaint filed in this case must be, as is hereby, dismissed. Plaintiffs
however has five (5) months and seventeen (17) days reckoned from the finality of
this decision within which to exercise their right of redemption. The writ of injunction
issued is automatically dissolved if no redemption is effected within that period.
The counterclaims and cross-claim are likewise dismissed for lack of legal and
factual basis.
186

No costs.
IT IS SO ORDERED.7
The trial court ruled that there was convincing and conclusive evidence proving that
BEC was a family corporation of the Lipats. As such, it was a mere extension of petitioners'
personality and business and a mere alter ego or business conduit of the Lipats established for
their own benefit. Hence, to allow petitioners to invoke the theory of separate corporate
personality would sanction its use as a shield to further an end subversive of justice. 8 Thus,
the trial court pierced the veil of corporate fiction and held that Bela's Export Corporation and
petitioners (Lipats) are one and the same. Pacific Bank had transacted business with both BET
and BEC on the supposition that both are one and the same. Hence, the Lipats were estopped
from disclaiming any obligations on the theory of separate personality of corporations, which
is contrary to principles of reason and good faith.
The Lipats timely appealed the RTC decision to the Court of Appeals in CA-G.R. CV No.
41536. Said appeal, however, was dismissed by the appellate court for lack of merit. The Court
of Appeals found that there was ample evidence on record to support the application of the
doctrine of piercing the veil of corporate fiction. In affirming the findings of the RTC, the
appellate court noted that Mrs. Lipat had full control over the activities of the corporation
and used the same to further her business interests.9 In fact, she had benefited from the loans
obtained by the corporation to finance her business. It also found unnecessary a board
resolution authorizing Teresita Lipat to secure loans from Pacific Bank on behalf of BEC
because the corporation's by-laws allowed such conduct even without a board resolution.
Finally, the Court of Appeals ruled that the mortgage property was not only liable for the
original loan of P583,854.00 but likewise for the value of the promissory notes, trust receipt,
and export bills as the mortgage contract equally applies to additional or new loans,
discounting lines, overdrafts, and credit accommodations which petitioners subsequently
obtained from Pacific Bank.
The Lipats then moved for reconsideration, but this was denied by the appellate
court in its Resolution of February 23, 2000.10
Hence, this petition, with petitioners submitting that the court a quo erred
1) . . . IN HOLDING THAT THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION APPLIES IN THIS CASE.
2) . . . IN HOLDING THAT PETITIONERS' PROPERTY CAN BE HELD LIABLE UNDER THE
REAL ESTATE MORTGAGE NOT ONLY FOR THE AMOUNT OF P583,854.00 BUT ALSO
FOR THE FULL VALUE OF PROMISSORY NOTES, TRUST RECEIPTS AND EXPORT BILLS
OF BELA'S EXPORT CORPORATION.
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3) . . . IN HOLDING THAT "THE IMPOSITION OF 15% ATTORNEY'S FEES IN THE EXTRA-
JUDICIAL FORECLOSURE IS BEYOND THIS COURT'S JURISDICTION FOR IT IS BEING
RAISED FOR THE FIRST TIME IN THIS APPEAL."
4) . . . IN HOLDING PETITIONER ALFREDO LIPAT LIABLE TO PAY THE DISPUTED
PROMISSORY NOTES, THE DOLLAR ACCOMMODATIONS AND TRUST RECEIPTS
DESPITE THE EVIDENT FACT THAT THEY WERE NOT SIGNED BY HIM AND THEREFORE
ARE NOT VALID OR ARE NOT BINDING TO HIM.
5) . . . IN DENYING PETITIONERS' MOTION FOR RECONSIDERATION AND IN HOLDING
THAT SAID MOTION FOR RECONSIDERATION IS "AN UNAUTHORIZED MOTION, A
MERE SCRAP OF PAPER WHICH CAN NEITHER BIND NOR BE OF ANY CONSEQUENCE
TO APPELLANTS."11
In sum, the following are the relevant issues for our resolution:
1. Whether or not the doctrine of piercing the veil of corporate fiction is applicable in this case;
2. Whether or not petitioners' property under the real estate mortgage is liable not only for
the amount of P583,854.00 but also for the value of the promissory notes, trust receipt, and
export bills subsequently incurred by BEC; and
3. Whether or not petitioners are liable to pay the 15% attorney's fees stipulated in the deed of
real estate mortgage.
On the first issue, petitioners contend that both the appellate and trial courts erred in
holding them liable for the obligations incurred by BEC through the application of the doctrine
of piercing the veil of corporate fiction absent any clear showing of fraud on their part.
Respondents counter that there is clear and convincing evidence to show fraud on
part of petitioners given the findings of the trial court, as affirmed by the Court of Appeals,
that BEC was organized as a business conduit for the benefit of petitioners.
Petitioners' contentions fail to persuade this Court. A careful reading of the judgment
of the RTC and the resolution of the appellate court show that in finding petitioners'
mortgaged property liable for the obligations of BEC, both courts below relied upon the alter
ego doctrine or instrumentality rule, rather than fraud in piercing the veil of corporate fiction.
When the corporation is the mere alter ego or business conduit of a person, the separate
personality of the corporation may be disregarded. 12 This is commonly referred to as the
"instrumentality rule" or the alter ego doctrine, which the courts have applied in disregarding
the separate juridical personality of corporations. As held in one case,
187

Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other, the
fiction of the corporate entity of the 'instrumentality' may be disregarded. The
control necessary to invoke the rule is not majority or even complete stock control
but such domination of finances, policies and practices that the controlled
corporation has, so to speak, no separate mind, will or existence of its own, and is
but a conduit for its principal. x x x .13
We find that the evidence on record demolishes, rather than buttresses, petitioners'
contention that BET and BEC are separate business entities. Note that Estelita Lipat admitted
that she and her husband, Alfredo, were the owners of BET 14 and were two of the
incorporators and majority stockholders of BEC. 15 It is also undisputed that Estelita Lipat
executed a special power of attorney in favor of her daughter, Teresita, to obtain loans and
credit lines from Pacific Bank on her behalf.16 Incidentally, Teresita was designated as
executive-vice president and general manager of both BET and BEC, respectively. 17 We note
further that: (1) Estelita and Alfredo Lipat are the owners and majority shareholders of BET
and BEC, respectively;18 (2) both firms were managed by their daughter, Teresita; 19 (3) both
firms were engaged in the garment business, supplying products to "Mystical Fashion," a U.S.
firm established by Estelita Lipat; (4) both firms held office in the same building owned by the
Lipats;20 (5) BEC is a family corporation with the Lipats as its majority stockholders; (6) the
business operations of the BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by Estelita Lipat and the
corporation itself had no visible assets; (8) the board of directors of BEC was composed of the
Burgos and Lipat family members;21 (9) Estelita had full control over the activities of and
decided business matters of the corporation;22 and that (10) Estelita Lipat had benefited from
the loans secured from Pacific Bank to finance her business abroad 23 and from the export bills
secured by BEC for the account of "Mystical Fashion."24 It could not have been coincidental
that BET and BEC are so intertwined with each other in terms of ownership, business purpose,
and management. Apparently, BET and BEC are one and the same and the latter is a conduit
of and merely succeeded the former. Petitioners' attempt to isolate themselves from and hide
behind the corporate personality of BEC so as to evade their liabilities to Pacific Bank is
precisely what the classical doctrine of piercing the veil of corporate entity seeks to prevent
and remedy. In our view, BEC is a mere continuation and successor of BET, and petitioners
cannot evade their obligations in the mortgage contract secured under the name of BEC on
the pretext that it was signed for the benefit and under the name of BET. We are thus
constrained to rule that the Court of Appeals did not err when it applied the instrumentality
doctrine in piercing the corporate veil of BEC.
On the second issue, petitioners contend that their mortgaged property should not
be made liable for the subsequent credit lines and loans incurred by BEC because, first, it was
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Corporation Law
not covered by the mortgage contract of BET which only covered the loan of P583,854.00 and
which allegedly had already been paid; and, second, it was secured by Teresita Lipat without
any authorization or board resolution of BEC.
We find petitioners' contention untenable. As found by the Court of Appeals, the
mortgaged property is not limited to answer for the loan of P583,854.00. Thus:
Finally, the extent to which the Lipats' property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the value of
the promissory notes, trust receipt and export bills as well. For the mortgage was
executed not only for the purpose of securing the Bela's Export Trading's original
loan of P583,854.00, but also for "other additional or new loans, discounting lines,
overdrafts and credit accommodations, of whatever amount, which the Mortgagor
and/or Debtor may subsequently obtain from the mortgagee as well as any renewal
or extension by the Mortgagor and/or Debtor of the whole or part of said original,
additional or new loans, discounting lines, overdrafts and other credit
accommodations, including interest and expenses or other obligations of the
Mortgagor and/or Debtor owing to the Mortgagee, whether directly, or indirectly
principal or secondary, as appears in the accounts, books and records of the
mortgagee.25
As a general rule, findings of fact of the Court of Appeals are final and conclusive, and
cannot be reviewed on appeal by the Supreme Court, provided they are borne out by the
record or based on substantial evidence.26 As noted earlier, BEC merely succeeded BET as
petitioners' alter ego; hence, petitioners' mortgaged property must be held liable for the
subsequent loans and credit lines of BEC.
Further, petitioners' contention that the original loan had already been paid, hence,
the mortgaged property should not be made liable to the loans of BEC, is unsupported by any
substantial evidence other than Estelita Lipat's self-serving testimony. Two disputable
presumptions under the rules on evidence weigh against petitioners, namely: (a) that a
person takes ordinary care of his concerns;27 and (b) that things have happened according to
the ordinary course of nature and the ordinary habits of life. 28 Here, if the original loan had
indeed been paid, then logically, petitioners would have asked from Pacific Bank for the
required documents evidencing receipt and payment of the loans and, as owners of the
mortgaged property, would have immediately asked for the cancellation of the mortgage in
the ordinary course of things. However, the records are bereft of any evidence contradicting
or overcoming said disputable presumptions.
Petitioners contend further that the mortgaged property should not bind the loans
and credit lines obtained by BEC as they were secured without any proper authorization or
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board resolution. They also blame the bank for its laxity and complacency in not requiring a
board resolution as a requisite for approving the loans.
Such contentions deserve scant consideration.
Firstly, it could not have been possible for BEC to release a board resolution since per
admissions by both petitioner Estelita Lipat and Alice Burgos, petitioners' rebuttal witness, no
business or stockholder's meetings were conducted nor were there election of officers held
since its incorporation. In fact, not a single board resolution was passed by the corporate
board29 and it was Estelita Lipat and/or Teresita Lipat who decided business matters. 30
Secondly, the principle of estoppel precludes petitioners from denying the validity of
the transactions entered into by Teresita Lipat with Pacific Bank, who in good faith, relied on
the authority of the former as manager to act on behalf of petitioner Estelita Lipat and both
BET and BEC. While the power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in its board of directors, subject
to the articles of incorporation, by-laws, or relevant provisions of law, yet, just as a natural
person may authorize another to do certain acts for and on his behalf, the board of directors
may validly delegate some of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally derived from law, corporate
by-laws, or authorization from the board, either expressly or impliedly by habit, custom, or
acquiescence in the general course of business.31 Apparent authority, is derived not merely
from practice. Its existence may be ascertained through (1) the general manner in which the
corporation holds out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, whether within or
beyond the scope of his ordinary powers. 32
We find no necessity to extensively deal with the liability of Alfredo Lipat for the
subsequent credit lines of BEC. Suffice it to state that Alfredo Lipat never disputed the validity
of the real estate mortgage of the original loan; hence, he cannot now dispute the
subsequent loans obtained using the same mortgage contract since it is, by its very terms, a
continuing mortgage contract.
On the third and final issue, petitioners assail the decision of the Court of Appeals for
not taking cognizance of the issue on attorney's fees on the ground that it was raised for the
first time on appeal. We find the conclusion of the Court of Appeals to be in accord with
settled jurisprudence. Basic is the rule that matters not raised in the complaint cannot be
raised for the first time on appeal.35 A close perusal of the complaint yields no allegations
disputing the attorney's fees imposed under the real estate mortgage and petitioners cannot
now allege that they have impliedly disputed the same when they sought the annulment of
the contract.
In sum, we find no reversible error of law committed by the Court of Appeals in
rendering the decision and resolution herein assailed by petitioners.
WHEREFORE, the petition is DENIED. The Decision dated October 21, 1999 and the Resolution
dated February 23, 2000 of the Court of Appeals in CA-G.R. CV No. 41536 are AFFIRMED. Costs
against petitioners.
SO ORDERED.
Bellosillo, Austria-Martinez and Callejo, Sr., JJ ., concur.

In this case, Teresita Lipat had dealt with Pacific Bank on the mortgage contract by
virtue of a special power of attorney executed by Estelita Lipat. Recall that Teresita Lipat
acted as the manager of both BEC and BET and had been deciding business matters in the
absence of Estelita Lipat. Further, the export bills secured by BEC were for the benefit of
"Mystical Fashion" owned by Estelita Lipat.33 Hence, Pacific Bank cannot be faulted for relying
on the same authority granted to Teresita Lipat by Estelita Lipat by virtue of a special power
of attorney. It is a familiar doctrine that if a corporation knowingly permits one of its officers
or any other agent to act within the scope of an apparent authority, it holds him out to the
public as possessing the power to do those acts; thus, the corporation will, as against anyone
who has in good faith dealt with it through such agent, be estopped from denying the agent's
authority.34

189

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 140667 August 12, 2004
WOODCHILD HOLDINGS, INC., petitioner,
vs.
ROXAS ELECTRIC AND CONSTRUCTION COMPANY, INC., respondent.
Corporations; Corporate Officers; Apparent Authority; Agency; The property of the
corporation is not the property of its stockholders or members and may not be sold by the
stockholders or members without express authorization from the corporations board of
directors.A corporation is a juridical person separate and distinct from its stockholders or
members. Accordingly, the property of the corporation is not the property of its stockholders
or members and may not be sold by the stockholders or members without express
authorization from the corporations board of direc-tors. Section 23 of BP 68, otherwise
known as the Corporation Code of the Philippines, provides: SEC. 23. The Board of Directors
or Trustees.Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business conducted and all
property of such corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from among the
members of the corporation, who shall hold office for one (1) year and until their successors
are elected and qualified. Indubitably, a corporation may act only through its board of
directors or, when authorized either by its by-laws or by its board resolution, through its
officers or agents in the normal course of business. The general principles of agency govern
the relation between the corporation and its officers or agents, subject to the articles of
incorporation, by-laws, or relevant provisions of law. . . .
Same; Same; Same; Estoppel; Acts done by corporate officers beyond the scope of
their authority cannot bind the corporation unless it has ratified such acts expressly or tacitly,
or is estopped from denying them. Generally, the acts of the corporate officers within the
scope of their authority are binding on the corporation. However, under Article 1910 of the
New Civil Code, acts done by such officers beyond the scope of their authority cannot bind
the corporation unless it has ratified such acts expressly or tacitly, or is estopped from
denying them: Art. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority. As for any obligation wherein the
agent has exceeded his power, the principal is not bound except when he ratifies it expressly
or tacitly. Thus, contracts entered into by corporate officers beyond the scope of authority
are unenforceable against the corporation unless ratified by the corporation.
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Corporation Law
Same; Same; Same; Same; Power of Attorney; Powers of attorney are generally
construed strictly and courts will not infer or presume broad powers from deeds which do not
sufficiently include property or subject under which the agent is to deal.Powers of attorney
are generally construed strictly and courts will not infer or presume broad powers from deeds
which do not sufficiently include property or subject under which the agent is to deal.The
general rule is that the power of attorney must be pursued within legal strictures, and the
agent can neither go beyond it; nor beside it. The act done must be legally identical with that
authorized to be done.
Same; Same; Same; Same; The apparent power of an agent is to be determined by the
acts of the principal and not by the acts of the agent.It bears stressing that apparent
authority is based on estoppel and can arise from two instances: first, the principal may
knowingly permit the agent to so hold himself out as having such authority, and in this way,
the principal becomes estopped to claim that the agent does not have such authority; second,
the principal may so clothe the agent with the indicia of authority as to lead a reasonably
prudent person to believe that he actually has such authority. There can be no apparent
authority of an agent without acts or conduct on the part of the principal and such acts or
conduct of the principal must have been known and relied upon in good faith and as a result
of the exercise of reasonable prudence by a third person as claimant and such must have
produced a change of position to its detriment. The apparent power of an agent is to be
determined by the acts of the principal and not by the acts of the agent.
Same; Same; Same; Elements; For the principle of apparent authority to apply, the
petitioner was burdened to prove the following.For the principle of apparent authority to
apply, the petitioner was burdened to prove the following: (a) the acts of the respondent
justifying belief in the agency by the petitioner; (b) knowledge thereof by the respondent
which is sought to be held; and, (c) reliance thereon by the petitioner consistent with ordinary
care and prudence.
Same; Same; Same; Implied Ratification; Ratification cannot be inferred from acts that a
principal has a right to do independently of the unauthorized act of the agent.For an act of
the principal to be considered as an implied ratification of an unauthorized act of an agent,
such act must be inconsistent with any other hypothesis than that he approved and intended
to adopt what had been done in his name. Ratification is based on waiverthe intentional
relinquishment of a known right. Ratification cannot be inferred from acts that a principal has
a right to do independently of the unauthorized act of the agent. Moreover, if a writing is
required to grant an authority to do a particular act, ratification of that act must also be in
writing.
PETITION for review on certiorari of a decision of the Court of Appeals.
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The facts are stated in the opinion of the Court.
DECISION
CALLEJO, SR., J.:
This is a petition for review on certiorari of the Decision 1 of the Court of Appeals in
CA-G.R. CV No. 56125 reversing the Decision2 of the Regional Trial Court of Makati, Branch 57,
which ruled in favor of the petitioner.
The Antecedents
The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the
Roxas Electric and Construction Company, was the owner of two parcels of land, identified as
Lot No. 491-A-3-B-1 covered by Transfer Certificate of Title (TCT) No. 78085 and Lot No. 491-A-
3-B-2 covered by TCT No. 78086. A portion of Lot No. 491-A-3-B-1 which abutted Lot No. 491-A-
3-B-2 was a dirt road accessing to the Sumulong Highway, Antipolo, Rizal.
At a special meeting on May 17, 1991, the respondent's Board of Directors approved a
resolution authorizing the corporation, through its president, Roberto B. Roxas, to sell Lot
No. 491-A-3-B-2 covered by TCT No. 78086, with an area of 7,213 square meters, at a price and
under such terms and conditions which he deemed most reasonable and advantageous to the
corporation; and to execute, sign and deliver the pertinent sales documents and receive the
proceeds of the sale for and on behalf of the company.3
Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot No. 491-A-3-B-2 covered
by TCT No. 78086 on which it planned to construct its warehouse building, and a portion of
the adjoining lot, Lot No. 491-A-3-B-1, so that its 45-foot container van would be able to readily
enter or leave the property. In a Letter to Roxas dated June 21, 1991, WHI President Jonathan
Y. Dy offered to buy Lot No. 491-A-3-B-2 under stated terms and conditions for P1,000 per
square meter or at the price of P7,213,000.4 One of the terms incorporated in Dy's offer was
the following provision:
5. This Offer to Purchase is made on the representation and warranty of the
OWNER/SELLER, that he holds a good and registrable title to the property, which
shall be conveyed CLEAR and FREE of all liens and encumbrances, and that the area
of 7,213 square meters of the subject property already includes the area on which the
right of way traverses from the main lot (area) towards the exit to the Sumulong
Highway as shown in the location plan furnished by the Owner/Seller to the buyer.
Furthermore, in the event that the right of way is insufficient for the buyer's
purposes (example: entry of a 45-foot container), the seller agrees to sell additional
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Corporation Law
square meter from his current adjacent property to allow the buyer to full access and
full use of the property.5
Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month
later or on July 1, 1991, Roxas, as President of RECCI, as vendor, and Dy, as President of WHI,
as vendee, executed a contract to sell in which RECCI bound and obliged itself to sell to Dy Lot
No. 491-A-3-B-2 covered by TCT No. 78086 for P7,213,000.6 On September 5, 1991, a Deed of
Absolute Sale7 in favor of WHI was issued, under which Lot No. 491-A-3-B-2 covered by TCT No.
78086 was sold for P5,000,000, receipt of which was acknowledged by Roxas under the
following terms and conditions:
The Vendor agree (sic), as it hereby agrees and binds itself to give Vendee
the beneficial use of and a right of way from Sumulong Highway to the property
herein conveyed consists of 25 square meters wide to be used as the latter's egress
from and ingress to and an additional 25 square meters in the corner of Lot No. 491-A-
3-B-1, as turning and/or maneuvering area for Vendee's vehicles.
The Vendor agrees that in the event that the right of way is insufficient for
the Vendee's use (ex entry of a 45-foot container) the Vendor agrees to sell
additional square meters from its current adjacent property to allow the Vendee full
access and full use of the property.
The Vendor hereby undertakes and agrees, at its account, to defend the title
of the Vendee to the parcel of land and improvements herein conveyed, against all
claims of any and all persons or entities, and that the Vendor hereby warrants the
right of the Vendee to possess and own the said parcel of land and improvements
thereon and will defend the Vendee against all present and future claims and/or
action in relation thereto, judicial and/or administrative. In particular, the Vendor shall
eject all existing squatters and occupants of the premises within two (2) weeks from
the signing hereof. In case of failure on the part of the Vendor to eject all occupants
and squatters within the two-week period or breach of any of the stipulations,
covenants and terms and conditions herein provided and that of contract to sell
dated 1 July 1991, the Vendee shall have the right to cancel the sale and demand
reimbursement for all payments made to the Vendor with interest thereon at 36% per
annum.8
On September 10, 1991, the Wimbeco Builder's, Inc. (WBI) submitted its quotation for
P8,649,000 to WHI for the construction of the warehouse building on a portion of the
property with an area of 5,088 square meters.9 WBI proposed to start the project on October
1, 1991 and to turn over the building to WHI on February 29, 1992.10
191

In a Letter dated September 16, 1991, Ponderosa Leather Goods Company, Inc.
confirmed its lease agreement with WHI of a 5,000-square-meter portion of the warehouse
yet to be constructed at the rental rate of P65 per square meter. Ponderosa emphasized the
need for the warehouse to be ready for occupancy before April 1, 1992. 11 WHI accepted the
offer. However, WBI failed to commence the construction of the warehouse in October 1, 1991
as planned because of the presence of squatters in the property and suggested a
renegotiation of the contract after the squatters shall have been evicted.12 Subsequently, the
squatters were evicted from the property.
On March 31, 1992, WHI and WBI executed a Letter-Contract for the construction of
the warehouse building for P11,804,160.13 The contractor started construction in April 1992
even before the building officials of Antipolo City issued a building permit on May 28, 1992.
After the warehouse was finished, WHI issued on March 21, 1993 a certificate of occupancy by
the building official. Earlier, or on March 18, 1993, WHI, as lessor, and Ponderosa, as lessee,
executed a contract of lease over a portion of the property for a monthly rental of P300,000
for a period of three years from March 1, 1993 up to February 28, 1996. 14
In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were
parked on a portion of the property over which WHI had been granted a right of way. Roxas
promised to look into the matter. Dy and Roxas discussed the need of the WHI to buy a 500-
square-meter portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 as provided for in the
deed of absolute sale. However, Roxas died soon thereafter. On April 15, 1992, the WHI wrote
the RECCI, reiterating its verbal requests to purchase a portion of the said lot as provided for
in the deed of absolute sale, and complained about the latter's failure to eject the squatters
within the three-month period agreed upon in the said deed.
The WHI demanded that the RECCI sell a portion of Lot No. 491-A-3-B-1 covered by
TCT No. 78085 for its beneficial use within 72 hours from notice thereof, otherwise the
appropriate action would be filed against it. RECCI rejected the demand of WHI. WHI
reiterated its demand in a Letter dated May 29, 1992. There was no response from RECCI.
On June 17, 1992, the WHI filed a complaint against the RECCI with the Regional Trial
Court of Makati, for specific performance and damages, and alleged, inter alia, the following
in its complaint:
5. The "current adjacent property" referred to in the aforequoted paragraph of the
Deed of Absolute Sale pertains to the property covered by Transfer Certificate of
Title No. N-78085 of the Registry of Deeds of Antipolo, Rizal, registered in the name
of herein defendant Roxas Electric.
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Corporation Law
6. Defendant Roxas Electric in patent violation of the express and valid terms of the
Deed of Absolute Sale unjustifiably refused to deliver to Woodchild Holdings the
stipulated beneficial use and right of way consisting of 25 square meters and 55
square meters to the prejudice of the plaintiff.
7. Similarly, in as much as the 25 square meters and 55 square meters alloted to
Woodchild Holdings for its beneficial use is inadequate as turning and/or
maneuvering area of its 45-foot container van, Woodchild Holdings manifested its
intention pursuant to para. 5 of the Deed of Sale to purchase additional square
meters from Roxas Electric to allow it full access and use of the purchased property,
however, Roxas Electric refused and failed to merit Woodchild Holdings' request
contrary to defendant Roxas Electric's obligation under the Deed of Absolute Sale
(Annex "A").
8. Moreover, defendant, likewise, failed to eject all existing squatters and occupants
of the premises within the stipulated time frame and as a consequence thereof,
plaintiff's planned construction has been considerably delayed for seven (7) months
due to the squatters who continue to trespass and obstruct the subject property,
thereby Woodchild Holdings incurred substantial losses amounting to P3,560,000.00
occasioned by the increased cost of construction materials and labor.
9. Owing further to Roxas Electric's deliberate refusal to comply with its obligation
under Annex "A," Woodchild Holdings suffered unrealized income of P300,000.00 a
month or P2,100,000.00 supposed income from rentals of the subject property for
seven (7) months.
10. On April 15, 1992, Woodchild Holdings made a final demand to Roxas Electric to
comply with its obligations and warranties under the Deed of Absolute Sale but
notwithstanding such demand, defendant Roxas Electric refused and failed and
continue to refuse and fail to heed plaintiff's demand for compliance.
Copy of the demand letter dated April 15, 1992 is hereto attached as Annex
"B" and made an integral part hereof.
11. Finally, on 29 May 1991, Woodchild Holdings made a letter request addressed to
Roxas Electric to particularly annotate on Transfer Certificate of Title No. N-78085 the
agreement under Annex "A" with respect to the beneficial use and right of way,
however, Roxas Electric unjustifiably ignored and disregarded the same.
Copy of the letter request dated 29 May 1992 is hereto attached as Annex "C" and
made an integral part hereof.
192

12. By reason of Roxas Electric's continuous refusal and failure to comply with
Woodchild Holdings' valid demand for compliance under Annex "A," the latter was
constrained to litigate, thereby incurring damages as and by way of attorney's fees in
the amount of P100,000.00 plus costs of suit and expenses of litigation.15
The WHI prayed that, after due proceedings, judgment be rendered in its favor, thus:
WHEREFORE, it is respectfully prayed that judgment be rendered in favor of
Woodchild Holdings and ordering Roxas Electric the following:
a) to deliver to Woodchild Holdings the beneficial use of the stipulated 25 square
meters and 55 square meters;
b) to sell to Woodchild Holdings additional 25 and 100 square meters to allow it full
access and use of the purchased property pursuant to para. 5 of the Deed of
Absolute Sale;
c) to cause annotation on Transfer Certificate of Title No. N-78085 the beneficial use
and right of way granted to Woodchild Holdings under the Deed of Absolute Sale;
d) to pay Woodchild Holdings the amount of P5,660,000.00, representing actual
damages and unrealized income;
e) to pay attorney's fees in the amount of P100,000.00; and
f) to pay the costs of suit.
Other reliefs just and equitable are prayed for.16
In its answer to the complaint, the RECCI alleged that it never authorized its former
president, Roberto Roxas, to grant the beneficial use of any portion of Lot No. 491-A-3-B-1, nor
agreed to sell any portion thereof or create a lien or burden thereon. It alleged that, under the
Resolution approved on May 17, 1991, it merely authorized Roxas to sell Lot No. 491-A-3-B-2
covered by TCT No. 78086. As such, the grant of a right of way and the agreement to sell a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085 in the said deed are ultra vires. The
RECCI further alleged that the provision therein that it would sell a portion of Lot No. 491-A-3-
B-1 to the WHI lacked the essential elements of a binding contract.17
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Corporation Law
In its amended answer to the complaint, the RECCI alleged that the delay in the
construction of its warehouse building was due to the failure of the WHI's contractor to
secure a building permit thereon.18
During the trial, Dy testified that he told Roxas that the petitioner was buying a
portion of Lot No. 491-A-3-B-1 consisting of an area of 500 square meters, for the price of
P1,000 per square meter.
On November 11, 1996, the trial court rendered judgment in favor of the WHI, the
decretal portion of which reads:
WHEREFORE, judgment is hereby rendered directing defendant:
(1) To allow plaintiff the beneficial use of the existing right of way plus the stipulated
25 sq. m. and 55 sq. m.;
(2) To sell to plaintiff an additional area of 500 sq. m. priced at P1,000 per sq. m. to
allow said plaintiff full access and use of the purchased property pursuant to Par. 5 of
their Deed of Absolute Sale;
(3) To cause annotation on TCT No. N-78085 the beneficial use and right of way
granted by their Deed of Absolute Sale;
(4) To pay plaintiff the amount of P5,568,000 representing actual damages and
plaintiff's unrealized income;
(5) To pay plaintiff P100,000 representing attorney's fees; and
To pay the costs of suit.
SO ORDERED.19
The trial court ruled that the RECCI was estopped from disowning the apparent
authority of Roxas under the May 17, 1991 Resolution of its Board of Directors. The court
reasoned that to do so would prejudice the WHI which transacted with Roxas in good faith,
believing that he had the authority to bind the WHI relating to the easement of right of way,
as well as the right to purchase a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085.
The RECCI appealed the decision to the CA, which rendered a decision on November
9, 1999 reversing that of the trial court, and ordering the dismissal of the complaint. The CA
ruled that, under the resolution of the Board of Directors of the RECCI, Roxas was merely
authorized to sell Lot No. 491-A-3-B-2 covered by TCT No. 78086, but not to grant right of way
in favor of the WHI over a portion of Lot No. 491-A-3-B-1, or to grant an option to the
193

petitioner to buy a portion thereof. The appellate court also ruled that the grant of a right of
way and an option to the respondent were so lopsided in favor of the respondent because
the latter was authorized to fix the location as well as the price of the portion of its property
to be sold to the respondent. Hence, such provisions contained in the deed of absolute sale
were not binding on the RECCI. The appellate court ruled that the delay in the construction of
WHI's warehouse was due to its fault.
The Present Petition
The petitioner now comes to this Court asserting that:
I.
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DEED OF ABSOLUTE SALE
(EXH. "C") IS ULTRA VIRES.
II.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT
A QUO ALLOWING THE PLAINTIFF-APPELLEE THE BENEFICIAL USE OF THE EXISTING
RIGHT OF WAY PLUS THE STIPULATED 25 SQUARE METERS AND 55 SQUARE METERS
BECAUSE THESE ARE VALID STIPULATIONS AGREED BY BOTH PARTIES TO THE DEED
OF ABSOLUTE SALE (EXH. "C").
III.
THERE IS NO FACTUAL PROOF OR EVIDENCE FOR THE COURT OF APPEALS TO RULE
THAT THE STIPULATIONS OF THE DEED OF ABSOLUTE SALE (EXH. "C") WERE
DISADVANTAGEOUS TO THE APPELLEE, NOR WAS APPELLEE DEPRIVED OF ITS
PROPERTY WITHOUT DUE PROCESS.
IV.
IN FACT, IT WAS WOODCHILD WHO WAS DEPRIVED OF PROPERTY WITHOUT DUE
PROCESS BY THE ASSAILED DECISION.
V.
THE DELAY IN THE CONSTRUCTION WAS DUE TO THE FAILURE OF THE APPELLANT
TO EVICT THE SQUATTERS ON THE LAND AS AGREED IN THE DEED OF ABSOLUTE
SALE (EXH. "C").
VI.
THE COURT OF APPEALS GRAVELY ERRED IN REVERSING THE RULING OF THE COURT
A QUO DIRECTING THE DEFENDANT TO PAY THE PLAINTIFF THE AMOUNT OF
P5,568,000.00 REPRESENTING ACTUAL DAMAGES AND PLAINTIFF'S UNREALIZED
INCOME AS WELL AS ATTORNEY'S FEES.20
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Corporation Law
The threshold issues for resolution are the following: (a) whether the respondent is
bound by the provisions in the deed of absolute sale granting to the petitioner beneficial use
and a right of way over a portion of Lot No. 491-A-3-B-1 accessing to the Sumulong Highway
and granting the option to the petitioner to buy a portion thereof, and, if so, whether such
agreement is enforceable against the respondent; (b) whether the respondent failed to eject
the squatters on its property within two weeks from the execution of the deed of absolute
sale; and, (c) whether the respondent is liable to the petitioner for damages.
On the first issue, the petitioner avers that, under its Resolution of May 17, 1991, the
respondent authorized Roxas, then its president, to grant a right of way over a portion of Lot
No. 491-A-3-B-1 in favor of the petitioner, and an option for the respondent to buy a portion of
the said property. The petitioner contends that when the respondent sold Lot No. 491-A-3-B-2
covered by TCT No. 78086, it (respondent) was well aware of its obligation to provide the
petitioner with a means of ingress to or egress from the property to the Sumulong Highway,
since the latter had no adequate outlet to the public highway. The petitioner asserts that it
agreed to buy the property covered by TCT No. 78085 because of the grant by the respondent
of a right of way and an option in its favor to buy a portion of the property covered by TCT No.
78085. It contends that the respondent never objected to Roxas' acceptance of its offer to
purchase the property and the terms and conditions therein; the respondent even allowed
Roxas to execute the deed of absolute sale in its behalf. The petitioner asserts that the
respondent even received the purchase price of the property without any objection to the
terms and conditions of the said deed of sale. The petitioner claims that it acted in good faith,
and contends that after having been benefited by the said sale, the respondent is estopped
from assailing its terms and conditions. The petitioner notes that the respondent's Board of
Directors never approved any resolution rejecting the deed of absolute sale executed by
Roxas for and in its behalf. As such, the respondent is obliged to sell a portion of Lot No. 491-
A-3-B-1 covered by TCT No. 78085 with an area of 500 square meters at the price of P1,000 per
square meter, based on its evidence and Articles 649 and 651 of the New Civil Code.
For its part, the respondent posits that Roxas was not so authorized under the May
17, 1991 Resolution of its Board of Directors to impose a burden or to grant a right of way in
favor of the petitioner on Lot No. 491-A-3-B-1, much less convey a portion thereof to the
petitioner. Hence, the respondent was not bound by such provisions contained in the deed of
absolute sale. Besides, the respondent contends, the petitioner cannot enforce its right to
buy a portion of the said property since there was no agreement in the deed of absolute sale
on the price thereof as well as the specific portion and area to be purchased by the petitioner.
We agree with the respondent.
In San Juan Structural and Steel Fabricators, Inc. v. Court of Appeals,21 we held that:
194

A corporation is a juridical person separate and distinct from its stockholders
or members. Accordingly, the property of the corporation is not the property of its
stockholders or members and may not be sold by the stockholders or members
without express authorization from the corporation's board of directors. Section 23
of BP 68, otherwise known as the Corporation Code of the Philippines, provides:
"SEC. 23. The Board of Directors or Trustees. Unless otherwise provided in
this Code, the corporate powers of all corporations formed under this Code
shall be exercised, all business conducted and all property of such
corporations controlled and held by the board of directors or trustees to be
elected from among the holders of stocks, or where there is no stock, from
among the members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified."
Indubitably, a corporation may act only through its board of directors or,
when authorized either by its by-laws or by its board resolution, through its officers
or agents in the normal course of business. The general principles of agency govern
the relation between the corporation and its officers or agents, subject to the articles
of incorporation, by-laws, or relevant provisions of law. 22
Generally, the acts of the corporate officers within the scope of their authority are
binding on the corporation. However, under Article 1910 of the New Civil Code, acts done by
such officers beyond the scope of their authority cannot bind the corporation unless it has
ratified such acts expressly or tacitly, or is estopped from denying them:
Art. 1910. The principal must comply with all the obligations which the agent
may have contracted within the scope of his authority.
As for any obligation wherein the agent has exceeded his power, the
principal is not bound except when he ratifies it expressly or tacitly.
Thus, contracts entered into by corporate officers beyond the scope of
authority are unenforceable against the corporation unless ratified by the
corporation.23
In BA Finance Corporation v. Court of Appeals,24 we also ruled that persons dealing
with an assumed agency, whether the assumed agency be a general or special one, are bound
at their peril, if they would hold the principal liable, to ascertain not only the fact of agency
but also the nature and extent of authority, and in case either is controverted, the burden of
proof is upon them to establish it.
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Corporation Law
In this case, the respondent denied authorizing its then president Roberto B. Roxas
to sell a portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, and to create a lien or
burden thereon. The petitioner was thus burdened to prove that the respondent so
authorized Roxas to sell the same and to create a lien thereon.
Central to the issue at hand is the May 17, 1991 Resolution of the Board of Directors of
the respondent, which is worded as follows:
RESOLVED, as it is hereby resolved, that the corporation, thru the President, sell to
any interested buyer, its 7,213-sq.-meter property at the Sumulong Highway,
Antipolo, Rizal, covered by Transfer Certificate of Title No. N-78086, at a price and on
terms and conditions which he deems most reasonable and advantageous to the
corporation;
FURTHER RESOLVED, that Mr. ROBERTO B. ROXAS, President of the corporation, be,
as he is hereby authorized to execute, sign and deliver the pertinent sales documents
and receive the proceeds of sale for and on behalf of the company. 25
Evidently, Roxas was not specifically authorized under the said resolution to grant a
right of way in favor of the petitioner on a portion of Lot No. 491-A-3-B-1 or to agree to sell to
the petitioner a portion thereof. The authority of Roxas, under the resolution, to sell Lot No.
491-A-3-B-2 covered by TCT No. 78086 did not include the authority to sell a portion of the
adjacent lot, Lot No. 491-A-3-B-1, or to create or convey real rights thereon. Neither may such
authority be implied from the authority granted to Roxas to sell Lot No. 491-A-3-B-2 to the
petitioner "on such terms and conditions which he deems most reasonable and
advantageous." Under paragraph 12, Article 1878 of the New Civil Code, a special power of
attorney is required to convey real rights over immovable property. 26 Article 1358 of the New
Civil Code requires that contracts which have for their object the creation of real rights over
immovable property must appear in a public document. 27 The petitioner cannot feign
ignorance of the need for Roxas to have been specifically authorized in writing by the Board
of Directors to be able to validly grant a right of way and agree to sell a portion of Lot No. 491-
A-3-B-1. The rule is that if the act of the agent is one which requires authority in writing, those
dealing with him are charged with notice of that fact.28
Powers of attorney are generally construed strictly and courts will not infer or presume broad
powers from deeds which do not sufficiently include property or subject under which the
agent is to deal.29 The general rule is that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside it. The act done must be legally
identical with that authorized to be done.30 In sum, then, the consent of the respondent to
the assailed provisions in the deed of absolute sale was not obtained; hence, the assailed
provisions are not binding on it.
195

We reject the petitioner's submission that, in allowing Roxas to execute the contract
to sell and the deed of absolute sale and failing to reject or disapprove the same, the
respondent thereby gave him apparent authority to grant a right of way over Lot No. 491-A-3-
B-1 and to grant an option for the respondent to sell a portion thereof to the petitioner.
Absent estoppel or ratification, apparent authority cannot remedy the lack of the written
power required under the statement of frauds. 31 In addition, the petitioner's fallacy is its
wrong assumption of the unproved premise that the respondent had full knowledge of all the
terms and conditions contained in the deed of absolute sale when Roxas executed it.
It bears stressing that apparent authority is based on estoppel and can arise from
two instances: first, the principal may knowingly permit the agent to so hold himself out as
having such authority, and in this way, the principal becomes estopped to claim that the
agent does not have such authority; second, the principal may so clothe the agent with the
indicia of authority as to lead a reasonably prudent person to believe that he actually has such
authority.32 There can be no apparent authority of an agent without acts or conduct on the
part of the principal and such acts or conduct of the principal must have been known and
relied upon in good faith and as a result of the exercise of reasonable prudence by a third
person as claimant and such must have produced a change of position to its detriment. The
apparent power of an agent is to be determined by the acts of the principal and not by the
acts of the agent.33
For the principle of apparent authority to apply, the petitioner was burdened to
prove the following: (a) the acts of the respondent justifying belief in the agency by the
petitioner; (b) knowledge thereof by the respondent which is sought to be held; and, (c)
reliance thereon by the petitioner consistent with ordinary care and prudence.34 In this case,
there is no evidence on record of specific acts made by the respondent 35 showing or
indicating that it had full knowledge of any representations made by Roxas to the petitioner
that the respondent had authorized him to grant to the respondent an option to buy a
portion of Lot No. 491-A-3-B-1 covered by TCT No. 78085, or to create a burden or lien thereon,
or that the respondent allowed him to do so.
The petitioner's contention that by receiving and retaining the P5,000,000 purchase
price of Lot No. 491-A-3-B-2, the respondent effectively and impliedly ratified the grant of a
right of way on the adjacent lot, Lot No. 491-A-3-B-1, and to grant to the petitioner an option
to sell a portion thereof, is barren of merit. It bears stressing that the respondent sold Lot No.
491-A-3-B-2 to the petitioner, and the latter had taken possession of the property. As such, the
respondent had the right to retain the P5,000,000, the purchase price of the property it had
sold to the petitioner. For an act of the principal to be considered as an implied ratification of
an unauthorized act of an agent, such act must be inconsistent with any other hypothesis
than that he approved and intended to adopt what had been done in his name. 36 Ratification
is based on waiver the intentional relinquishment of a known right. Ratification cannot be
MATABABE FILES
Corporation Law
inferred from acts that a principal has a right to do independently of the unauthorized act of
the agent. Moreover, if a writing is required to grant an authority to do a particular act,
ratification of that act must also be in writing.37 Since the respondent had not ratified the
unauthorized acts of Roxas, the same are unenforceable.38 Hence, by the respondent's
retention of the amount, it cannot thereby be implied that it had ratified the unauthorized
acts of its agent, Roberto Roxas.
On the last issue, the petitioner contends that the CA erred in dismissing its
complaint for damages against the respondent on its finding that the delay in the
construction of its warehouse was due to its (petitioner's) fault. The petitioner asserts that
the CA should have affirmed the ruling of the trial court that the respondent failed to cause
the eviction of the squatters from the property on or before September 29, 1991; hence, was
liable for P5,660,000. The respondent, for its part, asserts that the delay in the construction
of the petitioner's warehouse was due to its late filing of an application for a building permit,
only on May 28, 1992.
The petitioner's contention is meritorious. The respondent does not deny that it
failed to cause the eviction of the squatters on or before September 29, 1991. Indeed, the
respondent does not deny the fact that when the petitioner wrote the respondent
demanding that the latter cause the eviction of the squatters on April 15, 1992, the latter were
still in the premises. It was only after receiving the said letter in April 1992 that the respondent
caused the eviction of the squatters, which thus cleared the way for the petitioner's
contractor to commence the construction of its warehouse and secure the appropriate
building permit therefor.
The petitioner could not be expected to file its application for a building permit
before April 1992 because the squatters were still occupying the property. Because of the
respondent's failure to cause their eviction as agreed upon, the petitioner's contractor failed
to commence the construction of the warehouse in October 1991 for the agreed price of
P8,649,000. In the meantime, costs of construction materials spiraled. Under the
construction contract entered into between the petitioner and the contractor, the petitioner
was obliged to pay P11,804,160,39including the additional work costing P1,441,500, or a net
increase of P1,712,980.40 The respondent is liable for the difference between the original cost
of construction and the increase thereon, conformably to Article 1170 of the New Civil Code,
which reads:
Art. 1170. Those who in the performance of their obligations are guilty of
fraud, negligence, or delay and those who in any manner contravene the tenor
thereof, are liable for damages.
196
 MATABABE FILES
Corporation Law

The petitioner, likewise, lost the amount of P3,900,000 by way of unearned income
from the lease of the property to the Ponderosa Leather Goods Company. The respondent is,
thus, liable to the petitioner for the said amount, under Articles 2200 and 2201 of the New Civil
Code:

Art. 2200. Indemnification for damages shall comprehend not only the value
of the loss suffered, but also that of the profits which the obligee failed to obtain.

Art. 2201. In contracts and quasi-contracts, the damages for which the
obligor who acted in good faith is liable shall be those that are the natural and
probable consequences of the breach of the obligation, and which the parties have
foreseen or could have reasonably foreseen at the time the obligation was
constituted.

In case of fraud, bad faith, malice or wanton attitude, the obligor shall be
responsible for all damages which may be reasonably attributed to the non-
performance of the obligation.

In sum, we affirm the trial court's award of damages and attorney's fees to the
petitioner.

IN LIGHT OF ALL THE FOREGOING, judgment is hereby rendered AFFIRMING the

assailed Decision of the Court of Appeals WITH MODIFICATION. The respondent is ordered to
pay to the petitioner the amount of P5,612,980 by way of actual damages and P100,000 by
way of attorney's fees. No costs.

197

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-18287 March 30, 1963
TRINIDAD J. FRANCISCO, plaintiff-appellee,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellant.
-----------------------------
G.R. No. L-18155 March 30, 1963
TRINIDAD J. FRANCISCO, plaintiff-appellant,
vs.
GOVERNMENT SERVICE INSURANCE SYSTEM, defendant-appellee.
Corporations; Binding effect of acts of corporate officers.A corporation cannot
evade the binding effect produced by a telegram sent by its board secretary, and the
addressee of such telegram cannot be blamed for relying upon it, because if every person
dealing with a corporation were held duty-bound to dis-believe every act of its responsible
officers no matter how reg-ular it should appear on its face, corporate transactions would
speedily come to a standstill.
Same; Same; When corporation estopped to deny apparent authority of its officers.
If a private corporation intentional-ly or negligently clothes its officers or agents with
apparent power to perform acts for it, the corporation will be estopped to deny that such
apparent authority is real, as to innocent third persons dealing in good faith with such officers
or agents. (2 Fletchers Encyclopedia, Priv. Corp. 255, Perm. Ed.)
Same; Same; Same; When notice of lands by a corporate officer is notice to
corporation.Knowledge of facts acquired or possessed by an officer or agent of a
corporation in the course of his employment, and in relation to matters within the scope of
his authority, is notice to the corporation, whether he communicates such knowledge or not.
(Ballentine, Law on Cor-porations, section 112.)
Same; Same; Same; Silence of corporation as ratification of agreement.The silence
of the corporation, taken together with the unconditional acceptance of three subsequent
remit-tances from plaintiff, constitutes a binding ratification of the original agreement
between them (Civil Code, Article 1393).
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Corporation Law
Same; Same; Same; Maxim that the one who made it pos-sible for a wrong to be done
should suffer.The equitable maxim that between two innocent parties the one who made it
possi-ble for the wrong to be done should be the one to bear the re-sulting loss, applies when
as in the instant case a cor-poration allows one of its officers, now alleged to be without
the proper authority, to send a telegram binding the corporation.
Damages; Breach of contract; Moral damages not warranted if breach is not malicious
or fraudulent.Award of moral dam-ages under Article 2220 of the Civil Code is not
warranted if the breach of contract is not malicious or fraudulent (Ventanilla vs. Centeno, L-
14333, 28 Jan. 1961; Fores vs. Miranda, L-12163, 4 March 1959).
Same; Same; When exemplary damages allowed.Exem-plary damages are only
allowed in addition to moral, temperate, liquidated, or compensatory damages (Art. 2234,
Civil Code; Velayo vs. Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs. Aragon and
Lorza, L-5164, Jan. 27, 1953, 49 0.G. No. 2, 515).
Attorneys fees; Award essentially discretionary with trial court.The award of
attorneys fees is essentially discretionary with the trial court, and no abuse of discretion is
committed when the court refuses to make an award because of the ab-sence of gross and
evident bad faith in defendants refusal to satisfy plaintiffs claim, or of any of the other
grounds enu-merated in Article 2208 of the Civil Code.
APPEAL from a decision of the Court of First Instance of Rizal. Mojica, J.
The facts are stated in the opinion of the Court
Vicente J. Francisco for plaintiff-appellee.
The Government Corporate Counsel for defendant-appellant.
REYES, J.B.L., J.:
Appeal by the Government Service Insurance System from the decision of the Court
of First Instance of Rizal (Hon. Angel H. Mojica, presiding), in its Civil Case No. 2088-P, entitled
"Trinidad J. Francisco, plaintiff, vs. Government Service Insurance System, defendant", the
dispositive part of which reads as follows:
WHEREFORE, judgment is hereby rendered: (a) Declaring null and void the
consolidation in the name of the defendant, Government Service Insurance System,
of the title of the VIC-MARI Compound; said title shall be restored to the plaintiff; and
all payments made by the plaintiff, after her offer had been accepted by the
198

defendant, must be credited as amortizations on her loan; and (b) Ordering the
defendant to abide by the terms of the contract created by plaintiff's offer and it's
unconditional acceptance, with costs against the defendant.
The plaintiff, Trinidad J. Francisco, likewise appealed separately (L-18155), because
the trial court did not award the P535,000.00 damages and attorney's fees she claimed. Both
appeals are, therefore, jointly treated in this decision.
The following facts are admitted by the parties: On 10 October 1956, the plaintiff,
Trinidad J. Francisco, in consideration of a loan in the amount of P400,000.00, out of which
the sum of P336,100.00 was released to her, mortgaged in favor of the defendant,
Government Service Insurance System (hereinafter referred to as the System) a parcel of land
containing an area of 18,232 square meters, with twenty-one (21) bungalows, known as Vic-
Mari Compound, located at Baesa, Quezon City, payable within ten (10) years in monthly
installments of P3,902.41, and with interest of 7% per annum compounded monthly.
On 6 January 1959, the System extrajudicially foreclosed the mortgage on the ground
that up to that date the plaintiff-mortgagor was in arrears on her monthly installments in the
amount of P52,000.00. Payments made by the plaintiff at the time of foreclosure amounted
to P130,000.00. The System itself was the buyer of the property in the foreclosure sale.
On 20 February 1959, the plaintiff's father, Atty. Vicente J. Francisco, sent a letter to
the general manager of the defendant corporation, Mr. Rodolfo P. Andal, the material portion
of which recited as follows:
Yesterday, I was finally able to collect what the Government owed
me and I now propose to pay said amount of P30,000 to the GSIS if it would
agree that after such payment the foreclosure of my daughter's mortgage
would be set aside. I am aware that the amount of P30,000 which I offer to
pay will not cover the total arrearage of P52,000 but as regards the balance,
I propose this arrangement: for the GSIS to take over the administration of
the mortgaged property and to collect the monthly installments, amounting
to about P5,000, due on the unpaid purchase price of more than 31 lots and
houses therein and the monthly installments collected shall be applied to the
payment of Miss Francisco's arrearage until the same is fully covered. It is
requested, however, that from the amount of the monthly installments
collected, the sum of P350.00 be deducted for necessary expenses, such as
to pay the security guard, the street-caretaker, the Meralco Bill for the street
lights and sundry items.
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Corporation Law
It will be noted that the collectible income each month from the
mortgaged property, which as I said consists of installments amounting to
about P5,000, is more than enough to cover the monthly amortization on
Miss Francisco's loan. Indeed, had she not encountered difficulties, due to
unforeseen circumstances, in collecting the said installments, she could have
paid the amortizations as they fell due and there would have been really no
need for the GSIS to resort to foreclosure.
The proposed administration by the GSIS of the mortgaged property will
continue even after Miss Francisco's account shall have been kept up to
date. However, once the arrears shall have been paid, whatever amount of
the monthly installments collected in excess of the amortization due on the
loan will be turned over to Miss Francisco.
I make the foregoing proposal to show Francisco's sincere desire to
work out any fair arrangement for the settlement of her obligation. I trust
that the GSIS, under the broadminded policies of your administration, would
give it serious consideration.
Sincerely,
s/ Vicente J. Francisco
t/ VICENTE J. FRANCISCO
On the same date, 20 February 1959, Atty. Francisco received the
following telegram:.
VICENTE FRANCISCO
SAMANILLO BLDG. ESCOLTA.
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF
FORECLOSED PROPERTY OF YOUR DAUGHTER
ANDAL"
On 28 February 1959, Atty. Francisco remitted to the System, through Andal, a check
for P30,000.00, with an accompanying letter, which reads:
I am sending you herewith BPI Check No. B-299484 for Thirty Thousand
Pesos (P30,000.00) in accordance with my letter of February 20th and your reply
thereto of the same date, which reads:
GSIS BOARD APPROVED YOUR REQUEST RE REDEMPTION OF FORECLOSED
PROPERTY OF YOUR DAUGHTER
xxx xxx xxx
199

The defendant received the amount of P30,000.00, and issued therefor its official
receipt No. 1209874, dated 4 March 1959. It did not, however, take over the administration of
the compound. In the meantime, the plaintiff received the monthly payments of some of the
occupants thereat; then on 4 March 1960, she remitted, through her father, the amount of
P44,121.29, representing the total monthly installments that she received from the occupants
for the period from March to December 1959 and January to February 1960, minus expenses
and real estate taxes. The defendant also received this amount, and issued the corresponding
official receipt.
Remittances, all accompanied by letters, corresponding to the months of March,
April, May, and June, 1960 and totalling P24,604.81 were also sent by the plaintiff to the
defendant from time to time, all of which were received and duly receipted for.
Then the System sent three (3) letters, one dated 29 January 1960, which was signed
by its assistant general manager, and the other two letters, dated 19 and 26 February 1960,
respectively, which were signed by Andal, asking the plaintiff for a proposal for the payment
of her indebtedness, since according to the System the one-year period for redemption had
expired.
In reply, Atty. Francisco sent a letter, dated 11 March 1960, protesting against the
System's request for proposal of payment and inviting its attention to the concluded contract
generated by his offer of 20 February 1959, and its acceptance by telegram of the same date,
the compliance of the terms of the offer already commenced by the plaintiff, and the
misapplication by the System of the remittances she had made, and requesting the proper
corrections.
By letter, dated 31 May 1960, the defendant countered the preceding protest that, by
all means, the plaintiff should pay attorney's fees of P35,644.14, publication expenses, filing
fee of P301.00, and surcharge of P23.64 for the foreclosure work done; that the telegram
should be disregarded in view of its failure to express the contents of the board resolution
due to the error of its minor employees in couching the correct wording of the telegram. A
copy of the excerpts of the resolution of the Board of Directors (No. 380, February 20, 1959)
was attached to the letter, showing the approval of Francisco's offer
... subject to the condition that Mr. Vicente J. Francisco shall pay all expenses
incurred by the GSIS in the foreclosure of the mortgage.
Inasmuch as, according to the defendant, the remittances previously made by Atty.
Francisco were allegedly not sufficient to pay off her daughter's arrears, including attorney's
fees incurred by the defendant in foreclosing the mortgage, and the one-year period for
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Corporation Law
redemption has expired, said defendant, on 5 July 1960, consolidated the title to the
compound in its name, and gave notice thereof to the plaintiff on 26 July 1960 and to each
occupant of the compound.
Hence, the plaintiff instituted the present suit, for specific performance and
damages. The defendant answered, pleading that the binding acceptance of Francisco's offer
was the resolution of the Board, and that Andal's telegram, being erroneous, should be
disregarded. After trial, the court below found that the offer of Atty. Francisco, dated 20
February 1959, made on behalf of his daughter, had been unqualifiedly accepted, and was
binding, and rendered judgment as noted at the start of this opinion.
The defendant-appellant corporation assigns six (6) errors allegedly committed by
the lower court, all of which, however, are resolvable on the single issue as to whether or not
the telegram generated a contract that is valid and binding upon the parties.
Wherefore, the parties respectfully pray that the foregoing stipulation of facts be
admitted and approved by this Honorable Court, without prejudice to the parties adducing
other evidence to prove their case not covered by this stipulation of facts.
We find no reason for altering the conclusion reached by the court below that the
offer of compromise made by plaintiff in the letter, Exhibit "A", had been validly accepted,
and was binding on the defendant. The terms of the offer were clear, and over the signature
of defendant's general manager, Rodolfo Andal, plaintiff was informed telegraphically that
her proposal had been accepted. There was nothing in the telegram that hinted at any
anomaly, or gave ground to suspect its veracity, and the plaintiff, therefore, can not be
blamed for relying upon it. There is no denying that the telegram was within Andal's apparent
authority, but the defense is that he did not sign it, but that it was sent by the Board Secretary
in his name and without his knowledge. Assuming this to be true, how was appellee to know
it? Corporate transactions would speedily come to a standstill were every person dealing with
a corporation held duty-bound to disbelieve every act of its responsible officers, no matter
how regular they should appear on their face. This Court has observed in Ramirez vs.
Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this kind it is always
well to keep in mind the situation as it presents itself to the third party with whom
the contract is made. Naturally he can have little or no information as to what occurs
in corporate meetings; and he must necessarily rely upon the external manifestations
of corporate consent. The integrity of commercial transactions can only be
maintained by holding the corporation strictly to the liability fixed upon it by its
agents in accordance with law; and we would be sorry to announce a doctrine which
would permit the property of a man in the city of Paris to be whisked out of his hands
and carried into a remote quarter of the earth without recourse against the
200

corporation whose name and authority had been used in the manner disclosed in this
case. As already observed, it is familiar doctrine that if a corporation knowingly
permits one of its officers, or any other agent, to do acts within the scope of an
apparent authority, and thus holds him out to the public as possessing power to do
those acts, the corporation will, as against any one who has in good faith dealt with
the corporation through such agent, be estopped from denying his authority; and
where it is said "if the corporation permits" this means the same as "if the thing is
permitted by the directing power of the corporation."
It has also been decided that
A very large part of the business of the country is carried on by corporations.
It certainly is not the practice of persons dealing with officers or agents who assume
to act for such entities to insist on being shown the resolution of the board of
directors authorizing the particular officer or agent to transact the particular
business which he assumes to conduct. A person who knows that the officer or agent
of the corporation habitually transacts certain kinds of business for such corporation
under circumstances which necessarily show knowledge on the part of those
charged with the conduct of the corporate business assumes, as he has the right to
assume, that such agent or officer is acting within the scope of his authority. (Curtis
Land & Loan Co. vs. Interior Land Co., 137 Wis. 341, 118 N.W. 853, 129 Am. St. Rep.
1068; as cited in 2 Fletcher's Encyclopedia, Priv. Corp. 263, perm. Ed.)
Indeed, it is well-settled that
If a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be estopped
to deny that such apparent authority is real, as to innocent third persons dealing in
good faith with such officers or agents. (2 Fletcher's Encyclopedia, Priv. Corp. 255,
Perm. Ed.)
Hence, even if it were the board secretary who sent the telegram, the corporation
could not evade the binding effect produced by the telegram..
The defendant-appellant does not disown the telegram, and even asserts that it
came from its offices, as may be gleaned from the letter, dated 31 May 1960, to Atty.
Francisco, and signed "R. P. Andal, general manager by Leovigildo Monasterial, legal counsel",
wherein these phrases occur: "the telegram sent ... by this office" and "the telegram we sent
your" (emphasis supplied), but it alleges mistake in couching the correct wording. This alleged
mistake cannot be taken seriously, because while the telegram is dated 20 February 1959, the
defendant informed Atty. Francisco of the alleged mistake only on 31 May 1960, and all the
MATABABE FILES
Corporation Law
while it accepted the various other remittances, starting on 28 February 1959, sent by the
plaintiff to it in compliance with her performance of her part of the new contract.
The inequity of permitting the System to deny its acceptance become more patent
when account is taken of the fact that in remitting the payment of P30,000 advanced by her
father, plaintiff's letter to Mr. Andal quoted verbatim the telegram of acceptance. This was in
itself notice to the corporation of the terms of the allegedly unauthorized telegram, for as
Ballentine says:
Knowledge of facts acquired or possessed by an officer or agent of a
corporation in the course of his employment, and in relation to matters within the
scope of his authority, is notice to the corporation, whether he communicates such
knowledge or not. (Ballentine, Law on Corporations, section 112.)
since a corporation cannot see, or know, anything except through its officers.
Yet, notwithstanding this notice, the defendant System pocketed the amount, and kept silent
about the telegram not being in accordance with the true facts, as it now alleges. This silence,
taken together with the unconditional acceptance of three other subsequent remittances
from plaintiff, constitutes in itself a binding ratification of the original agreement (Civil Code,
Art. 1393).
ART. 1393. Ratification may be effected expressly or tacitly. It is understood
that there is a tacit ratification if, with knowledge of the reason which renders the
contract voidable and such reason having ceased, the person who has a right to
invoke it should execute an act which necessarily implies an intention to waive his
right.
Nowhere else do the circumstances call more insistently for the application of the
equitable maxim that between two innocent parties, the one who made it possible for the
wrong to be done should be the one to bear the resulting loss..
The defendant's assertion that the telegram came from it but that it was incorrectly
worded renders unnecessary to resolve the other point on controversy as to whether the said
telegram constitutes an actionable document..
Since the terms offered by the plaintiff in the letter of 20 February 1959 (Exhibit "A")
provided for the setting aside of the foreclosure effected by the defendant System, the
acceptance of the offer left the account of plaintiff in the same condition as if no foreclosure
had taken place. It follows, as the lower court has correctly held, that the right of the System
to collect attorneys' fees equivalent to 10% of the due (P35,694.14) and the expenses and
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Corporation Law

charges of P3,300.00 may no longer be enforced, since by the express terms of the mortgage
contract, these sums were collectible only "in the event of foreclosure."
The court a quo also called attention to the unconscionability of defendant's charging
the attorney's fees, totalling over P35,000.00; and this point appears well-taken, considering
that the foreclosure was merely extra-judicial, and the attorneys' work was limited to
requiring the sheriff to effectuate the foreclosure. However, in view of the parties' agreement
to set the same aside, with the consequential elimination of such incidental charges, the
matter of unreasonableness of the counsel fees need not be labored further.
precludes a recovery. The award of attorneys' fees is essentially discretionary in the trial
court, and no abuse of discretion has been shown.
FOR THE FOREGOING REASONS, the appealed decision is hereby affirmed, with costs
against the defendant Government Service Insurance System, in G.R. No.L-18287.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala
and Makalintal, JJ., concur.

Turning now to the plaintiff's separate appeal (Case G.R. No. L-18155): Her prayer for
an award of actual or compensatory damages for P83,333.33 is predicated on her alleged
unrealized profits due to her inability to sell the compound for the price of P750,000.00
offered by one Vicente Alunan, which sale was allegedly blocked because the System
consolidated the title to the property in its name. Plaintiff reckons the amount of P83,333.33
by placing the actual value of the property at P666,666.67, a figure arrived at by assuming
that the System's loan of P400,000.00 constitutes 60% of the actual value of the security. The
court a quo correctly refused to award such actual or compensatory damages because it could
not determine with reasonable certainty the difference between the offered price and the
actual value of the property, for lack of competent evidence. Without proof we cannot
assume, or take judicial notice, as suggested by the plaintiff, that the practice of lending
institutions in the country is to give out as loan 60% of the actual value of the collateral. Nor
should we lose sight of the fact that the price offered by Alunan was payable in installments
covering five years, so that it may not actually represent true market values.

Nor was there error in the appealed decision in denying moral damages, not only on
account of the plaintiff's failure to take the witness stand and testify to her social humiliation,
wounded feelings, anxiety, etc., as the decision holds, but primarily because a breach of
contract like that of defendant, not being malicious or fraudulent, does not warrant the
award of moral damages under Article 2220 of the Civil Code (Ventanilla vs. Centeno, L-14333,
28 Jan. 1961; Fores vs. Miranda, L-12163, 4 March 1959).

There is no basis for awarding exemplary damages either, because this species of
damages is only allowed in addition to moral, temperate, liquidated, or compensatory
damages, none of which have been allowed in this case, for reasons herein before discussed
(Art. 2234, Civil Code; Velayo vs. Shell Co. of P.I., L-7817, Res. July 30, 1957; Singson, et al. vs.
Aragon and Lorza, L-5164, Jan. 27, 1953, 49 O.G. No. 2, 515).

As to attorneys' fees, we agree with the trial court's stand that in view of the absence
of gross and evident bad faith in defendant's refusal to satisfy the plaintiff's claim, and there
being none of the other grounds enumerated in Article 2208 of the Civil Code, such absence

202

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-68555 March 19, 1993
PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.
Corporation Law; Contracts; When contracts signed by corporate officers binding on
corporation.Under the Corporation Law, which was then in force at the time this case
arose, as well as under the present Corporation Code, all corporate powers shall be exercised
by the Board of Directors, except as otherwise provided by law. Although it cannot
completely abdicate its power and responsibility to act for the juridical entity, the Board may
expressly delegate specific powers to its President or any of its officers. In the absence of
such express delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same expressly or
impliedly. Implied ratification may take various formslike silence or acquiescence; by acts
showing approval or adoption of the contract; or by acceptance and retention of benefits
flowing therefrom. Furthermore, even in the absence of express or implied authority by
ratification, the President as such may, as a general rule, bind the corporation by a contract in
the ordinary course of business, provided the same is reasonable under the circumstances.
These rules are basic, but are all general and thus quite flexible. They apply where the
President or other officer, purportedly acting for the corporation, is dealing with a third
person, i.e., a person outside the corporation.
Same; Same; A board director or other corporate officer cannot readily enter into a
contract with his own corporation; Exceptions.A director of a corporation holds a position
of trust and as such, he owes a duty of loyalty to his corporation. In case his interests conflict
with those of the corporation, he cannot sacrifice the latter to his own advantage and benefit.
As corporate managers, directors are committed to seek the maximum amount of profits for
the corporation. This trust relationship "is not a matter of statutory or technical law. It springs
from the fact that directors have the control and guidance of corporate affairs and property
and hence of the property interests of the stockholders."
Same; Same; Same.On the other hand, a director's contract with his corporation is
not in all instances void or voidable. If the contract is fair and reasonable under the
circumstances, it may be ratified by the stockholders provided a full disclosure of his adverse
interest is made.
MATABABE FILES
Corporation Law
Same; Same; Same.Granting arguendo that the "dealership agreement" involved
here would be valid and enforceable if entered into with a person other than a director or
officer of the corporation, the fact that the other party to the contract was a Director and
Auditor of the petitioner corporation changes the whole situation. First of all, We believe that
the contract was neither fair nor reasonable. The "dealership agreement" entered into in July,
1969, was to sell and supply to respondent Te 20,000 bags of white cement per month, for
five years starting September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to know, that at
that time, prices of commodities in general, and white cement in particular, were not stable
and were expected to rise. At the time of the contract, petitioner corporation had not even
commenced the manufacture of white cement, the reason why delivery was not to begin until
14 months later. He must have known that within that period of six years, there would be a
considerable rise in the price of white cement. In fact, respondent Te's own Memorandum
shows that in September, 1970, the price per bag was P 14.50, and by the middle of 1975, it
was already P37.50 per bag. Despite this, no provision was made in the "dealership
agreement" to allow for an increase in price mutually acceptable to the parties. Instead, the
price was pegged at P9.70 per bag for the whole five years of the contract. Fairness on his
part as a director of the corporation from whom he was to buy the cement, would require
such a provision. In fact, this unfairness in the contract is also a basis which renders a contract
entered into by the President, without authority from the Board of Directors, void or voidable,
although it may have been in the ordinary course of business. We believe that the fixed price
of P9.70 per bag for a period of five years was not fair and reasonable. Respondent Te,
himself, when he subsequently entered into contracts to resell the cement to his "new
dealers" Henry Wee and Gaudencio Galang stipulated as follows: The price of white cement
shall be mutually determined by us but in no case shall the same be less than P14.00 per bag
(94 Ibs)."
Same; Same; Damages; No moral damages for lost goodwill are awardable to a
corporation.As a result of this action which has been proven to be without legal basis,
petitioner corporation's reputation and goodwill have been prejudiced. However, there can
be no award for moral damages under Article 2217 and succeeding articles on Section 1 of
Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.
PETITION for review on certiorari of the decision of the then Intermediate Appellate
Court.
The facts are stated in the opinion of the Court. Prime White Cement Corp. vs.
Intermediate Appellate Court, 220 SCRA 103, G.R. No. 68555 March 19, 1993
De Jesus & Associates for petitioner.
203

Padlan, Sutton, Mendoza & Associates for private respondent.
CAMPOS, JR., J.:
Before Us is a Petition for Review on Certiorari filed by petitioner Prime White
Cement Corporation seeking the reversal of the decision * of the then Intermediate Appellate
Court, the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, the judgment appealed from
is hereby affirmed in toto. 1
The facts, as found by the trial court and as adopted by the respondent Court are
hereby quoted, to wit:
On or about the 16th day of July, 1969, plaintiff and defendant
corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as
Chairman of the Board, entered into a dealership agreement (Exhibit A)
whereby said plaintiff was obligated to act as the exclusive dealer and/or
distributor of the said defendant corporation of its cement products in the
entire Mindanao area for a term of five (5) years and proving (sic) among
others that:
a. The corporation shall, commencing September,
1970, sell to and supply the plaintiff, as dealer with 20,000
bags (94 lbs/bag) of white cement per month;
b. The plaintiff shall pay the defendant corporation
P9.70, Philippine Currency, per bag of white cement, FOB
Davao and Cagayan de Oro ports;
c. The plaintiff shall, every time the defendant
corporation is ready to deliver the good, open with any
bank or banking institution a confirmed, unconditional, and
irrevocable letter of credit in favor of the corporation and
that upon certification by the boat captain on the bill of
lading that the goods have been loaded on board the vessel
bound for Davao the said bank or banking institution shall
release the corresponding amount as payment of the
goods so shipped.
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Corporation Law
Right after the plaintiff entered into the aforesaid dealership
agreement, he placed an advertisement in a national, circulating newspaper
the fact of his being the exclusive dealer of the defendant corporation's
white cement products in Mindanao area, more particularly, in the Manila
Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even
congratulated by his business associates, so much so, he was asked by some
of his businessmen friends and close associates if they can be his sub-dealer
in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff sometime in
the months of September, October, and December, 1969, entered into a
written agreement with several hardware stores dealing in buying and
selling white cement in the Cities of Davao and Cagayan de Oro which would
thus enable him to sell his allocation of 20,000 bags regular supply of the
said commodity, by September, 1970 (Exhibits O, O-1, O-2, P, P-1, P-2, Q, Q-1
and Q-2). After the plaintiff was assured by his supposed buyer that his
allocation of 20,000 bags of white cement can be disposed of, he informed
the defendant corporation in his letter dated August 18, 1970 that he is
making the necessary preparation for the opening of the requisite letter of
credit to cover the price of the due initial delivery for the month of
September, 1970 (Exhibit B), looking forward to the defendant corporation's
duty to comply with the dealership agreement. In reply to the aforesaid
letter of the plaintiff, the defendant corporation thru its corporate secretary,
replied that the board of directors of the said defendant decided to impose
the following conditions:
a. Delivery of white cement shall commence at the end of
November, 1970;
b. Only 8,000 bags of white cement per month for only a
period of three (3) months will be delivered;
c. The price of white cement was priced at P13.30 per bag;
d. The price of white cement is subject to readjustment
unilaterally on the part of the defendant;
e. The place of delivery of white cement shall be Austurias
(sic);
204

f. The letter of credit may be opened only with the
Prudential Bank, Makati Branch;
g. Payment of white cement shall be made in advance and
which payment shall be used by the defendant as guaranty
in the opening of a foreign letter of credit to cover costs
and expenses in the procurement of materials in the
manufacture of white cement. (Exhibit C).
xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits
D, E, G, I, R, L, and N) were made by the plaintiff to the defendant, however,
defendant refused to comply with the same, and plaintiff by force of
circumstances was constrained to cancel his agreement for the supply of
white cement with third parties, which were concluded in anticipation of,
and pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement between the
plaintiff and defendant was in force and subsisting, the defendant
corporation, in violation of, and with evident intention not to be bound by
the terms and conditions thereof, entered into an exclusive dealership
agreement with a certain Napoleon Co for the marketing of white cement in
Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp. 86-
90). 2
After trial, the trial court adjudged the corporation liable to Alejandro Te in the
amount of P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00
as and for attorney's fees and costs. The appellate court affirmed the said decision mainly on
the following basis, and We quote:
There is no dispute that when Zosimo R. Falcon and Justo B. Trazo
signed the dealership agreement Exhibit "A", they were the President and
Chairman of the Board, respectively, of defendant-appellant corporation.
Neither is the genuineness of the said agreement contested. As a matter of
fact, it appears on the face of the contract itself that both officers were duly
authorized to enter into the said agreement and signed the same for and in
behalf of the corporation. When they, therefore, entered into the said
transaction they created the impression that they were duly clothed with the
authority to do so. It cannot now be said that the disputed agreement which
possesses all the essential requisites of a valid contract was never intended
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Corporation Law
to bind the corporation as this avoidance is barred by the principle of
estoppel. 3
In this petition for review, petitioner Prime White Cement Corporation made the
following assignment of errors. 4
I
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED
PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS IN
BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE
BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE, PRINCIPLE
AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND OFFICERS OF THE
CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE
AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE 1317
OF THE NEW CIVIL CODE.
IV
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO WHEN
AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS
ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH
COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY
DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL
PROCEEDINGS.
There is only one legal issue to be resolved by this Court: whether or not the
"dealership agreement" referred by the President and Chairman of the Board of petitioner
corporation is a valid and enforceable contract. We do not agree with the conclusion of the
respondent Court that it is.
205

Under the Corporation Law, which was then in force at the time this case arose, 5 as
well as under the present Corporation Code, all corporate powers shall be exercised by the
Board of Directors, except as otherwise provided by law. 6Although it cannot completely
abdicate its power and responsibility to act for the juridical entity, the Board may expressly
delegate specific powers to its President or any of its officers. In the absence of such express
delegation, a contract entered into by its President, on behalf of the corporation, may still
bind the corporation if the board should ratify the same expressly or impliedly. Implied
ratification may take various forms like silence or acquiescence; by acts showing approval
or adoption of the contract; or by acceptance and retention of benefits flowing
therefrom. 7 Furthermore, even in the absence of express or implied authority by ratification,
the President as such may, as a general rule, bind the corporation by a contract in the ordinary
course of business, provided the same is reasonable under the circumstances. 8 These rules
are basic, but are all general and thus quite flexible. They apply where the President or other
officer, purportedly acting for the corporation, is dealing with a third person, i. e., a
person outside the corporation.
The situation is quite different where a director or officer is dealing with his own
corporation. In the instant case respondent Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the corporation as well. He was what is
often referred to as a "self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty to
his corporation. 9 In case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As corporate managers, directors are
committed to seek the maximum amount of profits for the corporation. This trust relationship
"is not a matter of statutory or technical law. It springs from the fact that directors have the
control and guidance of corporate affairs and property and hence of the property interests of
the stockholders." 10 In the case of Gokongwei v. Securities and Exchange Commission, this
Court quoted with favor from Pepper v. Litton, 11 thus:
. . . He cannot by the intervention of a corporate entity violate the
ancient precept against serving two masters. . . . He cannot utilize his inside
information and his strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what he
could not do directly. He cannot use his power for his personal advantage
and to the detriment of the stockholders and creditors no matter how
absolute in terms that power may be and no matter how meticulous he is to
satisfy technical requirements. For that power is at all times subject to the
equitable limitation that it may not be exercised for the aggrandizement,
preference, or advantage of the fiduciary to the exclusion or detriment of
the cestuis. . . . .
MATABABE FILES
Corporation Law
On the other hand, a director's contract with his corporation is not in all instances
void or voidable. If the contract is fair and reasonable under the circumstances, it may be
ratified by the stockholders provided a full disclosure of his adverse interest is made. Section
32 of the Corporation Code provides, thus:
Sec. 32. Dealings of directors, trustees or officers with the
corporation. A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the option of such
corporation, unless all the following conditions are present:
1. That the presence of such director or trustee in the board meeting
in which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for
the approval of the contract;
3. That the contract is fair and reasonable under the circumstances;
and
4. That in the case of an officer, the contract with the officer has
been previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee, such
contract may be ratified by the vote of the stockholders representing at
least two-thirds (2/3) of the outstanding capital stock or of two-thirds (2/3)
of the members in a meeting called for the purpose: Provided, That full
disclosure of the adverse interest of the directors or trustees involved is
made at such meeting: Provided, however, That the contract is fair and
reasonable under the circumstances.
Although the old Corporation Law which governs the instant case did not contain a
similar provision, yet the cited provision substantially incorporates well-settled principles in
corporate law. 12
Granting arguendo that the "dealership agreement" involved here would be valid and
enforceable if entered into with a person other than a director or officer of the corporation,
the fact that the other party to the contract was a Director and Auditor of the petitioner
corporation changes the whole situation. First of all, We believe that the contract was neither
206
 MATABABE FILES
Corporation Law

fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to sell and As a result of this action which has been proven to be without legal basis, petitioner
supply to respondent Te 20,000 bags of white cement per month, for five years starting corporation's reputation and goodwill have been prejudiced. However, there can be no award
September, 1970, at the fixed price of P9.70 per bag. Respondent Te is a businessman himself for moral damages under Article 2217 and succeeding articles on Section 1 of Chapter 3 of Title
and must have known, or at least must be presumed to know, that at that time, prices of XVIII of the Civil Code in favor of a corporation.
commodities in general, and white cement in particular, were not stable and were expected
to rise. At the time of the contract, petitioner corporation had not even commenced the In view of the foregoing, the Decision and Resolution of the Intermediate Appellate
manufacture of white cement, the reason why delivery was not to begin until 14 months later. Court dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private
He must have known that within that period of six years, there would be a considerable rise in respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of
the price of white cement. In fact, respondent Te's own Memorandum shows that in P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
September, 1970, the price per bag was P14.50, and by the middle of 1975, it was already
P37.50 per bag. Despite this, no provision was made in the "dealership agreement" to allow SO ORDERED.
for an increase in price mutually acceptable to the parties. Instead, the price was pegged at
P9.70 per bag for the whole five years of the contract. Fairness on his part as a director of the Narvasa, C.J., Padilla, Regalado and Nocon, JJ., concur.
corporation from whom he was to buy the cement, would require such a provision. In fact,
this unfairness in the contract is also a basis which renders a contract entered into by the
President, without authority from the Board of Directors, void or voidable, although it may
have been in the ordinary course of business. We believe that the fixed price of P9.70 per bag
for a period of five years was not fair and reasonable. Respondent Te, himself, when he
subsequently entered into contracts to resell the cement to his "new dealers" Henry
Wee 13 and Gaudencio Galang 14 stipulated as follows:

The price of white cement shall be mutually determined by us but in

no case shall the same be less than P14.00 per bag (94 lbs).

The contract with Henry Wee was on September 15, 1969, and that with Gaudencio
Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on December
29, 1969. 15 All of these contracts were entered into soon after his "dealership agreement"
with petitioner corporation, and in each one of them he protected himself from any increase
in the market price of white cement. Yet, except for the contract with Henry Wee, the
contracts were for only two years from October, 1970. Why did he not protect the
corporation in the same manner when he entered into the "dealership agreement"? For that
matter, why did the President and the Chairman of the Board not do so either? As director,
specially since he was the other party in interest, respondent Te's bounden duty was to act in
such manner as not to unduly prejudice the corporation. In the light of the circumstances of
this case, it is to Us quite clear that he was guilty of disloyalty to the corporation; he was
attempting in effect, to enrich himself at the expense of the corporation. There is no showing
that the stockholders ratified the "dealership agreement" or that they were fully aware of its
provisions. The contract was therefore not valid and this Court cannot allow him to reap the
fruits of his disloyalty.

207

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. L-53820 June 15, 1992
YAO KA SIN TRADING, owned and operated by YAO KA SIN, petitioner,
vs.
HONORABLE COURT OF APPEALS and PRIME WHITE CEMENT CORPORATION, represented
by its President-Chairman, CONSTANCIO B. MALAGNA, respondents.
Actions; A sole proprietorship does not have legal capacity to sue. Its owner shall be
deemed the plaintiff.The complaint then should have been amended to implead Yao Ka Sin
as plaintiff in substitution of Yao Ka Sin Trading. However, it is now too late in the history of
this case to dismiss this petition and, in effect, nullify all proceedings had before the trial court
and the respondent Court on the sole ground of petitioner's lack of capacity to sue,
Considering that private respondent did not pursue this issue before the respondent Court
and this Court; that, as We held in Juasing, the defect is merely formal and not substantial,
and an amendment to cure such defect is expressly authorized by Section 4, Rule 10 of the
Rules of Court which provides that "[a] defect in the designation of the parties may be
summarily corrected at any stage of the action provided no prejudice is caused thereby to the
adverse party;" and that "[a] sole proprietorship does not, of course, possess any juridical
personality separate and apart from the personality of the owner of the enterprise and the
personality of the persons acting in the name of such proprietorship," We hold and declare
that Yao Ka Sin should be deemed as the plaintiff in Civil Case No. 5064 and the petitioner in
the instant case.
Corporations; Contracts; A contract signed by the President and Board Chairman
without authority from the Board of Directors is void; Exceptions.While there can be no
question that Mr, Maglana was an officerthe President and Chairmanof private
respondent corporation at the time he signed Exhibit "A", the above provisions of said private
respondent's By-Laws do not in any way confer upon the President the authority to enter into
contracts for the corporation independently of the Board of Directors. That power is
exclusively lodged in the latter. Nevertheless, to expedite or facilitate the execution of the
contract, only the Presidentand not all the members of the Board, or so much thereof as
are required for the actshall sign it for the corporation. This is the import of the words
through the president in Exhibit "8-A" and the clear intent of the power of the chairman "to
execute and sign for and in behalf of the corporation all contracts and agreements which the
corporation may enter into" in Exhibit "1-1". Both powers presuppose a prior act of the
corporation exercised through the Board of Directors. No greater power can be implied from
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such express, but limited, delegated authority. Neither can it be logically claimed that any
power greater than that expressly conferred is inherent in Mr. Maglana's position as
president and chairman of the corporation.
Same; Same; Same.Petitioner's last refuge then is his alternative proposition,
namely, that private respondent had clothed Mr. Maglana with the apparent power to act for
it and had caused persons dealing with it to believe that he was conferred with such power.
The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of,
his actual authority if he acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to appear as having such
authority, the corporation is bound thereby in favor of a person who deals with him in good
faith in reliance on such apparent authority, as where an officer is allowed to exercise a
particular authority with respect to the business, or a particular branch of it, continuously and
publicly, for a considerable time." Also, "if a private corporation intentionally or negligently
clothes its officers or agents with apparent power to perform acts for it, the corporation will
be estopped to deny that such apparant authority is real, as to innocent third persons dealing
in good faith with such officers or agents." This "apparent authority may result from (1) the
general manner by which the corporation holds out an officer or agent as having power to act
or, in other words, the apparent authority with which it clothes him to act in general, or (2)
the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, whether within or without the scope of his ordinary powers."
Same; Same; Petitioner failed to prove President of herein corporation clothe with
apparent authority to constract with it.lt was incumbent upon the petitioner to prove that
indeed the private respondent had clothed Mr. Maglana with the apparent power to execute
Exhibit "A" or any similar contract. This could have been easily done by evidence of similar
acts executed either in its favor or in favor of other parties. Petitioner miserably failed to do
that. Upon the other hand, private respondent's evidence overwhelmingly shows that no
contract can be signed by the president without first being approved by the Board of
Directors; such approval may only be given after the contract passes through, at least, the
comptroller, who is the NIDC representative, and the legal counsel.
Same; Same; Acceptance of goods and receipt therefor without protest, resulted in a
new transaction.The second ground is based on a wrong premise. It assumes, contrary to
Our conclusion above, that Exhibit "A" is a valid contract binding upon the private
respondent. It was effectively disapproved and rejected by the Board of Directors which, at
the same time, considered the amount of P243,000.00 received by Maglana as payment for
10,000 bags of white cement, treated as an entirely different contract, and forthwith notified
petitioner of its decision that "If within ten (10) days from date hereof we will not hear from
you but you will withdraw cement at P24.30 per bag from our plant, then we will deposit your
check of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per
208

instruction of the Board." Petitioner received a copy of this notification and thereafter
accepted without any protest the Delivery Receipt covering the 10,000 bags and the Official
Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had in
fact agreed to a new transaction involving only 10,000 bags of white cement.
Same; Same; Option given without consideration is void.The third ground must
likewise fail. Exhibit "A" being unenforceable, the option to renew it would have no leg to
stand on. The river cannot rise higher than its source. In any event, the option granted in this
case is without any consideration. Article 1324 of the Civil Code expressly provides that:
"When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid or promised."
Actions; Sec. 8, Rule 8 of the Rules of Court on how to contest genuineness of a
document does not apply to a person not privy thereto.lt is clear that the petitioner is not a
party to any of the documents attached to the private respondent's Answer. Thus, the above
quoted rule is not applicable. While the respondent Court erred in holding otherwise, the
challenged decision must, nevertheless, stand in view of the above disquisitions on the first to
the third grounds of the petition.
PETITION for review from the decision of the Court of Appeals. San Diego, J.
The facts are stated in the opinion of the Court
DECISION
DAVIDE, JR., J.:
Assailed in this petition for review is the decision of the respondent Court of Appeals
in C.A.-G.R. No. 61072-R, 1 promulgated on 21 December 1979, reversing the decision 2 of the
then Court of First Instance (now Regional Trial Court) of Leyte dated 20 November 1975 in
Civil Case No. 5064 entitled Yao Ka Sin Trading versus Prime White Cement Corporation.
The root of this controversy is the undated letter-offer of Constancio B. Maglana,
President and Chairman of the Board of private respondent Prime White Cement Corporation,
hereinafter referred to as PWCC, to Yao Ka Sin Trading, hereinafter referred to as YKS, which
describes itself as a business concern of single proprietorship, 3 and is represented by its
manager, Mr. Henry Yao; the letter reads as follows:
PRIME WHITE CEMENT CORPORATION
602 Cardinal Life Building
Herran Street, Manila
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Corporation Law
Yao Ka Sin
Tacloban City
Gentlemen:
We have the pleasure to submit hereby our firm offer to you under the following quotations,
terms, and conditions, to wit:
1). Commodity Prime White Cement
2). Price At your option: a) P24.30 per 94 lbs. bag net, FOB Cebu City; and b) P23.30 per 94
lbs. bag net, FOB Asturias Cebu.
3). Quality As fully specified in certificate No. 224-73 by Bureau of Public Works, Republic of
the Philippines.
4). Quantity Forty-five Thousand (45,000) bags at 94 lbs. net per bag withdrawable in
guaranteed monthly quantity of Fifteen Thousand (15,000) bags minimum effective from
June, 1973 to August 1973.
5). Delivery Schedule Shipment be made within four (4) days upon receipt of your shipping
instruction.
6). Bag/Container a) All be made of Standard Kraft (water resistant paper, 4 ply, with
bursting strength of 220 pounds, and b) Breakage allowance additional four percent (4%)
over the quantity of each shipment.
7). Terms of Payment Down payment of PESOS: TWO HUNDRED FORTY THREE THOUSAND
(P243,000.00) payable on the signing of this contract and the balance to be paid upon
presentation of corresponding shipping documents.
It is understood that in the event of a delay in our shipment, you hold the option to discount
any price differential resulting from a lower market price vis-a-vis the contract price. In
addition, grant (sic) you the option to extend this contract until the complete delivery of Forty
Five Thousand (45,000) bags of 94 lbs. each is made by us. You are also hereby granted the
option to renew this contract under the same price, terms and conditions.
Please countersign on the space provided for below as your acknowledgement and
confirmation of the above transaction. Thank You.
Very truly yours,
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PRIME WHITE CEMENT CORPORATION
BY: (SGD) CONSTANCIO B. MAGLANA
President & Chairman
CONFORME:
YAO KA SIN TRADING
BY: (SGD) HENRY YAO
WITNESSES:
(SGD) T. CATINDIG (SGD) ERNESTO LIM
RECEIVED from Mr. Henry Yao of Yao Ka Sin Trading, in pursuance of the above offer, the sum
of Pesos: TWO HUNDRED FORTY THREE THOUSAND ONLY (P243,000.00) in the form of
Producers Bank of the Philippines Check No. C-153576 dated June 7, 1973.
PRIME WHITE CEMENT CORPORATION
BY:
(SGD) CONSTANCIO B. MAGLANA
4
President & Chairman
This letter-offer, hereinafter referred to as Exhibit A, was prepared, typed and
signed on 7 June 1973 in the office of Mr. Teodoro Catindig, Senior Vice-President of the
Consolidated Bank and Trust Corporation (Solid Bank). 5
The principal issue raised in this case is whether or not the aforesaid letter-offer, as
accepted by YKS, is a contract that binds the PWCC. The trial court rule in favor of the
petitioner, but the respondent Court held otherwise.
The records disclose the following material operative facts:
In its meeting in Cebu City on 30 June 1973, or twenty-three (23) days after the
signing of Exhibit A, the Board of Directors of PWCC disapproved the same; the rejection is
evidenced by the following Minutes (Exhibit 10): the 10,000 bags of white cement sold to
Yao Ka Sin Trading is sold not because of the alleged letter-contract adhered to by them, but
must be understood as a new and separate contract, and has in no way to do with the letter-
offer which they (sic) as consummated is by this resolution totally disapproved and is
unacceptable to the corporation.
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On 5 July 1973, PWCC wrote a letter (Exhibit 1) to YKS informing it of the
disapproval of Exhibit A. Pursuant, however, to its decision with respect to the 10,000 bags
of cement, it is issued the corresponding Delivery Order (Exhibit 4) and Official Receipt No.
0394 (Exhibit 5) for the payment of the same in the amount of P243,000.00 This is the same
amount received and acknowledged by Maglana in Exhibit A.
YKS accepted without protest both the Delivery and Official Receipts. While YKS
denied having received a copy of Exhibit 1, it was established that the original thereof was
shown to Mr. Henry Yao; since no one would sign a receipt for it, the original was left at the
latters office and this fact was duly noted in Exhibit 1 (Exhibit l-A).
On 4 August 1973, PWCC wrote a letter (Exhibit 2) to YKS in answer to the latters 4
August 1973 letter stating that it is withdrawing or taking delivery of not less than 10,000
bags of white cement on August 6-7, 1973 at Asturias, Cebu, thru M/V Taurus. In said reply,
PWCC reminded YKS of its (PWCCs) 5 July 1973 letter (Exhibit 1) and told the latter that
PWCC only committed to you and which you correspondingly paid 10,000 bags of white
cement of which 4,150 bags were already delivered to you as of August 11,
1973. 6 Unfortunately, no copy of the said 4 August 1973 letter of YKS was presented in
evidence.
On 21 August 1973, PWCC wrote another letter (Exhibit 3) 7 to YKS in reply to the
latters letter of 15 August 1973. Enclosed in the reply was a copy of Exhibit 2. While the
records reveal that YKS received this reply also on 21 August 1973 (Exhibit 3 A), 8 it still
denied having received it. Likewise, no copy of the so-called 15 August 1973 letter was
presented in evidence.
On 10 September 1973, YKS, through Henry Yao, wrote a letter 9 to PWCC as a follow-
up to the letter of 15 August 1973; YKS insisted on the delivery of 45,030 bags of white
cement. 10
On 12 September 1973, Henry Yao sent a letter (Exhibit G) to PWCC calling the
latters attention to the statement of delivery dated 24 August 1973, particularly the price
change from P23.30 to P24.30 per 94 lbs. bag net FOB Asturias, Cebu. 11
On 2 November 1973, YKS sent a telegram (Exhibit C) 12 to PWCC insisting on the
full compliance with the terms of Exhibit A and informing the latter that it is exercising the
option therein stipulated.
On 3 November 1973, YKS sent to PWCC a letter (Exhibit D) as a follow-up to the 2
November 1973 telegram, but this was returned to sender as unclaimed. 13
As of 7 December 1973, PWCC had delivered only 9,775 bags of white cement.
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On 9 February 1974, YKS wrote PWCC a letter (Exhibit H) requesting, for the last
time, compliance by the latter with its obligation under
Exhibit A. 14
On 27 February 1974, PWCC sent an answer (Exhibit 7) to the aforementioned
letter of 9 February 1974; PWCC reiterated the unenforceability of Exhibit A. 15
On 4 March 1974, YKS filed with the then Court of First Instance of Leyte a complaint
for Specific Performance with Damages against PWCC. The complaint 16 was based on Exhibit
A and was docketed as Civil Case No. 5064.
In its Answer with Counterclaim 17 filed on 1 July 1974, PWCC denied under oath the material
averments in the complaint and alleged that: (a) YKS has no legal personality to sue having
no legal personality even by fiction to represent itself; (b) Mr. Maglana, its President and
Chairman, was lured into signing Exhibit A; (c) such signing was subject to the condition
that Exhibit A be approved by the Board of Directors of PWCC, as corporate commitments
are made through it; (d) the latter disapproved it, hence Exhibit A was never consummated
and is not enforceable against PWCC; (e) it agreed to sell 10,000 bags of white cement, not
under Exhibit A, but under a separate contract prepared by the Board; (f) the rejection by
the Board of Exhibit A was made known to YKS through various letters sent to it, copies of
which were attached to the Answer as Annexes 1, 2 and 3; 18 (g) YKS knew, per Delivery
Order 19 and Official Receipt 20 issued by PWCC, that only 10,000 bags were sold to it without
any terms or conditions, at P24.30 per bag FOB Asturias, Cebu; (h) YKS is solely to blame for
the failure to take complete delivery of 10,000 bags for it did not send its boat or truck to
PWCCs plant; and (i) YKS has, therefore, no cause of action.
In its Counterclaim, PWCC asks for moral damages in the amount of not less than
P10,000.00, exemplary damages in the sum of P500,000.00 and attorneys fees in the sum of
P10,000.00.
On 24 July 1974, YKS filed its Answer to the Counterclaim. 21
22
Issues having been joined, the trial court conducted a pre-trial. On that occasion,
the parties admitted that according to the By-Laws of PWCC, the Chairman of the Board, who
is also the President of the corporation, has the power to execute and sign, for and in behalf
of the corporation, all contracts or agreements which the corporation enters into, subject to
the qualification that all the presidents actuations, prior to and after he had signed and
executed said contracts, shall be given to the board of directors of defendant Corporation.
Furthermore, it was likewise stated for the record that the corporation is a semi-subsidiary of
the government because of the NIDC participation in the same, and that all contracts of the
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Corporation Law
corporation should meet the approval of the NIDC and/or the PNB Board because of an
exposure and financial involvement of around P10 million therein. 23
During the trial, PWCC presented evidence to prove that Exhibit A is not binding
upon it because Mr. Maglana was not authorized to make the offer and sign the contract in
behalf of the corporation. Per its By-Laws (Exhibit 8), only the Board of Directors has the
power . . . (7) To enter into (sic) agreement or contract of any kind with any person in the
name and for and in behalf of the corporation through its President, subject only to the
declared objects and purpose of the corporation and the existing provisions of law. 24 Among
the powers of the President is to operate and conduct the business of the corporation
according to his own judgment and discretion, whenever the same is not expressly limited by
such orders, directives or resolutions. 25 Per standard practice of the corporation, contracts
should first pass through the marketing and intelligence unit before they are finalized.
Because of its interest in the PWCC, the NIDC, through its comptroller, goes over contracts
involving funds of and white cement produced by the PWCC. Finally, among the duties of its
legal counsel is to review proposed contracts before they are submitted to the Board. While
the president. may be tasked with the preparation of a contract, it must first pass through the
legal counsel and the comptroller of the corporation. 26
On 20 November 1975, after trial on the merits, the court handed down its decision in
favor of herein petitioner, the dispositive portion of which reads:
WHEREFORE, in view of the foregoing, judgment is hereby rendered:
(1) Ordering defendant: to complete the delivery of 45,000 bags of prime white cement at 94
lbs. net per bag at the price agreed, with a breakage allowance of empty bags at 4% over the
quantity agreed;
(2) Ordering defendant to pay P50,000.00, as moral damages; P5,000.00 as exemplary
damages; P3,000.00 as attorneys fees; and the costs of these proceedings.
SO ORDERED. 27
In disregarding PWCCs theory, the trial court interpreted the provision of the By-
Laws granting its Board of Directors the power to enter into an agreement or contract of
any kind with any person through the President, to mean that the latter may enter into such
contract or agreement at any time and that the same is not subject to the ratification of the
board of directors but subject only to the declared objects and purpose of the corporation
and existing laws. It then concluded:
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It is obvious therefore, that it is not the whole membership of the board of directors
who actually enters into any contract with any person in the name and for and in behalf of the
corporation, but only its president. It is likewise crystal clear that this automatic
representation of the board by the president is limited only by the declared objects and
purpose of the corporation and existing provisions of law. 28
It likewise interpreted the provision on the power of the president to operate and
conduct the business of the corporation according to the orders, directives or resolutions of
the board of directors and according to his own judgment and discretion whenever the same
is not expressly limited by such orders, directives and resolutions, to mean that the president
can operate and conduct the business of the corporation according to his own judgment and
discretion as long as it is not expressly limited by the orders, directives or resolutions of the
board of directors. 29 The trial court found no evidence that the board had set a prior
limitation upon the exercise of such judgment and discretion; it further ruled that the By-
Laws, does not require that Exhibit A be approved by the Board of Directors. Finally, in the
light of the Chairmans power to execute and sign for and in behalf of the corporation all
contracts or agreements which the corporation may enter into (Exhibit I-1), it concluded
that Mr. Maglana merely followed the By-Laws presumably both as president and chairman
of the board thereof. 30 Hence, Exhibit A was validly entered into by Maglana and thus
binds the corporation.
The trial court, however, ruled that the option to sell is not valid because it is not
supported by any consideration distinct from the price; it was exercised before compliance
with the original contract by PWCC; and the repudiation of the original contract by PWCC was
deemed a withdrawal of the option before acceptance by the petitioner.
Both parties appealed from the said decision to the respondent Court of Appeals
before which petitioner presented the following Assignment of Errors:
I dismissed with costs. Plaintiff is ordered to pay defendant corporation P25,000.00 exemplary
THE TRIAL COURT ERRED IN HOLDING THAT THE OPTION TO RENEW THE CONTRACT OF
SALE IS NOT ENFORCEABLE BECAUSE THE OPTION WAS MADE EVEN BEFORE THE
COMPLIANCE OF (sic) THE ORIGINAL CONTRACT BY DEFENDANT AND THAT DEFENDANTS
PROMISE TO SELL IS NOT SUPPORTED BY ANY CONSIDERATION DISTINCT FROM THE PRICE.
II
THE TRIAL COURT ERRED IN NOT AWARDING TO THE PLAINTIFF ACTUAL DAMAGES,
SUFFICIENT EXEMPLARY DAMAGES AND ATTORNEYS FEES AS ALLEGED IN THE COMPLAINT
AND PROVEN DURING THE TRIAL. 31
while the private respondent cited the following errors:
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I
THE TRIAL COURT ERRED IN HOLDING THAT EXHIBIT A IS A VALID CONTRACT OR
PLAINTIFF CAN CLAIM THAT THE PROPOSED LETTER-CONTRACT, EXHIBIT A IS LEGALLY
ENFORCEABLE, AS THE SAME IS A MERE UNACCEPTED PROPOSAL, NOT HAVING BEEN
PREVIOUSLY AUTHORIZED TO BE ENTERED INTO OR LATER ON RATIFIED BY THE
DEFENDANTS BOARD OF DIRECTORS; IN FACT EXHIBIT A WAS TOTALLY REJECTED AND
DISAPPROVED IN TOTO BY THE DEFENDANTS BOARD OF DIRECTORS IN CLEAR, PLAIN
LANGUAGE AND DULY INFORMED AND TRANSMITTED TO PLAINTIFF.
II
THE TRIAL COURT ERRED IN HOLDING THAT PLAINTIFF CAN LEGALLY UTILIZE THE COURTS
AS THE FORUM TO GIVE LIFE AND VALIDITY TO A TOTALLY UNENFORCEABLE OR NON-
EXISTING CONTRACT.
III
THE TRIAL COURT ERRED IN ALLOWING YAO KA SIN TO IMPUGN AND CONTRADICT HIS VERY
OWN ACTUATIONS AND REPUDIATE HIS ACCEPTANCE AND RECEIPTS OF BENEFITS FROM
THE COUNTER-OFFER OF DEFENDANT FOR 10,000 BAGS OF CEMENT ONLY, UNDER THE
PRICE, TERMS AND CONDITIONS TOTALLY FOREIGN TO AND WHOLLY DIFFERENT FROM
THOSE WHICH APPEAR IN EXHIBIT A.
IV
THE TRIAL COURT ERRED IN DISMISSING DEFENDANTS COUNTER-CLAIMS AS THE SAME ARE
DULY SUPPORTED BY CLEAR AND INDUBITABLE EVIDENCE. 32
In its decision 33 promulgated on 21 December 1979, the respondent Court reversed
the decision of the trial court, thus:
WHEREFORE, the judgment appealed from is REVERSED and set aside, Plaintiffs complaint is
damages, and P10,000.00 attorneys fees.
SO ORDERED.
Such conclusion is based on its findings, to wit:
Before resolving the issue, it is helpful to bring out some preliminary facts. First, the
defendant corporation is supervised and principally financed by the National Investment and
Development Corporation (NIDC), a subsidiary investment of the Philippine National Bank
(PNB), with cash financial exposure of some P10,000,000.00. PNB is a government financial
institution whose Board is chairmaned (sic) by the Minister of National Defense. This fact is
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very material to the issue of whether defendant corporations president can bind the
corporation with his own act.
Second, for failure to deny under oath the following actionable documents in support
of defendants counterclaim:
1. The resolution contained in defendants letter to plaintiff dated July 5, 1973, on the
10,000 bags of white cement delivered to plaintiff was not by reason of the letter contract,
Exhibit A, which was totally disapproved by defendant corporations board of directors,
clearly stating that If within ten (10) days from date hereof, we will not hear from you but
you will withdraw cement at P24.30 per bag from our plant, then we will deposit your check
of P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per
instruction of the Board. (Annex I to defendants Answer).
2. Letter of defendant to plaintiff dated August 4, 1973 that defendant only
committed to you and which you accordingly paid 10,000 bags of white cement of which 4,150
bags were already delivered to you as of August 1, 1973 (Annex 2 of defendants Answer).
3. Letter dated August 21, 1973 to plaintiff reiterating defendants letter of August 4,
1973 (Annex 3 to defendants Answer).
4. Letter to stores dated August 21, 1973,
5. Receipt from plaintiff (sic) P243,000.00 in payment of 10,000 bags of white cement
at P24.30 per bag (Annex 5, to defendants Answer) plaintiff is deemed to have admitted,
not only the due execution and genuineness (sic) of said documents, (Rule 8 Sec. 8, Rules of
Court) but also the allegations therein (Rule 9, Sec. 1, Rules of Court). All of the foregoing
documents tend to prove that the letter-offer, Exhibit A, was rejected by defendant
corporations Board of Directors and plaintiff was duly notified thereof and that the
P243,000.00 check was considered by both parties as payment of the 10,000 bags of cement
under a separate transaction. As proof of which plaintiff did not complain nor protest until
February 9, 1974, when he threatened legal action.
Third, Maglanas signing the letter-offer prepared for him in the Solidbank was made
clearly upon the condition that it was subject to the approval of the board of directors of
defendant corporation. We find consistency herein because according to the Corporation
Law, and the By-Laws of defendant corporation, all corporate commitments and business are
conducted by, and contracts entered into through, the express authority of the Board of
Directors (Sec. 28. Corp. Law, Exh I or 8).
Fourth, What Henry Yao and Maglana agreed upon as embodied in Exhibit A,
insofar as defendant corporation is concerned, was an unauthorized contract (Arts. 1317 and
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Corporation Law
1403 (1), Civil Code). And because Maglana was not authorized by the Board of Directors of
defendant corporation nor was his, actuation ratified by the Board, the agreement is
unenforceable (Art. 1403 (1), Civil Code; Raquiza et al. vs. Lilles et al., 13 CA Rep. 343; Gana vs.
Archbishop of Manila, 43 O-G. 3224).
While it may be true that Maglana is President of defendant corporation nowhere in
the Articles of Incorporation nor in the By-Laws of said corporation was he empowered to
enter into any contract all by himself and bind the corporation without first securing the
authority and consent of the Board of Directors. Whatever authority Maglana may have must
be derived from the Board of Directors of defendant corporation. A corporate officers power
as an agent must be sought from the law, the articles of incorporation and the By-Laws or
from a resolution of the Board (Vicente vs. Geraldez, 52 SCRA 227, Board of Liquidators vs.
Kalaw, 20 SCRA 987).
It clearly results from the foregoing that the judgment appealed from is untenable.
Having no cause of action against defendant corporation, plaintiff is not entitled to any relief.
We see no justification, therefore, for the court a quos awards in its favor. . . . 34
Its motion for reconsideration having been denied by the respondent Court in its
resolution 35 dated 15 April 1980, petitioner filed the instant petition based on the following
grounds:
1. That the contract (Exh. A) entered into by the President and Chairman of the
Board of Directors Constancio B. Maglana in behalf of the respondent corporation binds the
said corporation.
2. That the contract (Exh. A) was never novated nor superseded (sic) by a
subsequent contract.
3. That the option to renew the contract as contained in Exhibit A is enforceable.
4. That Sec. 8, Rule 8 of the Rules of Court only applies when the adverse party
appear (sic) to be a party to the instrument but not to one who is not a party to the
instrument and Sec. 1, Rule 9 of the said Rules with regards (sic) to denying under oath refers
only to allegations of
usury. 36
We gave due course 37 to the petition after private respondent filed its
Comment 38 and required the parties to submit simultaneously their Memoranda, which the
parties subsequently complied with. 39
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Before going any further, this Court must first resolve an issue which, although raised
in the Answer of private respondent, was neither pursued in its appeal before the respondent
Court nor in its Comment and Memorandum in this case. It also eluded the attention of the
trial court and the respondent Court. The issue, which is of paramount importance, concerns
the lack of capacity of plaintiff/petitioner to sue. In the caption of both the complaint and the
instant petition, the plaintiff and the petitioner, respectively, is:
YAO KA SIN TRADING,
owned and operated by
YAO KA SIN. 40
and is described in the body thereof as a business concern of single proprietorship
owned and operated by Yao Ka Sin. 41 In the body of the petition, it is described as a single
proprietorship business concern. 42 It also appears that, as gathered from the decision of the
trial court, no Yao Ka Sin testified. Instead, one Henry Yao took the witness stand and testified
that he is the manager of Yao Ka Sin Trading and it was in representation of the plaintiff
that he signed Exhibit A43 Under Section 1, Rule 3 of the Rules of Court, only natural or
juridical persons or entities authorized by law may be parties in a civil action. In Juasing
Hardware vs. Mendoza, 44 this Court held that a single proprietorship is neither a natural
person nor a juridical person under Article 44 of the Civil Code; it is not an entity authorized by
law to bring suit in court:
The law merely recognizes the existence of a sole proprietorship as a form of
business organization conducted for profit by a single individual, and requires the proprietor
or owner thereof to secure licenses and permits, register the business name, and pair taxes to
the national government. It does not vest juridical or legal personality upon the sole
proprietorship nor empower it to file or defend an action in court. 45
Accordingly, the proper party plaintiff/petitioner should be YAO KA SIN. 46
The complaint then should have been amended to implead Yao Ka Sin as plaintiff in
substitution of Yao Ka Sin Trading. However, it is now too late in the history of this case to
dismiss this petition and, in effect, nullify all proceedings had before the trial court and the
respondent Court on the sole ground of petitioners lack of capacity to sue. Considering that
private respondent did not pursue this issue before the respondent Court and this Court; that,
as We held in Juasing, the defect is merely formal and not substantial, and an amendment to
cure such defect is expressly authorized by Section 4, Rule 10 of the Rules of Court which
provides that [a] defect in the designation of the parties may be summarily corrected at any
stage of the action provided no prejudice is caused thereby to the adverse party; and that
[a] sole proprietorship does not, of course, possess any juridical personality separate and
apart from the personality of the owner of the enterprise and the personality of the persons
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acting in the name of such proprietorship, 47 We hold and declare that Yao Ka Sin should be
deemed as the plaintiff in Civil Case No. 5064 and the petitioner in the instant case. As this
Court stated nearly eighty (80) years ago in Alonso vs. Villamor: 48
No one has been misled by the error in the name of the party plaintiff. If we should
by reason of this error send this case back for amendment and new trial, there would be on
the retrial the same complaint, the same answer, the same defense, the same interests, the
same witnesses, and the same evidence. The name of the plaintiff would constitute the only
difference between the old trial and the new. In our judgment there is not enough in a name
to justify such action.
And now to the merits of the petition.
The respondent Court correctly ruled that Exhibit A is not binding upon the private
respondent. Mr. Maglana, its President and Chairman, was not empowered to execute it.
Petitioner, on the other hand, maintains that it is a valid contract because the Maglana has
the power to enter into contracts for the corporation as implied from the following provisions
of the By-Laws of private respondent:
a) The power of the Board of Directors to . . . enter into (sic) agreement or contract
of any kind with any person in the name and for and in behalf of the corporation through its
President, subject only to the declared objects and purpose of the corporation and the
existing provisions of law. (Exhibit 8-A); and
b) The power of the Chairman of the Board of Directors to execute and sign, for and
in behalf of the corporation, all contracts or agreements which the corporation may enter
into (Exhibit I-1).
And even admitting, for the sake of argument, that Mr. Maglana was not so
authorized under the By-Laws, the private respondent, pursuant to the doctrine laid down by
this Court in Francisco vs. Government Service Insurance System 49 and Board of Liquidators vs.
Kalaw, 50 is still bound by his act for clothing him with apparent authority.
We are not persuaded.
Since a corporation, such as the private respondent, can act only through its officers
and agents, all acts within the powers of said corporation may be performed by agents of its
selection; and, except so far as limitations or restrictions may be imposed by special charter,
by-law, or statutory provisions, the same general principles of law which govern the relation
of agency for a natural person govern the officer or agent of a corporation, of whatever
status or rank, in respect to his power to act for the corporation; and agents when once
214

appointed, or members acting in their stead, are subject to the same rules, liabilities and
incapacities as are agents of individuals and private persons. 51 Moreover, . . . a corporate
officer or agent may represent and bind the corporation in transactions with third persons to
the extent that authority to do so has been conferred upon him, and this includes powers
which have been intentionally conferred, and also such powers as, in the usual course of the
particular business, are incidental to, or may be implied from, the powers intentionally
conferred, powers added by custom and usage, as usually pertaining to the particular officer
or agent, and such apparent powers as the corporation has caused persons dealing with the
officer or agent to believe that it has conferred. 52
While there can be no question that Mr. Maglana was an officer the President and
Chairman of private respondent corporation at the time he signed Exhibit A, the above
provisions of said private respondents By-Laws do not in any way confer upon the President
the authority to enter into contracts for the corporation independently, of the Board of
Directors. That power is exclusively lodged in the latter. Nevertheless, to expedite or facilitate
the execution of the contract, only the President and not all the members of the Board, or
so much thereof as are required for the act shall sign it for the corporation. This is the
import of the words through the president in Exhibit 8-A and the clear intent of the power
of the chairman to execute and sign for and in behalf of the corporation all contracts and
agreements which the corporation may enter into in Exhibit I-1. Both powers presuppose
a prior act of the corporation exercised through the Board of Directors. No greater power can
be implied from such express, but limited, delegated authority. Neither can it be logically
claimed that any power greater than that expressly conferred is inherent in Mr. Maglanas
position as president and chairman of the corporation.
Although there is authority that if the president is given general control and
supervision over the affairs of the corporation, it will be presumed that he has authority to
make contract and do acts within the course of its ordinary business, 53 We find such
inapplicable in this case. We note that the private corporation has a general manager who,
under its By-Laws has, inter alia, the following powers: (a) to have the active and direct
management of the business and operation of the corporation, conducting the same
accordingly to the order, directives or resolutions of the Board of Directors or of the
president. It goes without saying then that Mr. Maglana did not have a direct and active
hand in the management of the business and operations of the corporation. Besides, no
evidence was adduced to show that Mr. Maglana had, in the past, entered into contracts
similar to that of Exhibit A either with the petitioner or with other parties.
Petitioners last refuge then is his alternative proposition, namely, that private
respondent had clothed Mr. Maglana with the apparent power to act for it and had caused
persons dealing with it to believe that he was conferred with such power. The rule is of course
settled that [a]lthough an officer or agent acts without, or in excess of, his actual authority if
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he acts within the scope of an apparent authority with which the corporation has clothed him
by holding him out or permitting him to appear as having such authority, the corporation is
bound thereby in favor of a person who deals with him in good faith in reliance on such
apparent authority, as where an officer is allowed to exercise a particular authority with
respect to the business, or a particular branch of it, continuously and publicly, for a
considerable time. 54 Also, if a private corporation intentionally or negligently clothes its
officers or agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority in real, as to innocent third persons dealing in
good faith with such officers or agents. 55 This apparent authority may result from (1) the
general manner, by which the corporation holds out an officer or agent as having power to
act or, in other words, the apparent authority with which it clothes him to act in general or (2)
acquiescence in his acts of a particular nature, with actual or constructive knowledge thereof,
whether within or without the scope of his ordinary powers. 56
It was incumbent upon the petitioner to prove that indeed the private respondent
had clothed Mr. Maglana with the apparent power to execute Exhibit A or any similar
contract. This could have been easily done by evidence of similar acts executed either in its
favor or in favor of other parties. Petitioner miserably failed to do that. Upon the other hand,
private respondents evidence overwhelmingly shows that no contract can be signed by the
president without first being approved by the Board of Directors; such approval may only be
given after the contract passes through, at least, the comptroller, who is the NIDC
representative, and the legal counsel.
The cases then of Francisco vs. GSIS and Board of Liquidators vs. Kalaw are hopelessly
unavailing to the petitioner. In said cases, this Court found sufficient evidence, based on the
conduct and actuations of the corporations concerned, of apparent authority conferred upon
the officer involved which bound the corporations on the basis of ratification. In the first case,
it was established that the offer of compromise made by plaintiff in the letter, Exhibit A,
was validly accepted by the GSIS. The terms of the trial offer were clear, and over the
signature of defendants general manager Rodolfo Andal, plaintiff was informed
telegraphically that her proposal had been accepted. It was sent by the GSIS Board Secretary
and defendant did not disown the same. Moreover, in a letter remitting the payment of
P30,000 advanced by her father, plaintiff quoted verbatim the telegram of acceptance. This
was in itself notice to the corporation of the terms of the allegedly unauthorized telegram.
Notwithstanding this notice, GSIS pocketed the amount and kept silent about the telegram.
This Court then ruled that:
This silence, taken together with the unconditional acceptance of three other
subsequent remittances from plaintiff, constitutes in itself a binding ratification of the original
agreement (Civil Code, Art. 1393).
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Art. 1393. Ratification may be effected expressly or tacitly it is understood that there
is a tacit ratification if, with knowledge of the reason which renders the contract voidable and
such reason having ceased, the person who has a right to invoke it should execute an act
which necessarily implies an intention to waive his right
In the second case, this Court found:
In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and in
NACOCOs behalf without prior board approval. If the by-laws were to be literally followed,
the board should give its stamp of prior approval on all corporate contracts. But that board
itself, by its acts and through acquiescence, practically laid aside the by-laws requirement of
prior approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
The inevitable conclusion then is that Exhibit A is an unenforceable contract under
Article 1317 of the Civil Code which provides as follows:
Art. 1317. No one may contract in the name of another without being authorized by
the latter, or unless he has by law a right to represent him.
A contract entered into in the name of another by one who has no authority or legal
representation, or who has acted beyond his powers, shall be unenforceable, unless it is
ratified, expressly or impliedly, by the person on whose behalf it, has been execrated, before
it is revoked by the other contracting party.
The second ground is based on a wrong premise. It assumes, contrary to Our
conclusion above, that Exhibit A is a valid contract binding upon the private respondent. It
was effectively disapproved and rejected by the Board of Directors which, at the same time,
considered the amount of P243,000.00 received Mr. Maglana as payment for 10,000 bags of
white cement, treated as an entirely different contract, and forthwith notified petitioner of its
decision that If within ten (10) days from date hereof we will not hear from you but you will
withdraw cement at P24.30 per bag from our plant, then we will deposit your check of
P243,000.00 dated June 7, 1973 issued by the Producers Bank of the Philippines, per
instruction of the Board. 57 Petitioner received the copy of this notification and thereafter
accepted without any protest the Delivery Receipt covering the 10,000 bags and the Official
Receipt for the P243,000.00. The respondent Court thus correctly ruled that petitioner had in
fact agreed to a new transaction involving only 10,000 bags of white cement.
The third ground must likewise fail. Exhibit A being unenforceable, the option to
renew it would have no leg to stand on. The river cannot rise higher than its source. In any
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event, the option granted in. this case is without any consideration Article 1324 of the Civil
Code expressly provides that:
When the offerer has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when
the option is founded upon a consideration, as something paid or promised.
while Article 1749 of the same Code provides:
A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promissor if the promise is supported by a consideration distinct
from the price.
Accordingly, even if it were accepted, it cannot validly bind the private respondent. 58
The fourth ground is, however, meritorious.
Section 8, Rule 8 of the Rules of Court provides:
Sec. 8. How to contest genuineness of such documents When an action or defense is
founded upon a written instrument, copied in or attached in the corresponding pleading as
provided in the preceding section, the genuineness and due execution of the instrument shall
be deemed admitted unless the adverse party, under oath, specifically denies them, and sets
forth what he claims to be the facts; but this provision does not apply when the adverse party
does not appear, to be a party to the instrument or when compliance with an order for an
inspection of the original instrument is refused.
It is clear that the petitioner is not a party to any of the documents attached to the
private respondents Answer. Thus, the above quoted rule is not applicable. 59 While the
respondent Court, erred in holding otherwise, the challenged decision must, nevertheless,
stand in view of the above disquisitions on the first to the third grounds of the petition.
WHEREFORE, judgment is hereby rendered AFFIRMING the decision of respondent
Court of Appeals in C.A. G.R. No. 61072-R promulgated on 21 December 1979.
216

Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. 71694 August 16, 1991
NYCO SALES CORPORATION, petitioner,
vs.
BA FINANCE CORPORATION, JUDGE ROSALIO A. DE LEONREGIONAL TRIAL COURT, BR. II,
INTERMEDIATE APPELLATE COURT, FIRST CIVIL CASES DIVISION, respondents.
Civil Law; Assignment; Case at bar; According to Art. 1628 of the Civil Code, the
assignor-vendor warrants both the credit itself and the person of the debtor, if so stipulated, as
in the case at bar.An assignment of credit is the process of transferring the right of the
assignor to the assignee, who would then be allowed to proceed against the debtor. It may
be done either gratuitously or onerously, in which case, the assignment has an effect similar
to that of a sale. According to Article 1628 of the Civil Code, the assignor-vendor warrants
both the credit itself (its existence and legality) and the person of the debtor (his solvency), if
so stipulated, as in the case at bar. Consequently, if there be any breach of the above
warranties, the assignor-vendor should be held answerable therefor. There is no question
then that the assignor-vendor is indeed liable for the invalidity of whatever he assigned to the
assignee-vendee.
Same; Same; Negotiable Instruments Law; Notice of Dishonor; The dishonor of an
assigned check simply stresses its liability and the failure to give a notice of dishonor will not
discharge it from such liability.Nycos pretension that it had not been notified of the fact of
dishonor is belied not only by the formal demand letter but also by the findings of the trial
court that Rufino Yao of Nyco and the Fernandez Brothers of Sanshell had frequent contacts
before, during and after the dishonor (Rollo, p. 40). More importantly, it fails to realize that
for as long as the credit remains outstanding, it shall continue to be liable to BA Finance as its
assignor. The dishonor of an assigned check simply stresses its liability and the failure to give a
notice of dishonor will not discharge it from such liability. This is because the cause of action
stems from the breach of the warranties embodied in the Deed of Assignment, and not from
the dishonoring of the check alone (See Art. 1628, Civil Code).
Same; Novation; In order to produce the effect of extinguishing obligation, novation
must (a) be explicitly stated and declared in unequivocal terms, and (b) the old and the new
obligations must be incompatible on every point.There are only two ways which indicate the
presence of novation and thereby produce the effect of extinguishing an obligation by
another which substitutes the same. First, novation must be explicitly stated and declared in
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unequivocal terms as novation is never presumed (Mondragon v. Intermediate Appellate
Court, G.R. No. 71889, April 17, 1990; Caneda, Jr. v. Court of Appeals, G.R. No. 81322, February
5, 1990). Secondly, the old and the new obligations must be incompatible on every point. The
test of incompatibility is whether or not the two obligations can stand together, each one
having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first (Mondragon v. Intermediate Appellate Court, supra; Caneda, Jr. v.
Court of Appeals, supra). In the instant case, there was no express agreement that BA
Finances acceptance of the SBTC check will discharge Nyco from liability. Neither is there
incompatibility because both checks were given precisely to terminate a single obligation
arising from Nycos sale of credit to BA Finance. As novation speaks of two distinct
obligations, such is inapplicable to this case.
Same; Corporation Law; Estoppel in pais.Nyco is estopped from denying Rufino
Yaos authority as far as the latters transactions with BA Finance are concerned.
PETITION for certiorari to review the decision of the then Intermediate Appellate
Court. Caquioa, J.
The facts are stated in the opinion of the Court.
ABC Law Offices for petitioner.
Valera, Urmeneta & Associates for private respondent.
PARAS, J.:
In this petition for review on certiorari, petitioner challenges the April 22, 1985
decision * and the July 16, 1985 resolution * of the then Intermediate Appellate Court in AC-
G.R. CV No. 02553 entitled "BA Finance Corporation v. Nyco Sales Corporation, et al." which
affirmed with modification the July 20, 1983 decision ** of the Regional Trial Court, National
Capital Region, Manila, Branch II in the same case docketed as Civil Case No. 125909 ordering
petitioner to pay respondent the amount of P60,000.00 as principal obligation plus
corresponding interest, the sum of P10,000.00 as and for, attomey's fees and 1/3 of the costs
of suit.
It appears on record that petitioner Nyco Sales Corporation (hereinafter referred to
as Nyco) whose president and general manager is Rufino Yao, is engaged in the business of
selling construction materials with principal office in Davao City. Sometime in 1978, the
brothers Santiago and Renato Fernandez (hereinafter referred to as the Fernandezes), both
acting in behalf of Sanshell Corporation, approached Rufino Yao for credit accommodation.
They requested Nyco, thru Yao, to grant Sanshell discounting privileges which Nyco had with
BA Finance Corporation (hereinafter referred to as BA Finance). Yao apparently acquiesced,
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hence on or about November 15, 1978, the Fernandezes went to Yao for the purpose of
discounting Sanshell's post-dated check which was a BPI-Davao Branch Check No. 499648
dated February 17, 1979 for the amount of P60,000.00. The said check was payable to Nyco.
Following the discounting process agreed upon, Nyco, thru Yao, endorsed the check in favor
of BA Finance. Thereafter, BA Finance issued a check payable to Nyco which endorsed it in
favor of Sanshell. Sanshell then made use of and/or negotiated the check. Accompanying the
exchange of checks was a Deed of Assignment executed by Nyco in favor of BA Finance with
the conformity of Sanshell. Nyco was represented by Rufino Yao, while Sanshell was
represented by the Fernandez brothers. Under the said Deed, the subject of the discounting
was the aforecited check (Rollo, pp- 26-28). At the back thereof and of every deed of
assignment was the Continuing Suretyship Agreement whereby the Fernandezes
unconditionally guaranteed to BA Finance the full, faithful and prompt payment and discharge
of any and all indebtedness of Nyco (Ibid., pp. 36, 46). The BPI check, however, was
dishonored by the drawee bank upon presentment for payment. BA Finance immediately
reported the matter to the Fernandezes who thereupon issued a substitute check dated
February 19,1979 for the same amount in favor of BA Finance. It was a Security Bank and Trust
Company check bearing the number 183157, which was again dishonored when it was
presented for payment. Despite repeated demands, Nyco and the Fernandezes failed to settle
the obligation with BA Finance, thus prompting the latter to institute an action in court (Ibid.,
p 28). Nyco and the Fernandezes, despite having been served with summons and copies of
the complaint, failed to file their answer and were consequently declared in default. On May
16, 1980, the lower court ruled in favor of BA Finance ordering them to pay the former jointly
and severally, the sum of P65,536.67 plus 14% interest per annum from July 1, 1979 and
attorney's fees in the amount of P3, 000. 00 as well as the costs of suit (Rollo, pp. 51-52).
Nyco, however, moved to set aside the order of default, to have its answer admitted and to
be able to implead Sanshell. The prayer was granted through an order dated June 23, 1980,
wherein the decision of the court was set aside only as regards Nyco. Trial ensued once more
until the court reached a second decision which states:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff
and against the defendant Nyco Sales Corporation by ordering the latter to
pay the former the following:
1) P60,000.00 as principal obligation, plus interest thereon at the rate of 14%
per annum from February 1, 1979 until fully paid;
2) The amount of P100,000.00 as and for attorney's fees; and
3) One-third (1/3) of the costs of this suit.
With respect to defendants Santiago and Renato Fernandez, the
decision of May 16, 1980 stands.
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The cross-claim of defendant Nyco Sales Corporation against
codefendants Santiago B. Fernandez and Renato B. Fernandez is hereby
denied, as there is no showing that Nyco's Answer with cross-claim dated
May 29, 1980 was ever received by said Fernandez brothers, even as it is
noted that the latter have not been declared in default with respect to said
cross-claim, nor were evidence adduced in connection therewith.
As to the would-be litigant Sanshell Construction and Development
Corporation, defendant Nyco Sales Corporation did not properly implead
said corporation which should have been by way of a third-party complaint
instead of a mere cross-claim. The same observations are noted as regard
this cross-claim against Sanshell as those made with respect to the
Fernandez brothers.
SO ORDERED.
On appeal, the appellate court also upheld BA Finance but modified the lower court's
decision by ordering that the interest should run from February 19, 1979 until paid and not
from February 1, 1979. Nyco's subsequent motion for reconsideration was denied (Ibid., pp.
33, 62). Hence, the present recourse.
The crux of the controversy is whether or not the assignor is liable to its assignee for
its dishonored checks.
For its defense, Nyco anchors its arguments on the following premises:
a) that the appellate court erred in affirming its liability for the BPI check despite a
similar finding of liability for the SBTC check rendered by the same lower court;
b) that it was actually discharged of its liability over the SBTC check when BA Finance
failed to give it a notice of dishonor; c) that there was novation when BA Finance accepted
the SBTC check in replacement of the BPI check; and d) that it cannot be held liable for its
Presidents unauthorized acts.
The petition is devoid of merit.
An assignment of credit is the process of transferring the right of the assignor to the
assignee, who would then be allowed to proceed against the debtor. It may be done either
gratuitously or generously, in which case, the assignment has an effect similar to that of a
sale.
218

According to Article 1628 of the Civil Code, the assignor-vendor warrants both the
credit itself (its existence and legality) and the person of the debtor (his solvency), if so
stipulated, as in the case at bar. Consequently, if there be any breach of the above warranties,
the assignor-vendor should be held answerable therefor. There is no question then that the
assignor-vendor is indeed liable for the invalidity of whatever he as signed to the assignee-
vendee.
Considering now the facts of the case at bar, it is beyond dispute that Nyco executed
a deed of assignment in favor of BA Finance with Sanshell Corporation as the debtor-obligor.
BA Finance is actually enforcing said deed and the check covered thereby is merely an
incidental or collateral matter. This particular check merely evidenced the credit which was
actually assigned to BA Finance. Thus, the designation is immaterial as it could be any other
check. Both the lower and the appellate courts recognized this and so it is utterly misplaced
to say that Nyco is being held liable for both the BPI and the SBTC checks. It is only what is
represented by the said checks that Nyco is being asked to pay. Indeed, nowhere in the
dispositive parts of the decisions of the courts can it be gleaned that BA Finance may recover
from the two checks.
Nyco's pretension that it had not been notified of the fact of dishonor is belied not
only by the formal demand letter but also by the findings of the trial court that Rufino Yao of
Nyco and the Fernandez Brothers of Sanshell had frequent contacts before, during and after
the dishonor (Rollo, p. 40). More importantly, it fails to realize that for as long as the credit
remains outstanding, it shall continue to be liable to BA Finance as its assignor. The dishonor
of an assigned check simply stresses its liability and the failure to give a notice of dishonor will
not discharge it from such liability. This is because the cause of action stems from the breach
of the warranties embodied in the Deed of Assignment, and not from the dishonoring of the
check alone (See Art. 1628, Civil Code).
Novation is the third defense set up by petitioner Nyco. It insists that novation took
place when BA Finance accepted the SBTC check in replacement of the BPI cheek. Such is
manifestly untenable.
There are only two ways which indicate the presence of novation and thereby
produce the effect of extinguishing an obligation by another which substitutes the same.
First, novation must be explicitly stated and declared in unequivocal terms as novation is
never presumed (Mondragon v. Intermediate Appellate Court, G.R. No. 71889, April 17, 1990;
Caneda Jr. v. Court of Appeals, G.R. No. 81322, February 5, 1990). Secondly, the old and the
new obligations must be incompatible on every point. The test of incompatibility is whether
or not the two obligations can stand together, each one having its independent existence If
they cannot, they are incompatible and the latter obligation novates the first (Mondragon v.
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Corporation Law
Intermediate Appellate Court, supra; Caneda Jr. v. Court of Appeals, supra). In the instant
case, there was no express agreement that BA Finance's acceptance of the SBTC check will
discharge Nyco from liability. Neither is there incompatibility because both checks were given
precisely to terminate a single obligation arising from Nyco's sale of credit to BA Finance. As
novation speaks of two distinct obligations, such is inapplicable to this case.
Finally, Nyco disowns its President's acts claiming that it never authorized Rufino Yao
(Nyco's President) to even apply to BA Finance for credit accommodation. It supports its
argument with the fact that it did not issue a Board resolution giving Yao such authority.
However, the very evidence on record readily belies Nyco's contention. Its corporate By-Laws
clearly provide for the powers of its President, which include, inter alia, executing contracts
and agreements, borrowing money, signing, indorsing and delivering checks, all in behalf of
the corporation. Furthermore, the appellate court correctly adopted the lower court's
observation that there was already a previous transaction of discounting of checks involving
the same personalities wherein any enabling resolution from Nyco was dispensed with and
yet BA Finance was able to collect from Nyco and Sanshell was able to discharge its own
undertakings. Such effectively places Nyco under estoppel in pais which arises when one, by
his acts, representations or admissions, or by his silence when he ought to speak out,
intentionally or through culpable negligence, induces another to believe certain facts to exist
and such other rightfully relies and acts on such belief, so that he will be prejudiced if the
former is permitted to deny the existence of such facts (Panay Electric Co., Inc. v. Court of
Appeals, G.R. No. 81939, June 29,1989). Nyco remained silent in the course of the transaction
and spoke out only later to escape liability. This cannot be countenanced. Nyco is estopped
from denying Rufino Yao's authority as far as the latter's transactions with BA Finance are
concerned.
PREMISES CONSIDERED, the decision appealed from is AFFIRMED.
SO ORDERED.
Melencio-Herrera (Chairperson), Padilla, Sarmiento and Regalado, JJ., concur.
219

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 148444 July 14, 2008
ASSOCIATED BANK (now UNITED OVERSEAS BANK [PHILS.]), Petitioner,
vs.
SPOUSES RAFAEL and MONALIZA PRONSTROLLER, Respondents.
Actions; Appeals; Well-settled is the rule that the findings of the RTC, as affirmed by
the appellate court, are binding on the Supreme Court.Well-settled is the rule that the
findings of the RTC, as affirmed by the appellate court, are binding on this Court. In a petition
for review on certiorari under Rule 45 of the Rules of Court, as in this case, this Court may not
review the findings of fact all over again. It must be stressed that this Court is not a trier of
facts, and it is not its function to re-examine and weigh anew the respective evidence of the
parties. The findings of the CA are conclusive on the parties and carry even more weight when
these coincide with the factual findings of the trial court, unless the factual findings are not
supported by the evidence on record. Petitioner failed to show why the above doctrine
should not be applied to the instant case.
Corporation Law; Board of Directors; Doctrine of Apparent Authority; Words and
Phrases; While it is a general rule that, in the absence of authority from the board of directors,
no person, not even its officers, can validly bind a corporation, the Board may validly delegate
some of its functions and powers to officers, committees and agents; The doctrine of
apparent authority, with special reference to banks, had long been recognized in the
Philippine jurisdiction; Apparent authority is derived not only from practiceits existence may
be ascertained through (1) the general manner in which the corporation holds out an officer or
agent as having the power to act, with which it clothes him, or, (2) the acquiescence in his acts
of a particular nature, with actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers.The general rule is that, in the absence of authority from the
board of directors, no person, not even its officers, can validly bind a corporation. The power
and responsibility to decide whether the corporation should enter into a contract that will
bind the corporation is lodged in the board of directors. However, just as a natural person
may authorize another to do certain acts for and on his behalf, the board may validly delegate
some of its functions and powers to officers, committees and agents. The authority of such
individuals to bind the corporation is generally derived from law, corporate bylaws or
authorization from the board, either expressly or impliedly, by habit, custom, or
acquiescence, in the general course of business. The authority of a corporate officer or agent
in dealing with third persons may be actual or apparent. The doctrine of apparent authority,
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Corporation Law
with special reference to banks, had long been recognized in this jurisdiction. Apparent
authority is derived not merely from practice. Its existence may be ascertained through 1) the
general manner in which the corporation holds out an officer or agent as having the power to
act, or in other words, the apparent authority to act in general, with which it clothes him; or 2)
the acquiescence in his acts of a particular nature, with actual or constructive knowledge
thereof, within or beyond the scope of his ordinary powers.
Same; Same; Same; It is not the quantity of similar acts which establishes apparent
authority, but the vesting of a corporate officer with the power to bind the corporationthe
third person has little or no information as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestations of corporate consent; The integrity of
commercial transactions can only be maintained by holding the corporation strictly to the
liability fixed upon it by its agents in accordance with law.The authority to act for and to
bind a corporation may be presumed from acts of recognition in other instances, wherein the
power was exercised without any objection from its board or shareholders. Undoubtedly,
petitioner had previously allowed Atty. Soluta to enter into the first agreement without a
board resolution expressly authorizing him; thus, it had clothed him with apparent authority
to modify the same via the second letter-agreement. It is not the quantity of similar acts
which establishes apparent authority, but the vesting of a corporate officer with the power to
bind the corporation. Naturally, the third person has little or no information as to what occurs
in corporate meetings; and he must necessarily rely upon the external manifestations of
corporate consent. The integrity of commercial transactions can only be maintained by
holding the corporation strictly to the liability fixed upon it by its agents in accordance with
law. What transpires in the corporate board room is entirely an internal matter. Hence,
petitioner may not impute negligence on the part of the respondents in failing to find out the
scope of Atty. Solutas authority. Indeed, the public has the right to rely on the
trustworthiness of bank officers and their acts.
Contracts; Mutuality of Contracts; Unilateral Rescission; Basic is the rule that a
contract constitutes the law between the parties; Parties may validly stipulate the unilateral
rescission of a contract.Basic is the rule that a contract constitutes the law between the
parties. Concededly, parties may validly stipulate the unilateral rescission of a contract. This is
usually in the form of a stipulation granting the seller the right to forfeit installments or
deposits made by the buyer in case of the latters failure to make full payment on the
stipulated date. While the petitioner in the instant case may have the right, under the March
18 agreement, to unilaterally rescind the contract in case of respondents failure to comply
with the terms of the contract, the execution of the July 14 Agreement prevented petitioner
from exercising the right to rescind. This is so because there was in the first place, no breach
of contract, as the date of full payment had already been modified by the later agreement.
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Same; Valid Offer; It is contrary to human experience that parties would abandon
their right to a contract and subject property, absent any form of protection, considering that
they have a continuing interest over the said property and when they have the capacity to pay
for the same.Neither can the July 14, 1993 agreement be considered abandoned by
respondents act of making a new offer, which was unfortunately rejected by petitioner. A
careful reading of the June 6, 1994 letter of respondents impels this Court to believe that such
offer was made only to demonstrate their capacity to purchase the subject property. Besides,
even if it was a valid new offer, they did so only due to the fraudulent misrepresentation
made by petitioner that their earlier contracts had already been rescinded. Considering
respondents capacity to pay and their continuing interest in the subject property, to abandon
their right to the contract and to the property, absent any form of protection, is contrary to
human nature. The presumption that a person takes ordinary care of his concerns applies and
remains unrebutted. Obviously therefore, respondents made the new offer without
abandoning the previous contract. Since there was never a perfected new contract, the July
14, 1993 agreement was still in effect and there was no abandonment to speak of.
Actions; Lis Pendens; Effect of Filing; Words and Phrases; Lis Pendens, Defined;
Founded upon public policy and necessity, lis pendens is intended to keep the properties in
litigation within the power of the court until the litigation is terminated, and to prevent the
defeat of the judgment or decree by subsequent alienation; The filing of a notice of lis pendens
has a twofold effect(1) to keep the subject matter of the litigation within the power of the
court until the entry of the final judgment to prevent the defeat of the final judgment by
successive alienations; and (2) to bind a purchaser, bona fide or not, of the land subject of the
litigation to the judgment or decree that the court will promulgate subsequently.Lis
pendens, which literally means pending suit, refers to the jurisdiction, power or control which
a court acquires over property involved in a suit, pending the continuance of the action, and
until final judgment. Founded upon public policy and necessity, lis pendens is intended to
keep the properties in litigation within the power of the court until the litigation is
terminated, and to prevent the defeat of the judgment or decree by subsequent alienation.
Its notice is an announcement to the whole world that a particular property is in litigation and
serves as a warning that one who acquires an interest over said property does so at his own
risk or that he gambles on the result of the litigation over said property. The filing of a notice
of lis pendens has a twofold effect: (1) to keep the subject matter of the litigation within the
power of the court until the entry of the final judgment to prevent the defeat of the final
judgment by successive alienations; and (2) to bind a purchaser, bona fide or not, of the land
subject of the litigation to the judgment or decree that the court will promulgate
subsequently.
Same; Same; Land Titles and Deeds; Settled is the rule that the notice of lis pendens is
not considered a collateral attack on the title, for the indefeasibility of the title shall not be
used to defraud another especially if the latter performs acts to protect his rights such as the
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timely registration of a notice of lis pendens.This registration, therefore, gives the court
clear authority to cancel the title of the spouses Vaca, since the sale of the subject property
was made after the notice of lis pendens. Settled is the rule that the notice is not considered a
collateral attack on the title, for the indefeasibility of the title shall not be used to defraud
another especially if the latter performs acts to protect his rights such as the timely
registration of a notice of lis pendens.
Damages; Article 2220 of the New Civil Code allows the recovery of moral damages in
breaches of contract where the party acted fraudulently and in bad faith.As to the liability
for moral damages, attorneys fees and expenses of litigation, we affirm in toto the appellate
courts conclusion. Article 2220 of the New Civil Code allows the recovery of moral damages in
breaches of contract where the party acted fraudulently and in bad faith. As found by the CA,
petitioner undoubtedly acted fraudulently and in bad faith in breaching the letter-
agreements. Despite the pendency of the case in the RTC, it sold the subject property to the
spouses Vaca and allowed the demolition of the house even if there was already a writ of
preliminary injunction lawfully issued by the court. This is apart from its act of unilaterally
rescinding the subject contract. Clearly, petitioners acts are brazen attempts to frustrate the
decision that the court may render in favor of respondents. It is, likewise, apparent that
because of petitioners acts, respondents were compelled to litigate justifying the award of
attorneys fees and expenses of litigation.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
DECISION
NACHURA, J.:
This is a Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by
petitioner Associated Bank (now United Overseas Bank [Phils.]) assailing the Court of Appeals
(CA) Decision1 dated February 27, 2001, which in turn affirmed the Regional Trial Court 2 (RTC)
Decision3 dated November 14, 1997 in Civil Case No. 94-3298 for Specific Performance.
Likewise assailed is the appellate courts Resolution4 dated May 31, 2001 denying petitioners
motion for reconsideration.
The facts of the case are as follows:
On April 21, 1988, the spouses Eduardo and Ma. Pilar Vaca (spouses Vaca) executed a
Real Estate Mortgage (REM) in favor of the petitioner5 over their parcel of residential land
with an area of 953 sq. m. and the house constructed thereon, located at No. 18, Lovebird
Street, Green Meadows Subdivision 1, Quezon City (herein referred to as the subject
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property). For failure of the spouses Vaca to pay their obligation, the subject property was
sold at public auction with the petitioner as the highest bidder. Transfer Certificate of Title
(TCT) No. 254504, in the name of spouses Vaca, was cancelled and a new one --TCT No. 52593--
was issued in the name of the petitioner.6
The spouses Vaca, however, commenced an action for the nullification of the real
estate mortgage and the foreclosure sale. Petitioner, on the other hand, filed a petition for
the issuance of a writ of possession which was denied by the RTC. Petitioner, thereafter,
obtained a favorable judgment when the CA granted its petition but the spouses Vaca
questioned the CA decision before this Court in the case docketed as G.R. No. 109672.7
During the pendency of the aforesaid cases, petitioner advertised the subject
property for sale to interested buyers for P9,700,000.00.8 Respondents Rafael and Monaliza
Pronstroller offered to purchase the property for P7,500,000.00. Said offer was made
through Atty. Jose Soluta, Jr. (Atty. Soluta), petitioners Vice-President, Corporate Secretary
and a member of its Board of Directors.9 Petitioner accepted respondents offer of P7.5
million. Consequently, respondents paid petitioner P750,000.00, or 10% of the purchase price,
as down payment.10
On March 18, 1993, petitioner, through Atty. Soluta, and respondents, executed a
Letter-Agreement setting forth therein the terms and conditions of the sale, to wit:
1. Selling price shall be at P7,500,000.00 payable as follows:
a. 10% deposit and balance of P6,750,000.00 to be deposited under escrow
agreement. Said escrow deposit shall be applied as payment upon delivery of the
aforesaid property to the buyers free from occupants.
b. The deposit shall be made within ninety (90) days from date hereof.Any interest
earned on the aforesaid investment shall be for the buyers account. However, the
10% deposit is non-interest earning.11
Prior to the expiration of the 90-day period within which to make the escrow deposit,
in view of the pendency of the case between the spouses Vaca and petitioner involving the
subject property,12 respondents requested that the balance of the purchase price be made
payable only upon service on them of a final decision or resolution of this Court affirming
petitioners right to possess the subject property. Atty. Soluta referred respondents proposal
to petitioners Asset Recovery and Remedial Management Committee (ARRMC) but the latter
deferred action thereon.13
On July 14, 1993, a month after they made the request and after the payment
deadline had lapsed, respondents and Atty. Soluta, acting for the petitioner, executed
another Letter-Agreement allowing the former to pay the balance of the purchase price upon
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receipt of a final order from this Court (in the Vaca case) and/or the delivery of the property to
them free from occupants.14
Towards the end of 1993, or in early 1994, petitioner reorganized its management.
Atty. Braulio Dayday (Atty. Dayday) became petitioners Assistant Vice-President and Head of
the Documentation Section, while Atty. Soluta was relieved of his responsibilities. Atty.
Dayday reviewed petitioners records of its outstanding accounts and discovered that
respondents failed to deposit the balance of the purchase price of the subject property. He,
likewise, found that respondents requested for an extension of time within which to pay. The
matter was then resubmitted to the ARRMC during its meeting on March 4, 1994, and it was
disapproved. ARRMC, thus, referred the matter to petitioners Legal Department for
rescission or cancellation of the contract due to respondents breach thereof.15
On May 5, 1994, Atty. Dayday informed respondents that their request for extension
was disapproved by ARRMC and, in view of their breach of the contract, petitioner was
rescinding the same and forfeiting their deposit. Petitioner added that if respondents were
still interested in buying the subject property, they had to submit their new
proposal.16 Respondents went to the petitioners office, talked to Atty. Dayday and gave him
the Letter-Agreement of July 14, 1993 to show that they were granted an extension. However,
Atty. Dayday claimed that the letter was a mistake and that Atty. Soluta was not authorized to
give such extension.17
On June 6, 1994, respondents proposed to pay the balance of the purchase price as
follows: P3,000,000.00 upon the approval of their proposal and the balance after six (6)
months.18 However, the proposal was disapproved by the petitioners President. In a letter
dated June 9, 1994, petitioner advised respondents that the former would accept the latters
proposal only if they would pay interest at the rate of 24.5% per annum on the unpaid balance.
Petitioner also allowed respondents a refund of their deposit of P750,000.00 if they would
not agree to petitioners new proposal.19
For failure of the parties to reach an agreement, respondents, through their counsel,
informed petitioner that they would be enforcing their agreement dated July 14,
1993.20 Petitioner countered that it was not aware of the existence of the July 14 agreement
and that Atty. Soluta was not authorized to sign for and on behalf of the bank. It, likewise,
reiterated the rescission of their previous agreement because of the breach committed by
respondents.21
On July 14, 1994, in the Vaca case, this Court upheld petitioners right to possess the
subject property.
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On July 28, 1994, respondents commenced the instant suit by filing a Complaint for
Specific Performance before the RTC of Antipolo, Rizal. 22 The case was raffled to Branch 72
and was docketed as Civil Case No. 94-3298. Respondents prayed that petitioner be ordered
to sell the subject property to them in accordance with their letter-agreement of July 14, 1993.
They, likewise, caused the annotation of a notice of lis pendens at the dorsal portion of TCT
No. 52593.
For its part, petitioner contended that their contract had already been rescinded
because of respondents failure to deposit in escrow the balance of the purchase price within
the stipulated period.23
During the pendency of the case, petitioner sold the subject property to the spouses
Vaca, who eventually registered the sale; and on the basis thereof, TCT No. 52593 was
cancelled and TCT No. 158082 was issued in their names. 24 As new owners, the spouses Vaca
started demolishing the house on the subject property which, however, was not completed
by virtue of the writ of preliminary injunction issued by the court.25
On November 14, 1997, the trial court finally resolved the matter in favor of
respondents, disposing, as follows:
WHEREFORE, premises considered, the Court finds defendants rescission of the
Agreement to Sell to be null and void for being contrary to law and public policy.
ACCORDINGLY, defendant bank is hereby ordered to accept plaintiffs payment of
the balance of the purchase price in the amount of Six Million Seven Hundred Fifty Thousand
Pesos (P6,750,000.00) and to deliver the title and possession to subject property, free from
all liens and encumbrances upon receipt of said payment. Likewise, defendant bank is ordered
to pay plaintiffs moral damages and attorneys fees in the amount of One Hundred Thirty
Thousand Pesos (P130,000.00) and expenses of litigation in the amount of Twenty Thousand
Pesos (P20,000.00).
SO ORDERED.26
Applying the rule of "apparent authority,"27 the court upheld the validity of the July
14, 1993 Letter-Agreement where the respondents were given an extension within which to
make payment. Consequently, respondents did not incur in delay, and thus, the court
concluded that the rescission of the contract was without basis and contrary to law. 28
On appeal, the CA affirmed the RTC decision and upheld Atty. Solutas authority to
represent the petitioner. It further ruled that petitioner had no right to unilaterally rescind the
contract; otherwise, it would give the bank officers license to continuously review and
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eventually rescind contracts entered into by previous officers. As to whether respondents
were estopped from enforcing the July 14, 1993 Letter-Agreement, the appellate court ruled
in the negative. It found, instead, that petitioners were estopped from questioning the
efficacy of the July 14 agreement because of its failure to repudiate the same for a period of
one year.29 Thus, the court said in its decision:
1. The Appellant (Westmont Bank) is hereby ordered to execute a "Deed of Absolute
Sale" in favor of the Appellees over the property covered by Transfer Certificate of
Title No. 52593, including the improvement thereon, and secure, from the Register of
Deeds, a Torrens Title over the said property free from all liens, claims or
encumbrances upon the payment by the Appellees of the balance of the purchase
price of the property in the amount of P6,750,000.00;
2. The Register of Deeds is hereby ordered to cancel Transfer Certificate of Title No.
158082 under the names of the Spouses Eduardo [and Ma. Pilar] Vaca and to issue
another under the names of the Appellees as stated in the preceding paragraph;
3. The appellant is hereby ordered to pay to the appellee Rafael Pronstroller the
amount of P100,000.00 as and by way of moral damages and to pay to the Appellees
the amount of P30,000.00 as and by way of attorneys fees and the amount
of P20,000.00 for litigation expense.
4. The counterclaims of the Appellant are dismissed.
SO ORDERED.30
Petitioners motion for reconsideration was denied on May 31, 2001. Hence, the
present petition raising the following issues:
I.
THE NARRATION OR STATEMENT OF THE FACTS OF THE CASE BY THE HONORABLE COURT
OF APPEALS IS TOTALLY BEREFT OF EVIDENTIARY SUPPORT, CONTRARY TO THE EVIDENCE
ON RECORD AND PURELY BASED ON ERRONEOUS ASSUMPTIONS, PRESUMPTIONS,
SURMISES, AND CONJECTURES.
II.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN MERELY RELYING UPON THE
MANIFESTLY ERRONEOUS FINDING OF THE HONORABLE TRIAL COURT ON THE ALLEGED
APPARENT AUTHORITY OF ATTY. JOSE SOLUTA, JR. IN THAT THE LATTERS FINDING IS
CONTRARY TO THE UNDISPUTED FACTS AND THE EVIDENCE ON RECORD.
III.
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THE HONORABLE COURT OF APPEALS OWN FINDING THAT ATTY. JOSE SOLUTA, JR. HAD
AUTHORITY TO SELL THE SUBJECT PROPERTY ON HIS OWN (EVEN WITHOUT THE
COMMITTEES APPROVAL) IS LIKEWISE GROSSLY ERRONEOUS, FINDS NO EVIDENTIARY
SUPPORT AND IS EVEN CONTRARY TO THE EVIDENCE ON RECORD IN THAT
A.) AT NO TIME DID PETITIONER ADMIT THAT ATTY. JOSE SOLUTA, JR. IS
AUTHORIZED TO SELL THE SUBJECT PROPERTY ON HIS OWN;
B.) THE AUTHORITY OF ATTY. JOSE SOLUTA, JR. CANNOT BE PRESUMED FROM HIS
DESIGNATIONS OR TITLES; AND
C.) RESPONDENTS FULLY KNEW OR HAD KNOWLEDGE OF THE LACK OF AUTHORITY
OF ATTY. JOSE SOLUTA, JR. TO SELL THE SUBJECT PROPERTY ON HIS OWN.
IV.
THE HONORABLE TRIAL COURT AND THE HONORABLE COURT OF APPEALS GROSSLY
MISAPPLIED THE DOCTRINE OF APPARENT AUTHORITY IN THE PRESENT CASE.
V.
THE HONORABLE TRIAL COURT AND THE HONORABLE COURT OF APPEALS GROSSLY ERRED
IN NOT HOLDING THAT THE CONTRACT TO SELL CONTAINED IN THE MARCH 18, 1993 LETTER
WAS VALIDLY RESCINDED BY PETITIONER.
VI.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN NOT HOLDING RESPONDENTS
ESTOPPED FROM DENYING THE VALIDITY OF THE RESCISSION OF THE CONTRACT TO SELL AS
EMBODIED IN THE MARCH 18, 1993 LETTER AND THE LACK OF AUTHORITY OF ATTY. SOLUTA,
JR. TO GRANT THE EXTENSION AS CONTAINED IN HIS LETTER OF JULY 14, 1993 AFTER THEY
VOLUNTARILY SUBMITTED WITH FULL KNOWLEDGE OF ITS IMPORT AND IMPLICATION A
NEW OFFER TO PURCHASE THE SUBJECT PROPERTY CONTAINED IN THEIR LETTER DATED
JUNE 6, 1994.
VII.
IN ANY EVENT, THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THE
CONTRACT TO SELL UNDER THE LETTER OF MARCH 18, 1993 AND THE LETTER OF JULY 14,
1993 HAD BEEN VACATED WHEN RESPONDENTS VOLUNTARILY SUBMITTED WITH FULL
KNOWLEDGE OF ITS IMPORT AND IMPLICATION THEIR NEW OFFER CONTAINED IN THEIR
LETTER OF JUNE 6, 1994 WITHOUT ANY CONDITION OR RESERVATION WHATSOEVER.
VIII.
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THE HONORABLE COURT OF APPEALS ERRED IN HOLDING PETITIONER ESTOPPED FROM
QUESTIONING THE VALIDITY OF THE JULY 14, 1993 LETTER SIGNED BY ATTY. JOSE SOLUTA,
JR.
IX.
THE HONORABLE COURT OF APPEALS GROSSLY ERRED IN HOLDING THAT PETITIONER
ALLEGEDLY ACTED FRAUDULENTLY AND IN BAD FAITH IN ITS DEALINGS WITH
RESPONDENTS.
X.
THE ORDER OF THE HONORABLE COURT OF APPEALS TO CANCEL TCT NO. 158082 UNDER
THE NAMES OF SPS. VACA IS A COLLATERAL ATTACK AGAINST THE SAID CERTIFICATE OF
TITLE WHICH IS PROSCRIBED BY SECTION 48 OF P.D. 1529.
XI.
THE HONORABLE COURT OF APPEALS ERRED IN AWARDING MORAL DAMAGES, ATTORNEYS
FEES, AND EXPENSES OF LITIGATION IN FAVOR OF RESPONDENTS.31
Reduced to bare essentials, the decision on the instant petition hinges on the
resolution of the following specific questions: 1) Is the petitioner bound by the July 14, 1993
Letter-Agreement signed by Atty. Soluta under the doctrine of apparent authority? 2) Was
there a valid rescission of the March 18, 1993 and/or July 14, 1993 Letter-Agreement? 3) Are the
respondents estopped from enforcing the July 14 Letter-Agreement because of their June 6,
1994 "new" proposal? 4) Is the petitioner estopped from questioning the validity of the July 14
letter because of its failure to repudiate the same and 5) Is the instant case a collateral attack
on TCT No. 158082 in the name of the spouses Vaca?
The petition is unmeritorious.
Well-settled is the rule that the findings of the RTC, as affirmed by the appellate
court, are binding on this Court. In a petition for review on certiorari under Rule 45 of the
Rules of Court, as in this case, this Court may not review the findings of fact all over again. It
must be stressed that this Court is not a trier of facts, and it is not its function to re-examine
and weigh anew the respective evidence of the parties.32 The findings of the CA are conclusive
on the parties and carry even more weight when these coincide with the factual findings of
the trial court, unless the factual findings are not supported by the evidence on
record.33 Petitioner failed to show why the above doctrine should not be applied to the
instant case.
Contrary to petitioners contention that the CAs factual findings are not supported
by the evidence on record, the assailed decision clearly shows that the appellate court not
224

only relied on the RTCs findings but made its own analysis of the record of the case. The CA
decision contains specific details drawn from the contents of the pleadings filed by both
parties, from the testimonies of the witnesses and from the documentary evidence
submitted. It was from all these that the appellate court drew its own conclusion using
applicable legal principles and jurisprudential rules.
The Court notes that the March 18, 1993 Letter-Agreement was written on a paper
with petitioners letterhead. It was signed by Atty. Soluta with the conformity of respondents.
The authority of Atty. Soluta to act for and on behalf of petitioner was not reflected in said
letter or on a separate paper attached to it. Yet, petitioner recognized Atty. Solutas authority
to sign the same and, thus, acknowledged its binding effect. On the other hand, the July 14,
1993 letter was written on the same type of paper with the same letterhead and of the same
form as the earlier letter. It was also signed by the same person with the conformity of the
same respondents. Again, nowhere in said letter did petitioner specifically authorize Atty.
Soluta to sign it for and on its behalf. This time, however, petitioner questioned the validity
and binding effect of the agreement, arguing that Atty. Soluta was not authorized to modify
the earlier terms of the contract and could not in any way bind the petitioner.
We beg to differ.
The general rule is that, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation. The power and responsibility to
decide whether the corporation should enter into a contract that will bind the corporation is
lodged in the board of directors. However, just as a natural person may authorize another to
do certain acts for and on his behalf, the board may validly delegate some of its functions and
powers to officers, committees and agents. The authority of such individuals to bind the
corporation is generally derived from law, corporate bylaws or authorization from the board,
either expressly or impliedly, by habit, custom, or acquiescence, in the general course of
business.34
The authority of a corporate officer or agent in dealing with third persons may be
actual or apparent. The doctrine of "apparent authority," with special reference to banks, had
long been recognized in this jurisdiction.35 Apparent authority is derived not merely from
practice. Its existence may be ascertained through 1) the general manner in which the
corporation holds out an officer or agent as having the power to act, or in other words, the
apparent authority to act in general, with which it clothes him; or 2) the acquiescence in his
acts of a particular nature, with actual or constructive knowledge thereof, within or beyond
the scope of his ordinary powers.36
Accordingly, the authority to act for and to bind a corporation may be presumed
from acts of recognition in other instances, wherein the power was exercised without any
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objection from its board or shareholders. Undoubtedly, petitioner had previously allowed
Atty. Soluta to enter into the first agreement without a board resolution expressly authorizing
him; thus, it had clothed him with apparent authority to modify the same via the second
letter-agreement. It is not the quantity of similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power to bind the corporation. 37
Naturally, the third person has little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents in accordance with law.38 What
transpires in the corporate board room is entirely an internal matter. Hence, petitioner may
not impute negligence on the part of the respondents in failing to find out the scope of Atty.
Solutas authority. Indeed, the public has the right to rely on the trustworthiness of bank
officers and their acts.39
As early as June 1993, or prior to the 90-day period within which to make the full
payment, respondents already requested a modification of the earlier agreement such that
the full payment should be made upon receipt of this Courts decision confirming petitioners
right to the subject property. The matter was brought to the petitioners attention and was in
fact discussed by the members of the Board. Instead of acting on said request (considering
that the 90-day period was about to expire), the board deferred action on the request. It was
only after one year and after the banks reorganization that the board rejected respondents
request. We cannot therefore blame the respondents in relying on the July 14, 1993 Letter-
Agreement. Petitioners inaction, coupled with the apparent authority of Atty. Soluta to act
on behalf of the corporation, validates the July 14 agreement and thus binds the corporation.
All these taken together, lead to no other conclusion than that the petitioner attempted to
defraud the respondents. This is bolstered by the fact that it forged another contract
involving the same property, with another buyer, the spouses Vaca, notwithstanding the
pendency of the instant case.
We would like to emphasize that if a corporation knowingly permits its officer, or any
other agent, to perform acts within the scope of an apparent authority, holding him out to
the public as possessing power to do those acts, the corporation will, as against any person
who has dealt in good faith with the corporation through such agent, be estopped from
denying such authority.40
Petitioner further insists that specific performance is not available to respondents
because the Letter-Agreements had already been rescinded --- the March 18 agreement
because of the breach committed by the respondents; and the July 14 letter because of the
new offer of the respondents which was not approved by petitioner.
Again, the argument is misplaced.
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Basic is the rule that a contract constitutes the law between the parties. Concededly,
parties may validly stipulate the unilateral rescission of a contract. 41 This is usually in the form
of a stipulation granting the seller the right to forfeit installments or deposits made by the
buyer in case of the latters failure to make full payment on the stipulated date. While the
petitioner in the instant case may have the right, under the March 18 agreement, to
unilaterally rescind the contract in case of respondents failure to comply with the terms of
the contract,42 the execution of the July 14 Agreement prevented petitioner from exercising
the right to rescind. This is so because there was in the first place, no breach of contract, as
the date of full payment had already been modified by the later agreement.
Neither can the July 14, 1993 agreement be considered abandoned by respondents
act of making a new offer, which was unfortunately rejected by petitioner. A careful reading
of the June 6, 1994 letter of respondents impels this Court to believe that such offer was
made only to demonstrate their capacity to purchase the subject property. 43 Besides, even if it
was a valid new offer, they did so only due to the fraudulent misrepresentation made by
petitioner that their earlier contracts had already been rescinded. Considering respondents
capacity to pay and their continuing interest in the subject property, 44 to abandon their right
to the contract and to the property, absent any form of protection, is contrary to human
nature. The presumption that a person takes ordinary care of his concerns applies and
remains unrebutted.45 Obviously therefore, respondents made the new offer without
abandoning the previous contract. Since there was never a perfected new contract, the July
14, 1993 agreement was still in effect and there was no abandonment to speak of.
In its final attempt to prevent respondents from attaining a favorable result,
petitioner argues that the instant case should not prosper because the cancellation of TCT No.
158082 is a collateral attack on the title which is proscribed by law.
Such contention is baseless.
Admittedly, during the pendency of the case, respondents timely registered a notice
of lis pendens to warn the whole world that the property was the subject of a pending
litigation.
Lis pendens, which literally means pending suit, refers to the jurisdiction, power or
control which a court acquires over property involved in a suit, pending the continuance of
the action, and until final judgment. Founded upon public policy and necessity, lis pendens is
intended to keep the properties in litigation within the power of the court until the litigation is
terminated, and to prevent the defeat of the judgment or decree by subsequent alienation.
Its notice is an announcement to the whole world that a particular property is in litigation and
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serves as a warning that one who acquires an interest over said property does so at his own
risk or that he gambles on the result of the litigation over said property.46
The filing of a notice of lis pendens has a twofold effect: (1) to keep the subject
matter of the litigation within the power of the court until the entry of the final judgment to
prevent the defeat of the final judgment by successive alienations; and (2) to bind a
purchaser, bona fide or not, of the land subject of the litigation to the judgment or decree that
the court will promulgate subsequently.47
This registration, therefore, gives the court clear authority to cancel the title of the
spouses Vaca, since the sale of the subject property was made after the notice of lis pendens.
Settled is the rule that the notice is not considered a collateral attack on the title, 48 for the
indefeasibility of the title shall not be used to defraud another especially if the latter performs
acts to protect his rights such as the timely registration of a notice of lis pendens.
As to the liability for moral damages, attorneys fees and expenses of litigation, we
affirm in toto the appellate courts conclusion. Article 2220 49 of the New Civil Code allows the
recovery of moral damages in breaches of contract where the party acted fraudulently and in
bad faith. As found by the CA, petitioner undoubtedly acted fraudulently and in bad faith in
breaching the letter-agreements. Despite the pendency of the case in the RTC, it sold the
subject property to the spouses Vaca and allowed the demolition of the house even if there
was already a writ of preliminary injunction lawfully issued by the court. This is apart from its
act of unilaterally rescinding the subject contract. Clearly, petitioners acts are brazen
attempts to frustrate the decision that the court may render in favor of respondents. 50 It is,
likewise, apparent that because of petitioners acts, respondents were compelled to litigate
justifying the award of attorneys fees and expenses of litigation.
WHEREFORE, premises considered, the petition is DENIED. The Decision of the Court
of Appeals dated February 27, 2001 and its Resolution dated May 31, 2001 in CA-G.R. CV No.
60315 are AFFIRMED.
SO ORDERED.
226

Republic of the Philippines
SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 93695 February 4, 1992
RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO GONZALES, JR.
and THOMAS GONZALES, respondents.
Mercantile Law; Corporation Code; Every director must own at least one (1) share of
the capital stock of the corporation of which he is a director which share shall stand in his
name on the books of the corporation. Any director who ceases to be the owner of at least one
(1) share of the capital stock of the corporation of which he is a director shall thereby cease to
be a director.Under the old Corporation Code, the eligibility of a director, strictly speaking,
cannot be adversely affected by the simple act of such director being a party to a voting trust
agreement inasmuch as he remains owner (although beneficial or equitable only) of the
shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation
Code). No disqualification arises by virtue of the phrase "in his own right" provided under the
old Corporation Code. With the omission of the phrase "in his own right" the election of
trustees and other persons who in fact are not the beneficial owners of the shares registered
in their names on the books of the corporation becomes formally legalized (see Campos and
Lopez-Campos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership of, the stock as
appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of Private
Corporations, section 300, p. 92 [1969] citing People v. Lihme, 269111. 351, 109 N.E. 1051).
Same; Same; Voting Trusts; A voting trust agreement results in the separation of
the voting rights of a stockholder from his other rights such as the right to receive dividends
and other rights to which a stockholder may be entitled until the liquidation of the
corporation.There can be no reliance on the inference that the five-year period of the
voting trust agreement in question had lapsed in 1986 so that the legal title to the stocks
covered by the said voting trust agreement ipso facto reverted to the petitioners as beneficial
owners pursuant to the 6th paragraph of section 59 of the new Corporation Code which
reads: "Unless expressly renewed, all rights granted in a voting trust agreement shall
automatically expire at the end of the agreed period, and the voting trust certificates as well
as the certificates of stock in the name of the trustee or trustees shall thereby be deemed
cancelled and new certificates of stock shall be reissued in the name of the transferors." On
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the contrary, it is manifestly clear from the terms of the voting trust agreement between
ALFA and the DBP that the duration of the agreement is contingent upon the fulfillment of
certain obligations of ALFA with the DBP.
Remedial Law; Civil Procedure; Service of summons; If the defendant is a corporation
organized under the laws of the Philippines, service may be made on the president, manager,
secretary, cashier, agent or any of its directors.It is a basic principle in Corporation Law that
a corporation has a personality separate and distinct from the officers or members who
compose it. (See Sulo ng Bayan Inc. v. Araneta, Inc., 72 SCRA 347 [1976]; Osias Academy v.
Department of Labor and Employment, et al., G.R. Nos. 83257-58, December 21, 1990). Thus,
the above rule on service of processes on a corporation enumerates the representatives of a
corporation who can validly receive court processes on its behalf. Not every stockholder or
officer can bind the corporation considering the existence of a corporate entity separate from
those who compose it. The rationale of the aforecited rule is that service must be made on a
representative so integrated with the corporation sued as to make it a priori supposable that
he will realize his responsibilities and know what he should do with any legal papers served on
him. (Far Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East
Motor Corp., 81 SCRA 303 [1978]).
PETITION for certiorari to review the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.
GUTIERREZ, JR., J.:
What is the nature of the voting trust agreement executed between two parties in
this case? Who owns the stocks of the corporation under the terms of the voting trust
agreement? How long can a voting trust agreement remain valid and effective? Did a director
of the corporation cease to be such upon the creation of the voting trust agreement? These
are the questions the answers to which are necessary in resolving the principal issue in this
petition for certiorari whether or not there was proper service of summons on Alfa
Integrated Textile Mills (ALFA, for short) through the petitioners as president and vice-
president, allegedly, of the subject corporation after the execution of a voting trust
agreement between ALFA and the Development Bank of the Philippines (DBP, for short).
From the records of the instant case, the following antecedent facts appear:
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On November 15, 1985, a complaint for a sum of money was filed by the International
Corporate Bank, Inc. against the private respondents who, in turn, filed a third party
complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint
which the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27, 1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter
informing the court that the summons for ALFA was erroneously served upon them
considering that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to
receive summons on behalf of ALFA since the DBP had not taken over the company which has
a separate and distinct corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private respondents to
take the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the
Declaration of Proper Service of Summons which the trial court granted on August 17, 1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting
that Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no
longer officers of ALFA and that the private respondents should have availed of another
mode of service under Rule 14, Section 16 of the said Rules, i.e., through publication to effect
proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the private
respondents argued that the voting trust agreement dated March 11, 1981 did not divest the
petitioners of their positions as president and executive vice-president of ALFA so that service
of summons upon ALFA through the petitioners as corporate officers was proper.
On January 2, 1989, the trial court upheld the validity of the service of summons on
ALFA through the petitioners, thus, denying the latter's motion for reconsideration and
requiring ALFA to filed its answer through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners
reiterating their stand that by virtue of the voting trust agreement they ceased to be officers
and directors of ALFA, hence, they could no longer receive summons or any court processes
for or on behalf of ALFA. In support of their second motion for reconsideration, the
petitioners attached thereto a copy of the voting trust agreement between all the
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stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the other
hand, whereby the management and control of ALFA became vested upon the DBP.
On April 25, 1989, the trial court reversed itself by setting aside its previous Order
dated January 2, 1989 and declared that service upon the petitioners who were no longer
corporate officers of ALFA cannot be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above
Order which was affirmed by the court in its Order dated August 14, 1989 denying the private
respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the private
respondent before the public respondent which, nonetheless, resolved to give due course
thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition
for certiorari with public respondent issued an Order declaring as final the Order dated April
25, 1989. The private respondents in the said Order were required to take positive steps in
prosecuting the third party complaint in order that the court would not be constrained to
dismiss the same for failure to prosecute. Subsequently, on October 25, 1989 the private
respondents filed a motion for reconsideration on which the trial court took no further action.
On March 19, 1990, after the petitioners filed their answer to the private
respondents' petition for certiorari, the public respondent rendered its decision, the
dispositive portion of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent
judge dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and
respondent corporation is ordered to file its answer within the reglementary
period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the
public respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners
filed this certiorari petition imputing grave abuse of discretion amounting to lack of
jurisdiction on the part of the public respondent in reversing the questioned Orders dated
April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper
service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on
July 16, 1990 erroneously applying the rule that the period during which a motion for
reconsideration has been pending must be deducted from the 15-day period to appeal.
However, in its Resolution dated January 3, 1991, the public respondent set aside the
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aforestated entry of judgment after further considering that the rule it relied on applies to
appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals
from its decision to us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholders of his position as director of the
corporation; to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code ( Rollo, pp. 270-
3273); and
(2) that the petitioners were no longer acting or holding any of the positions
provided under Rule 14, Section 13 of the Rules of Court authorized to
receive service of summons for and in behalf of the private domestic
corporation so that the service of summons on ALFA effected through the
petitioners is not valid and ineffective; to maintain the respondent Court of
Appeals' position that ALFA was properly served its summons through the
petitioners would be contrary to the general principle that a corporation can
only be bound by such acts which are within the scope of its officers' or
agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case,
we dwell first on the nature of a voting trust agreement and the consequent effects upon its
creation in the light of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders of a
corporation and the trustee or by a group of identical agreements between
individual stockholders and a common trustee, whereby it is provided that
for a term of years, or for a period contingent upon a certain event, or until
the agreement is terminated, control over the stock owned by such
stockholders, either for certain purposes or for all purposes, is to be lodged
in the trustee, either with or without a reservation to the owners, or persons
designated by them, of the power to direct how such control shall be used.
(98 ALR 2d. 379 sec. 1 [d]; 19 Am J 2d Corp. sec. 685).
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Under Section 59 of the new Corporation Code which expressly recognizes voting
trust agreements, a more definitive meaning may be gathered. The said provision partly
reads:
Sec. 59. Voting Trusts One or more stockholders of a stock corporation
may create a voting trust for the purpose of conferring upon a trustee or
trustees the right to vote and other rights pertaining to the share for a
period rights pertaining to the shares for a period not exceeding five (5)
years at any one time: Provided, that in the case of a voting trust specifically
required as a condition in a loan agreement, said voting trust may be for a
period exceeding (5) years but shall automatically expire upon full payment
of the loan. A voting trust agreement must be in writing and notarized, and
shall specify the terms and conditions thereof. A certified copy of such
agreement shall be filed with the corporation and with the Securities and
Exchange Commission; otherwise, said agreement is ineffective and
unenforceable. The certificate or certificates of stock covered by the voting
trust agreement shall be cancelled and new ones shall be issued in the name
of the trustee or trustees stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting
rights of a stockholder from his other rights such as the right to receive dividends, the right to
inspect the books of the corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. However, in order to distinguish a voting trust agreement from proxies and
other voting pools and agreements, it must pass three criteria or tests, namely: (1) that the
voting rights of the stock are separated from the other attributes of ownership; (2) that the
voting rights granted are intended to be irrevocable for a definite period of time; and (3) that
the principal purpose of the grant of voting rights is to acquire voting control of the
corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations, section 2075 [1976] p.
331 citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may
confer upon a trustee not only the stockholder's voting rights but also other rights pertaining
to his shares as long as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the
traditional concept of a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made irrevocable for a limited
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duration may in practice become a legal device whereby a transfer of the stockholder's shares
is effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy
between the equitable or beneficial ownership of the corporate shares of a stockholders, on
the one hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing
whereby one or more stockholders of a corporation consent to transfer his or their shares to
a trustee in order to vest in the latter voting or other rights pertaining to said shares for a
period not exceeding five years upon the fulfillment of statutory conditions and such other
terms and conditions specified in the agreement. The five year-period may be extended in
cases where the voting trust is executed pursuant to a loan agreement whereby the period is
made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of
the voting trust agreement. The petitioners maintain that with the execution of the voting
trust agreement between them and the other stockholders of ALFA, as one party, and the
DBP, as the other party, the former assigned and transferred all their shares in ALFA to DBP,
as trustee. They argue that by virtue to of the voting trust agreement the petitioners can no
longer be considered directors of ALFA. In support of their contention, the petitioners invoke
section 23 of the Corporation Code which provides, in part, that:
Every director must own at least one (1) share of the capital stock of
the corporation of which he is a director which share shall stand in his name
on the books of the corporation. Any director who ceases to be the owner of
at least one (1) share of the capital stock of the corporation of which he is a
director shall thereby cease to be director . . . (Rollo, p. 270)
The private respondents, on the contrary, insist that the voting trust agreement
between ALFA and the DBP had all the more safeguarded the petitioners' continuance as
officers and directors of ALFA inasmuch as the general object of voting trust is to insure
permanency of the tenure of the directors of a corporation. They cited the commentaries by
Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing
stockholder", is equitable owner for the stocks represented by the voting
trust certificates and the stock reversible on termination of the trust by
surrender. It is said that the voting trust agreement does not destroy the
status of the transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement seems to be that for
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some purposes the depositing stockholder holding voting trust certificates
in lieu of his stock and being the beneficial owner thereof, remains and is
treated as a stockholder. It seems to be deducible from the case that he may
sue as a stockholder if the suit is in equity or is of an equitable nature, such
as, a technical stockholders' suit in right of the corporation. [Commercial
Laws of the Philippines by Agbayani, Vol. 3 pp. 492-493, citing 5 Fletcher 326,
327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party to
its execution from legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner. (Salonga, Philippine Law on Private
Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private Corporations and
Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The Corporation Code;
Comments, Notes & Selected Cases, 1981, ed., p. 386; Agbayani, Commentaries and
Jurisprudence on the Commercial Laws of the Philippines, Vol. 3, 1988 ed., p. 536). The
penultimate question, therefore, is whether the change in his status deprives the stockholder
of the right to qualify as a director under section 23 of the present Corporation Code which
deletes the phrase "in his own right." Section 30 of the old Code states that:
Every director must own in his own right at least one share of the
capital stock of the stock corporation of which he is a director, which stock
shall stand in his name on the books of the corporation. A director who
ceases to be the owner of at least one share of the capital stock of a stock
corporation of which is a director shall thereby cease to be a director . . .
(Emphasis supplied)
Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot
be adversely affected by the simple act of such director being a party to a voting trust
agreement inasmuch as he remains owner (although beneficial or equitable only) of the
shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation
Code). No disqualification arises by virtue of the phrase "in his own right" provided under the
old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other persons
who in fact are not beneficial owners of the shares registered in their names on the books of
the corporation becomes formally legalized (see Campos and Lopez-Campos, supra, p. 296)
Hence, this is a clear indication that in order to be eligible as a director, what is material is the
legal title to, not beneficial ownership of, the stock as appearing on the books of the
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corporation (2 Fletcher, Cyclopedia of the Law of Private Corporations, section 300, p. 92
[1969] citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust
agreement executed in 1981 disposed of all their shares through assignment and delivery in
favor of the DBP, as trustee. Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under Section 23 of the new
Corporation Code. They also ceased to have anything to do with the management of the
enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners'
shares to the DBP created vacancies in their respective positions as directors of ALFA. The
transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject
voting trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the certificate of
the shares of the stocks owned by them respectively and shall do all things
necessary for the transfer of their respective shares to the TRUSTEE on the
books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate for
the number of shares transferred, which shall be transferrable in the same
manner and with the same effect as certificates of stock subject to the
provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of ALFA,
annual or special, upon any resolution, matter or business that may be
submitted to any such meeting, and shall possess in that respect the same
powers as owners of the equitable as well as the legal title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of
stock for the purpose of qualifying such person as director of ALFA, and
cause a certificate of stock evidencing the share so transferred to be issued
in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his shares
to the same trustees without the need of revising this agreement, and this
agreement shall have the same force and effect upon that said stockholder.
(CA Rollo, pp. 137-138; Emphasis supplied)
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Considering that the voting trust agreement between ALFA and the DBP transferred
legal ownership of the stock covered by the agreement to the DBP as trustee, the latter
became the stockholder of record with respect to the said shares of stocks. In the absence of
a showing that the DBP had caused to be transferred in their names one share of stock for the
purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed to have
retained their status as officers of ALFA which was the case before the execution of the
subject voting trust agreement. There appears to be no dispute from the records that DBP
has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one
Elsa A. Guevarra, Vice-President of its Special Accounts Department II, Remedial Management
Group, the petitioners were no longer included in the list of officers of ALFA "as of April
1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim
that the subject voting trust agreement did not deprive the petitioners of their position as
directors of ALFA, the public respondent committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao)
may have ceased to be president and vice-president, respectively, of the
corporation at the time of service of summons on them on August 21, 1987,
they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of
Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the DBP, were
aware at the time of the execution of the agreement that by virtue of the transfer of shares of
ALFA to the DBP, all the directors of ALFA were stripped of their positions as such.
There can be no reliance on the inference that the five-year period of the voting trust
agreement in question had lapsed in 1986 so that the legal title to the stocks covered by the
said voting trust agreement ipso facto reverted to the petitioners as beneficial owners
pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust
agreement shall automatically expire at the end of the agreed period, and
the voting trust certificate as well as the certificates of stock in the name of
the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement
between ALFA and the DBP that the duration of the agreement is contingent upon the
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fulfillment of certain obligations of ALFA with the DBP. This is shown by the following
portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its
credit is secured by a first mortgage on the manufacturing plant of said
company;
WHEREAS, ALFA is also indebted to other creditors for various
financial accomodations and because of the burden of these obligations is
encountering very serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA had offered and the TRUSTEE has accepted participation in
the management and control of the company and to assure the aforesaid
participation by the TRUSTEE, the TRUSTORS have agreed to execute a
voting trust covering their shareholding in ALFA in favor of the TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any portion
thereof, remains outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP
would not have transferred all its rights, titles and interests in ALFA "effective June 30, 1986"
to the national government through the Asset Privatization Trust (APT) as attested to in a
Certification dated January 24, 1989 of the Vice President of the DBP's Special Accounts
Department II. In the same certification, it is stated that the DBP, from 1987 until 1989, had
handled APT's account which included ALFA's assets pursuant to a management agreement
by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence on record that at
the time of the service of summons on ALFA through the petitioners on August 21, 1987, the
voting trust agreement in question was not yet terminated so that the legal title to the stocks
of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper
service of summons on ALFA through the petitioners is readily answered in the negative.
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Corporation Law
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership.
If the defendant is a corporation organized under the laws of the Philippines
or a partnership duly registered, service may be made on the president,
manager, secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a personality separate
and distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta,
Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al., G.R.
Nos. 83257-58, December 21, 1990). Thus, the above rule on service of processes of a
corporation enumerates the representatives of a corporation who can validly receive court
processes on its behalf. Not every stockholder or officer can bind the corporation considering
the existence of a corporate entity separate from those who compose it.
The rationale of the aforecited rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that he will realize his
responsibilities and know what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East Motor
Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The
service of summons upon ALFA, through the petitioners, therefore, is not valid. To rule
otherwise, as correctly argued by the petitioners, will contravene the general principle that a
corporation can only be bound by such acts which are within the scope of the officer's or
agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed
decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are SET
ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by the Regional Trial
Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
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Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-34192 June 30, 1988
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA MARIO
Y. CONSING and ROBERTO S. BENEDICTO, petitioners,
vs.
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of Branch VIII of the
Court of First Instance of Rizal, BATJAK INC., GRACIANO A. GARCIA and MARCELINO
CALINAWAN JR., respondents.
G.R. No. L-34213 June 30, 1988
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court of First Instance
of Rizal, Branch VIII and BATJAK INCORPORATED, respondents.
Remedial Law; Certiorari; Mjotion to Quash; General Rule; An order denying a motion
to quash or to dismiss is interlocutory and cannot be subject ofa petition for certiorari;
Remedies ofthe aggrieved party; Exceptions to the general ruJe.As a general rule, an order
denying a motion to quash or to dismiss is interlocutory and cannot be the subject of a
petition for certiorari. The remedy of the aggrieved party in a denied motion to dismiss is to
file an answer and interpose, as defense or defenses, the objection or objections raised by
him in said motion to dismiss, then proceed to trial and, in case of adverse decision, to elevate
the entire case by appeal in due course. However, under certain situations, recourse to the
extraordinary legal remedies of certiorari, prohibition and mandamus to question the denial
of a motion to dismiss or quash is considered proper, in the interest of more enlightened and
substantial justice. As the Court said in Pineda andAmpil Manufacturing Co. vs. Bartolome, 95
Phil. 930, 938: "For analogous reasons it may be said that the petition for certiorari interposed
by the accused against the order of the court a quo denying the motion to quash may be
entertained, not only because it was rendered in a criminal case, but because it was rendered,
as claimed, with grave abuse of discretion, as found by the Court of Appeals, xxx." and
reiterated in Mead v. Argel citing Yap v. Lutero (105 Phil. 1307): "However, were we to require
adherence to this pretense, the case at bar would have to be dismissed and petitioner
required to go through the inconvenience, not to say the mental agony the torture, of
submitting himself to trial on the merits in Case No. 166443, apart from the expenses
incidental thereto, despite the fact that his trial and conviction therein would violate one of
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this [sic] constitutional rights, and that, an appeal to this Court, we would, therefore, have to
set aside the judgment of conviction of the lower court. This would, obviously, be most unfair
and unjust. Under the circumstances obtaining in the present case, the flaw in the procedure
followed by petitioner herein may be overlooked, in the interest of a more enlightened and
substantial justice." Thus, where there is patent grave abuse of discretion, in denying the
motion to disrniss, as in the present case, this Court may entertain the petition for certiorari
interposed by the party against whom the said order is issued.
Same; Same; Same; Jurisdiction; Jurisdiction of CFI to issue a writ of preliminary or
permanent injunction is confmed within the province where the land in question is situated.
Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First Instance
to issue a writ of preliminary permanent injunction is confmed within the boundaries of the
province where the land in controversy is situated. The petition for mandamus of Batjak
prayed that NIDC and PNB be ordered to surrender, relinquish and turnover to Batjak the
assets, management and operation of Batjak particularly the three (3) oil mills located in Sasa,
Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.
Same; Same; Same; Venue; Respondent Batjak's complaint should have been filed in
the provinces where the oil mills are located pursuajit to Sec. 2, Rule 4, par. A ofRules
ofCourt.On the matter of proper venue, Batjak's complaint should have been filed in the
provinces where said oil mills are located. Under Rule 4, Sec. 2, paragraph A of the Rules of
Court, "actions affecting title to, or for recovery of possession, or for partition or
condemnation of, or foreclosure of mortgage on, real property, shall be commenced and
tried in the province where the property or any part thereof lies."
Same; Same; Same;Actions; Every action must beprosecuted and defended in the
name ofthe real party in interest.In support of the third ground of their motion to dismiss,
PNB and NIDC contend that Batjak's complaint for mandamus is based 011 its claim or right to
recovery of possession of the three (3) oil mills, on the ground of an alleged breach of
fiduciary relationship. Noteworthy is the fact that, in the Voting Trust Agreement, the parties
thereto were NIDC and certain stockholders of Batjak. Batjak itself was not a signatory
thereto. Under Sec. 2, Rule 3 of the Rules of Court, every action must be prosecuted and
defended in the name of the real party in interest. Applying the rule in the present case, the
action should have been filed by the stockholders of Batjak, who executed the Voting Trust
Agreement with NIDC; and not by Batjak itself which is not a party to said agreement, and
therefore, not the real party in interest in the suit to enforce the same.
Same; Same; Same; Mandamus, nature of; Legal Right, defined in Sec. 3, Rule 65
ofRules of Court.Moreover, the action instituted by Batjak before the respondent court was
a special civil action for mandamus with prayer for preliminajy mandatory injunction.
Generally, mandamus is not a writ of righiand its allowance or refusal is a matter of discretion
233

to be exercised on equitable principles and in accordance with well-settled rules of law, and
that it should never be used to effectuate an injustice, but only to prevent a failure of justice.
The writ does not issue as a matter of course. It will issue only where there is a clear legal
right sought to be enforced. It will not issue to enforce a doubtful right. A clear legal right
within the meaning of Sec. 3, Rule 65 of the Rules of Court means a right clearly founded in or
granted by law, a right which is enforceable as a matter of law.
Same; Same; Same; Same; Writ of mandamus will not issue to give the applicant
anything to which he is not entitled by law; Case at bar.Applymg the above-cited principles
of law in the present case, the Court fmds no clear right in Batjak to be entitled to the writ
prayed for. It should be noted that the petition for mandamus filed by it prayed that NIDC and
PNB be ordered to surrender, relinquish and turn-over to Batjak the assets, management, and
operation of Batjak particularly the three (3) oil mills and to make the order permanent, after
trial, and ordering NIDC and PNB to submit a complete accounting of the assets, management
and operation of Batjak from 1965. In effect, what Batjak seeks to recover is title to, or
possession of, real property (the three (3) oil mills which really made up the assets of Batjak)
but which the records show already belong to NIDC. It is not disputed that the mortgages on
the three (3) oil mills were foreclosed by PNB and NIDC and acquired by them as the highest
bidder in the appropriate foreclosure sales. Ownership thereto was subsequently
consolidated by PNB and NIDC, after Batjak failed to exercise its right of redemption. The
three (3) oil mills are now titled in the name of NIDC. From the foregoing, it is evident that
Batjak had no clear right to be entitled to the writ prayed for. In Lamb vs. Philippines (22 Phil.
456) citing the case of Gonzales V. Salazar vs. The Board ofPharmacy, 20 Phil. 367, the Court
said that the writ of mandamus will not issue to give to the applicant anything to which he is
not entitled by law.
Same; Same; Same; Receivership; A receiver ofproperty subject of the action may be
appointed by the court when the party applying for the appointment of a receiver has an
interest in said property.A receiver of real or personal property, which is the subject of the
action, may be appointed by the court when it appears from the pleadings that the party
applying for the appointment of receiver has an interest in said property. The right, interest,
or claim in property, to entitle one to a receiver over it, must be present and existing.
Same; Same; Same; Same; Prevention of imminent danger to property, the guiding
principle that governs courts in appointing receivers.Moreover, the prevention of imminent
danger to property is the guiding principle that governs courts in the matter of appointing
receivers. Under Sec. l(b), Rule 59 of the Rules of Court, it is necessary in granting the relief of
receivership that the property or fund be in danger of loss, removal or material injury. In the
case at bar, Batjak in its petition for receivership, or in its amended petition therefor, failed to
present any evidence to establish the requisite condition that the property is in danger of
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being lost, removed or materially injured unless a receiver is appointed to guard and preserve
it.
Corporations; Voting Trust Agreement; A voting trust transfers only voting or other
rights pertaining to the shares subject of the agreement or control over the stock.ln any
event, a voting trust transfers only voting or other rights pertaining to the shares subject of
the agreement, or control over the stock. The law on the matter is Section 59, paragraph 1 of
the Corporation Code (BP 68) which provides: "Sec. 59. Voting TrustsOne or more
stockholders of a stock corporation may create a voting trust for the purpose of confering
upon a trustee or trusties the right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any one time: x x x"
PETITIONS for certiorari and prohibition with preliminary injunction to review the orders of
the Court of First Instance of Rizal, Br. VIII. Aquino, J.
The facts are stated in the opinion of the Court.
Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.
The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.
Reyes and Sundiam Law Office for respondent Batjak, Inc.
Duran, Chuanico Oebanda, Benemerito & Associates for private respondents in G.R. Nos. 34192 &
34213.
Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.
PADILLA, J.:
These two (2) separate petitions for certiorari and prohibition, with preliminary
injunction, seek to annul and set aside the orders of respondent judge, dated 16 August 1971
and 30 September 1971, in Civil Case No. 14452 of the Court of First Instance of Rizal, entitled
Batjak Inc. vs. NIDC et al." The order of 16 August 1971 1 granted the alternative petition of
private respondent Batjak, Inc. Batjak for short) for the appointment of receiver and denied
petitioners' motion to dismiss the complaint of said private respondent. The order dated 30
September 1971 2 denied petitioners' motion for reconsideration of the order dated 16 August
1971.
The herein petitions likewise seek to prohibit the respondent judge from hearing
and/or conducting any further proceedings in Civil Case No. 14452 of said court.
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-
American corporation organized under the laws of the Philippines, primarily engaged in the
manufacture of coconut oil and copra cake for export. In 1965, Batjak's financial condition
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deteriorated to the point of bankruptcy. As of that year, Batjak's indebtedness to some 1) That NIDC shall invest P6,722,500.00 in the form of preferred shares of
private banks and to the Philippine National Bank (PNB) amounted to P11,915,000.00, shown stocks at 9% cumulative, participating and convertible within 5 years at par
as follows: into common stocks to liquidate your accounts with the Republic Bank,
Manufacturers Bank & Trust Company and the PCIB which, however, shall be
Republic Bank P 2,324,000.00 applied to the latter three (3) banks accounts with the Loans & Discounts
Philippine Commercial and Dept. NIDC shall match your P 10 million subscription by an additional
Industrial Bank 1,346,000.00 investment of P3,277,500 within a period of one to two years at NIDC's
Manila Banking Corporation 2,000,000.00 option;
Manufacturers Bank 440,000.00
Hongkong and Shanghai 2) That NIDC will guaranty for five (5) years your account with the Manila
Banking Corporation 250,000.00 Banking Corporation;
Foreign Export Advances
(against immediate shipment) 555,000.00 3) That the above banks (Republic Bank, PCIB, MBTC and Manila Banking
PNB export advance line Corp.) shall release in favor of PNB the first and any mortgage they hold on
(against immediate shipment) 5,000,000.00 your properties;
TOTAL 11,915,000.00
4) That you shall exercise (execute) a first mortgage on all your properties
As security for the payment of its obligations and advances against shipments, Batjak located at Sasa, Davao City; Jimenez, Misamis Occidental; and Tanauan,
mortgaged its three (3) coco-processing oil mills in Sasa, Davao City, Jimenez, Misamis Leyte and assign leasehold rights on the property on which your plant at
Occidental and Tanauan, Leyte to Manila Banking Corporation (Manila Bank), Republic Bank Sasa, Davao City is erected in favor of PNB;
(RB), and Philippine Commercial and Industrial Bank (PCIB), respectively. In need for
additional operating capital to place the three (3) coco-processing mills at their optimum 5) That a voting trust agreement for five (5) years over 60% of the
capacity and maximum efficiency and to settle, pay or otherwise liquidate pending financial oustanding paid up and subscribed shares shall be executed by your
obligations with the different private banks, Batjak applied to PNB for additional financial stockholders in favor of NIDC;
assistance. On 5 October 1965, a Financial Agreement was submitted by PNB to Batjak for
acceptance. The Financial Agreement reads: 6) That this accomodation shall be secured by the joint and several
signatures of officers and directors;
PHILIPPINE NATIONAL BANK
Manila, Philippines 7) That the number of the Board of Directors shall be increased to seven (7),
International Department three (3) from your firm and the other four (4) from the PNB-NIDC;
5
BATJAK, INCORPORATED 8) That a comptroller, at your expense, shall be appointed by PNB-NIDC to
3rd Floor, G. Puyat Bldg. supervise the financial management of your firm;
Escolta, Manila
9) That the past due accounts of P 5 million with the International
Attn.: Mr. CIRIACO B. MENDOZA Department of the PNB shall be transferred to the Loans & Discount
Vice-President & General Manager Department and to be treated as a Demand Loan;
Gentlemen:
We are pleased to advise that our Board of Directors 10) That any excess of NIDC investment as required in Condition 1 after
approved for you the following: payment of the obligations to three (3) Banks (RB, MBTC, & PCIB) shall be
applied to reduce the above Demand Loan of P 5 million;

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11) That we shall grant you an export advance of P3 million to be used for
copra purchases, subject to the following conditions:
a) That the line shall expire on September 30, 1966 but
revocable at the Bank(s) option;
b) That drawings against the line shall be allowed only
when an irrevocable export L/C for coconut products has
been established or assigned in your favor and you shall
assign to us all proceeds of negotiations to be received
from your letters of credit;
c) That drawings against the line be limited to 60% of the
peso value of the export letters of credit computed at
P3.50 per $1.00 but total drawings shall not in any event
exceed P3,000,000.00;
d) That release or releases against the line shall be covered
by promissory note or notes for 90 days but not beyond the
expiry dates of the coveting L/C and proceeds of said L/C
shall first be applied to the correspondent drawings on the
line;
e) That drawings against the line shall be charged interest
at the rate of 9% per annum and subject to 1/2% penalty
charge on all drawings not paid or extended on maturity
date; and
f) That within 90 days from date of release against the line,
you shall negotiate with us on equivalent amount in export
bills, otherwise, the line shag be temporarily suspended
until the outstanding export advance is fully liquidated.
We are writing the National Investment & Development
Corporation, the Republic Bank, the Philippine Commercial & Industrial Bank
and the Manufacturers Bank & Trust Company and the Manila Banking
Corporation regarding the above.
In connection with the above, kindly submit to us two (2) copies of
your board resolution certified to under oath by your corporate secretary
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accepting the conditions enumerated above authorizing the above
transactions and the officer or officers to sign on behalf of the corporation.
Thank you.
The terms and conditions of the Financial Agreement were duly accepted by Batjak.
Under said Agreement, NIDC would, as it actually did, invest P6,722,500.00 in Batjak in the
form of preferred shares of stock convertible within five (5) years at par into common stock,
to liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank and Trust
Company (MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the balance of the
investment was to be applied to Batjak's past due account of P 5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and
any mortgages they held on the properties of Batjak.
As agreed, PNB also granted Batjak an export-advance line of P 3 million, later
increased to P 5million, and a standby letter of credit facility in the amount of P5,850,000.00.
As of 29 September 1966, the financial accomodation that had been extended by PNB to
Batjak amounted to a total of P 14,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its
properties located at Jimenez, Misamis Occidental and Tanauan, Leyte. Batjak's plant in Sasa,
Davao City was mortgaged to the Manila Bank which, in 1967, instituted foreclosure
proceedings against the same but which were aborted by the payment by Batjak of the sum
of P2,400,000.00 to Manila Bank, and which amount was advanced to Batjak by NIDC, a
wholly-owned subsidiary of PNB. To secure the advance, Batjak mortgaged the oil mill in Sasa,
Davao City to NIDC. 4
Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by
the stockholders representing 60% of the outstanding paid-up and subscribed shares of
Batjak. This agreement was for a period of five (5) years and, upon its expiration, was to be
subject to negotiation between the parties.
The voting Trust Agreement reads:
VOTING TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:
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This AGREEMENT made and executed by the undersigned
stockholders of BATJAK, INC., a corporation duly organized and existing
under the laws of the Philippines, whose names are hereinbelow subscribed
hereinafter caged the SUBSCRIBERS, and the NATIONAL INVESTMENT AND
DEVELOPMENT CORPORATION, hereinafter referred to as the trustee.
WITNESSETH:
WHEREAS, the SUBSCRIBERS are owners respectively of the capital
stock of the BATJAK, INC. (hereinafter called the CORPORATION) in the
amounts represented by the number of shares set fort opposite their
respective names hereunder;
AND WHEREAS, with a view or establishing a safe and competent
management to operate the corporation for the best interest of all the
stockholders thereof, and as mutually agreed between the SUBSCRIBERS
and the TRUSTEE, this Voting Trust Agreement has been executed under the
following terms and conditions.
NOW THEREFORE, the undersigned stockholders, in consideration
of the premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in the
TRUSTEE the voting rights of the shares of stock held by the undersigned in
the CORPORATION as hereinafter stated it is mutually agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from
and after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein provided is
hereby made, constituted and appointed as a VOTING TRUSTEE to act for
and in the name of the SUBSCRIBERS, it being understood, however, that
this Voting Trust Agreement shall, upon its expiration be subject to a re-
negotiation between the parties, as may be warranted by the balance and
attending circumstance of the loan investment of the TRUSTEE or otherwise
in the CORPORATION.
2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE The
undersigned stockholders hereby transfer and assign their common shares
to the capital stock of the CORPORATION to the extent shown hereunder:
JAMES A. KEISTER 21,500 shares
JOHNNY LIEUSON 20,300 shares
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CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.) 5,000 shares
ALEJANDRO G. BELTRAN 4,000 shares
ESPERANZA A. ZAMORA 3,000 shares
CIRIACO B. MENDOZA 2,000 shares
FIDELA DE GUZMAN 2,000 shares
LLOYD D. COMBS 2,000 shares
RENATO B. BEJAR 200 shares
TOTAL 60,000 shares
to the TRUSTEE by virtue of the provisions hereof and do hereby
authorize the Secretary of the CORPORATION to issue the corresponding
certificate directly in the name of the TRUSTEE and on which certificates it
shall appear that they have been issued pursuant to this Voting Trust
Agreement and the said TRUSTEE shall hold in escrow all such certificates
during the term of the Agreement. In turn, the TRUSTEE shall deliver to the
undersigned stockholders the corresponding Voting Trust certificates
provided for in Sec. 36 of Act No. 1459.
3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors in trust, if
anym shall have the power and it shall be its duty to vote the shares of the
undersigned subject hereof and covered by this Agreement at all annual,
adjourned and special meetings of the CORPORATION on all questions,
motions, resolutions and matters including the election of directors and such
matters on which the stockholders, by virtue of the by-laws of the
CORPORATION and of the existing legislations are entitled to vote, which
may be voted upon at any and all said meetings and shall also have the
power to execute and acknowledge any agreements or documents that may
be necessary in its opinion to express the consent or assent of all or any of
the stockholders of the CORPORATION with respect to any matter or thing
to which any consent or assent of the stockholders may be necessary,
proper or convenient.
4. FILING of AGREEMENT An executed copy of this Agreement shall be
filed with the CORPORATION at its office in the City of Manila wherever it
may be transfered therefrom and shall constitute irrevocable authority and
absolute direction of the officers of the CORPORATION whose duty is to sign
and deliver stock certificates to make delivery only to said voting trustee of
the shares and certificates of stock subject to the provisions of this
Agreement as aforesaid. Such copy of this Agreement shall at all times be
open to inspection by any stockholder, as provided by law.
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5. DIVIDEND the full and absolute beneficial interest in the shares subject
of this Agreement shall remain with the stockholders executing the same
and any all dividends which may be declared by the CORPORATION shall
belong and be paid to them exclusively in accordance with their
stockholdings after deducting therefrom or applying the same to whatever
liabilities the stockholders may have in favor of the TRUSTEE by virtue of any
Agreement or Contract that may have been or will be executed by and
between the TRUSTEE and the CORPORATION or between the former and
the undersigned stockholders.
6 COMPENSATION; IMMUNITY The TRUSTEE or its successor in trust shall
not receive any compensation for its serviceexcept perhaps that which the
CORPORATION may grant to the TRUSTEE's authorized representative, if
any. Expenses costs, champs, and other liabilities incurred in the carrying out
of the but herein established or by reason thereof, shall be paid for with the
funds of the CORPORATION. The TRUSTEE or any of its duly authorized
representative shall incur no liability by reason of any error of law or of any
matter or thing done or omitted under this Agreement, except for his own
individual malfeasance.
7. REPRESENTATION The TRUSTEE, being a corporation and a juridical
person shall accomplish the foregoing objectives and perform its functions
under this Agreement as well as enjoy and exercise the powers, privileges,
rights and interests herein established through its duly authorized and
accredited re resentatives . p with full authority under the specific
appointment or designation or Proxy.
8. IRREVOCABILITY This Agreement shall during its 5-year term or any
extension thereof be binding upon and inure to the benefit of the
undersigned stockholders and their respective legal representatives,
pledges, transferees, and/or assigns and shall be irrevocable during the said
terms and/or its extension pursuant to the provisions of paragraph 1 hereof.
It is hereby understood and the undersigned stockholders have bound as
they hereby bind themselves to make a condition of every pledge, transfer
of assignment of their interests in the CORPORATION that the interests and
participation so pledged, transferred or assigned is evidenced by
annotations in the certificates of stocks or in the books of the corporation,
shall be subject to this Agreement and the same shall be binding upon the
pledgees, transferees and assigns while the trust herein created still subsists.
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9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof shall be
returned and delivered to the undersigned stockholders as the absolute
owners thereof, upon surrender of their respective voting trust certificates,
and the duties of the TRUSTEE shall cease and terminate.
10. ACCEPTANCE OF TRUST The TRUSTEE hereby accepts the trust
created by this Agreement under the signature of its duly authorized
representative affixed hereinbelow and agrees to perform the same in
accordance with the term/s hereof.
IN WITNTESS HEREOF, the undersigned stockholders and the TRUSTEE by its
representatives, have hereunto affixed their signatures this 26 day of
October, 1965 in the City of Manila, Philippines.
(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON
Stockholder Stockholder
CBM FINANCE & INVESTMENT CORPORATION
By: (SGD) C.B. MENDOZA
President
ESPERANZA A. ZAMORA (SGD) ALEJANDRO G. BELTRAN
By: (SGD) MARIANO ZAMORA Stockholder
ESPERANZA A. ZAMORA
(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA
Stockholder Stockholder
(SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS
Stockholder Stockholder
INVESTMENT AND
DEVELOPMENT CORPORATION
By:
(SGD) IGNACIO DEBUQUE JRVice-President 5
In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial
foreclosure proceedings against the oil mills of Batjak located in Tanauan, Leyte and Jimenez,
Misamis Occidental. The properties were sold to PNB as the highest bidder. One year
thereafter, or in September 1968, final Certificates of Sale were issued by the provincial
sheriffs of Leyte 6 and Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in
favor of PNB, after Batjak failed to exercise its right to redeem the foreclosed properties
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within the allowable one year period of redemption. Subsequently, PNB transferred the
ownership of the two (2) oil mills to NIDC which, as aforestated, was a wholly-owned PNB
subsidiary.
As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed
extrajudicial by NIDC. It was sold to NIDC as the highest bidder. After Batjak failed to redeem
the property, NIDC consolidated its ownership of the oil mill. 8
Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority
stockholders, through Atty. Amado Duran, legal counsel of private respondent Batjak, wrote a
letter to NIDC inquiring if the latter was still interested in negotiating the renewal of the
Voting Trust Agreement. 9 On 22 September 1970, legal counsel of Batjak wrote another letter
to NIDC informing the latter that Batjak would now safely assume that NIDC was no longer
interested in the renewal of said Voting Trust Agreement and, in view thereof, requested for
the turn-over and transfer of all Batjak assets, properties, management and operations. 10
On 23 September 1970, legal counsel of Batjak sent stin another letter to NIDC, this
time asking for a complete accounting of the assets, properties, management and operation
of Batjak, preparatory to their turn-over and transfer to the stockholders of Batjak. 11
NIDC replied, confirming the fact that it had no intention whatsoever to comply with
the demands of Batjak. 12
On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special
civil action for mandamus with preliminary injunction against herein petitioners docketed as
Civil Case No. 14452. 13
On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex parte motion for
the issuance of a writ of preliminary prohibitory and mandatory injunction. 14 On the same day,
respondent judge issued a restraining order "prohibiting defendants (herein petitioners) from
removing any record, books, commercial papers or cash, and leasing, renting out, disposing of
or otherwise transferring any or all of the properties, machineries, raw materials and finished
products and/or by-products thereof now in the factory sites of the three (3) modem coco
milling plants situated in Jimenez, Misamis Occidental, Sasa, Davao City, and Tanauan,
Leyte." 15
The order of 14 April 1971 was subsequently amended by respondent judge upon
an ex parte motion of private respondent Batjak so as to include the premises of NIDC in
Makati and those of PNB in Manila, as among the premises which private respondent Batjak
was authorized to enter in order to conduct an inventory.
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On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the
issuance of a writ of preliminary prohibitory and mandatory injunction and a motion to set
aside restraining order.
Before the court could act on the said motion, private respondent Batjak filed on 3
May 1971 a petition for receivership as alternative to writ of preliminary prohibitory and
mandatory injunction. 16 This was opposed by PNB and NIDC . 17
On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's complaints. 18
On 16 August 1971, respondent judge issued the now assailed order denying
petitioners' motion to dismiss and appointing a set of three (3) receivers. 19 NIDC moved for
reconsideration of the aforesaid order. 20 On 30 September 1971, respondent judge denied the
motion for reconsideration. 21
Hence, these two (2) petitions, which have been consolidated, as they involve a
resolution of the same issues. In their manifestation with motion for early decision, dated 25
August 1986, private respondent, Batjak contends that the NIDC has already been abolished
or scrapped by its parent company, the PNB.
After a careful study and examination of the records of the case, the Court finds and
holds for the petitioners.
1. On the denial of petitioners' motion to dismiss.
As a general rule, an order denying a motion to quash or to dismiss is interlocutory
and cannot be the subject of a petition for certiorari. The remedy of the aggrieved party in a
denied motion to dismiss is to file an answer and interpose, as defense or defenses, the
objection or objections raised by him in said motion to dismiss, then proceed to trial and, in
case of adverse decision, to elevate the entire case by appeal in due course. However, under
certain situations, recourse to the extraordinary legal remedies of certiorari, prohibition and
mandamus to question the denial of a motion to dismiss or quash is considered proper, in the
interest of more enlightened and substantial justice. As the court said in Pineda and Ampil
Manufacturing Co. vs. Bartolome, 95 Phil. 930,938
For analogous reasons it may be said that the petition for certiorari
interposed by the accused against the order of the court a quo denying the
motion to quash may be entertained, not only because it was rendered in a
criminal case, but because it was rendered, as claimed, with grave abuse of
discretion, as found by the Court of Appeals. ..
and reiterated in Mead v. Argel 22 citing Yap v. Lutero (105 Phil. 1307):
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However, were we to require adherence to this pretense, the case at bar
would have to be dismissed and petitioner required to go through the
inconvenience, not to say the mental agony and torture, of submitting
himself to trial on the merits in Case No. 166443, apart from the expenses
incidental thereto, despite the fact that his trial and conviction therein would
violate one of this [sic] constitutional rights, and that, an appeal to this
Court, we would, therefore, have to set aside the judgment of conviction of
the lower court. This would, obviously, be most unfair and unjust. Under the
circumstances obtaining the present case, the flaw in the procedure
followed by petitioner herein may be overlooked, in the interest of a more
enlightened and substantial justice.
Thus, where there is patent grave abuse of discretion, in denying the motion to
dismiss, as in the present case, this Court may entertain the petition for certiorari interposed
by the party against whom the said order is issued.
In their motion to dismiss Batjaks complaint, in Civil Case No. 14452, NIDC and PNB
raised common grounds for its allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction over the subject
of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of action (Rule 16,
Sec. 1, Par. a, c, d & g, Rules of Court).
Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First
Instance to issue a writ of preliminary or permanent injunction is confined within the
boundaries of the province where the land in controversy is situated. 23 The petition for
mandamus of Batjak prayed that NIDC and PNB be ordered to surrender, relinquish and
turnover to Batjak the assets, management and operation of Batjak particularly the three (3)
oil mills located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.
Clearly, what Batjak asked of respondent court was the exercise of power or
authority outside its jurisdiction.
On the matter of proper venue, Batjak's complaint should have been filed in the
provinces where said oil mills are located. Under Rule 4, Sec. 2, paragraph A of the Rules of
Court, "actions affecting title to, or for recovery of possession, or for partition or
condemnation of, or foreclosure of mortgage on, real property, shall be commenced and
tried in the province where the property or any part thereof lies."
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In support of the third ground of their motion to dismiss, PNB and NIDC contend that
Batjak's complaint for mandamus is based on its claim or right to recovery of possession of
the three (3) oil mills, on the ground of an alleged breach of fiduciary relationship.
Noteworthy is the fact that, in the Voting Trust Agreement, the parties thereto were NIDC
and certain stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2,
Rule 3 of the Rules of Court, every action must be prosecuted and defended in the name of
the real party in interest. Applying the rule in the present case, the action should have been
filed by the stockholders of Batjak, who executed the Voting Trust Agreement with NIDC, and
not by Batjak itself which is not a party to said agreement, and therefore, not the real party in
interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the petition
for mandamus be dismissed. A careful reading of the Voting Trust Agreement shows that PNB
was really not a party thereto. Hence, mandamus will not lie against PNB.
Moreover, the action instituted by Batjak before the respondent court was a special
civil action for mandamus with prayer for preliminary mandatory injunction. Generally,
mandamus is not a writ of right and its allowance or refusal is a matter of discretion to be
exercised on equitable principles and in accordance with well-settled rules of law, and that it
should never be used to effectuate an injustice, but only to prevent a failure of justice. 24 The
writ does not issue as a matter of course. It will issue only where there is a clear legal right
sought to be enforced. It will not issue to enforce a doubtful right. A clear legal right within
the meaning of Sec. 3, Rule 65 of the Rules of Court means a right clearly founded in or
granted by law, a right which is enforceable as a matter of law.
Applying the above-cited principles of law in the present case, the Court finds no
clear right in Batjak to be entitled to the writ prayed for. It should be noted that the petition
for mandamus filed by it prayed that NIDC and PNB be ordered to surrender, relinquish and
turn-over to Batjak the assets, management, and operation of Batjak particularly the three (3)
oil mills and to make the order permanent, after trial, and ordering NIDC and PNB to submit a
complete accounting of the assets, management and operation of Batjak from 1965. In effect,
what Batjak seeks to recover is title to, or possession of, real property (the three (3) oil mills
which really made up the assets of Batjak) but which the records show already belong to
NIDC. It is not disputed that the mortgages on the three (3) oil mills were foreclosed by PNB
and NIDC and acquired by them as the highest bidder in the appropriate foreclosure sales.
Ownership thereto was subsequently consolidated by PNB and NIDC, after Batjak failed to
exercise its right of redemption. The three (3) oil mills are now titled in the name of NIDC.
From the foregoing, it is evident that Batjak had no clear right to be entitled to the writ
prayed for. In Lamb vs. Philippines (22 Phil. 456) citing the case of Gonzales V. Salazar vs. The
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Board of Pharmacy, 20 Phil. 367, the Court said that the writ of mandamus will not issue to
give to the applicant anything to which he is not entitled by law.
2. On the appointment of receiver.
A receiver of real or personal property, which is the subject of the action, may be
appointed by the court when it appears from the pleadings that the party applying for the
appointment of receiver has an interest in said property. 25 The right, interest, or claim in
property, to entitle one to a receiver over it, must be present and existing.
As borne out by the records of the case, PNB acquired ownership of two (2) of the
three (3) oil mills by virtue of mortgage foreclosure sales. NIDC acquired ownership of the
third oil mill also under a mortgage foreclosure sale. Certificates of title were issued to PNB
and NIDC after the lapse of the one (1) year redemption period. Subsequently, PNB
transferred the ownership of the two (2) oil mills to NIDC. There can be no doubt, therefore,
that NIDC not only has possession of, but also title to the three (3) oil mills formerly owned by
Batjak. The interest of Batjak over the three (3) oil mills ceased upon the issuance of the
certificates of title to PNB and NIDC confirming their ownership over the said properties.
More so, where Batjak does not impugn the validity of the foreclosure proceedings. Neither
Batjak nor its stockholders have instituted any legal proceedings to annul the mortgage
foreclosure aforementioned.
Batjak premises its right to the possession of the three (3) off mills on the Voting
Trust Agreement, claiming that under said agreement, NIDC was constituted as trustee of the
assets, management and operations of Batjak, that due to the expiration of the Voting Trust
Agreement, on 26 October 1970, NIDC should tum over the assets of the three (3) oil mills to
Batjak. The relevant provisions of the Voting Trust Agreement, particularly paragraph 4 & No.
1 thereof, are hereby reproduced:
NOW THEREFORE, the undersigned stockholders, in consideration of the
premises and of the mutual covenants and agreements herein contained and
to carry out the foregoing purposes in order to vest in the TRUSTEE the
voting right.8 of the shares of stock held by the undersigned in the
CORPORATION as hereinafter stated it is mutually agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from and after
date hereof, without power of revocation on the part of the SUBSCRIBERS,
the TRUSTEE designated in the manner herein provided is hereby made,
constituted and appointed as a VOTING TRUSTEE to act for and in the name
of the SUBSCRIBERS, it being understood, however, that this Voting Trust
Agreement shall, upon its expiration be subject to a re-negotiation between
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the parties, as may be warranted by the balance and attending circumstance
of the loan investment of the TRUSTEE or otherwise in the CORPORATION.
and No. 3 thereof reads:
3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors
in trust, if any, shall have the power and it shall be its duty to vote the shares
of the undersigned subject hereof and covered by this Agreement at all
annual, adjourned and special meetings of the CORPORATION on all
questions, motions, resolutions and matters including the election of
directors and all such matters on which the stockholders, by virtue of the by-
laws of the CORPORATION and of the existing legislations are entitled to
vote, which may be voted upon at any and all said meetings and shall also
have the power to execute and acknowledge any agreements or documents
that may be necessary in its opinion to express the consent or assent of all or
any of the stockholders of the CORPORATION with respect to any matter or
thing to which any consent or assent of the stockholders may be necessary,
proper or convenient.
From the foregoing provisions, it is clear that what was assigned to NIDC was the
power to vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak's
outstanding shares, and who are the signatories to the agreement. The power entrusted to
NIDC also included the authority to execute any agreement or document that may be
necessary to express the consent or assent to any matter, by the stockholders. Nowhere in
the said provisions or in any other part of the Voting Trust Agreement is mention made of any
transfer or assignment to NIDC of Batjak's assets, operations, and management. NIDC was
constituted as trustee only of the voting rights of 60% of the paid-up and outstanding shares
of stock in Batjak. This is confirmed by paragraph No. 9 of the Voting Trust Agreement, thus:
9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof shall be
returned and delivered to the undersigned stockholders as the absolute
owners thereof, upon surrender of their respective voting trust certificates,
and the duties of the TRUSTEE shall cease and terminate.-
Under the aforecited provision, what was to be returned by NIDC as trustee to
Batjak's stockholders, upon the termination of the agreement, are the certificates of shares of
stock belonging to Batjak's stockholders, not the properties or assets of Batjak itself which
were never delivered, in the first place to NIDC, under the terms of said Voting Trust
Agreement.
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In any event, a voting trust transfers only voting or other rights pertaining to the
shares subject of the agreement or control over the stock. The law on the matter is Section
59, Paragraph 1 of the Corporation Code (BP 68) which provides:

Sec. 59. Voting Trusts One or more stockholders of a stock corporation

may create a voting trust for the purpose of confering upon a trustee or
trusties the right to vote and other rights pertaining to the shares for a
period not exceeding five (5) years at any one time: ... 26

The acquisition by PNB-NIDC of the properties in question was not made or effected
under the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on
a just and valid obligation of Batjak.

Moreover, the prevention of imminent danger to property is the guiding principle

that governs courts in the matter of appointing receivers. Under Sec. 1 (b), Rule 59 of the
Rules of Court, it is necessary in granting the relief of receivership that the property or fired
be in danger of loss, removal or material injury.

In the case at bar, Batjak in its petition for receivership, or in its amended petition
therefor, failed to present any evidence, to establish the requisite condition that the property
is in danger of being lost, removed or materially injured unless a receiver is appointed to
guard and preserve it.
WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated
16 August 1971 and 30 September 1971, are hereby ANNULLED and SET ASIDE. The respondent
judge and/or his successors are ordered to desist from hearing and/or conducting any further
proceedings in Civil Case No. 14452, except to dismiss the same. With costs against private
respondent.

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Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-5883 November 28, 1953
DOMINGO PONCE AND BUHAY L. PONCE, petitioners,
vs.
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of Manila, Branch I, and
POTENCIANO GAPOL, respondents.
1. CORPORATION LAW; STOCKHOLDERS' MEETING TO ELECT A NEW BOARD OF
DlRECTORSJ CALL OF MEETING BY A STOCKHOLDER ON COURT'S AUTHORITY.Under and
pursuant to section 26 of Act No. 1459, on the showing of good cause therefor the court may
authorize a stockholder to call a meeting and to preside thereat until the majority
stockholders representing a majority of the stockholders present and permitted to be voted
shall have chosen one among them to preside it. And this showing of good cause therefor
exists when the court is apprised of the fact that the by-laws of the corporation require the
calling of a general meeting of 'the stockholders to elect the board of directors but the call for
such meeting has not been done.
2. ID.; ID.; ID.; PETITION FOR SUCH PURPOSE NEED NOT BE SET FOR HEARING.The
requirement that "on the showing of good cause therefor," the court may grant to a
stockholder the authority to call such meeting and to preside thereat does not mean that the
petition for such authority must be set for hearing with notice served upon the board of
directors. It may be likened to a writ of preliminary injunction or of attachment which may be
issued ex-parte upon compliance with the requirements of the rules and upon the court being
satisfied that the same should issue. Such provisional reliefs have not been deemed and held
as violative of the due process of law clause of the Constitution.
3. ID.; ID.; ID.; "QUO WARRANTO" TO QUESTION AN ILLEGALITY IN THE ELECTION OF A
MEMBER OF THE BOARD OF DIRECTORS.The alleged illegality of the election of one member
of the board of directors at the meeting called as authorized by the court being subsequent
to the order complained of cannot affect the validity and legality of the order. If it be true that
one of the directors elected at such meeting was not qualified in accordance with the
provisions of the by-laws, the remedy of an aggrieved party would be quo warranto.
4.ID.; ID.; ID.; AGREEMENT TO DISSOLVE CORPORATION, IS NO HINDRANCE TO THE
COURT'S POWER TO AUTHORIZE STOCKHOLDER TO CALL SUCH MEETING.An alleged
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previous agreement to dissolve the corporation does not affect or render illegal the said
order issued by the court.
ORIGINAL ACTION in the Supreme Court. Certiorari.
The facts are stated in the opinion of the Court. Ponce vs. Encarnacion etc., and Gapol, 94
Phil., 81, No. L-5883 November 28, 1953
Marcelino Lontok for petitioners.
Zavalla, Bautista and Nuevas for respondents.
PADILLA, J.:
This is a petition for a writ of certiorari to annul an order of the respondent court
granting Potenciano Gapol authority, pursuant to section 26, Act No. 1459, otherwise known
as the Corporation Law, to call a meeting of the stockholders of the Dagunoy Enterprises, Inc.
and to preside at such meeting by giving proper notice to the stockholders, as required by law
or by laws of the corporation, until after the majority of the stockholders present and
qualified to vote shall have chosen one of them to act as presiding officer of the meeting;
another order denying a motion of the petitioners to have the previous order set aside; and a
third order denying a motion to the same effect as the one previously filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered as such
on 24 June 1948; that on 16 April 1951 at a meeting duly called, the voluntary dissolution of the
corporation and the appointment of Potenciano Gapol as receiver were agreed upon and to
that end a petitioner Domingo Ponce; that instead of filing the petition for voluntary
dissolution of the of the corporation as agreed upon, the respondent Potenciano Gapol, who
is the largest stockholder, charged his mind and filed a complaint in the Court of First Instance
of Manila (civil No. 13753) to compel the petitioners to render an accounting of the funds and
assets of the corporation, to reimburse it, jointly and severally, in the sum of P4,500, the
purchase price of a parcel of land acquired by the corporation; P6,190 loaned to the wife of
petitioner Domingo Ponce; and P8,000 spent by the latter in his trip to the United States, or a
total sum of P18,690, plus interest, or such sum as may be found after the accounting shall
have been rendered to have been misspent, misapplied, missappropriated and converted by
the petitioner Domingo Ponce to his own use and benefit; that on 18 May 1951 the plaintiff in
that case, the respondent Potenciano Gapol in this case, filed a motion praying that the
petitioners be removed as members of the board of directors which was denied by the court;
that on 3 January 1952 respondent Potenciano Gapol filed a petition (civil No. 15445, Exhibit
L), praying for an order directing him to a call a meeting of the stockholders of the
corporation and to preside at such meeting in accordance with section 26 of the Corporation
law; that two days later, without notice to the petitioners and to the other members of the
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board of directors and in violation of the Rules of Court which require that the adverse parties
be notified of the hearing of the motion three days in advance, the respondent court issued
the order as prayed for (Exhibit M); that the petitioners learned only of this order of the court
on 27 February, when the Bank of America refused to recognize the new board of directors
elected at such meeting and returned the checks drawn upon it by the said board of directors;
that the election of Juanito R. Tianzon as member of the board of directors of the corporation
he must be a member of the Legionarios del Trabajo, as required and provided for in article 7
of the by-laws of the corporation; that on 5 March the petitioners filed a petition in the
respondent court to have the order of 5 January set aside but on April, the date set for the
hearing of the petition, as the respondent judge was on leave vacation judge directed its
transfer to the branch of the respondent judge; that without having set the motion for
hearing, the respondent court denied the motion of 5 March in its order of 7 May; that on 14
May the petitioners filed another motion inviting the attention of the respondent court to the
irregularity and illegality of its procedure and setting the motion for hearing on 21 May, but
the court denied the motion by its order of 13 June.
The only question to determine in this case is whether under and pursuant to section
26 of Act No. 1459, known as the Corporation law, the respondent court may issue the order
complained of. Said section provides:
Whenever, from any cause, there is no person authorized to call a meeting,
or when the officer authorized to do so refuses, fails or neglects to call a meeting,
any judge of a Court of First Instance on the showing of good cause therefor, may
issue an order to any stockholder or member of a corporation, directing him to call a
meeting of the corporation by giving the proper notice required by this Act or by-
laws; and if there be no person legally authorized to preside at such meeting, the
judge of the Court of First Instance may direct the person calling the meeting to
preside at the same until a majority of the members or stockholders representing a
majority of the stock members or stockholders presenting a majority of the stock
present and permitted by law to be voted have chosen one of their number to act as
presiding officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a stockholder to call
a meeting and to preside threat until the majority stockholders representing a majority
strockholders representing a majority of the stock present and permitted to be voted shall
have chosen one among them to preside it. And this showing of good cause therefor exists
when the court is apprised of the fact that the by-laws of the corporation require the calling
of a general meeting of the stockholders to elect the board of directors but call for such
meeting has not been done.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:
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The Board of Directors shall compose of five (5) members who shall be elected by the
stockholders in a general meeting called for that purpose which shall be held every
even year during the month of January.
Article 20 of the by-laws in part provides:
. . . Regular general meetings are those which shall be called for every even year . . . .
The requirement that "on the showing of good cause therefor," the court may grant
to a stockholder the authority to call such meeting and to preside thereat does not mean that
the petition must be set for hearing with notice served upon the board of directors. The
respondent court was satisfied that there was a showing of good cause for authorizing the
respondent Potenciano Gapol to call a meeting of the stockholders for the purpose of
electing the board of directors as required and provided for in the by-laws, because the
chairman of the board of directors called upon to do so had failed, neglected, or refused to
perform his duty. It may be likened to a writ of preliminary injunction or of attachment which
may be issued ex-parte upon compliance with the requirements of the rules and upon the
court being satisfied that the same should be issue. Such provisional reliefs have not been
deemed and held as violative of the due process of law clause of the Constitution.
In several state of the Union1 the remedy which may be availed of our resorted to in a
situation such as the one brought about in this case is mandamus to compel the officer or
incumbent board of directors to perform a duties specifically enjoined by law or by-laws, to
wit: to call a meeting of the stockholders. Dela ware is the estate that has a law similar to ours
and there the chancellor of a chancery court may summarily issue or enter an order
authorizing a stockholder to call a meeting of the stockholders of the corporation and preside
thereat.2 It means that the chancellor may issue such order without notice and hearing.
That the relief granted by the respondent court lies within its jurisdiction is not
disputed. Having the authority to grant the relief, the respondent court did not exceed its
jurisdiction; nor did it abuse its discretion in granting it.
With persistency petitioners claim that they have been deprived of their right without
due process of law. They had no right to continue as directors of the corporation unless
reflected by the stockholders in a meeting called for that purpose every even year. They had
no right to a hold-over brought about by the failure to perform the duty incumbent upon one
of them. If they felt that they were sure to be reelected, why did they fail, neglect, or refuse
to call the meeting to elect the members of the board? Or, why did they not seek their
reelection at the meeting called to elect the directors pursuant to the order of the respondent
court.
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The alleged illegality of the election of one member of the board of directors at the
meeting called by the respondent Potenciano Gapol as authorized by the court being
subsequent to the order complained of cannot affect the validity and legality of the order. If it
be true that one of the directors elected at the meting called by the respondent Potenciano
Gapol, as authorized by the order of the court complained of, was not qualified in accordance
with the provisions of the by-laws, the remedy of an aggrieved party would be quo a
warranto. Also, the alleged previous agreement to dissolve the corporation does not affect or
render illegal the order issued by the respondent court.

The petition is denied, with costs against the petitioners.

Paras, C.J., Pablo, Bengzon, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo and Labrador,
JJ., concur.

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