Republic of the Philippines purchaser fails to pay any of the instalments when due, the shares of stock which

SUPREME COURT are the object of the sale are to revert to the seller and the payments already
Manila
EN BANC
G.R. Nos. L-48195 and 48196 May 1, 1942
SOFRONIO T. BAYLA, ET AL., petitioners,
vs.
SILANG TRAFFIC CO., INC., respondent.
SILANG TRAFFIC CO., petitioner, vs. SOFRONIO BAYLA, ET AL., respondents.
1.Corporations; Distinction between Subscription to Capital Stock and
Contract of Sale of Shares of Stock.—Eight years after the corporation was
organized, it en-tered into an "agreement for instalment sale" of its shares of
stock with various individuals. After the latter had paid several instalments on
account of the purchase price agreed upon, and upon default in the payment of
the suc-ceeding intalment, the board of directors of the corporation passed a
resolution authoriz-ing the refund of the amounts paid and the reversion of the
shares of stock to the corpo-ration. Held: That such resolution is valid because
the contract was not one of subscrip-tion but of purchase and sale. In some
par-ticulars, the rules governing subscriptions and and sales of shares are
different. For in-stance, the provisions of our Corporation Law regarding calls for
unpaid subscriptions and assessment of stock (sections 37-60) do not apply to a
purchase of stock. Likewise the rule that the corporation has no legal capac-ity to
release an original subscriber to its capital stock from the obligation to pay for
his shares, is inapplicable to a contract of purchase of shares.
2.Id.; Id.—Whether a particular contract is a subscription or a sale of
stock is a matter of construction and depends upon its terms and the intention of
the parties. In Salmon, Dex-ter & Co. vs. Unson, 47 Phil. 649, it was held that a
subscription to stock in an existing corporation is, as between the subscriber and
the corporation, simply a contract of purchase and sale. A subscription, properly
speaking, is the mutual agreement of the subscribers to take and pay for the
stock of a corporation, while a purchase is an independent agreement between
the individual and the corporation to buy shares of stock from it at a stipulated
price.
3.Obligations and Contracts; Necessity of Demand upon Default as
Requisite to Forfei-ture.—The contract here involved provides that if the
made are to be forfeited in favor of said seller. The seller, through its board of
directors, an-nulled a previous resolution rescinding the sale and declared the
forfeiture of the pay-ments already made and the reversion of the shares of
stock to the corporation. Held: That such forfeiture was ineffective. The con-tract
did not expressly provide that the fail-ure of the purchaser to pay any instalment
would give rise to forfeiture and cancellation without the necessity of any
demand from the seller; and under article 1100 of the Civil Code persons obliged
to deliver or do some-thing are not in default until the moment the creditor
demands of them judicially or extra-judicially the fulfilment of their obligation,
unless (1) the obligation or the law expressly provides that demand shall not be
necessary in order that default may arise, or (2) by reason of the nature and
circumstances of the obligation it shall appear that the desig-nation of the time
at which the thing was to be delivered or the service rendered was the principal
inducement to the creation of the obligation.
PETITION for review on certiorari.
The facts are stated in the opinion of the courtE. A. Beltran for petitioners.
Conrado V. Sanchez, Melchor C. Benitez, and Enrique M. Fernando for respondent.
OZAETA, J.:
Petitioners in G.R. No. 48195 instituted this action in the Court of First Instance of
Cavite against the respondent Silang Traffic Co., Inc. (cross-petitioner in G.R. No.
48196), to recover certain sums of money which they had paid severally to the
corporation on account of shares of stock they individually agreed to take and
pay for under certain specified terms and conditions, of which the following
referring to the petitioner Josefa Naval, is typical:
AGREEMENT FOR INSTALLMENT SALE OF SHARES IN THE "SILANG
TRAFFIC COMPANY, INC.,"
Silang, Cavite, P. I.
THIS AGREEMENT, made and entered into between Mrs. Josefa Naval,
of legal age, married and resident of the Municipality of Silang, Province
of Cavite, Philippine Islands, party of the First Part, hereinafter called the
1
subscriber, and the "Silang Traffic Company, Inc.," a corporation duly
President.
organized and existing by virtue of and under the laws of the Philippine
Islands, with its principal office in the Municipality of Silang, Province of
Cavite, Philippine Islands, party of the Second Part, hereinafter called (Exhibit 1. Notarial acknowledgment omitted.)
the seller,
The agreements signed by the other petitioners were of the same date (March
WITNESSETH: 30, 1935) and in identical terms as the foregoing except as to the number of
shares and the corresponding purchase price. The petitioners agreed to purchase
That the subscriber promises to pay personally or by his duly authorized the following number of shares and, up to April 30, 1937, had paid the following
agent to the seller at the Municipality of Silang, Province of Cavite, sums on account thereof:
Philippine Islands, the sum of one thousand five hundred pesos (P1,500),
Philippine currency, as purchase price of FIFTEEN (15) shares of capital
stock, said purchase price to be paid as follows, to wit: five (5%) per cent Sofronio T. 8 shares P360
upon the execution of the contract, the receipt whereof is hereby Bayla.......
acknowledged and confessed, and the remainder in installments of five
Venancio 8 shares 375
per cent, payable within the first month of each and every quarter
thereafter, commencing on the 1st day of July, 1935, with interest on Toledo........
deferred payments at the rate of SIX (6%) per cent per annum until paid.
Josefa 15 shares 675
Naval..............
That the said subscriber further agrees that if he fails to pay any of said
installment when due, or to perform any of the aforesaid conditions, or Paz Toledo................ 15 shares 675
if said shares shall be attached or levied upon by creditors of the said
subscriber, then the said shares are to revert to the seller and the
payments already made are to be forfeited in favor of said seller, and the Petitioners' action for the recovery of the sums above mentioned is based on a
latter may then take possession, without resorting to court proceedings. resolution by the board of directors of the respondent corporation on August 1,
1937, of the following tenor:
The said seller upon receiving full payment, at the time and manner
hereinbefore specified, agrees to execute and deliver to said subscriber, A mocion sel Sr. Marcos Caparas y secundado por el Sr. Alejandro Bayla,
or to his heirs and assigns, the certificate of title of said shares, free and que para el bien de la corporacion y la pronta terminacion del asunto
clear of all encumbrances. civil No. 3125 titulado "Vicente F. Villanueva et al. vs. Lino Gomez et al.,"
en el Juzgado de Primera Instancia de Cavite, donde se gasto y se
In testimony whereof, the parties have hereunto set their hands in the gastara no poca cantidad de la Corporacion, se resolvio y se aprobo por
la Junta Directiva los siguientes:
Municipality of Silang, Province of Cavite, Philippine Islands, this 30th
day of March, 1935.
(a) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3 de
marzo, 1935, art. 11, sec. 162, sobre las cobranzas que se haran por el
(Sgd.) JOSEFA NAVAL Secretario Tesorero de la Corporacion a los accionistas que habian
SILANG TRAFFIC COMPANY, INC. tomado o suscrito nuevas acciones y que se permitia a estos pagar 20%
Subscriber del valor de las acciones suscritas en un año, con interes de 6% y el pago
o jornal que se hara por trimestre.
By (Sgd.) LINO GOMEZ

2
 (b) Se dejara sin efecto, en vista de que aun no esta pagado todo el valor The respondent corporation set up the following defenses: (1) That the above-
de las 123 acciones, tomadas de las acciones no expedidas (unissued quoted resolution is not applicable to the petitioners Sofronio T. Bayla, Josefa
stock) de la Corporacion y que fueron suscritas por los siguienes: Naval, and Paz Toledo because on the date thereof "their subscribed shares of
stock had already automatically reverted to the defendant, and the installments
paid by them had already been forfeited"; and (2) that said resolution of August
Lino 10 Acciones
1, 1937, was revoked and cancelled by a subsequent resolution of the board of
Gomez.....................
directors of the defendant corporation dated August 22, 1937.
Venancio 8 Acciones
Toledo............. The trial court absolved the defendant from the complaint and declared canceled
(forfeited) in favor of the defendant the shares of stock in question. It held that
Melchor P. Benitez........ 17 Acciones the resolution of August 1, 1937, was null and void, citing Velasco vs. Poizat (37
Phil., 802), wherein this Court held that "a corporation has no legal capacity to
Isaias Videña................. 14 Acciones release an original subscriber to its capital stock from the obligation to pay for
shares; and any agreement to this effect is invalid" Plaintiffs below appealed to
Esteban Velasco............ 10 Acciones the Court of Appeals, which modified of the trial court as follows:

Numeriano S. Aldaba.... 15 Acciones

Inocencio
Cruz.................
Josefa Naval ..................
That part of the judgment dismissing plaintiff's complaint is affirmed,
but that part thereof declaring their subscription canceled is reversed.
8 Acciones
Defendant is directed to grant plaintiffs 30 days after final judgment
within which to pay the arrears on their subscription. Without
15 Acciones pronouncement as to costs.

Sofronio 8 Acciones
Bayla.................
Dionisio Dungca............. 3 Acciones
y devolver a las personas arriba descritas toda la cantidad que estas habian
pagado por las 123 acciones.
(c) Que se dejara sin efecto lo aprobado por la Junta Directiva el 3
marzo, 1935, art. V. sec. 165, sobre el cambio o trueque de las 31 acciones
del Treasury Stock, contra las 32 acciones del Sr. Numeriano Aldaba, en
la corporacion Northern Luzon Transportation Co. y que se devuelva al
Sr. Numeriano Aldaba las 32 acciones mencionadas despues que el haya
devuelto el certificado de las 31 acciones de la Silang Traffic Co., Inc.
(d) Permitir al Tesorero de la Corporacion para que devuelva a las
personas arriba indicadas, las cantidades pagadas por las 123 acciones.
(Exhibit A-1.)
Both parties appealed to this Court by petition and cross-petition
for certiorari. Petitioners insist that they have the right to recover the amounts
involved under the resolution of August 1, 1937, while the respondent and cross-
petitioner on its part contends that said amounts have been automatically
forfeited and the shares of stock have reverted to the corporation under the
agreement hereinabove quoted.
The parties litigant, the trial court, and the Court of Appeals have interpreted or
considered the said agreement as a contract of subscription to the capital stock
of the respondent corporation. It should be noted, however, that said
agreement is entitled "Agreement for Installment Sale of Shares in the Silang
Traffic Company, Inc.,"; that while the purchaser is designated as "subscriber,"
the corporation is described as "seller"; that the agreement was entered into on
March 30, 1935, long after the incorporation and organization of the corporation,
which took place in 1927; and that the price of the stock was payable in quarterly
installments spread over a period of five years. It also appears that in civil case
No. 3125 of the Court of First Instance of Cavite mentioned in the resolution of
August 1, 1937, the right of the corporation to sell the shares of stock to the

3
person named in said resolution (including herein petitioners) was impugned by
the plaintiffs in said case, who claimed a preferred right to buy said shares.
Whether a particular contract is a subscription or a sale of stock is a matter of
construction and depends upon its terms and the intention of the parties (4
Fletcher, Cyclopedia of Corporation [permanent edition], 29, cited in Salmon,
Dexter & Co. vs. Unson (47 Phil. 649, 652). In the Unson case just cited, this Court
held that a subscription to stock in an existing corporation is, as between the
subscriber and the corporation, simply a contract of purchase and sale.
It seems clear from the terms of the contracts in question that they are contracts
of sale and not of subscription. The lower courts erred in overlooking the
distinction between subscription and purchase "A subscription, properly
speaking, is the mutual agreement of the subscribers to take and pay for the
stock of a corporation, while a purchase is an independent agreement between
the individual and the corporation to buy shares of stock from it at stipulated
price." (18 C. J. S., 760.) In some particulars the rules governing subscriptions and
sales of shares are different. For instance, the provisions of our Corporation Law
regarding calls for unpaid subscription and assessment of stock (sections 37-50)
do not apply to a purchase of stock. Likewise the rule that corporation has no
legal capacity to release an original subscriber to its capital stock from the
obligation to pay for his shares, is inapplicable to a contract of purchase of
shares.
The next question to determine is whether under the contract between the
parties the failure of the purchaser to pay any of the quarterly installments on
the purchase price automatically gave rise to the forfeiture of the amounts
already paid and the reversion of the shares to the corporation. The contract
provides for interest of the rate of six per centum per annum on deferred
payments. It is also provides that if the purchaser fails to pay any of said
installments when due, the said shares are to revert to the seller and the
payments already made are to be forfeited in favor of said seller. The respondent
corporation contends that when the petitioners failed to pay the installment
which fell due on or before July 31, 1937, forfeiture automatically took place, that
is to say, without the necessity of any demand from the corporation, and that
therefore the resolution of August 1, 1937, authorizing the refund of the
installments already paid was inapplicable to the petitioners, who had already
lost any and all rights under said contract. The contention is, we think, untenable.
The provision regarding interest on deferred payments would not have been
inserted if it had been the intention of the parties to provide for automatic
forfeiture and cancelation of the contract. Moreover, the contract did not
expressly provide that the failure of the purchaser to pay any installment would
give rise to forfeiture and cancelation without the necessity of any demand from
the seller; and under article 1100 of the Civil Code persons obliged to deliver or do
something are not in default until the moment the creditor demands of them
judicially or extrajudicially the fulfillment of their obligation, unless (1) the
obligation or the law expressly provides that demand shall not be necessary in
order that default may arise, (2) by reason of the nature and circumstances of
the obligation it shall appear that the designation of the time at which that thing
was to be delivered or the service rendered was the principal inducement to the
creation of the obligation.
Is the resolution of August 1, 1937, valid? The contract in question being one of
purchase and not subscription as we have heretofore pointed out, we see no
legal impediment to its rescission by agreement of the parties. According to the
resolution of August 1, 1937, the recission was made for the good of the
corporation and in order to terminate the then pending civil case involving the
validity of the sale of the shares in question among others. To that rescission the
herein petitioners apparently agreed, as shown by their demand for the refund
of the amounts they had paid as provided in said resolution. It appears from the
record that said civil case was subsequently dismissed, and that the purchasers
of shares of stock, other than the herein petitioners, who were mentioned in said
resolution were able to benefit by said resolution. It would be an unjust
discrimination to deny the same benefit to the herein petitioners.
We may add that there is no intimation in this case that the corporation was
insolvent, or that the right of any creditor of the same was in any way prejudiced
by the rescission.
The attempted revocation of said rescission by the resolution of August 22, 1937,
was invalid, it not having been agreed to by the petitioners.
Wherefore, the judgment of the court of appeals is hereby reversed and another
judgment will be entered against the defendant Silang Traffic Co., Inc., ordering
it to pay to the plaintiffs Sofronio T. Bayla, Venancio Toledo, Josefa Naval, and
Paz Toledo, the sums of P360, P375, P675, and P675, respectively, with legal
interest on each of said sums from May 28, 1938, the date of the filing of the
complaint, until the date of payment, and with costs in the three instances. So
ordered.
4
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-43350 December 23, 1937
CAGAYAN FISHING DEVELOPMENT CO., INC., plaintiff-appellant,
vs.
TEODORO SANDIKO, defendant-appellee.
1.CORPORATIONS; TRANSFER MADE TO A NON-EXISTENT CORPORATION;
JURIDICAL CAPACITY TO ENTER INTO A CONTRACT.—The transfer made by T to
the C, F. D. Co,, Inc., was effected on May 31, 1930 and the actual incorporation of
said company was effected later on October 22, 1930. In other words, the
transfer was made almost five months before the incorporation of the company.
Unquestionably, a duly organized corporation has the power to purchase and
hold such real property as the purposes for which such corporation was formed
may permit and for this purpose may enter into such contracts as may be
necessary. But before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of articles
of incorporation. Although there is a presumption that all the requirements of
law have been complied with in the case before us it can not be denied that the
plaintiff was not yet incorporated when it entered into the contract of sale. The
contract itself referred to the plaintiff as "una sociedad en vías de
incorporación." It was not even a de facto corporation at the time. Not being in
legal existence then, it did not possess juridical capacity to enter into the
contract.
2.ID. ; ID. ; ID.—Corporations are creatures of the law, and can only come
into existence in the manner prescribed by law. General laws authorizing the
formation of corporations are general offers to any persons who may bring
themselves within their provisions; and if conditions precedent are prescribed in
the statute, or certain acts are required to be done, they are terms of the offer,
and must be complied with substantially before legal corporate existence can be
acquired. That a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind' of a contract or transact
any business, would seem to be self-evident.
3.ID. ; ID.; ID.—A corporation, until organized, has no life and, therefore,
no faculties. It is, as it were, a child in ventre sa mere. This is not saying that
under no circumstances may the acts of promoters of a corporation be ratified
by the corporation if and when subsequently organized. There are, of course,
exceptions, but under the peculiar facts and circumstances of the present case
the doctrine of ratification should not be extended because to do so would
result in injustice or fraud to the candid and unwary.
APPEAL from a judgment of the Court of First Instance of Manila. Enage, J.
The f acts are stated in the opinion of the court. Cagayan Fishing Development
vs. Sandiko, 65 Phil. 223, No. 43350 December 23, 1937
Arsenio P. Dizon for appellant.
Sumulong, Lavides and Sumulong for appellee.
LAUREL, J.:
This is an appeal from a judgment of the Court of First Instance of Manila
absolving the defendant from the plaintiff's complaint.
Manuel Tabora is the registered owner of four parcels of land situated in the
barrio of Linao, town of Aparri, Province of Cagayan, as evidenced by transfer
certificate of title No. 217 of the land records of Cagayan, a copy of which is in
evidence as Exhibit 1. To guarantee the payment of a loan in the sum of P8,000,
Manuel Tabora, on August 14, 1929, executed in favor of the Philippine National
Bank a first mortgage on the four parcels of land above-mentioned. A second
mortgage in favor of the same bank was in April of 1930 executed by Tabora over
the same lands to guarantee the payment of another loan amounting to P7,000.
A third mortgage on the same lands was executed on April 16, 1930 in favor of
Severina Buzon to whom Tabora was indebted in the sum of P2,9000. These
mortgages were registered and annotations thereof appear at the back of
transfer certificate of title No. 217.
On May 31, 1930, Tabora executed a public document entitled "Escritura de
Transpaso de Propiedad Inmueble" (Exhibit A) by virtue of which the four parcels
of land owned by him was sold to the plaintiff company, said to under process of
incorporation, in consideration of one peso (P1) subject to the mortgages in
favor of the Philippine National Bank and Severina Buzon and, to the condition
that the certificate of title to said lands shall not be transferred to the name of
5
the plaintiff company until the latter has fully and completely paid Tabora's
indebtedness to the Philippine National Bank.
The plaintiff company filed its article incorporation with the Bureau of Commerce
and Industry on October 22, 1930 (Exhibit 2). A year later, on October 28, 1931,
the board of directors of said company adopted a resolution (Exhibit G)
authorizing its president, Jose Ventura, to sell the four parcels of lands in
question to Teodoro Sandiko for P42,000. Exhibits B, C and D were thereafter
made and executed. Exhibit B is a deed of sale executed before a notary public
by the terms of which the plaintiff sold ceded and transferred to the defendant
all its right, titles, and interest in and to the four parcels of land described in
transfer certificate in turn obligated himself to shoulder the three mortgages
hereinbefore referred to. Exhibit C is a promisory note for P25,300. drawn by the
defendant in favor of the plaintiff, payable after one year from the date thereof.
Exhibit D is a deed of mortgage executed before a notary public in accordance
with which the four parcels of land were given a security for the payment of the
promissory note, Exhibit C. All these three instrument were dated February 15,
1932.
The defendant having failed to pay the sum stated in the promissory note,
plaintiff, on January 25, 1934, brought this action in the Court of First Instance of
Manila praying that judgment be rendered against the defendant for the sum of
P25,300, with interest at legal rate from the date of the filing of the complaint,
and the costs of the suits. After trial, the court below, on December 18, 1934,
rendered judgment absolving the defendant, with costs against the plaintiff.
Plaintiff presented a motion for new trial on January 14, 1935, which motion was
denied by the trial court on January 19 of the same year. After due exception and
notice, plaintiff has appealed to this court and makes an assignment of various
errors.
In dismissing the complaint against the defendant, the court below, reached the
conclusion that Exhibit B is invalid because of vice in consent and repugnancy to
law. While we do not agree with this conclusion, we have however voted to
affirm the judgment appealed from the reasons which we shall presently state.
The transfer made by Tabora to the Cagayan fishing Development Co., Inc.,
plaintiff herein, was affected on May 31, 1930 (Exhibit A) and the actual
incorporation of said company was affected later on October 22, 1930 (Exhibit 2).
In other words, the transfer was made almost five months before the
incorporation of the company. Unquestionably, a duly organized corporation has
the power to purchase and hold such real property as the purposes for which
such corporation was formed may permit and for this purpose may enter into
such contracts as may be necessary (sec. 13, pars. 5 and 9, and sec. 14, Act No.
1459). But before a corporation may be said to be lawfully organized, many
things have to be done. Among other things, the law requires the filing of articles
of incorporation (secs. 6 et seq., Act. No. 1459). Although there is a presumption
that all the requirements of law have been complied with (sec. 334, par. 31 Code
of Civil Procedure), in the case before us it can not be denied that the plaintiff
was not yet incorporated when it entered into a contract of sale, Exhibit A. The
contract itself referred to the plaintiff as "una sociedad en vias de
incorporacion." It was not even a de facto corporation at the time. Not being in
legal existence then, it did not possess juridical capacity to enter into the
contract.
Corporations are creatures of the law, and can only come into existence
in the manner prescribed by law. As has already been stated, general law
authorizing the formation of corporations are general offers to any
persons who may bring themselves within their provisions; and if
conditions precedent are prescribed in the statute, or certain acts are
required to be done, they are terms of the offer, and must be complied
with substantially before legal corporate existence can be acquired. (14
C. J., sec. 111, p. 118.)
That a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or
transact any business, would seem to be self evident. . . . A corporation,
until organized, has no being, franchises or faculties. Nor do those
engaged in bringing it into being have any power to bind it by contract,
unless so authorized by the charter there is not a corporation nor does it
possess franchise or faculties for it or others to exercise, until it acquires
a complete existence. (Gent vs. Manufacturers and Merchant's Mutual
Insurance Company, 107 Ill., 652, 658.)
Boiled down to its naked reality, the contract here (Exhibit A) was entered into
not between Manuel Tabora and a non-existent corporation but between the
Manuel Tabora as owner of the four parcels of lands on the one hand and the
same Manuel Tabora, his wife and others, as mere promoters of a corporations
on the other hand. For reasons that are self-evident, these promoters could not
have acted as agent for a projected corporation since that which no legal
existence could have no agent. A corporation, until organized, has no life and
therefore no faculties. It is, as it were, a child in ventre sa mere. This is not saying
that under no circumstances may the acts of promoters of a corporation be
6
ratified by the corporation if and when subsequently organized. There are, of to the Philippine National Bank, and that this condition not having been complied
course, exceptions (Fletcher Cyc. of Corps., permanent edition, 1931, vol. I, secs. with by the Cagayan Fishing Development Company, Inc., the transfer was
207 et seq.), but under the peculiar facts and circumstances of the present case ineffective. (Art. 1114, Civil Code; Wise & Co. vs. Kelly and Lim, 37 Phil., 696;
we decline to extend the doctrine of ratification which would result in the Manresa, vol. 8, p. 141.) However, having arrived at the conclusion that the
commission of injustice or fraud to the candid and unwary.(Massachusetts rule, transfer by Manuel Tabora to the Cagayan Fishing Development Company, Inc.
Abbott vs. Hapgood, 150 Mass., 248; 22 N. E. 907, 908; 5 L. R. A., 586; 15 Am. St. was null because at the time it was affected the corporation was non-existent,
Rep., 193; citing English cases; Koppel vs. Massachusetts Brick Co., 192 Mass., 223; we deem it unnecessary to discuss this point.lawphil.net
78 N. E., 128; Holyoke Envelope Co., vs. U. S. Envelope Co., 182 Mass., 171; 65 N. E.,
54.) It should be observed that Manuel Tabora was the registered owner of the The decision of the lower court is accordingly affirmed, with costs against the
four parcels of land, which he succeeded in mortgaging to the Philippine National appellant. So Ordered.
Bank so that he might have the necessary funds with which to convert and
develop them into fishery. He appeared to have met with financial reverses. He Villa-Real, Abad Santos, Imperial, Diaz and Concepcion, JJ., concur.
formed a corporation composed of himself, his wife, and a few others. From the
articles of incorporation, Exhibit 2, it appears that out of the P48,700, amount of
capital stock subscribed, P45,000 was subscribed by Manuel Tabora himself and
P500 by his wife, Rufina Q. de Tabora; and out of the P43,300, amount paid on
subscription, P42,100 is made to appear as paid by Tabora and P200 by his wife.
Both Tabora and His wife were directors and the latter was treasurer as well. In
fact, to this day, the lands remain inscribed in Tabora's name. The defendant
always regarded Tabora as the owner of the lands. He dealt with Tabora directly.
Jose Ventura, president of the plaintiff corporation, intervened only to sign the
contract, Exhibit B, in behalf of the plaintiff. Even the Philippine National Bank,
mortgagee of the four parcels of land, always treated Tabora as the owner of the
same. (See Exhibits E and F.) Two civil suits (Nos. 1931 and 38641) were brought
against Tabora in the Court of First Instance of Manila and in both cases a writ of
attachment against the four parcels of land was issued. The Philippine National
Bank threatened to foreclose its mortgages. Tabora approached the defendant
Sandiko and succeeded in the making him sign Exhibits B, C, and D and in making
him, among other things, assume the payment of Tabora's indebtedness to the
Philippine National Bank. The promisory note, Exhibit C, was made payable to the
plaintiff company so that it may not attached by Tabora's creditors, two of
whom had obtained writs of attachment against the four parcels of land.

If the plaintiff corporation could not and did not acquire the four parcels of land
here involved, it follows that it did not possess any resultant right to dispose of
them by sale to the defendant, Teodoro Sandiko.

Some of the members of this court are also of the opinion that the transfer from
Manuel Tabora to the Cagayan Fishing Development Company, Inc., which
transfer is evidenced by Exhibit A, was subject to a condition precedent
(condicion suspensiva), namely, the payment of the mortgage debt of said Tabora

7
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-20993 September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE MUNICIPALITY OF MORONG, RIZAL and THE PUBLIC SERVICE
COMMISSION, respondents.
----------------------------
G.R. No. L-21221 September 28, 1968
RIZAL LIGHT & ICE CO., INC., petitioner,
vs.
THE PUBLIC SERVICE COMMISSION and MORONG ELECTRIC CO.,
INC., respondents.
Public Service Commission; Hearing; Delegation of authority to hear a,
case; Who may be authorized to hear and investigate a case filed before it; Effect
of failure to interpose objection to illegal delegation of authority to hear; Case at
bar.—The Public Service Commission can only authorize a division chief to hear
and investigate a case filed before it if he is a lawyer (Sec. 32, par. 2,
Commonwealth Act No. 146, as amended). Objection to the delegation of
authority to hear a case filed before the Commission and to receive the evidence
in connection therewith is a procedural, not a jurisdictional point, and is waived
by failure to interpose timely the objection and the case had been decided by the
Commission. Since petitioner in the case at bar has never raised any objection to
the authority of Mr. Pedro Talavera (a division chief—but not a lawyer) to
conduct the hearing before the Commission, it should be deemed to have waived
such procedural defect, and petitioner's claim that the Commission acted
without or in excess of jurisdiction in so authorizing Mr. Talavera should be
dismissed.
Same; Review of decision of the Public Service Commission; Function of
Supreme Court in reviewing a decision of the Public Service Commission.—Settled
is the rule that in reviewing the decision of the Public Service Commission the
Supreme Court is not required to examine the proof de novo and determine for
itself whether or not the preponderance of evidence really justifies the decision.
The only function of this Court is to determine whether or not there is evidence
before the Commission upon which its decision might reasonably be based. The
Supreme Court will not substitute its descretion for that of the Commission on
questions of fact and will not interfere in the latter's decision unless it clearly
appears that there is no evidence to support it (citing cases). The evidence that
should be made the basis of the Supreme Court's determination should be only
those presented in the case before the Commission.
Same; "Protection-of-investment rule"; When not applicable; Paramount
consideration in the grant of certificate of public convenience; To whom duty to
protect investment of a public utility operator refers.—The "protection-of-
investment rule" was enunciated in Batangas Transportation Co. v. Orlanes. 52
"The Government having taken over the control and supervision of all public
utilities, so long as an operator under a prior license complies with the terms and
conditions of his license and reasonable rules and regulations for its operation
and meets the reasonable demands of the public, it is the duty of the
Commission to protect rather than to destroy his investment by the granting of
the second license to another person for the same thing over the same route of
travel. The granting of such a license does not serve its convenience or promote
the interests of the public."
The above-quoted rule, however. is not absolute, f or nobody has exclusive right
to secure a franchise or a certificate of public convenience. Where it has been
shown by ample evidence that the petitioner. despite ample time and
opportunity given to it by the Commission, had failed to render adequate,
sufficient and satisfactory service and had violated the important conditions of
its certificate as well as the directives and the rules and regulations of the
Commission, the rule cannot apply. To apply that rule unqualifiedly is to
encourage violation or disregard of the terms and conditions of the certificate
and the Commission's directives and regulations, and would close the door to
other applicants who could establish, operate and provide adequate, efficient
and satisfactory service for the benefit and convenience of the inhabitants. It
should be emphasized that the paramount consideration should always be the
public interest and public convenience. The duty of the Commission to protect
the investment of a public utility operator refers only to operators of good
standing—those who comply with the laws, rules and regulations—and not to
operators who are unconcerned with the public interest and whose investments
8
have failed or deteriorated because of their own fault (Paredes v. Public Service
Commission, et al., L-7111, May 30, 1955).
Same; Cancellation and revocation of certificate of public convenience;
Circumstances that warranted the imposition of both a fine and a revocation of
certificate of public convenience.—Section 16 (n) of Commonwealth Act No. 146,
as amended, confers upon the Commission ample power and discretion to order
the cancellation and revocation of any certificate of public convenience issued to
an operator who has violated, or has willfully and contumaciously refused to
comply with, any order, rule or regulation of the Commission or any provision of
law. What matters is that there is evidence to support the action of the
Commission. Where the evidence shows: (a) a contumacious refusal of the
petitioner since 1954 to comply with the directives, rules and regulations of the
Commission; (b) a violation of the conditions of the certificate of public
convenience; and (c) municipality to comply with commitment as shown by
inadequate service, such circumstances warranted the action of the Commission
in not merely imposing a fine but in revoking altogether petitioner's certificate.
Same; Requisites for the grant of certificate of public convenience.—
Before any certificate of public convenience may be granted, three requisites
must be complied with, namely: (1) the applicant must be a citizen of the
Philippines or of the United States, or a corporation or co-partnership,
association or jointstock company constituted and organized under the laws of
the Philippines, sixty per centum at least of the stock or paid-up capital of which
belongs entirely to citizens of the Philippines or of the United States; (2) the
applicant must be financially capable of undertaking the proposed service and
meeting the responsibilities incident to its operation; and (3) the applicant must
prove that the operation of the public service proposed and the authorization to
do business will promote the public interest in a proper and suitable manner.
Same; Efficacy of a franchise.—A franchise takes effect upon its approval
by the Public Service Commission (Almendras v. Ramos, 90 Phil. 231).
APPEAL from two decisions of the Public Service Commission.
The facts are stated in the opinion of the Court.
Amado A. Amador, Jr. for petitioner.
Atilano C. Bautista and Pompeyo F. Olivas for respondents.
ZALDIVAR, J.:
These two cases, being interrelated, are decided together.
Case G.R. No. L-20993 is a petition of the Rizal Light & Ice Co., Inc. to review and
set aside the orders of respondent Public Service Commission, 1 dated August 20,
1962, and February 15, 1963, in PSC Case No. 39716, cancelling and revoking the
certificate of public convenience and necessity and forfeiting the franchise of
said petitioner. In the same petition, the petitioner prayed for the issuance of a
writ of preliminary injunction ex parte suspending the effectivity of said orders
and/or enjoining respondents Commission and/or Municipality of Morong, Rizal,
from enforcing in any way the cancellation and revocation of petitioner's
franchise and certificate of public convenience during the pendency of this
appeal. By resolution of March 12, 1963, this Court denied the petition for
injunction, for lack of merit.
Case G. R. L-21221 is likewise a petition of the Rizal Light & Ice Co., Inc. to review
and set aside the decision of the Commission dated March 13, 1963 in PSC Case
No. 62-5143 granting a certificate of public convenience and necessity to
respondent Morong Electric Co., Inc. 2 to operate an electric light, heat and
power service in the municipality of Morong, Rizal. In the petition Rizal Light &
Ice Co., Inc. also prayed for the issuance of a writ of preliminary injunction ex
parte suspending the effectivity of said decision. Per resolution of this Court,
dated May 6, 1963, said petition for injunction was denied.
The facts, as they appear in the records of both cases, are as follows:
Petitioner Rizal Light & Ice Co., Inc. is a domestic corporation with business
address at Morong, Rizal. On August 15, 1949, it was granted by the Commission
a certificate of public convenience and necessity for the installation, operation
and maintenance of an electric light, heat and power service in the municipality
of Morong, Rizal.
In an order dated December 19, 1956, the Commission required the petitioner to
appear before it on February 18, 1957 to show cause why it should not be
penalized for violation of the conditions of its certificate of public convenience
and the regulations of the Commission, and for failure to comply with the
directives to raise its service voltage and maintain them within the limits
prescribed in the Revised Order No. 1 of the Commission, and to acquire and
9
install a kilowattmeter to indcate the load in kilowatts at any particular time of
the generating unit. 3
For failure of the petitioner to appear at the hearing on February 18, 1957, the
Commission ordered the cancellation and revocation of petitioner's certificate of
public convenience and necessity and the forfeiture of its franchise. Petitioner
moved for reconsideration of said order on the ground that its manager, Juan D.
Francisco, was not aware of said hearing. Respondent municipality opposed the
motion alleging that petitioner has not rendered efficient and satisfactory
service and has not complied with the requirements of the Commission for the
improvement of its service. The motion was set for hearing and Mr. Pedro S.
Talavera, Chief, Industrial Division of the Commission, was authorized to conduct
the hearing for the reception of the evidence of the parties. 4
Finding that the failure of the petitioner to appear at the hearing set for February
18, 1957 — the sole basis of the revocation of petitioner's certificate — was really
due to the illness of its manager, Juan D. Francisco, the Commission set aside its
order of revocation. Respondent municipality moved for reconsideration of this
order of reinstatement of the certificate, but the motion was denied.
In a petition dated June 25, 1958, filed in the same case, respondent municipality
formally asked the Commission to revoke petitioner's certificate of public
convenience and to forfeit its franchise on the ground, among other things, that
it failed to comply with the conditions of said certificate and franchise. Said
petition was set for hearing jointly with the order to show cause. The hearings
had been postponed several times.
Meanwhile, inspections had been made of petitioner's electric plant and
installations by the engineers of the Commission, as follows: April 15, 1958 by
Engineer Antonio M. Alli; September 18, 1959, July 12-13, 1960, and June 21-24,
1961, by Engineer Meliton S. Martinez. The inspection on June 21-24, 1961 was
made upon the request of the petitioner who manifested during the hearing on
December 15, 1960 that improvements have been made on its service since the
inspection on July 12-13, 1960, and that, on the basis of the inspection report to
be submitted, it would agree to the submission of the case for decision without
further hearing.
When the case was called for hearing on July 5, 1961, petitioner failed to appear.
Respondent municipality was then allowed to present its documentary evidence,
and thereafter the case was submitted for decision.
On July 7, 1961, petitioner filed a motion to reopen the case upon the ground that
it had not been furnished with a copy of the report of the June 21-24, 1961
inspection for it to reply as previously agreed. In an order dated August 25, 1961,
petitioner was granted a period of ten (10) days within which to submit its
written reply to said inspection report, on condition that should it fail to do so
within the said period the case would be considered submitted for decision.
Petitioner failed to file the reply. In consonance with the order of August 25,
1961, therefore, the Commission proceeded to decide the case. On July 29, 1962
petitioner's electric plant was burned.
In its decision, dated August 20, 1962, the Commission, on the basis of the
inspection reports of its aforenamed engineers, found that the petitioner had
failed to comply with the directives contained in its letters dated May 21, 1954
and September 4, 1954, and had violated the conditions of its certificate of public
convenience as well as the rules and regulations of the Commission. The
Commission concluded that the petitioner "cannot render the efficient, adequate
and satisfactory electric service required by its certificate and that it is against
public interest to allow it to continue its operation." Accordingly, it ordered the
cancellation and revocation of petitioner's certificate of public convenience and
the forfeiture of its franchise.
On September 18, 1962, petitioner moved for reconsideration of the decision,
alleging that before its electric plant was burned on July 29, 1962, its service was
greatly improved and that it had still existing investment which the Commission
should protect. But eight days before said motion for reconsideration was filed,
or on September 10, 1962, Morong Electric, having been granted a municipal
franchise on May 6, 1962 by respondent municipality to install, operate and
maintain an electric heat, light and power service in said municipality —
approved by the Provincial Board of Rizal on August 31, 1962 — filed with the
Commission an application for a certificate of public convenience and necessity
for said service. Said application was entitled "Morong Electric Co., Inc.,
Applicant", and docketed as Case No. 62-5143.
Petitioner opposed in writing the application of Morong Electric, alleging among
other things, that it is a holder of a certificate of public convenience to operate
an electric light, heat and power service in the same municipality of Morong,
Rizal, and that the approval of said application would not promote public
convenience, but would only cause ruinous and wasteful competition. Although
the opposition is dated October 6, 1962, it was actually received by the
Commission on November 8, 1962, or twenty four days after the order of general
default was issued in open court when the application was first called for hearing
10
on October 15, 1962. On November 12, 1962, however, the petitioner filed a
motion to lift said order of default. But before said motion could be resolved,
petitioner filed another motion, dated January 4, 1963, this time asking for the
dismissal of the application upon the ground that applicant Morong Electric had
no legal personality when it filed its application on September 10, 1962, because
its certificate of incorporation was issued by the Securities and Exchange
Commission only on October 17, 1962. This motion to dismiss was denied by the
Commission in a formal order issued on January 17, 1963 on the premise that
applicant Morong Electric was a de facto corporation. Consequently, the case
was heard on the merits and both parties presented their respective evidence.
On the basis of the evidence adduced, the Commission, in its decision dated
March 13, 1963, found that there was an absence of electric service in the
municipality of Morong and that applicant Morong Electric, a Filipino-owned
corporation duly organized and existing under the laws of the Philippines, has
the financial capacity to maintain said service. These circumstances, considered
together with the denial of the motion for reconsideration filed by petitioner in
Case No. 39715 on February, 15, 1963, such that as far as the Commission was
concerned the certificate of the petitioner was already declared revoked and
cancelled, the Commission approved the application of Morong Electric and
ordered the issuance in its favor of the corresponding certificate of public
convenience and necessity.1awphîl.nèt
On March 8, 1963, petitioner filed with this Court a petition to review the
decision in Case No. 39715 (now G. R. No. L-20993). Then on April 26, 1963,
petitioner also filed a petition to review the decision in Case No. 62-5143 (now G.
R. No. L-21221).
In questioning the decision of the Commission in Case No. 39715, petitioner
contends: (1) that the Commission acted without or in excess of its jurisdiction
when it delegated the hearing of the case and the reception of evidence to Mr.
Pedro S. Talavera who is not allowed by law to hear the same; (2) that the
cancellation of petitioner's certificate of public convenience was unwarranted
because no sufficient evidence was adduced against the petitioner and that
petitioner was not able to present evidence in its defense; (3) that the
Commission failed to give protection to petitioner's investment; and (4) that the
Commission erred in imposing the extreme penalty of revocation of the
certificate.
In questioning the decision in Case No. 62-5143, petitioner contends: (1) that the
Commission erred in denying petitioner's motion to dismiss and proceeding with
the hearing of the application of the Morong Electric; (2) that the Commission
erred in granting Morong Electric a certificate of public convenience and
necessity since it is not financially capable to render the service; (3) that the
Commission erred when it made findings of facts that are not supported by the
evidence adduced by the parties at the trial; and (4) that the Commission erred
when it did not give to petitioner protection to its investment — a reiteration of
the third assignment of error in the other case.1awphîl.nèt
We shall now discuss the appeals in these two cases separately.
G.R. No. L-20993
1. Under the first assignment of error, petitioner contends that while Mr. Pedro
S. Talavera, who conducted the hearings of the case below, is a division chief, he
is not a lawyer. As such, under Section 32 of Commonwealth Act No. 146, as
amended, the Commission should not have delegated to him the authority to
conduct the hearings for the reception of evidence of the parties.
We find that, really, Mr. Talavera is not a lawyer. 5 Under the second paragraph of
Section 32 of Commonwealth Act No. 146, as amended, 6 the Commission can
only authorize a division chief to hear and investigate a case filed before it if he is
a lawyer. However, the petitioner is raising this question for the first time in this
appeal. The record discloses that petitioner never made any objection to the
authority of Mr. Talavera to hear the case and to receive the evidence of the
parties. On the contrary, we find that petitioner had appeared and submitted
evidence at the hearings conducted by Mr. Talavera, particularly the hearings
relative to the motion for reconsideration of the order of February 18, 1957
cancelling and revoking its certificate. We also find that, through counsel,
petitioner had entered into agreements with Mr. Talavera, as hearing officer, and
the counsel for respondent municipality, regarding procedure in order to
abbreviate the proceedings. 7 It is only after the decision in the case turned out to
be adverse to it that petitioner questioned the proceedings held before Mr.
Talavera.
This Court in several cases has ruled that objection to the delegation of authority
to hear a case filed before the Commission and to receive the evidence in
connection therewith is a procedural, not a jurisdictional point, and is waived by
failure to interpose timely the objection and the case had been decided by the
Commission. 8 Since petitioner has never raised any objection to the authority of
Mr. Talavera before the Commission, it should be deemed to have waived such
procedural defect, and consonant with the precedents on the matter,
11
petitioner's claim that the Commission acted without or in excess of jurisdiction
in so authorizing Mr. Talavera should be dismissed. 9
2. Anent the second assigned error, the gist of petitioner's contention is that the
evidence — consisting of inspection reports — upon which the Commission
based its decision is insufficient and untrustworthy in that (1) the authors of said
reports had not been put to test by way of cross-examination; (2) the reports
constitute only one side of the picture as petitioner was not able to present
evidence in its defense; (3) judicial notice was not taken of the testimony of Mr.
Harry B. Bernardino, former mayor of respondent municipality, in PSC Case No.
625143 (the other case, G. R. No. L-21221) to the effect that the petitioner had
improved its service before its electric power plant was burned on July 29, 1962
— which testimony contradicts the inspection reports; and (4) the Commission
acted both as prosecutor and judge — passing judgment over the very same
evidence presented by it as prosecutor — a situation "not conducive to the
arrival at just and equitable decisions."
Settled is the rule that in reviewing the decision of the Public Service Commission
this Court is not required to examine the proof de novo and determine for itself
whether or not the preponderance of evidence really justifies the decision. The
only function of this Court is to determine whether or not there is evidence
before the Commission upon which its decision might reasonably be based. This
Court will not substitute its discretion for that of the Commission on questions of
fact and will not interfere in the latter's decision unless it clearly appears that
there is no evidence to support it. 10 Inasmuch as the only function of this Court in
reviewing the decision of the Commission is to determine whether there is
sufficient evidence before the Commission upon which its decision can
reasonably be based, as it is not required to examine the proof de novo, the
evidence that should be made the basis of this Court's determination should be
only those presented in this case before the Commission. What then was the
evidence presented before the Commission and made the basis of its decision
subject of the present appeal? As stated earlier, the Commission based its
decision on the inspection reports submitted by its engineers who conducted the
inspection of petitioner's electric service upon orders of the Commission. 11 Said
inspection reports specify in detail the deficiencies incurred, and violations
committed, by the petitioner resulting in the inadequacy of its service. We
consider that said reports are sufficient to serve reasonably as bases of the
decision in question. It should be emphasized, in this connection that said
reports, are not mere documentary proofs presented for the consideration of
the Commission, but are the results of the Commission's own observations and
investigations which it can rightfully take into consideration, 12 particularly in this
case where the petitioner had not presented any evidence in its defense, and
speaking of petitioner's failure to present evidence, as well as its failure to cross-
examine the authors of the inspection reports, petitioner should not complain
because it had waived not only its right to cross-examine but also its right to
present evidence. Quoted hereunder are the pertinent portions of the
transcripts of the proceedings where the petitioner, through counsel,
manifested in clear language said waiver and its decision to abide by the last
inspection report of Engineer Martinez:
Proceedings of December 15, 1960
COMMISSION:
It appears at the last hearing of this case on September 23, 1960, that an
engineer of this Commission has been ordered to make an inspection of all
electric services in the province of Rizal and on that date the engineer of this
Commission is still undertaking that inspection and it appears that the said
engineer had actually made that inspection on July 12 and 13, 1960. The engineer
has submitted his report on November 18, 1960 which is attached to the records
of this case.
ATTY. LUQUE (Councel for Petitioner):
... (W)e respectfully state that while the report is, as I see it attached to the
records, clear and very thorough, it was made sometime July of this year and I
understand from the respondent that there is some improvement since this
report was made ... we respectfully request that an up-to-date inspection be
made ... . An inspector of this Commission can be sent to the plant and
considering that the engineer of this Commission, Engineer Meliton Martinez, is
very acquainted to the points involved we pray that his report will be used by us
for the reason that he is a technical man and he knows well as he has done a
good job and I think our proposition would expedite the matter. We sincerely
believe that the inspection report will be the best evidence to decide this matter.
xxx xxx xxx
ATTY. LUQUE:
... This is a very important matter and to show the good faith of respondent in
this case we will not even cross-examine the engineer when he makes a new
12
report. We will agree to the findings and, your honor please, considering as we
have manifested before that Engineer Martinez is an experienced engineer of
this Commission and the points reported by Engineer Martinez on the situation
of the plant now will prevent the necessity of having a hearing, of us bringing
new evidence and complainant bringing new evidence. ... .
xxx xxx xxx
COMMISSION (to Atty. Luque):
Q Does the Commission understand from the counsel for applicant
that if the motion is granted he will submit this order to show cause for
decision without any further hearing and the decision will be based on
the report of the engineer of this Commission?
A We respectfully reply in this manner that we be allowed or be
given an opportunity just to read the report and 99%, we will agree that
the report will be the basis of that decision. We just want to find out the
contents of the report, however, we request that we be furnished with a
copy of the report before the hearing so that we will just make a
manifestation that we will agree.
COMMISSION (to Atty. Luque):
Q In order to prevent the delay of the disposition of this case the
Commission will allow counsel for the applicant to submit his written
reply to the report that the engineer of this Commission. Will he submit
this case without further hearing upon the receipt of that written reply?
A Yes, your honor.
Proceedings of August 25, 1961
ATTY. LUQUE (Counsel for petitioner):
In order to avoid any delay in the consideration of this case we are respectfully
move (sic) that instead of our witnesses testifying under oath that we will submit
a written reply under oath together with the memorandum within fifteen (15)
days and we will furnish a copy and upon our submission of said written reply
under oath and memorandum we consider this case submitted. This suggestion
is to abbreviate the necessity of presenting witnesses here which may prolong
the resolution of this case.
ATTY. OLIVAS (Counsel for respondent municipality):
I object on the ground that there is no resolution by this Commission on the
action to reopen the case and second this case has been closed.
ATTY. LUQUE:
With regard to the testimony on the ground for opposition we respectfully
submit to this Commission our motion to submit a written reply together with a
memorandum. Also as stated to expedite the case and to avoid further hearing
we will just submit our written reply. According to our records we are furnished
with a copy of the report of July 17, 1961. We submit your honor.
xxx xxx xxx
COMMISSION:
To give applicant a chance to have a day in court the Commission grants the
request of applicant that it be given 10 days within which to submit a written
reply on the report of the engineer of the Commission who inspected the electric
service, in the municipality of Morong, Rizal, and after the submission of the said
written reply within 10 days from today this case will be considered submitted for
decision.
The above-quoted manifestation of counsel for the petitioner, specifically the
statement referring to the inspection report of Engineer Martinez as the "best
evidence to decide this matter," can serve as an argument against petitioner's
claim that the Commision should have taken into consideration the testimony of
Mr. Bernardino. But the primary reasons why the Commission could not have
taken judicial cognizance of said testimony are: first, it is not a proper subject of
judicial notice, as it is not a "known" fact — that is, well established and
authoritatively settled, without qualification and contention; 13 second, it was
given in a subsequent and distinct case after the petitioner's motion for
reconsideration was heard by the Commission en banc and submitted for
decision, 14 and third, it was not brought to the attention of the Commission in
this case through an appropriate pleading. 15
13
Regarding the contention of petitioner that the Commission had acted both as
prosecutor and judge, it should be considered that there are two matters that
had to be decided in this case, namely, the order to show cause dated December
19, 1956, and the petition or complaint by respondent municipality dated June 25,
1958. Both matters were heard jointly, and the record shows that respondent
municipality had been allowed to present its evidence to substantiate its
complaint. It can not be said, therefore, that in this case the Commission had
acted as prosecutor and judge. But even assuming, for the sake of argument,
that there was a commingling of the prosecuting and investigating functions, this
exercise of dual function is authorized by Section 17(a) of Commonwealth Act
No. 146, as amended, under which the Commission has power "to investigate,
upon its own initiative or upon complaint in writing, any matter concerning any
public service as regards matters under its jurisdiction; to, require any public
service to furnish safe, adequate, and proper service as the public interest may
require and warrant; to enforce compliance with any standard, rule, regulation,
order or other requirement of this Act or of the Commission ... ." Thus, in the
case of Collector of Internal Revenue vs. Estate of F. P. Buan, L-11438, July 31, 1958,
this Court held that the power of the Commission to cancel and revoke a
certificate of public convenience and necessity may be exercised by it even
without a formal charge filed by any interested party, with the only limitation
that the holder of the certificate should be given his day in court.
It may not be amiss to add that when prosecuting and investigating duties are
delegated by statute to an administrative body, as in the case of the Public
Service Commission, said body may take steps it believes appropriate for the
proper exercise of said duties, particularly in the manner of informing itself
whether there is probable violation of the law and/or its rules and regulations. It
may initiate an investigation, file a complaint, and then try the charge as
preferred. So long as the respondent is given a day in court, there can be no
denial of due process, and objections to said procedure cannot be sustained.
3. In its third assignment of error, petitioner invokes the "protection-of-
investment rule" enunciated by this Court in Batangas Transportation Co. vs.
Orlanes 16 in this wise:
The Government having taken over the control and supervision of all
public utilities, so long as an operator under a prior license complies with
the terms and conditions of his license and reasonable rules and
regulations for its operation and meets the reasonable demands of the
public, it is the duty of the Commission to protect rather than to destroy
his investment by the granting of the second license to another person
for the same thing over the same route of travel. The granting of such a
license does not serve its convenience or promote the interests of the
public.
The above-quoted rule, however, is not absolute, for nobody has exclusive right
to secure a franchise or a certificate of public convenience. 17 Where, as in the
present case, it has been shown by ample evidence that the petitioner, despite
ample time and opportunity given to it by the Commission, had failed to render
adequate, sufficient and satisfactory service and had violated the important
conditions of its certificate as well as the directives and the rules and regulations
of the Commission, the rule cannot apply. To apply that rule unqualifiedly is to
encourage violation or disregard of the terms and conditions of the certificate
and the Commission's directives and regulations, and would close the door to
other applicants who could establish, operate and provide adequate, efficient
and satisfactory service for the benefit and convenience of the inhabitants. It
should be emphasized that the paramount consideration should always be the
public interest and public convenience. The duty of the Commission to protect
investment of a public utility operator refers only to operators of good standing
— those who comply with the laws, rules and regulations — and not to
operators who are unconcerned with the public interest and whose investments
have failed or deteriorated because of their own fault. 18
4. The last assignment of error assails the propriety of the penalty imposed by
the Commission on the petitioner — that is, the revocation of the certificate and
the forfeiture of the franchise. Petitioner contends that the imposition of a fine
would have been sufficient, as had been done by the Commission in cases of a
similar nature.
It should be observed that Section 16(n) of Commonwealth Act No. 146, as
amended, confers upon the Commission ample power and discretion to order
the cancellation and revocation of any certificate of public convenience issued to
an operator who has violated, or has willfully and contumaciously refused to
comply with, any order, rule or regulation of the Commission or any provision of
law. What matters is that there is evidence to support the action of the
Commission. In the instant case, as shown by the evidence, the contumacious
refusal of the petitioner since 1954 to comply with the directives, rules and
regulations of the Commission, its violation of the conditions of its certificate and
its incapability to comply with its commitment as shown by its inadequate
service, were the circumstances that warranted the action of the Commission in
not merely imposing a fine but in revoking altogether petitioner's certificate. To
14
allow petitioner to continue its operation would be to sacrifice public interest
and convenience in favor of private interest.
A grant of a certificate of public convenience confers no property rights
but is a mere license or privilege, and such privilege is forfeited when the
grantee fails to comply with his commitments behind which lies the
paramount interest of the public, for public necessity cannot be made to
wait, nor sacrificed for private convenience. (Collector of Internal
Revenue v. Estate of F. P. Buan, et al., L-11438 and Santiago Sambrano,
et al. v. PSC, et al., L-11439 & L-11542-46, July 31, 1958)
(T)he Public Service Commission, ... has the power to specify and define
the terms and conditions upon which the public utility shall be operated,
and to make reasonable rules and regulations for its operation and the
compensation which the utility shall receive for its services to the public,
and for any failure to comply with such rules and regulations or the
violation of any of the terms and conditions for which the license was
granted, the Commission has ample power to enforce the provisions of
the license or even to revoke it, for any failure or neglect to comply with
any of its terms and provisions. (Batangas Trans. Co. v. Orlanes, 52 Phil.
455, 460; emphasis supplied)
Presumably, the petitioner has in mind Section 21 of Commonwealth Act No. 146,
as amended, which provides that a public utility operator violating or failing to
comply with the terms and conditions of any certificate, or any orders, decisions
or regulations of the Commission, shall be subject to a fine and that the
Commission is authorized and empowered to impose such fine, after due notice
and hearing. It should be noted, however, that the last sentence of said section
states that the remedy provided therein "shall not be a bar to, or affect any other
remedy provided in this Act but shall be cumulative and additional to such
remedy or remedies." In other words, the imposition of a fine may only be one of
the remedies which the Commission may resort to, in its discretion. But that
remedy is not exclusive of, or has preference over, the other remedies. And this
Court will not substitute its discretion for that of the Commission, as long as
there is evidence to support the exercise of that discretion by the Commission.
G. R. No. L-21221
Coming now to the other case, let it be stated at the outset that before any
certificate may be granted, authorizing the operation of a public service, three
requisites must be complied with, namely: (1) the applicant must be a citizen of
the Philippines or of the United States, or a corporation or co-partnership,
association or joint-stock company constituted and organized under the laws of
the Philippines, sixty per centum at least of the stock or paid-up capital of which
belongs entirely to citizens of the Philippines or of the United States; 19 (2) the
applicant must be financially capable of undertaking the proposed service and
meeting the responsibilities incident to its operation; 20 and (3) the applicant
must prove that the operation of the public service proposed and the
authorization to do business will promote the public interest in a proper and
suitable manner. 21
As stated earlier, in the decision appealed from, the Commission found that
Morong Electric is a corporation duly organized and existing under the laws of
the Philippines, the stockholders of which are Filipino citizens, that it is financially
capable of operating an electric light, heat and power service, and that at the
time the decision was rendered there was absence of electric service in Morong,
Rizal. While the petitioner does not dispute the need of an electric service in
Morong, Rizal, 22 it claims, in effect, that Morong Electric should not have been
granted the certificate of public convenience and necessity because (1) it did not
have a corporate personality at the time it was granted a franchise and when it
applied for said certificate; (2) it is not financially capable of undertaking an
electric service, and (3) petitioner was rendering efficient service before its
electric plant was burned, and therefore, being a prior operator its investment
should be protected and no new party should be granted a franchise and
certificate of public convenience and necessity to operate an electric service in
the same locality.
1. The bulk of petitioner's arguments assailing the personality of Morong Electric
dwells on the proposition that since a franchise is a contract, 23 at least two
competent parties are necessary to the execution thereof, and parties are not
competent except when they are in being. Hence, it is contended that until a
corporation has come into being, in this jurisdiction, by the issuance of a
certificate of incorporation by the Securities and Exchange Commission (SEC) it
cannot enter into any contract as a corporation. The certificate of incorporation
of the Morong Electric was issued by the SEC on October 17, 1962, so only from
that date, not before, did it acquire juridical personality and legal existence.
Petitioner concludes that the franchise granted to Morong Electric on May 6,
1962 when it was not yet in esse is null and void and cannot be the subject of the
Commission's consideration. On the other hand, Morong Electric argues, and to
which argument the Commission agrees, that it was a de facto corporation at the
time the franchise was granted and, as such, it was not incapacitated to enter
into any contract or to apply for and accept a franchise. Not having been
15
incapacitated, Morong Electric maintains that the franchise granted to it is valid
and the approval or disapproval thereof can be properly determined by the
Commission.
Petitioner's contention that Morong Electric did not yet have a legal personality
on May 6, 1962 when a municipal franchise was granted to it is correct. The
juridical personality and legal existence of Morong Electric began only on
October 17, 1962 when its certificate of incorporation was issued by the
SEC. 24 Before that date, or pending the issuance of said certificate of
incorporation, the incorporators cannot be considered as de
facto corporation. 25 But the fact that Morong Electric had no corporate
existence on the day the franchise was granted in its name does not render the
franchise invalid, because later Morong Electric obtained its certificate of
incorporation and then accepted the franchise in accordance with the terms and
conditions thereof. This view is sustained by eminent American authorities. Thus,
McQuiuin says:
The fact that a company is not completely incorporated at the time the
grant is made to it by a municipality to use the streets does not, in most
jurisdictions, affect the validity of the grant. But such grant cannot take
effect until the corporation is organized. And in Illinois it has been
decided that the ordinance granting the franchise may be presented
before the corporation grantee is fully organized, where the
organization is completed before the passage and acceptance.
(McQuillin, Municipal Corporations, 3rd Ed., Vol. 12, Chap. 34, Sec. 34.21)
Fletcher says:
While a franchise cannot take effect until the grantee corporation is
organized, the franchise may, nevertheless, be applied for before the
company is fully organized.
A grant of a street franchise is valid although the corporation is not
created until afterwards. (Fletcher, Cyclopedia Corp. Permanent Edition,
Rev. Vol. 6-A, Sec. 2881)
And Thompson gives the reason for the rule:
(I)n the matter of the secondary franchise the authorities are numerous
in support of the proposition that an ordinance granting a privilege to a
corporation is not void because the beneficiary of the ordinance is not
fully organized at the time of the introduction of the ordinance. It is
enough that organization is complete prior to the passage and
acceptance of the ordinance. The reason is that a privilege of this
character is a mere license to the corporation until it accepts the grant
and complies with its terms and conditions. (Thompson on
Corporations, Vol. 4, 3rd Ed., Sec. 2929) 26
The incorporation of Morong Electric on October 17, 1962 and its acceptance of
the franchise as shown by its action in prosecuting the application filed with the
Commission for the approval of said franchise, not only perfected a contract
between the respondent municipality and Morong Electric but also cured the
deficiency pointed out by the petitioner in the application of Morong EIectric.
Thus, the Commission did not err in denying petitioner's motion to dismiss said
application and in proceeding to hear the same. The efficacy of the franchise,
however, arose only upon its approval by the Commission on March 13, 1963. The
reason is that —
Under Act No. 667, as amended by Act No. 1022, a municipal council has
the power to grant electric franchises, subject to the approval of the
provincial board and the President. However, under Section 16(b) of
Commonwealth Act No. 146, as amended, the Public Service Commission
is empowered "to approve, subject to constitutional limitations any
franchise or privilege granted under the provisions of Act No. 667, as
amended by Act No. 1022, by any political subdivision of the Philippines
when, in the judgment of the Commission, such franchise or privilege
will properly conserve the public interests and the Commission shall in
so approving impose such conditions as to construction, equipment,
maintenance, service, or operation as the public interests and
convenience may reasonably require, and to issue certificates of public
convenience and necessity when such is required or provided by any law
or franchise." Thus, the efficacy of a municipal electric franchise arises,
therefore, only after the approval of the Public Service Commission.
(Almendras vs. Ramos, 90 Phil. 231) .
The conclusion herein reached regarding the validity of the franchise granted to
Morong Electric is not incompatible with the holding of this Court in Cagayan
Fishing Development Co., Inc. vs. Teodoro Sandiko 27upon which the petitioner
leans heavily in support of its position. In said case this Court held that a
corporation should have a full and complete organization and existence as an
entity before it can enter into any kind of a contract or transact any business. It
should be pointed out, however, that this Court did not say in that case that the
16
rule is absolute or that under no circumstances may the acts of promoters of a
corporation be ratified or accepted by the corporation if and when subsequently
organized. Of course, there are exceptions. It will be noted that American courts
generally hold that a contract made by the promoters of a corporation on its
behalf may be adopted, accepted or ratified by the corporation when
organized. 28
2. The validity of the franchise and the corporate personality of Morong Electric
to accept the same having been shown, the next question to be resolved is
whether said company has the financial qualification to operate an electric light,
heat and power service. Petitioner challenges the financial capability of Morong
Electric, by pointing out the inconsistencies in the testimony of Mr. Jose P. Ingal,
president of said company, regarding its assets and the amount of its initial
investment for the electric plant. In this connection it should be stated that on
the basis of the evidence presented on the matter, the Commission has found
the Morong Electric to be "financially qualified to install, maintain and operate
the proposed electric light, heat and power service." This is essentially a factual
determination which, in a number of cases, this Court has said it will not disturb
unless patently unsupported by evidence. An examination of the record of this
case readily shows that the testimony of Mr. Ingal and the documents he
presented to establish the financial capability of Morong Electric provide
reasonable grounds for the above finding of the Commission.
It is now a very well-settled rule in this jurisdiction that the findings and
conclusions of fact made by the Public Service Commission, after
weighing the evidence adduced by the parties in a public service case,
will not be disturbed by the Supreme Court unless those findings and
conclusions appear not to be reasonably supported by evidence. (La
Mallorca and Pampanga Bus Co. vs. Mercado, L-19120, November 29,
1965)
For purposes of appeal, what is decisive is that said testimonial evidence
provides reasonable support for the Public Service Commission's
findings of financial capacity on the part of applicants, rendering such
findings beyond our power to disturb. (Del Pilar Transit vs. Silva, L-21547,
July 15, 1966)
It may be worthwhile to mention in this connection that per inspection report
dated January 20, 1964 29 of Mr. Meliton Martinez of the Commission, who
inspected the electric service of Morong on January 15-16, 1964, Morong Electric
"is serving electric service to the entire area covered by its approved plan and
has constructed its line in accordance with the plans and specifications approved
by the Commission." By reason thereof, it was recommended that the requests
of Morong Electric (1) for the withdrawal of its deposit in the amount of
P1,000.00 with the Treasurer of the Philippines, and (2) for the approval of
Resolution No. 160 of the Municipal Council of Morong, Rizal, exempting the
operator from making the additional P9,000.00 deposit mentioned in its petition,
dated September 16, 1963, be granted. This report removes any doubt as to the
financial capability of Morong Electric to operate and maintain an electric light,
heat and power service.
3. With the financial qualification of Morong Electric beyond doubt, the
remaining question to be resolved is whether, or not, the findings of fact of the
Commission regarding petitioner's service are supported by evidence. It is the
contention of the petitioner that the Commission made some findings of fact
prejudicial to its position but which do not find support from the evidence
presented in this case. Specifically, petitioner refers to the statements or findings
that its service had "turned from bad to worse," that it miserably failed to
comply with the oft-repeated promises to bring about the needed improvement,
that its equipment is unserviceable, and that it has no longer any plant site and,
therefore, has discredited itself. Petitioner further states that such statements
are not only devoid of evidentiary support but contrary to the testimony of its
witness, Mr. Harry Bernardino, who testified that petitioner was rendering
efficient and satisfactory service before its electric plant was burned on July 29,
1962.
On the face of the decision appealed from, it is obvious that the Commission in
describing the kind of service petitioner was rendering before its certificate was
ordered revoked and cancelled, took judicial notice of the records of the
previous case (PSC Case No. 39715) where the quality of petitioner's service had
been squarely put in issue. It will be noted that the findings of the Commission
were made notwithstanding the fact that the aforementioned testimony of Mr.
Bernardino had been emphasized and pointed out in petitioner's Memorandum
to the Commission. 30 The implication is simple: that as between the testimony of
Mr. Bernardino and the inspection reports of the engineers of the Commission,
which served as the basis of the revocation order, the Commission gave
credence to the latter. Naturally, whatever conclusion or finding of fact that the
Commission arrived at regarding the quality of petitioner's service are not borne
out by the evidence presented in this case but by evidence in the previous
case. 31 In this connection, we repeat, the conclusion, arrived at by the
Commission after weighing the conflicting evidence in the two related cases, is a
conclusion of fact which this Court will not disturb.
17

And it has been held time and again that where the Commission has
reached a conclusion of fact after weighing the conflicting evidence,
that conclusion must be respected, and the Supreme Court will not
interfere unless it clearly appears that there is no evidence to support
the decision of the Commission. (La Mallorca and Pampanga Bus Co.,
Inc. vs. Mercado, L-19120, November 29, 1965 citing Pangasinan Trans.
Co., Inc. vs. Dela Cruz, 96 Phil. 278)
For that matter, petitioner's pretension that it has a prior right to the operation
of an electric service in Morong, Rizal, is not tenable; and its plea for protection
of its investment, as in the previous case, cannot be entertained.
WHEREFORE, the two decisions of the Public Service Commission, appealed
from, should be, as they are hereby affirmed, with costs in the two cases against
petitioner Rizal Light & Ice Co., Inc. It is so ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Sanchez, Castro, Angeles and
Fernando, JJ., concur.
Footnotes
1
Hereinafter referred to as "Commission".
2
Hereinafter referred to as "Morong Electric".
3
Order dated December 19, 1956.
4 Taxicab Co., Inc. vs. B. Stables Co., 60 Phil. 851.)
Not "Pedro G. Talavera" as appearing in petitioner's Brief. Mr. Pedro S.
Talavera also conducted the hearings in the main case.
5 records." (Dagupan Ice Plant Co., Inc. vs. Lucero, et al., 66 Phil. 120, 123.)
Law List 1961, First Edition, does not contain the name "Pedro S.
Talavera."
6 fixed, and do not depend upon uncertain testimony, for as soon as a
As amended by R.A. No. 723 which took effect on June 6, 1962, it reads:
"The Commission may also, by proper order, authorize any of the
attorneys of the legal division or division chiefs of the Commission, if
they be lawyers, to hear and investigate any case filed with the
Commission and in connection therewith to receive such evidence as
may be material thereto." (Emphasis supplied.)
7
Sessions of September 23, 1960, December 15, 1960, February 24, 1961
and August 25, 1961.
8
Everett Steamship Corp. vs. Chuahiong, L-2933, September 26, 1951;
Raymundo Trans. vs. Cervo, L-3899, May 21, 1952; Enriquez & Co. vs.
Ortega, L-4865, December 22, 1952; and Luzon Stevedoring Co. vs. PSC,
L-5458, September 16, 1953.
9
In Raymundo Trans. vs. Cervo, supra, it was held: "As provided for in
Rule 43, section 2 of the Rules of Court an appellant can only raise in a
petition for review questions that had been raised before the Public
Service Commission."
10
A. L. Ammen Transportation Co. vs. Froilan Japa, L-19643, July 26, 1966;
Del Pilar Transit, Inc. vs. Jose M. Silva, L-21547, July 15, 1966; Pineda vs.
Carandang, L-13270-71, March 24, 1960; and Ramos vs. Lat, et al., L-14476
& L-15773, May 23, 1960.
11
Admitted by the petitioner in its Brief, pp. 3 & 11.
12
"The Public Service Commission in the exercise of its quasi-judicial and
administrative functions has the power to take into consideration the
result of its own observation and investigation of the matter submitted
to it for consideration and decision, in connection with other evidence
presented at the hearing of a case." (Cebu Transit Co. vs. PSC, 79 Phil.
386; Sambrano vs. Northern Luzon Trans. Co., 63 Phil. 554; Manila
Yellow Taxicab Co., Inc. vs. Araullo, et al., 60 Phil. 833; and Manila Yellow
"The Commission can take cognizance of the facts disclosed by its own
13
"Matters of which the Court will take notice are necessarily uniform or
matter becomes disputable, it ceases to fall under the head of common
knowledge and will not be judicially recognized." (29 Am Jur 2d 61-62)
14
Petitioner's motion for reconsideration was heard on Jan. 11, 1963 and
on that date said motion was considered submitted for decision, while
the testimony of Bernardino was given on January 24, 1963.
18
15 28
"Judicial nonce is not judicial knowledge; and one having the burden of Fletcher, Cyclopedia Corporation, Permanent Ed., Vol. I, Chap. 9, Sec.
establishing a fact of which a court may take judicial notice is not in 207, p. 681.
consequence relieved of the necessity of bringing the fact to the
knowledge of the Court." (Francisco, Evidence, pp. 51- 52 citing 29
Marked Annex "A" of the memorandum of Morong Electric in lieu of
Shapleigh, et al. v. Mier, No. 125 [U.S.] Jan. 1937.) oral arguments.

16
52 Phil. 455, 472; see also Javier v. Orlanes, 53 Phil. 468 and Bohol 30
P. 16, Memorandum of Oppositor (herein petitioner).
Trans. Co. vs. Jureidini, 53 Phil. 560.
31
The close connection of the matter in controversy in the two cases
17
See Teresa Electric & Power Co., Inc. vs. PSC, L-21804, Sept. 25, 1967; warranted the Commission to take judicial notice of the records of the
Manila Taxicab, et al. vs. PSC, et al., 90 Phil. 301. previous case, the findings of fact therein and the ruling of the
Commission. (See also 5 Moran, 1963 Ed., p. 42.)
18
Paredes vs. PSC, et al., L-7111, May 30, 1955.

19
Ishi v. PSC, 63 Phil. 428.

20
Manila Yellow Taxicab v. Austin Taxicab Co., 59 Phil. 771.

21
Sec. 15, Com. Act No. 146; Batangas Trans. Co. v. Orlanes, 52 Phil. 455.
See also Martin, Phil. Commercial Laws, Vol. 3, pp. 1195-1196; Almario,
Transportation and Public Service Law, pp. 300-301; Agbayani,
Commercial Laws of the Phil., Vol. 4 (1964 Ed.), pp. 2363-2364.

22
T.s.n., p. 89 (Session on January 11, 1963).

23
City of Manila vs. PSC, 52 Phil. 515.

24
Hall vs. Judge Piccio, 86 Phil. 603, 605; See also Fisher, The Phil. Law of
Stock Corp., p. 36.

25
Tolentino, Commercial Laws of the Philippines, Vol. II, 8th Ed., p. 723;
See also Guevara, The Phil. Corp. Law, New Ed., p. 18.

26
McQuillin, Fletcher and Thompson cite as authorities the cases of
Clarksburg Electric Light Co. vs. Clarksburg, 47 W. Va. 739, 35 S. E. 994,
50 L.R.A. 142 and Chicago Telephone Co. vs. Northwestern Tel. Co, 199
Ill. 324, 65 N. E. 329.

27
65 Phil. 223.

19

Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-48627
FERMIN Z. CARAM, JR. and ROSA O. DE CARAM, petitioners
vs.
THE HONORABLE COURT OF APPEALS and ALBERTO V.
ARELLANO, respondents.
Corporation Law; A bona fide corporation should alone be liable for its
corporate acts duly authorized by its officers and directors.—Significantly, there
was no showing that the Filipinas Orient Airways was a fictitious corporation and
did not have a separate juridical personality, to justify making the petitioners, as
principal stockholders thereof, responsible for its obligations. As a bona fide
corporation, the Filipinas Orient Airways should alone be liable for its corporate
acts as duly authorized by its officers and directors.
Same; Contracts; Liability of stockholders; Petitioners cannot be held
personally liable for the compensation claimed by private respondent for services
performed by him in the organization of the corporation since petitioners did not
contract such services.—In the light of these circumstances, we hold that the
petitioners cannot be held personally liable for the compensation claimed by the
private respondent for the services performed by him in the organization of the
corporation. To repeat, the petitioners did not contract such services, It was only
the results of such services that Barretto and Garcia presented to them and
which persuaded them to invest in the proposed airline. The most that can be
said is that they benefited from such services, but that surely is no justification to
hold them personally liable therefor. Otherwise, all the other stockholders of the
corporation, including those who came in later, and regardless of the amount of
their shareholdings, would be equally and personally liable also with the
petitioners for the claims of the private respondent.
PETITION to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court. Caram, Jr. vs. Court of Appeals,
151 SCRA 372, No. L-48627 June 30, 1987
CRUZ, J.:
We gave limited due course to this petition on the question of the solidary
liability of the petitioners with their co-defendants in the lower court 1 because of
the challenge to the following paragraph in the dispositive portion of the
decision of the respondent court: *
1. Defendants are hereby ordered to jointly and severally pay the plaintiff
the amount of P50,000.00 for the preparation of the project study and
his technical services that led to the organization of the defendant
corporation, plus P10,000.00 attorney's fees; 2
The petitioners claim that this order has no support in fact and law because they
had no contract whatsoever with the private respondent regarding the above-
mentioned services. Their position is that as mere subsequent investors in the
corporation that was later created, they should not be held solidarily liable with
the Filipinas Orient Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court, ** who were the ones who
requested the said services from the private respondent. 3
We are not concerned here with the petitioners' co-defendants, who have not
appealed the decision of the respondent court and may, for this reason, be
presumed to have accepted the same. For purposes of resolving this case before
us, it is not necessary to determine whether it is the promoters of the proposed
corporation, or the corporation itself after its organization, that shall be
responsible for the expenses incurred in connection with such organization.
The only question we have to decide now is whether or not the petitioners
themselves are also and personally liable for such expenses and, if so, to what
extent.
20
The reasons for the said order are given by the respondent court in its decision in
this wise:
As to the 4th assigned error we hold that as to the remuneration due
the plaintiff for the preparation of the project study and the pre-
organizational services in the amount of P50,000.00, not only the
defendant corporation but the other defendants including defendants
Caram should be jointly and severally liable for this amount. As we above
related it was upon the request of defendants Barretto and Garcia that
plaintiff handled the preparation of the project study which project
study was presented to defendant Caram so the latter was convinced to
invest in the proposed airlines. The project study was revised for
purposes of presentation to financiers and the banks. It was on the basis
of this study that defendant corporation was actually organized and
rendered operational. Defendants Garcia and Caram, and Barretto
became members of the Board and/or officers of defendant
corporation. Thus, not only the defendant corporation but all the other
defendants who were involved in the preparatory stages of the
incorporation, who caused the preparation and/or benefited from the
project study and the technical services of plaintiff must be liable. 4
It would appear from the above justification that the petitioners were not really
involved in the initial steps that finally led to the incorporation of the Filipinas
Orient Airways. Elsewhere in the decision, Barretto was described as "the
moving spirit." The finding of the respondent court is that the project study was
undertaken by the private respondent at the request of Barretto and Garcia who,
upon its completion, presented it to the petitioners to induce them to invest in
the proposed airline. The study could have been presented to other prospective
investors. At any rate, the airline was eventually organized on the basis of the
project study with the petitioners as major stockholders and, together with
Barretto and Garcia, as principal officers.
The following portion of the decision in question is also worth considering:
... Since defendant Barretto was the moving spirit in the pre-
organization work of defendant corporation based on his experience
and expertise, hence he was logically compensated in the amount of
P200,000.00 shares of stock not as industrial partner but more for his
technical services that brought to fruition the defendant corporation. By
the same token, We find no reason why the plaintiff should not be
similarly compensated not only for having actively participated in the
preparation of the project study for several months and its subsequent
revision but also in his having been involved in the pre-organization of
the defendant corporation, in the preparation of the franchise, in
inviting the interest of the financiers and in the training and screening of
personnel. We agree that for these special services of the plaintiff the
amount of P50,000.00 as compensation is reasonable. 5
The above finding bolsters the conclusion that the petitioners were not involved
in the initial stages of the organization of the airline, which were being directed
by Barretto as the main promoter. It was he who was putting all the pieces
together, so to speak. The petitioners were merely among the financiers whose
interest was to be invited and who were in fact persuaded, on the strength of
the project study, to invest in the proposed airline.
Significantly, there was no showing that the Filipinas Orient Airways was a
fictitious corporation and did not have a separate juridical personality, to justify
making the petitioners, as principal stockholders thereof, responsible for its
obligations. As a bona fide corporation, the Filipinas Orient Airways should alone
be liable for its corporate acts as duly authorized by its officers and directors.
In the light of these circumstances, we hold that the petitioners cannot be held
personally liable for the compensation claimed by the private respondent for the
services performed by him in the organization of the corporation. To repeat, the
petitioners did not contract such services. It was only the results of such services
that Barretto and Garcia presented to them and which persuaded them to invest
in the proposed airline. The most that can be said is that they benefited from
such services, but that surely is no justification to hold them personally liable
therefor. Otherwise, all the other stockholders of the corporation, including
those who came in later, and regardless of the amount of their share holdings,
would be equally and personally liable also with the petitioners for the claims of
the private respondent.
The petition is rather hazy and seems to be flawed by an ambiguous
ambivalence. Our impression is that it is opposed to the imposition of solidary
responsibility upon the Carams but seems to be willing, in a vague, unexpressed
offer of compromise, to accept joint liability. While it is true that it does here and
there disclaim total liability, the thrust of the petition seems to be against the
imposition of solidary liability only rather than against any liability at all, which is
what it should have categorically argued.
21
Categorically, the Court holds that the petitioners are not liable at all, jointly or
jointly and severally, under the first paragraph of the dispositive portion of the
challenged decision. So holding, we find it unnecessary to examine at this time
the rules on solidary obligations, which the parties-needlessly, as it turns out
have belabored unto death.

WHEREFORE, the petition is granted. The petitioners are declared not liable
under the challenged decision, which is hereby modified accordingly. It is so
ordered.

Yap (Chairman), Narvasa, Melencio-Herrera, Feliciano and Sarmiento, JJ., concur.

Gancayco, J., took no part.

22
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-2598 June 29, 1950
C. ARNOLD HALL and BRADLEY P. HALL, petitioners,
vs.
EDMUNDO S. PICCIO, Judge of the Court of First Instance of Leyte, FRED
BROWN, EMMA BROWN, HIPOLITA CAPUCIONG, in his capacity as receiver of
the Far Eastern Lumber and Commercial Co., Inc., respondents.
1.CORPORATION "DE FACTO"; DISSOLUTION BY SUIT OF STOCKHOLDERS;
JURISDICTION OF COURT.—An entity whose certificate of incorporation had not
been obtained may be terminated in a private suit for its dissolution between
stockholders, without 'the intervention of the state. The question as to the right
of minority stockholders to sue for dissolution does not affect the court's
jurisdiction, and is a matter for decision by the judge, subject to review on appeal
by the aggrieved party at the proper time.
2.ID.; RIGHTS OF.—Persons acting as corporation may not claim rights of
"de facto" corporation if they have not obtained certificate of incorporation.
ORIGINAL ACTION in the Supreme Court. Certiorari with preliminary injunction.
The facts are stated in the opinion of the Court.
Claro M. Recto for petitioners.
Ramon Diokno and Jose W. Diokno for respondents.
BENGZON, J.:
This is petition to set aside all the proceedings had in civil case No. 381 of the
Court of First Instance of Leyte and to enjoin the respondent judge from further
acting upon the same.
Facts: (1) on May 28, 1947, the petitioners C. Arnold Hall and Bradley P. Hall, and
the respondents Fred Brown, Emma Brown, Hipolita D. Chapman and Ceferino S.
Abella, signed and acknowledged in Leyte, the article of incorporation of the Far
Eastern Lumber and Commercial Co., Inc., organized to engage in a general
lumber business to carry on as general contractors, operators and managers, etc.
Attached to the article was an affidavit of the treasurer stating that 23,428
shares of stock had been subscribed and fully paid with certain properties
transferred to the corporation described in a list appended thereto.
(2) Immediately after the execution of said articles of incorporation, the
corporation proceeded to do business with the adoption of by-laws and the
election of its officers.
(3) On December 2, 1947, the said articles of incorporation were filed in the office
of the Securities and Exchange Commissioner, for the issuance of the
corresponding certificate of incorporation.
(4) On March 22, 1948, pending action on the articles of incorporation by the
aforesaid governmental office, the respondents Fred Brown, Emma Brown,
Hipolita D. Chapman and Ceferino S. Abella filed before the Court of First
Instance of Leyte the civil case numbered 381, entitled "Fred Brown et al. vs.
Arnold C. Hall et al.", alleging among other things that the Far Eastern Lumber
and Commercial Co. was an unregistered partnership; that they wished to have it
dissolved because of bitter dissension among the members, mismanagement
and fraud by the managers and heavy financial losses.
(5) The defendants in the suit, namely, C. Arnold Hall and Bradley P. Hall, filed a
motion to dismiss, contesting the court's jurisdiction and the sufficiently of the
cause of action.
(6) After hearing the parties, the Hon. Edmund S. Piccio ordered the dissolution
of the company; and at the request of plaintiffs, appointed of the properties
thereof, upon the filing of a P20,000 bond.
(7) The defendants therein (petitioners herein) offered to file a counter-bond for
the discharge of the receiver, but the respondent judge refused to accept the
offer and to discharge the receiver. Whereupon, the present special civil action
was instituted in this court. It is based upon two main propositions, to wit:
(a) The court had no jurisdiction in civil case No. 381 to decree the dissolution of
the company, because it being a de facto corporation, dissolution thereof may
23
only be ordered in a quo warranto proceeding instituted in accordance with
section 19 of the Corporation Law.
(b) Inasmuch as respondents Fred Brown and Emma Brown had signed the
article of incorporation but only a partnership.
Discussion: The second proposition may at once be dismissed. All the parties are
informed that the Securities and Exchange Commission has not, so far, issued the
corresponding certificate of incorporation. All of them know, or sought to know,
that the personality of a corporation begins to exist only from the moment such
certificate is issued — not before (sec. 11, Corporation Law). The complaining
associates have not represented to the others that they were incorporated any
more than the latter had made similar representations to them. And as nobody
was led to believe anything to his prejudice and damage, the principle of
estoppel does not apply. Obviously this is not an instance requiring the
enforcement of contracts with the corporation through the rule of estoppel.
The first proposition above stated is premised on the theory that, inasmuch as
the Far Eastern Lumber and Commercial Co., is a de facto corporation, section 19
of the Corporation Law applies, and therefore the court had not jurisdiction to
take cognizance of said civil case number 381. Section 19 reads as follows:
. . . The due incorporation of any corporations claiming in good faith to
be a corporation under this Act and its right to exercise corporate
powers shall not be inquired into collaterally in any private suit to which
the corporation may be a party, but such inquiry may be had at the suit
of the Insular Government on information of the Attorney-General.
this act" could not be made "in good faith." (Fisher on the Philippine
Law of Stock Corporations, p. 75. See also Humphreys vs. Drew, 59 Fla.,
295; 52 So., 362.)
Second, this is not a suit in which the corporation is a party. This is a litigation
between stockholders of the alleged corporation, for the purpose of obtaining
its dissolution. Even the existence of a de jure corporation may be terminated in a
private suit for its dissolution between stockholders, without the intervention of
the state.
There might be room for argument on the right of minority stockholders to sue
for dissolution;1 but that question does not affect the court's jurisdiction, and is a
matter for decision by the judge, subject to review on appeal. Whkch brings us to
one principal reason why this petition may not prosper, namely: the petitioners
have their remedy by appealing the order of dissolution at the proper time.
There is a secondary issue in connection with the appointment of a receiver. But
it must be admitted that receivership is proper in proceedings for dissolution of a
company or corporation, and it was no error to reject the counter-bond, the
court having declared the dissolution. As to the amount of the bond to be
demanded of the receiver, much depends upon the discretion of the trial court,
which in this instance we do not believe has been clearly abused.
Judgment: The petition will, therefore, be dismissed, with costs. The preliminary
injunction heretofore issued will be dissolved.
Ozaeta, Pablo, Tuason, Montemayor, and Reyes, JJ., concur.

There are least two reasons why this section does not govern the situation. Not
having obtained the certificate of incorporation, the Far Eastern Lumber and
Commercial Co. — even its stockholders — may not probably claim "in good
faith" to be a corporation.

Under our statue it is to be noted (Corporation Law, sec. 11) that it is the
issuance of a certificate of incorporation by the Director of the Bureau
of Commerce and Industry which calls a corporation into being. The
immunity if collateral attack is granted to corporations "claiming in good
faith to be a corporation under this act." Such a claim is compatible with
the existence of errors and irregularities; but not with a total or
substantial disregard of the law. Unless there has been an evident
attempt to comply with the law the claim to be a corporation "under
24
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-11442 May 23, 1958
MANUELA T. VDA. DE SALVATIERRA, petitioner,
vs.
HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First
Instance of Leyte, Branch II, and SEGUNDINO REFUERZO, respondents.
1.PLEADING AND PRACTICE; PETITION FOR RELIEF; WHEN TO FILE
PETITION.—Rule 38, Section 3, of the Rules of Court treats of 2 periods within
which a petition for relief may be filed. The petition must be filed within 60 days
after the petitioner learns of the judgment and not more than 6 months after the
judgment or order was rendered, both of which must be satisfied.
2.CORPORATION LAW; LlABILITY OF PERSON DEALING WITH
ASSOCIATION AS A CORPORATE BODY; WHEN ESTOPPEL MAY NOT BE INVOKED.—
While as a general rule, a person who deals with an association in such a way to
recognize its existence as a corporate body is estopped from denying the same
in an action arising out of such transaction, yet this doctrine may not be held to
be applicable where fraud takes a part in the said transaction. In the instant case,
on plaintiff's charge that she was unaware of the fact that the defendant
corporation had no juridical personality, its president gave no confirmation or
denial of the same and the circumstance surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff was really made to
believe that such corporation was duly organized in accordance with law.
3.ID.; LIABILITY OF MEMBERS WHO ACT AS AGENTS OF AN
UNINCORPORATED ASSOCIATION.—A corporation when registered has a juridical
personality separate and distinct from its component members or stockholders
and officers, such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president (Walter A. Smith
Co. vs. Ford, SC-G. R. No. 42420) and conversely, a stockholder cannot be held
personally liable for any financial obligation by the corporation in excess of his
unpaid subscription. But this rule is understood to refer merely to registered
corporations and cannot be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is obvious—an
unincorporated association has no personality and would be incompetent to act
and appropriate for itself the power and attributes of a corporation as provided
by law, it cannot create agents or confer authority on another to act in its behalf;
thus, those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the right and subject to all the
liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and obligations
and becomes personally liable for contracts entered into or for other acts
performed as such agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II
Tolentino's Commercial Laws of the Philippines, Fifth Ed., p. 689-690).
ORIGINAL ACTION in the Supreme Court. Certiorari.
The facts are stated in the opinion of the Court. Vda. de Salvatierra vs. Hon.
Garlitos etc, and Refuerzo, 103 Phil. 757, No. L-11442 May 23, 1958
Jimenez, Tantuico, Jr. and Tolete for petitioner.
Francisco Astilla for respondent Segundino Refuerzo.
FELIX, J.:
This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to
nullify the order of the Court of First Instance of Leyte in Civil Case No. 1912,
dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract
entered into between the former and the Philippine Fibers Producers Co., Inc., of
which Refuerzo is the president. The facts of the case are as follows:
Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land
located at Maghobas, Poblacion, Burauen, Teyte. On March 7, 1954, said
landholder entered into a contract of lease with the Philippine Fibers Producers
Co., Inc., allegedly a corporation "duly organized and existing under the laws of
the Philippines, domiciled at Burauen, Leyte, Philippines, and with business
address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the
President". It was provided in said contract, among other things, that the lifetime
of the lease would be for a period of 10 years; that the land would be planted to
kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled
to 30 per cent of the net income accruing from the harvest of any, crop without
25
being responsible for the cost of production thereof; and that after every
harvest, the lessee was bound to declare at the earliest possible time the income
derived therefrom and to deliver the corresponding share due the lessor.
Apparently, the aforementioned obligations imposed on the alleged corporation
were not complied with because on April 5, 1955, Alanuela T. Vda, de Salvatierra
filed with the Court of First Instance of Leyte a complaint against the Philippine
Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission
and damages (Civil Case No. 1912). She averred that sometime in April, 1954,
defendants planted kenaf on 3 hectares of the leased property which crop was,
at the time of the commencement of the action, already harvested, processed
and sold by defendants; that notwithstanding that fact, defendants refused to
render an accounting of the income derived therefrom and to deliver the lessor's
share; that the estimated gross income was P4,500, and the deductible expenses
amounted to P1,000; that as defendants' refusal to undertake such task was in
violation of the terms of the covenant entered into between the plaintiff and
defendant corporation, a rescission was but proper.
As defendants apparently failed to file their answer to the complaint, of which
they were allegedly notified, the Court declared them in default and proceeded
to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered
judgment granting plaintiff's prayer, and required defendants to render a
complete accounting of the harvest of the land subject of the proceeding within
15 days from receipt of the decision and to deliver 30 per cent of the net income
realized from the last harvest to plaintiff, with legal interest from the date
defendants received payment for said crop. It was further provide that upon
defendants' failure to abide by the said requirement, the gross income would be
fixed at P4,200 or a net income of P3,200 after deducting the expenses for
production, 30 per cent of which or P960 was held to be due the plaintiff
pursuant to the aforementioned contract of lease, which was declared
rescinded.
No appeal therefrom having been perfected within the reglementary period, the
Court, upon motion of plaintiff, issued a writ of execution, in virtue of which the
Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered
in the name of Segundino Refuerzo. No property of the Philippine Fibers
Producers Co., Inc., was found available for attachment. On January 31, 1956,
defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him, there
being no allegation in the complaint pointing to his personal liability and thus
prayed that an order be issued limiting such liability to defendant corporation.
Over plaintiff's opposition, the Court a quo granted the same and ordered the
Provincial Sheriff of Leyte to release all properties belonging to the movant that
might have already been attached, after finding that the evidence on record
made no mention or referred to any fact which might hold movant personally
liable therein. As plaintiff's petition for relief from said order was denied,
Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial
Judge in issuing the order complained of, acted with grave abuse of discretion
and prayed that same be declared a nullity.
From the foregoing narration of facts, it is clear that the order sought to be
nullified was issued by tile respondent Judge upon motion of defendant
Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said
Rule, however, in providing for the period within which such a motion may be
filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A
petition provided for in either of the preceding sections of this rule must
be verified, filed within sixty days after the petitioner learns of the
judgment, order, or other proceeding to be set aside, and not more than
six months after such judgment or order was entered, or such proceeding
was taken; and must be must be accompanied with affidavit showing
the fraud, accident, mistake, or excusable negligence relied upon, and
the facts constituting the petitioner is good and substantial cause of
action or defense, as the case may be, which he may prove if his petition
be granted". (Rule 38)
The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns
of the judgment, and not more than 6 months after the judgment or order was
rendered, both of which must be satisfied. As the decision in the case at bar was
under date of June 8, 1955, whereas the motion filed by respondent Refuerzo
was dated January 31, 1956, or after the lapse of 7 months and 23 days, the filing
of the aforementioned motion was clearly made beyond the prescriptive period
provided for by the rules. The remedy allowed by Rule 38 to a party adversely
affected by a decision or order is certainly an alert of grace or benevolence
intended to afford said litigant a penultimate opportunity to protect his interest.
Considering the nature of such relief and the purpose behind it, the periods fixed
by said rule are non-extendible and never interrupted; nor could it be subjected
to any condition or contingency because it is of itself devised to meet a condition
or contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On
this score alone, therefore, the petition for a writ of certiorari filed herein may be
granted. However, taking note of the question presented by the motion for relief
26
involved herein, We deem it wise to delve in and pass upon the merit of the
same.
Refuerzo, in praying for his exoneration from any liability resulting from the non-
fulfillment of the obligation imposed on defendant Philippine Fibers Producers
Co., Inc., interposed the defense that the complaint filed with the lower court
contained no allegation which would hold him liable personally, for while it was
stated therein that he was a signatory to the lease contract, he did so in his
capacity as president of the corporation. And this allegation was found by the
Court a quo to be supported by the records. Plaintiff on the other hand tried to
refute this averment by contending that her failure to specify defendant's
personal liability was due to the fact that all the time she was under the
impression that the Philippine Fibers Producers Co., Inc., represented by
Refuerzo was a duly registered corporation as appearing in the contract, but a
subsequent inquiry from the Securities and Exchange Commission yielded
otherwise. While as a general rule a person who has contracted or dealt with an
association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction or
dealing, (Asia Banking Corporation vs. Standard Products Co., 46 Phil., 114;
Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs.
Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be
applicable where fraud takes a part in the said transaction. In the instant case, on
plaintiff's charge that she was unaware of the fact that the Philippine Fibers
Producers Co., Inc., had no juridical personality, defendant Refuerzo gave no
confirmation or denial and the circumstances surrounding the execution of the
contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de
Salvatierra was really made to believe that such corporation was duly organized
in accordance with law.
agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at
their own risk. And as it is an elementary principle of law that a person who acts
as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the rights and subject to all the liabilities of a principal,
a person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and comes personally liable
for contracts entered into or for other acts performed as such, agent (Fay vs.
Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the
Philippines, Fifth Ed., P. 689-690). Considering that defendant Refuerzo, as
president of the unregistered corporation Philippine Fibers Producers Co., Inc.,
was the moving spirit behind the consummation of the lease agreement by
acting as its representative, his liability cannot be limited or restricted that
imposed upon corporate shareholders. In acting on behalf of a corporation
which he knew to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of such transaction.
Wherefore, the order of the lower Court of March 21, 1956, amending its previous
decision on this matter and ordering the Provincial Sheriff of Leyte to release any
and all properties of movant therein which might have been attached in the
execution of such judgment, is hereby set aside and nullified as if it had never
been issued. With costs against respondent Segundino Refuerzo. It is so ordered.
Paras, C.J., Bengzon, Montemayor, Reyes, A., Bautista Angelo, Labrador,
Concepcion, Reyes, J.B.L., and Endencia, JJ., concur.

There can be no question that a corporation with registered has a juridical

personality separate and distinct from its component members or stockholders
and officers such that a corporation cannot be held liable for the personal
indebtedness of a stockholder even if he should be its president (Walter A. Smith
Co. vs. Ford, SC-G.R. No. 42420) and conversely, a stockholder or member cannot
be held personally liable for any financial obligation be, the corporation in excess
of his unpaid subscription. But this rule is understood to refer merely to
registered corporations and cannot be made applicable to the liability of
members of an unincorporated association. The reason behind this doctrine is
obvious-since an organization which before the law is non-existent has no
personality and would be incompetent to act and appropriate for itself the
powers and attribute of a corporation as provided by law; it cannot create

27
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19118 January 30, 1965
MARIANO A. ALBERT, plaintiff-appellant,
vs.
UNIVERSITY PUBLISHING CO., INC., defendant-appellee.
Corporations; Principle of corporation by estoppel; Not invokable by one
who misrepresented corporation as duly organized against his victim.—One who
has induced another to act upon his wilful misrepresentation that a corporation
was duly organized and existing under the law, cannot thereafter set up against
his victim the principle of corporation by estoppel.
Same; Person acting for corporation with no valid existence is personally
liable for contracts entered into as such agent.—A person acting or purporting to
act on behalf of a corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts entered
into or for other acts performed as such agent.
Parties to Action; Suit against corporation with no valid existence; Real
defendant is person who has control of its proceedings.—In a suit against a
corporation with no valid existence the person who had and exercised the rights
to control the proceedings, to make defense, to adduce and cross-examine
witnesses, and to appeal from a decision, is the real defendant, and .the
enforcement of a judgment against the corporation upon him is substantial
observance of due process of law.
Same; Real party in interest; Person who acted as representative of non-
existent principal and who reaped benefits from its contracts.—A person who
acted as representative of a non-existent principal, who reaped the benefits
resulting from a contract entered into by him as such, and who violated its terms,
thereby precipitating a suit, is the real party to the contract sued upon.
Due Process of Law; Purpose is to secure justice and not to sacrifice it by
technicalities.—The “due process” clause of the Constitution is designed to
secure justice as a living reality, not to sacrifice it by paying undue homage to
formality. For substance must prevail over form. Albert vs. University Publishing
Co., Inc., 13 SCRA 84, No. L-19118 January 30, 1965
Uy & Artiaga and Antonio M. Molina for plaintiff-appellant.
Aruego, Mamaril & Associates for defendant-appellees.
BENGZON, J.P., J.:
No less than three times have the parties here appealed to this Court.
In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we found
plaintiff entitled to damages (for breach of contract) but reduced the amount
from P23,000.00 to P15,000.00.
Then in Albert vs. University Publishing Co., Inc., L-15275, October 24, 1960, we
held that the judgment for P15,000.00 which had become final and executory,
should be executed to its full amount, since in fixing it, payment already made
had been considered.
Now we are asked whether the judgment may be executed against Jose M.
Aruego, supposed President of University Publishing Co., Inc., as the real
defendant.
Fifteen years ago, on September 24, 1949, Mariano A. Albert sued University
Publishing Co., Inc. Plaintiff alleged inter alia that defendant was a corporation
duly organized and existing under the laws of the Philippines; that on July 19,
1948, defendant, through Jose M. Aruego, its President, entered into a contract
with plaintifif; that defendant had thereby agreed to pay plaintiff P30,000.00 for
the exclusive right to publish his revised Commentaries on the Revised Penal
Code and for his share in previous sales of the book's first edition; that defendant
had undertaken to pay in eight quarterly installments of P3,750.00 starting July
15, 1948; that per contract failure to pay one installment would render the rest
due; and that defendant had failed to pay the second installment.
Defendant admitted plaintiff's allegation of defendant's corporate existence;
admitted the execution and terms of the contract dated July 19, 1948; but
alleged that it was plaintiff who breached their contract by failing to deliver his
manuscript. Furthermore, defendant counterclaimed for damages.1äwphï1.ñët
28
Plaintiff died before trial and Justo R. Albert, his estate's administrator, was
substituted for him.
The Court of First Instance of Manila, after trial, rendered decision on April 26,
1954, stating in the dispositive portion —
IN VIEW OF ALL THE FOREGOING, the Court renders judgment in favor
of the plaintiff and against the defendant the University Publishing Co.,
Inc., ordering the defendant to pay the administrator Justo R. Albert,
the sum of P23,000.00 with legal [rate] of interest from the date of the
filing of this complaint until the whole amount shall have been fully paid.
The defendant shall also pay the costs. The counterclaim of the
defendant is hereby dismissed for lack of evidence.
As aforesaid, we reduced the amount of damages to P15,000.00, to be executed
in full. Thereafter, on July 22, 1961, the court a quo ordered issuance of an
execution writ against University Publishing Co., Inc. Plaintiff, however, on
August 10, 1961, petitioned for a writ of execution against Jose M. Aruego, as the
real defendant, stating, "plaintiff's counsel and the Sheriff of Manila discovered
that there is no such entity as University Publishing Co., Inc." Plaintiff annexed to
his petition a certification from the securities and Exchange Commission dated
July 31, 1961, attesting: "The records of this Commission do not show the
registration of UNIVERSITY PUBLISHING CO., INC., either as a corporation or
partnership." "University Publishing Co., Inc." countered by filing, through
counsel (Jose M. Aruego's own law firm), a "manifestation" stating that "Jose M.
Aruego is not a party to this case," and that, therefore, plaintiff's petition should
be denied.
Parenthetically, it is not hard to decipher why "University Publishing Co., Inc.,"
through counsel, would not want Jose M. Aruego to be considered a party to the
present case: should a separate action be now instituted against Jose M. Aruego,
the plaintiff will have to reckon with the statute of limitations.
The court a quo denied the petition by order of September 9, 1961, and from this,
plaintiff has appealed.
The fact of non-registration of University Publishing Co., Inc. in the Securities and
Exchange Commission has not been disputed. Defendant would only raise the
point that "University Publishing Co., Inc.," and not Jose M. Aruego, is the party
defendant; thereby assuming that "University Publishing Co., Inc." is an existing
corporation with an independent juridical personality. Precisely, however, on
account of the non-registration it cannot be considered a corporation, not even a
corporation de facto (Hall vs. Piccio, 86 Phil. 603). It has therefore no personality
separate from Jose M. Aruego; it cannot be sued independently.
The corporation-by-estoppel doctrine has not been invoked. At any rate, the
same is inapplicable here. Aruego represented a non-existent entity and induced
not only the plaintiff but even the court to believe in such representation. He
signed the contract as "President" of "University Publishing Co., Inc.," stating
that this was "a corporation duly organized and existing under the laws of the
Philippines," and obviously misled plaintiff (Mariano A. Albert) into believing the
same. One who has induced another to act upon his wilful misrepresentation
that a corporation was duly organized and existing under the law, cannot
thereafter set up against his victim the principle of corporation by estoppel
(Salvatiera vs. Garlitos, 56 O.G. 3069).
"University Publishing Co., Inc." purported to come to court, answering the
complaint and litigating upon the merits. But as stated, "University Publishing
Co., Inc." has no independent personality; it is just a name. Jose M. Aruego was,
in reality, the one who answered and litigated, through his own law firm as
counsel. He was in fact, if not, in name, the defendant.
Even with regard to corporations duly organized and existing under the law, we
have in many a case pierced the veil of corporate fiction to administer the ends
of justice. * And in Salvatiera vs. Garlitos, supra, p. 3073, we ruled: "A person
acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally
liable for contracts entered into or for other acts performed as such agent." Had
Jose M. Aruego been named as party defendant instead of, or together with,
"University Publishing Co., Inc.," there would be no room for debate as to his
personal liability. Since he was not so named, the matters of "day in court" and
"due process" have arisen.
In this connection, it must be realized that parties to a suit are "persons who
have a right to control the proceedings, to make defense, to adduce and cross-
examine witnesses, and to appeal from a decision" (67 C.J.S. 887) — and Aruego
was, in reality, the person who had and exercised these rights. Clearly, then,
Aruego had his day in court as the real defendant; and due process of law has
been substantially observed.
By "due process of law" we mean " "a law which hears before it condemns;
which proceeds upon inquiry, and renders judgment only after trial. ... ." (4
29
Wheaton, U.S. 518, 581.)"; or, as this Court has said, " "Due process of law" Bengzon, C.J., Concepcion, Reyes, J.B.L., Barrera, Paredes, Dizon, Regala, Makalintal
contemplates notice and opportunity to be heard before judgment is rendered, and Zaldivar, JJ., concur.
affecting one's person or property" (Lopez vs. Director of Lands, 47 Phil. 23, 32)." Bautista Angelo, J., took no part.
(Sicat vs. Reyes, L-11023, Dec. 14, 1956.) And it may not be amiss to mention here
also that the "due process" clause of the Constitution is designed to secure
justice as a living reality; not to sacrifice it by paying undue homage to formality.
For substance must prevail over form. It may now be trite, but none the less apt,
to quote what long ago we said in Alonso vs. Villamor, 16 Phil. 315, 321-322:

A litigation is not a game of technicalities in which one, more deeply

schooled and skilled in the subtle art of movement and position, entraps
and destroys the other. It is, rather, a contest in which each contending
party fully and fairly lays before the court the facts in issue and then,
brushing side as wholly trivial and indecisive all imperfections of form
and technicalities of procedure, asks that Justice be done upon the
merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust.
Technicality, when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in
technicalities.

The evidence is patently clear that Jose M. Aruego, acting as representative of a

non-existent principal, was the real party to the contract sued upon; that he was
the one who reaped the benefits resulting from it, so much so that partial
payments of the consideration were made by him; that he violated its terms,
thereby precipitating the suit in question; and that in the litigation he was the
real defendant. Perforce, in line with the ends of justice, responsibility under the
judgment falls on him.

We need hardly state that should there be persons who under the law are liable
to Aruego for reimbursement or contribution with respect to the payment he
makes under the judgment in question, he may, of course, proceed against them
through proper remedial measures.

PREMISES CONSIDERED, the order appealed from is hereby set aside and the
case remanded ordering the lower court to hold supplementary proceedings for
the purpose of carrying the judgment into effect against University Publishing
Co., Inc. and/or Jose M. Aruego. So ordered.

30
 Republic of the Philippines recognized the existence of national sports associations and provided the
SUPREME COURT manner by which these entities may acquire juridical personality.
Manila
Same; Same; Same; The statutory provisions require that before an entity
FIRST DIVISION may be considered as a national sports association, such entity must be
recognized by the accrediting organization, the Philippine Amateur Athletic
G.R. No. 119002 October 19, 2000 Federation under R.A. 3135, and the Department of Youth and Sports
Development under P.D. 604.—Clearly the above cited provisions require that
INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC., petitioner, before an entity may be considered as a national sports association, such entity
vs. must be recognized by the accrediting organization, the Philippine Amateur
HON. COURT OF APPEALS, HENRI KAHN, PHILIPPINE FOOTBALL Athletic Federation under R.A. 3135, and the Department of Youth and Sports
FEDERATION, respondents. Development under P.D. 604. This fact of recognition, however, Henri Kahn
failed to substantiate. In attempting to prove the juridical existence of the
Federation, Henri Kahn attached to his motion for reconsideration before the
Corporation Law; National Sports Associations; Statutes; R.A. 3135 and
trial court a copy of the constitution and by-laws of the Philippine Football
P.D. No. 604 recognized the juridical existence of national sports associations.—
Federation. Unfortunately, the same does not prove that said Federation has
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
indeed been recognized and accredited by either the Philippine Amateur Athletic
recognized the juridical existence of national sports associations. This may be
Federation or the Department of Youth and Sports Development. Accordingly,
gleaned from the powers and functions granted to these associations.
we rule that the Philippine Football Federation is not a national sports
association within the purview of the aforementioned laws and does not have a
Same; Same; The powers and functions granted to national sports
corporate existence of its own.
associations clearly indicate that these entities may acquire a juridical
personality.—The above powers and functions granted to national sports
Same; It is a settled principle in corporation law that any person acting or
associations clearly indicate that these entities may acquire a juridical
purporting to act on behalf of a corporation which has no valid existence assumes
personality. The power to purchase, sell, lease and encumber property are acts
such privileges and obligations and becomes personally liable for contracts
which may only be done by persons, whether natural or artificial, with juridical
entered into or for such other acts performed as such agent.—This being said, it
capacity. However, while we agree with the appellate court that national sports
follows that private respondent Henry Kahn should be held liable for the unpaid
associations may be accorded corporate status, such does not automatically take
obligations of the unincorporated Philippine Football Federation. It is a settled
place by the mere passage of these laws.
principle in corporation law that any person acting or purporting to act on behalf
of a corporation which has no valid existence assumes such privileges and
Same; Same; Philippine Football Association; It is a basic postulate that
obligations and becomes personally liable for contracts entered into or for other
before a corporation may acquire juridical personality, the State must give its
acts performed as such agent. As president of the Federation, Henri Kahn is
consent either in the form of a special law or a general enabling act; The Court
presumed to have known about the corporate existence or non-existence of the
cannot agree with the view of the Court of Appeals that the Philippine Football
Federation. We cannot subscribe to the position taken by the appellate court
Association came into existence upon the passage of RA. 3135 or P.D. 604.—It is a
that even assuming that the Federation was defectively incorporated, the
basic postulate that before a corporation may acquire juridical personality, the
petitioner cannot deny the corporate existence of the Federation because it had
State must give its consent either in the form of a special law or a general
contracted and dealt with the Federation in such a manner as to recognize and in
enabling act. We cannot agree with the view of the appellate court and the
effect admit its existence.
private respondent that the Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604
Same; Doctrine of Corporation by Estoppel; The doctrine of corporation
any provision creating the Philippine Football Federation. These laws merely
by estoppel applies to a third party only when he tries to escape liability on a

31
contract from which he has benefited on the irrelevant ground of defective
incorporation.—The doctrine of corporation by estoppel is mistakenly applied by
the respondent court to the petitioner. The application of the doctrine applies to
a third party only when he tries to escape liability on a contract from which he
has benefited on the irrelevant ground of defective incorporation. In the case at
bar, the petitioner is not trying to escape liability from the contract but rather is
the one claiming from the contract.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
DECISION
KAPUNAN, J.:
On June 30 1989, petitioner International Express Travel and Tour Services, Inc.,
through its managing director, wrote a letter to the Philippine Football
Federation (Federation), through its president private respondent Henri Kahn,
wherein the former offered its services as a travel agency to the latter. 1 The offer
was accepted.
Petitioner secured the airline tickets for the trips of the athletes and officials of
the Federation to the South East Asian Games in Kuala Lumpur as well as various
other trips to the People's Republic of China and Brisbane. The total cost of the
tickets amounted to P449,654.83. For the tickets received, the Federation made
two partial payments, both in September of 1989, in the total amount of
P176,467.50.2
On 4 October 1989, petitioner wrote the Federation, through the private
respondent a demand letter requesting for the amount of P265,894.33. 3 On 30
October 1989, the Federation, through the Project Gintong Alay, paid the amount
of P31,603.00.4
On 27 December 1989, Henri Kahn issued a personal check in the amount of
P50,000 as partial payment for the outstanding balance of the
Federation.5 Thereafter, no further payments were made despite repeated
demands.
This prompted petitioner to file a civil case before the Regional Trial Court of
Manila. Petitioner sued Henri Kahn in his personal capacity and as President of
the Federation and impleaded the Federation as an alternative defendant.
Petitioner sought to hold Henri Kahn liable for the unpaid balance for the tickets
purchased by the Federation on the ground that Henri Kahn allegedly
guaranteed the said obligation.6
Henri Kahn filed his answer with counterclaim. While not denying the allegation
that the Federation owed the amount P207,524.20, representing the unpaid
balance for the plane tickets, he averred that the petitioner has no cause of
action against him either in his personal capacity or in his official capacity as
president of the Federation. He maintained that he did not guarantee payment
but merely acted as an agent of the Federation which has a separate and distinct
juridical personality.7
On the other hand, the Federation failed to file its answer, hence, was declared in
default by the trial court.8
In due course, the trial court rendered judgment and ruled in favor of the
petitioner and declared Henri Kahn personally liable for the unpaid obligation of
the Federation. In arriving at the said ruling, the trial court rationalized:
Defendant Henri Kahn would have been correct in his contentions had it been
duly established that defendant Federation is a corporation. The trouble,
however, is that neither the plaintiff nor the defendant Henri Kahn has adduced
any evidence proving the corporate existence of the defendant Federation. In
paragraph 2 of its complaint, plaintiff asserted that "Defendant Philippine
Football Federation is a sports association xxx." This has not been denied by
defendant Henri Kahn in his Answer. Being the President of defendant
Federation, its corporate existence is within the personal knowledge of
defendant Henri Kahn. He could have easily denied specifically the assertion of
the plaintiff that it is a mere sports association, if it were a domestic corporation.
But he did not.
xxx
A voluntary unincorporated association, like defendant Federation has no power
to enter into, or to ratify, a contract. The contract entered into by its officers or
agents on behalf of such association is not binding on, or enforceable against it.
The officers or agents are themselves personally liable.
32
x x x9
The dispositive portion of the trial court's decision reads:
WHEREFORE, judgment is rendered ordering defendant Henri Kahn to pay the
plaintiff the principal sum of P207,524.20, plus the interest thereon at the legal
rate computed from July 5, 1990, the date the complaint was filed, until the
principal obligation is fully liquidated; and another sum of P15,000.00 for
attorney's fees.
The complaint of the plaintiff against the Philippine Football Federation and the
counterclaims of the defendant Henri Kahn are hereby dismissed.
With the costs against defendant Henri Kahn.10
Only Henri Kahn elevated the above decision to the Court of Appeals. On 21
December 1994, the respondent court rendered a decision reversing the trial
court, the decretal portion of said decision reads:
WHEREFORE, premises considered, the judgment appealed from is hereby
REVERSED and SET ASIDE and another one is rendered dismissing the complaint
against defendant Henri S. Kahn.11
In finding for Henri Kahn, the Court of Appeals recognized the juridical existence
of the Federation. It rationalized that since petitioner failed to prove that Henri
Kahn guaranteed the obligation of the Federation, he should not be held liable
for the same as said entity has a separate and distinct personality from its
officers.
Petitioner filed a motion for reconsideration and as an alternative prayer pleaded
that the Federation be held liable for the unpaid obligation. The same was denied
by the appellate court in its resolution of 8 February 1995, where it stated that:
As to the alternative prayer for the Modification of the Decision by expressly
declaring in the dispositive portion thereof the Philippine Football Federation
(PFF) as liable for the unpaid obligation, it should be remembered that the trial
court dismissed the complaint against the Philippine Football Federation, and the
plaintiff did not appeal from this decision. Hence, the Philippine Football
Federation is not a party to this appeal and consequently, no judgment may be
pronounced by this Court against the PFF without violating the due process
clause, let alone the fact that the judgment dismissing the complaint against it,
had already become final by virtue of the plaintiff's failure to appeal therefrom.
The alternative prayer is therefore similarly DENIED.12
Petitioner now seeks recourse to this Court and alleges that the respondent
court committed the following assigned errors:13
A. THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT
PETITIONER HAD DEALT WITH THE PHILIPPINE FOOTBALL FEDERATION
(PFF) AS A CORPORATE ENTITY AND IN NOT HOLDING THAT PRIVATE
RESPONDENT HENRI KAHN WAS THE ONE WHO REPRESENTED THE PFF
AS HAVING A CORPORATE PERSONALITY.
B. THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING
PRIVATE RESPONDENT HENRI KAHN PERSONALLY LIABLE FOR THE
OBLIGATION OF THE UNINCORPORATED PFF, HAVING NEGOTIATED
WITH PETITIONER AND CONTRACTED THE OBLIGATION IN BEHALF OF
THE PFF, MADE A PARTIAL PAYMENT AND ASSURED PETITIONER OF
FULLY SETTLING THE OBLIGATION.
C. ASSUMING ARGUENDO THAT PRIVATE RESPONDENT KAHN IS NOT
PERSONALLY LIABLE, THE HONORABLE COURT OF APPEALS ERRED IN
NOT EXPRESSLY DECLARING IN ITS DECISION THAT THE PFF IS SOLELY
LIABLE FOR THE OBLIGATION.
The resolution of the case at bar hinges on the determination of the existence of
the Philippine Football Federation as a juridical person. In the assailed decision,
the appellate court recognized the existence of the Federation. In support of
this, the CA cited Republic Act 3135, otherwise known as the Revised Charter of
the Philippine Amateur Athletic Federation, and Presidential Decree No. 604 as
the laws from which said Federation derives its existence.
As correctly observed by the appellate court, both R.A. 3135 and P.D. No. 604
recognized the juridical existence of national sports associations. This may be
gleaned from the powers and functions granted to these associations. Section 14
of R.A. 3135 provides:
SEC. 14. Functions, powers and duties of Associations. - The National Sports'
Association shall have the following functions, powers and duties:
33
 1. To adopt a constitution and by-laws for their internal organization and
government;
2. To raise funds by donations, benefits, and other means for their
purposes.
3. To purchase, sell, lease or otherwise encumber property both real and
personal, for the accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after
due consultation with the executive committee;
xxx
13. To perform such other acts as may be necessary for the proper
accomplishment of their purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The
National sports associations shall have the following functions, powers, and
duties:
1. Adopt a Constitution and By-Laws for their internal organization and
government which shall be submitted to the Department and any
amendment thereto shall take effect upon approval by the Department:
Provided, however, That no team, school, club, organization, or entity
shall be admitted as a voting member of an association unless 60 per
cent of the athletes composing said team, school, club, organization, or
entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose
subject to the approval of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and
personal, for the accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than
the Olympic and Asian Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due
consultation with the Department;
xxx
13. Perform such other functions as may be provided by law.
The above powers and functions granted to national sports associations clearly
indicate that these entities may acquire a juridical personality. The power to
purchase, sell, lease and encumber property are acts which may only be done by
persons, whether natural or artificial, with juridical capacity. However, while we
agree with the appellate court that national sports associations may be accorded
corporate status, such does not automatically take place by the mere passage of
these laws.
It is a basic postulate that before a corporation may acquire juridical personality,
the State must give its consent either in the form of a special law or a general
enabling act. We cannot agree with the view of the appellate court and the
private respondent that the Philippine Football Federation came into existence
upon the passage of these laws. Nowhere can it be found in R.A. 3135 or P.D. 604
any provision creating the Philippine Football Federation. These laws merely
recognized the existence of national sports associations and provided the
manner by which these entities may acquire juridical personality. Section 11 of
R.A. 3135 provides:
SEC. 11. National Sports' Association; organization and recognition. - A National
Association shall be organized for each individual sports in the Philippines in the
manner hereinafter provided to constitute the Philippine Amateur Athletic
Federation. Applications for recognition as a National Sports' Association shall be
filed with the executive committee together with, among others, a copy of the
constitution and by-laws and a list of the members of the proposed association,
and a filing fee of ten pesos.
The Executive Committee shall give the recognition applied for if it is satisfied
that said association will promote the purposes of this Act and particularly
section three thereof. No application shall be held pending for more than three
months after the filing thereof without any action having been taken thereon by
the executive committee. Should the application be rejected, the reasons for
such rejection shall be clearly stated in a written communication to the applicant.
Failure to specify the reasons for the rejection shall not affect the application
which shall be considered as unacted upon: Provided, however, That until the
34
executive committee herein provided shall have been formed, applications for
recognition shall be passed upon by the duly elected members of the present
executive committee of the Philippine Amateur Athletic Federation. The said
executive committee shall be dissolved upon the organization of the executive
committee herein provided: Provided, further, That the functioning executive
committee is charged with the responsibility of seeing to it that the National
Sports' Associations are formed and organized within six months from and after
the passage of this Act.
Section 7 of P.D. 604, similarly provides:
SEC. 7. National Sports Associations. - Application for accreditation or recognition
as a national sports association for each individual sport in the Philippines shall
be filed with the Department together with, among others, a copy of the
Constitution and By-Laws and a list of the members of the proposed association.
The Department shall give the recognition applied for if it is satisfied that the
national sports association to be organized will promote the objectives of this
Decree and has substantially complied with the rules and regulations of the
Department: Provided, That the Department may withdraw accreditation or
recognition for violation of this Decree and such rules and regulations
formulated by it.
Thus being said, it follows that private respondent Henry Kahn should be held
liable for the unpaid obligations of the unincorporated Philippine Football
Federation. It is a settled principal in corporation law that any person acting or
purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and becomes personally liable for contract entered into
or for other acts performed as such agent.14 As president of the Federation,
Henri Kahn is presumed to have known about the corporate existence or non-
existence of the Federation. We cannot subscribe to the position taken by the
appellate court that even assuming that the Federation was defectively
incorporated, the petitioner cannot deny the corporate existence of the
Federation because it had contracted and dealt with the Federation in such a
manner as to recognize and in effect admit its existence.15 The doctrine of
corporation by estoppel is mistakenly applied by the respondent court to the
petitioner. The application of the doctrine applies to a third party only when he
tries to escape liability on a contract from which he has benefited on the
irrelevant ground of defective incorporation.16 In the case at bar, the petitioner is
not trying to escape liability from the contract but rather is the one claiming from
the contract.
WHEREFORE, the decision appealed from is REVERSED and SET ASIDE. The
decision of the Regional Trial Court of Manila, Branch 35, in Civil Case No. 90-
53595 is hereby REINSTATED.

The Department shall supervise the national sports association: Provided, That SO ORDERED.
the latter shall have exclusive technical control over the development and
promotion of the particular sport for which they are organized. Davide, Jr., C.J., (Chairman), Puno, Pardo, and Ynares-Santiago, JJ., concur.

Clearly the above cited provisions require that before an entity may be
considered as a national sports association, such entity must be recognized by
the accrediting organization, the Philippine Amateur Athletic Federation under
R.A. 3135, and the Department of Youth and Sports Development under P.D. 604.
This fact of recognition, however, Henri Kahn failed to substantiate. In
attempting to prove the juridical existence of the Federation, Henri Kahn
attached to his motion for reconsideration before the trial court a copy of the
constitution and by-laws of the Philippine Football Federation. Unfortunately,
the same does not prove that said Federation has indeed been recognized and
accredited by either the Philippine Amateur Athletic Federation or the
Department of Youth and Sports Development. Accordingly, we rule that the
Philippine Football Federation is not a national sports association within the
purview of the aforementioned laws and does not have corporate existence of
its own.
35
 Republic of the Philippines Same; Same; Same; A proper adjudication of claimants’ rights mandates
SUPREME COURT that courts must review and thoroughly appraise all relevant facts.—A proper
Manila adjudication of claimants’ rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have
THIRD DIVISION found, correctly, a preexisting partnership among the parties. In implying that
the lower courts have decided on the basis of one piece of document alone,
petitioner fails to appreciate that the CA and the RTC delved into the history of
the document and explored all the possible consequential combinations in
harmony with law, logic and fairness. Verily, the two lower courts’ factual
G.R. No. 136448 November 3, 1999
findings mentioned above nullified petitioner’s argument that the existence of a
partnership was based only on the Compromise Agreement.
LIM TONG LIM, petitioner,
vs.
Same; Loans; It is not uncommon to register the properties acquired from
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
a loan in the name of the person the lender trusts.—Verily, as found by the lower
courts, petitioner entered into a business agreement with Chua and Yao, in
Partnerships; A partnership may be deemed to exist among parties who
which debts were undertaken in order to finance the acquisition and the
agree to borrow money to pursue a business and to divide the profits or losses
upgrading of the vessels which would be used in their fishing business. The sale
that may arise therefrom, even if it is shown that they have not contributed any
of the boats, as well as the division among the three of the balance remaining
capital of their own to a “common fund,” as their contribution to such fund could
after the payment of their loans, proves beyond cavil that F/B Lourdes, though
be an intangible like credit or industry.—From the factual findings of both lower
registered in his name, was not his own property but an asset of the partnership.
courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing
It is not uncommon to register the properties acquired from a loan in the name
business, which they started by buying boats worth P3.35 million, financed by a
of the person the lender trusts, who in this case is the petitioner himself. After
loan secured from Jesus Lim who was petitioner’s brother. In their Compromise
all, he is the brother of the creditor, Jesus Lim.
Agreement, they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among them the excess
Same; Corporation Law; Estoppel; Corporation by Estoppel Doctrine;
or loss. These boats, the purchase and the repair of which were financed with
Agency; Those who act or purport to act as the representatives or agents of an
borrowed money, fell under the term “common fund” under Article 1767. The
ostensible corporate entity who is proven to be legally inexistent do so without
contribution to such fund need not be cash or fixed assets; it could be an
authority and at their own risk.—Even if the ostensible corporate entity is proven
intangible like credit or industry. That the parties agreed that any loss or profit
to be legally nonexistent, a party may be estopped from denying its corporate
from the sale and operation of the boats would be divided equally among them
existence. “The reason behind this doctrine is obvious—an unincorporated
also shows that they had indeed formed a partnership.
association has no personality and would be incompetent to act and appropriate
for itself the power and attributes of a corporation as provided by law; it cannot
Same; Appeals; Petitions for Review; Pleadings and Practice; Under Rule
create agents or confer authority on another to act in its behalf; thus, those who
45, a petition for review should involve only questions of law, and a petitioner, in
act or purport to act as its representatives or agents do so without authority and
assailing the factual findings of the two lower courts, effectively goes beyond the
at their own risk. And as it is an elementary principle of law that a person who
bounds of a petition for review.—We stress that under Rule 45, a petition for
acts as an agent without authority or without a principal is himself regarded as
review like the present case should involve only questions of law. Thus, the
the principal, possessed of all the right and subject to all the liabilities of a
foregoing factual findings of the RTC and the CA are binding on this Court,
principal, a person acting or purporting to act on behalf of a corporation which
absent any cogent proof that the present action is embraced by one of the
has no valid existence assumes such privileges and obligations and becomes
exceptions to the rule. In assailing the factual findings of the two lower courts,
personally liable for contracts entered into or for other acts performed as such
petitioner effectively goes beyond the bounds of a petition for review under Rule
agent.”
45.
36
 Same; Same; Same; Same; The doctrine of corporation by estoppel may of the Court in Alonso v. Villamor: “A litigation is not a game of technicalities in
apply to the alleged corporation and to a third party; An unincorporated which one, more deeply schooled and skilled in the subtle art of movement and
association, which represents itself to be a corporation, will be estopped from position, entraps and destroys the other. It is, rather, a contest in which each
denying its corporate capacity in a suit against it by a third person who relies in contending party fully and fairly lays before the court the facts in issue and then,
good faith on such representation.—The doctrine of corporation by estoppel may brushing aside as wholly trivial and indecisive all imperfections of form and
apply to the alleged corporation and to a third party. In the first instance, an technicalities of procedure, asks that justice be done upon the merits. Lawsuits,
unincorporated association, which represented itself to be a corporation, will be unlike duels, are not to be won by a rapier’s thrust. Technicality, when it deserts
estopped from denying its corporate capacity in a suit against it by a third person its proper office as an aid to justice and becomes its great hindrance and chief
who relied in good faith on such representation. It cannot allege lack of enemy, deserves scant consideration from courts. There should be no vested
personality to be sued to evade its responsibility for a contract it entered into rights in technicalities.”
and by virtue of which it received advantages and benefits.
PETITION for review on certiorari of a decision of the Court of Appeals.
Same; Same; Same; Same; A third party who, knowing an association to
be unincorporated, nonetheless treated it as a corporation and received benefits
from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation.—A third party who, knowing an association to The facts are stated in the opinion of the Court. Lim Tong Lim vs. Philippine
be unincorporated, nonetheless treated it as a corporation and received benefits Fishing Gear Industries, Inc., 317 SCRA 728, G.R. No. 136448 November 3, 1999
from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the
PANGANIBAN, J.:
transaction made by the ostensible corporation, despite knowledge of its legal
defects, may be held liable for contracts they impliedly assented to or took
A partnership may be deemed to exist among parties who agree to borrow
advantage of.
money to pursue a business and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not contributed any capital of their
Same; Same; Same; Same; Under the law on estoppel, those acting on
own to a "common fund." Their contribution may be in the form of credit or
behalf of a corporation and those benefited by it, knowing it to be without valid
industry, not necessarily cash or fixed assets. Being partner, they are all liable for
existence, are held liable as general partners.—It is difficult to disagree with the
debts incurred by or on behalf of the partnership. The liability for a contract
RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although
entered into on behalf of an unincorporated association or ostensible
it was never legally formed for unknown reasons, this fact alone does not
corporation may lie in a person who may not have directly transacted on its
preclude the liabilities of the three as contracting parties in representation of it.
behalf, but reaped benefits from that contract.
Clearly, under the law on estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid existence, are held liable as
The Case
general partners.

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
Same; Same; Same; Same; A person who has reaped the benefits of a
contract entered into by persons with whom he previously had an existing November 26, 1998 Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
relationship is deemed to be part of said association and is covered by the scope
of the doctrine of corporation by estoppel.—Technically, it is true that petitioner
did not directly act on behalf of the corporation. However, having reaped the WHEREFORE, [there being] no reversible error in the appealed
benefits of the contract entered into by persons with whom he previously had an decision, the same is hereby affirmed. 2
existing relationship, he is deemed to be part of said association and is covered
by the scope of the doctrine of corporation by estoppel. We reiterate the ruling

37
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which
was affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment
issued by this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following
amounts, subject to the modifications as hereinafter made by
reason of the special and unique facts and circumstances and
the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid
purchase price of the fishing nets covered by
the Agreement plus P68,000.00 representing
the unpaid price of the floats not covered by
said Agreement;
b. 12% interest per annum counted from date of
plaintiff's invoices and computed on their
respective amounts as follows:
i. Accrued interest of
P73,221.00 on Invoice No.
14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest for
P27,904.02 on Invoice No.
14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of
P12,920.00 on Invoice No.
14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus
P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly
rental for storage charges on the nets counted
from September 20, 1990 (date of attachment)
to September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the
principal obligation or for the unpaid price of nets and
floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount P600,045.00, this
Court noted that these items were attached to
guarantee any judgment that may be rendered in favor
of the plaintiff but, upon agreement of the parties, and,
to avoid further deterioration of the nets during the
pendency of this case, it was ordered sold at public
auction for not less than P900,000.00 for which the
plaintiff was the sole and winning bidder. The proceeds
of the sale paid for by plaintiff was deposited in court.
In effect, the amount of P900,000.00 replaced the
attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the
ownership and possession of the nets and floats
awarded and delivered by the sheriff to plaintiff as the
highest bidder in the public auction sale. It has also
been noted that ownership of the nets [was] retained
by the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the plaintiff
attached its own properties. It [was] for this reason
also that this Court earlier ordered the attachment
bond filed by plaintiff to guaranty damages to
defendants to be cancelled and for the P900,000.00
cash bidded and paid for by plaintiff to serve as its
bond in favor of defendants.
From the foregoing, it would appear therefore that
whatever judgment the plaintiff may be entitled to in
38
 this case will have to be satisfied from the amount of
P900,000.00 as this amount replaced the attached nets
and floats. Considering, however, that the total
judgment obligation as computed above would
amount to only P840,216.92, it would be inequitable,
unfair and unjust to award the excess to the
defendants who are not entitled to damages and who
did not put up a single centavo to raise the amount of
P900,000.00 aside from the fact that they are not the
owners of the nets and floats. For this reason, the
defendants are hereby relieved from any and all
liabilities arising from the monetary judgment
obligation enumerated above and for plaintiff to retain
possession and ownership of the nets and floats and
for the reimbursement of the P900,000.00 deposited
by it with the Clerk of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990, for the purchase of fishing nets
of various sizes from the Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged in a business venture with
Petitioner Lim Tong Lim, who however was not a signatory to the agreement.
The total price of the nets amounted to P532,045. Four hundred pieces of floats
worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence,
private respondents filed a collection suit against Chua, Yao and Petitioner Lim
Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the Securities and Exchange
Commission. 5 On September 20, 1990, the lower court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes which was then docked at the Fisheries Port, Navotas,
Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his
liability and requesting a reasonable time within which to pay. He also turned
over to respondent some of the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to have waived his right to cross-
examine witnesses and to present evidence on his behalf, because of his failure
to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an
Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ
of Attachment. 6 The trial court maintained the Writ, and upon motion of private
respondent, ordered the sale of the fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and deposited with the said court the
sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ of Attachment and that Chua,
Yao and Lim, as general partners, were jointly liable to pay respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed based
(1) on the testimonies of the witnesses presented and (2) on a Compromise
Agreement executed by the three 9 in Civil Case No. 1492-MN which Chua and
Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a
declaration of nullity of commercial documents; (b) a reformation of contracts;
(c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages. 10 The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net
will be sold at a higher price than
P5,750,000.00 whatever will be the excess will
be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be
less than P5,750,000.00 whatever the
deficiency shall be shouldered and paid to JL
39
 Holding Corporation by 1/3 Lim Tong Lim; 1/3
Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the nature
of their obligations, but that joint liability could be presumed from the equal
distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the
RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and
Yao in a fishing business and may thus be held liable as a such for the fishing nets
and floats purchased by and for the use of the partnership. The appellate court
ruled:
The evidence establishes that all the defendants including
herein appellant Lim Tong Lim undertook a partnership for a
specific undertaking, that is for commercial fishing . . . .
Oviously, the ultimate undertaking of the defendants was to
divide the profits among themselves which is what a
partnership essentially is . . . . By a contract of partnership, two
or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of
dividing the profits among themselves (Article 1767, New Civil
Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed
Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A
COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER
LIM ENTERED INTO IN A SEPARATE CASE, THAT A
PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS
ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE
BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF
APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO
PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND
ATTACHMENT OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and
floats from respondent, the Court must resolve this key issue: whether by their
acts, Lim, Chua and Yao could be deemed to have entered into a partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership
and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased from
respondent, petitioner controverts the CA finding that a partnership existed
between him, Peter Yao and Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement alone. Furthermore, he disclaims any
direct participation in the purchase of the nets, alleging that the negotiations
were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he
was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease " dated
February 1, 1990, showed that he had merely leased to the two the main asset of
the purported partnership — the fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus 25 percent of the gross catch of
the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the
two lower courts clearly showed that there existed a partnership among Chua,
Yao and him, pursuant to Article 1767 of the Civil Code which provides:
40
 Art. 1767 — By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed
based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was
engaged in commercial fishing to join him, while Antonio Chua
was already Yao's partner;
(2) That after convening for a few times, Lim, Chua, and Yao
verbally agreed to acquire two fishing boats, the FB Lourdes and
the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of
Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation,
which executed a Deed of Sale over these two (2) boats in favor
of Petitioner Lim Tong Lim only to serve as security for the loan
extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-
equipping, repairing, dry docking and other expenses for the
boats would be shouldered by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim
again extended a loan to the partnership in the amount of P1
million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats, Chua's FB
Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and
Antonio Chua bought nets from Respondent Philippine Fishing
Gear, in behalf of "Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against
Lim Tong Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c) declaration of
ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise
Agreement executed between the parties-litigants the terms of
which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim
had decided to engage in a fishing business, which they started by buying boats
worth P3.35 million, financed by a loan secured from Jesus Lim who was
petitioner's brother. In their Compromise Agreement, they subsequently
revealed their intention to pay the loan with the proceeds of the sale of the
boats, and to divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed money, fell
under the term "common fund" under Article 1767. The contribution to such fund
need not be cash or fixed assets; it could be an intangible like credit or industry.
That the parties agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them also shows that they had indeed
formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of
the boat, but also to that of the nets and the floats. The fishing nets and the
floats, both essential to fishing, were obviously acquired in furtherance of their
business. It would have been inconceivable for Lim to involve himself so much in
buying the boat but not in the acquisition of the aforesaid equipment, without
which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and
Yao, a partnership engaged in the fishing business. They purchased the boats,
which constituted the main assets of the partnership, and they agreed that the
proceeds from the sales and operations thereof would be divided among them.
We stress that under Rule 45, a petition for review like the present case should
involve only questions of law. Thus, the foregoing factual findings of the RTC and
the CA are binding on this Court, absent any cogent proof that the present action
is embraced by one of the exceptions to the rule. 16 In assailing the factual
findings of the two lower courts, petitioner effectively goes beyond the bounds
of a petition for review under Rule 45.
41
 Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the existence
of a partnership was the Compromise Agreement. He also claims that the
settlement was entered into only to end the dispute among them, but not to
adjudicate their preexisting rights and obligations. His arguments are baseless.
The Agreement was but an embodiment of the relationship extant among the
parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review and
thoroughly appraise all relevant facts. Both lower courts have done so and have
found, correctly, a preexisting partnership among the parties. In implying that
the lower courts have decided on the basis of one piece of document alone,
petitioner fails to appreciate that the CA and the RTC delved into the history of
the document and explored all the possible consequential combinations in
harmony with law, logic and fairness. Verily, the two lower courts' factual
findings mentioned above nullified petitioner's argument that the existence of a
partnership was based only on the Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor of
the boats to Chua and Yao, not a partner in the fishing venture. His argument
allegedly finds support in the Contract of Lease and the registration papers
showing that he was the owner of the boats, including F/B Lourdes where the
nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he
consented to the sale of his own boats to pay a debt of Chua and Yao, with the
excess of the proceeds to be divided among the three of them. No lessor would
do what petitioner did. Indeed, his consent to the sale proved that there was a
preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business
agreement with Chua and Yao, in which debts were undertaken in order to
finance the acquisition and the upgrading of the vessels which would be used in
their fishing business. The sale of the boats, as well as the division among the
three of the balance remaining after the payment of their loans, proves beyond
cavil that F/B Lourdes, though registered in his name, was not his own property
but an asset of the partnership. It is not uncommon to register the properties
acquired from a loan in the name of the person the lender trusts, who in this case
is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.
We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell
his property to pay a debt he did not incur, if the relationship among the three of
them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can
be imputed only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to
act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all debts, liabilities and
damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on
any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation as
such, cannot resist performance thereof on the ground that
there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent,
a party may be estopped from denying its corporate existence. "The reason
behind this doctrine is obvious — an unincorporated association has no
personality and would be incompetent to act and appropriate for itself the
power and attributes of a corporation as provided by law; it cannot create
agents or confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority and at
their own risk. And as it is an elementary principle of law that a person who acts
as an agent without authority or without a principal is himself regarded as the
principal, possessed of all the right and subject to all the liabilities of a principal, a
42
person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and obligations and becomes personally liable
for contracts entered into or for other acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation
and to a third party. In the first instance, an unincorporated association, which
represented itself to be a corporation, will be estopped from denying its
corporate capacity in a suit against it by a third person who relied in good faith
on such representation. It cannot allege lack of personality to be sued to evade
its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received benefits
from it, may be barred from denying its corporate existence in a suit brought
against the alleged corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge of its legal
defects, may be held liable for contracts they impliedly assented to or took
advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The only question here is whether
petitioner should be held jointly 18 liable with Chua and Yao. Petitioner contests
such liability, insisting that only those who dealt in the name of the ostensible
corporation should be held liable. Since his name does not appear on any of the
contracts and since he never directly transacted with the respondent
corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B
Lourdes, the boat which has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of the nets, because the Writ
has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided
to form a corporation. Although it was never legally formed for unknown
reasons, this fact alone does not preclude the liabilities of the three as
contracting parties in representation of it. Clearly, under the law on estoppel,
those acting on behalf of a corporation and those benefited by it, knowing it to
be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into
by persons with whom he previously had an existing relationship, he is deemed
to be part of said association and is covered by the scope of the doctrine of
corporation by estoppel. We reiterate the ruling of the Court in Alonso
v. Villamor: 19
A litigation is not a game of technicalities in which one, more
deeply schooled and skilled in the subtle art of movement and
position, entraps and destroys the other. It is, rather, a contest
in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial
and indecisive all imperfections of form and technicalities of
procedure, asks that justice be done upon the merits. Lawsuits,
unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and
becomes its great hindrance and chief enemy, deserves scant
consideration from courts. There should be no vested rights in
technicalities.
Third Issue:
Validity of Attachment
Finally, petitioner claims that the Writ of Attachment was improperly issued
against the nets. We agree with the Court of Appeals that this issue is now moot
and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were
specifically manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence, the
issuance of the Writ to assure the payment of the price stipulated in the invoices
is proper. Besides, by specific agreement, ownership of the nets remained with
Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
Melo, Purisima and Gonzaga-Reyes, JJ., concur.
43
Vitug, J., pls. see concurring opinion.

Separate Opinions

VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr.

Justice Artemio V. Panganiban, particularly the finding that Antonio Chua, Peter
Yao and petitioner Lim Tong Lim have incurred the liabilities of general partners.
I merely would wish to elucidate a bit, albeit briefly, the liability of partners in a
general partnership.

When a person by his act or deed represents himself as a partner in an existing

partnership or with one or more persons not actual partners, he is deemed an
agent of such persons consenting to such representation and in the same
manner, if he were a partner, with respect to persons who rely upon the
representation. 1 The association formed by Chua, Yao and Lim, should be, as it
has been deemed, a de facto partnership with all the consequent obligations for
the purpose of enforcing the rights of third persons. The liability of general
partners (in a general partnership as so opposed to a limited partnership) is laid
down in Article 1816 2 which posits that all partners shall be liable pro rata beyond
the partnership assets for all the contracts which may have been entered into in
its name, under its signature, and by a person authorized to act for the
partnership. This rule is to be construed along with other provisions of the Civil
Code which postulate that the partners can be held solidarily liable with the
partnership specifically in these instances — (1) where, by any wrongful act or
omission of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is caused to any
person, not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so acting or
omitting to act; (2) where one partner acting within the scope of his apparent
authority receives money or property of a third person and misapplies it; and (3)
where the partnership in the course of its business receives money or property
of a third person and the money or property so received is misapplied by any
partner while it is in the custody of the partnership 3 — consistently with the
rules on the nature of civil liability in delicts and quasi-delicts.

44

Republic of the Philippines
SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 77860 November 22, 1988
BOMAN ENVIRONMENTAL DEVELOPMENT CORPORATION, petitioners,
vs.
HON. COURT OF APPEALS and NILCAR Y. FAJILAN, respondents.
Corporation Law; Jurisdiction of the SEC; Intra-corporate Controversy; A
suit filed by a stockholder against the corporation to enforce the latter's
promissory note or to compel the corporation to pay for his shareholdings is
cognizable by the SEC alone.—Fajilan's suit against the corporation to enforce
the latter's promissory note or compel the corporation to pay for his
shareholdings is cognizable by the SEC alone which shall determine whether such
payment will not constitute a distribution of corporate assets to a stockholder in
preference over creditors of the corporation. The SEC has exclusive supervision,
control and regulatory jurisdiction to investigate whether the corporation has
unrestricted retained earnings to cover the payment for the shares, and whether
the purchase is for a legitimate corporate purpose as provided in Sections 41 and
122 of the Corporation Code.
Same; Corporations; Trust Fund Doctrine; There can be no distribution of
assets among stockholders without first paying the corporate creditors.—The
requirement of unrestricted retained earnings to cover the shares is based on
the trust fund doctrine which means that the capital stock, property and other
assets of a corporation are regarded as equity in trust for the payment of
corporate creditors. The reason is that creditors of a corporation are preferred
over the stockholders in the distribution of corporate assets. There can be no
distribution of assets among the stockholders without first paying corporate
creditors. Hence, any disposition of corporate funds to the prejudice of creditors
is null and void. "Creditors of a corporation have the right to assume that so long
as there are outstanding debts and liabilities, the board of directors will not use
the assets of the corporation to purchase its own stock ..." (Steinberg vs.
Velasco, 52 Phil. 953.)
Contracts, Interpretation of; Provisions of existing laws are deemed
incorporated in a valid contract without the parties' making express reference to
it.—These provisions of the Corporation Code should be deemed written into
the agreement between the corporation and the stockholders even if there is no
express reference to them in the promissory note. The principle is well settled
that an existing law enters into and forms part of a valid contract without need
for the parties' expressly making reference to it (Lakas ng Manggagawang
Makabayan vs. Abiera, 36 SCRA 437).
PETITION for certiorari to review the decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Lim, Duran & Associates for petitioner.
Renato J. Dilag for private respondent.
GRIÑO-AQUINO, J.:
The only issue in this case is whether or not a suit brought by a withdrawing
stockholder against the corporation to enforce payment of the balance due on
the consideration (evidenced by a corporate promissory note) for the surrender
of his shares of stock and interests in the corporation, involves an intra-corporate
dispute. The resolution of that issue will determine whether the Securities and
Exchange Commission (SEC) or a regular court has jurisdiction over the action.
On May 7, 1984, respondent Nilcar Y. Fajilan offered in writing to resign as
President and Member of the Board of Directors of petitioner, Boman
Environmental Development Corporation (BEDECO), and to sell to the company
all his shares, rights, and interests therein for P300,000 plus the transfer to him
of the company's Isuzu pick-up truck which he had been using. The letter-offer
(Exh. A-1) reads as follows:
"07 May l984
45
 At a meeting of the Board of Directors of BEDECO on June 14,1984, Fajilan's
resignation as president was accepted and new officers were elected. Fajilan's
"THE BOARD OF DIRECTORS, offer to sell his shares back to the corporation was approved, the Board
promising to pay for them on a staggered basis from July 15, 1984 to December
BOMAN ENVIRONMENTAL DEVELOPMENT 15, 1984(Annex B).

CORPORATION The resolution of the Board was communicated to Fajilan in the following letter-
agreement dated June 25, 1984 to which he affixed his conformity (Annex C):
2nd Floor, AGS Building,
"June 25,1984
466 EDSA, Makati,
"Mr. Nilcar Y. Fajilan
Metro Manila
No. 159 Aramismis Street
Gentlemen:.
Project 7, Quezon City
"With deepest regrets, I am tendering my resignation as member of the Board of
Directors and President of the Company effective as soon as my shares and "Dear Mr. Fajilan:
interests thereto are sold and fully paid.
"Please be informed that after due deliberation the Board of Directors has
"It is really painful to leave the Company which we painstakingly labored and accepted your offer to sell your share and interest in the company at the price of
nortured for years to attain its success today, however, family interests and P300,000.00, inclusive of your unpaid salary from February 1984 to May 31,1984,
other considerations dictate me otherwise. loan principal, interest on loan, profit sharing and share on book value of the
corporation as at May 31,1984. Payment of the P300,000.00 shall be as follows:
"Thank you for your interest of buying my shares and other interests on the
Company. It is really my intention to divest myself of these investments and sell "July 15, 1984 —P100,000.00
them all for PESOS: THREE HUNDRED THOUSAND (P300,000) payable in cash in
addition to the Isuzu pick up I am presently using for and in behalf of the September 15, 1984 —P 75,000.00
Company.
October 15, 1984 —P 62,500.00
"Thank you.
December 15, 1984 —P 62,500.00
NILCAR Y. FAJILAN

Director/President" (p. 239, Rollo.)

P300,000.00.

"To assure you of payment of the above amount on respective due dates, the
company will execute the necessary promissory note.

46
"In addition to the above, the Ford Courier Pick-up will belong to you subject to Until December 31,1984
your assumption of the outstanding obligation thereof with Fil-Invest. It is
understood that upon your full payment of the pick-up, arrangement will be PTR No. 8582861 Issued
made and negotiated with Fil-Invest regarding the transfer of the ownership of
the vehicle to your name. on January 24,1984 at

"If the above meets your requirements, kindly signify your conformity/approval Makati, Metro Manila
by signing below.
Doc. No. 392
Very truly yours,
Page No. 80
(SGD) JAMES C. PERALTA
Book No. X
Corporate Secretary
Series of 1984." (p. 245, Rollo.)
"CONFORME:

(SGD) NILCAR Y. FAJILAN

A promissory note dated July 3, 1984, was signed by BEDECO'S new president,
Noted: Alfredo Pangilinan, in the presence of two directors, committing BEDECO to pay
him P300,000 over a six-month period from July 15, 1984 to December 15, 1984.
The promissory note (Exh. D) provided as follows:

(SGD) ALFREDO S. PANGILINAN "PROMISSORY NOTE

(SGD) MAXIMO R. REBALDO

(SGD) BENEDICTO M. EMPAYNADO" Makati, Metro Manila

"SUBSCRIBED AND SWORN TO before me, this 3rd day of July, 1984, Alfredo S.
Pangilinan exhibiting to me his Residence Certificate No. 1696224 issued at
Makati, Metro Manila on January 24, 1984, in his capacity as President of Boman
Environmental Development Corporation with Corporate Residence Certificate
No. 207911 issued at Makati, Metro Manila on March 26,1984.
"(SGD) ERNESTO B. DURAN
NOTARY PUBLIC
July 3, 1984
"FOR VALUE RECEIVED, BOMAN ENVIRONMENTAL DEVELOPMENT
CORPORATION, a domestic corporation duly registered with the Securities and
Exchange Commission, with office at Rm. 608, Metro Bank Bldg., Ayala Blvd.,
Makati, Metro Manila, promise to pay NILCAR Y. FAJILAN of 17 Aramismis St.,
Project 7, Quezon City, the sum of PESOS: THREE HUNDRED THOUSAND
(P300,000.00), Philippine Currency payable as follows:
"P100,000.00— July 15, 1984

47
75,000.00— Sept. 15, 1984 However, BEDECO paid only P50,000 on July 15, 1984 and another P50,000 on
August 31, 1984 and defaulted in paying the balance of P200,000.
62,500.00— October 15, 1984
On April 30,1985, Fajilan filed a complaint in the Regional Trial Court of Makati for
62,500.00— Dec. 15, 1984 collection of that balance from BEDECO.

P300,000.00 In an order dated September 9,1985, the trial court, through Judge Ansberto
Paredes, dismissed the complaint for lack of jurisdiction. It ruled that the
BOMAN ENVIRONMENTAL controversy arose out of intracorporate relations, hence, the Securities and
Exchange Commission has original and exclusive jurisdiction to hear and decide
it.

His motion for reconsideration of that order having been denied, Fajilan filed a
DEVELOPMENT CORPORATION
"Petition for Certiorari, and Mandamus with Preliminary Attachment" in the
Intermediate Appellate Court.

In a decision dated March 2, 1987, the Court of Appeals set aside Judge Paredes'
By:
order of dismissal and directed him to take cognizance of the case. BEDECO's
motion for reconsideration was denied in a resolution dated March 24,1987 of
the Court of Appeals.

(SGD)ALFREDO S. PANGILINAN
President
"Signed in the presence of:
(SGD) MAXIMO R. REBALDO
(SGD) BENEDICTO M. EMPAYNADO"
(Annex D, p. 247, Rollo.)
In its decision, the Appellate Court characterized the case as a suit for collection
of a sum of money as Fajilan "was merely suing on the balance of the promissory
note" (p. 4, Decision; p. 196, Rollo) which BEDECO failed and refused to pay in
full. More particularly, the Court of Appeals held:
"While it is true that the circumstances which led to the execution of the
promissory note by the Board of Directors of respondent corporation was an
intra-corporate matter, there arose no contro versy as to the sale of petitioner's
interests and rights as well as his shares as Member of the Board of Directors and
President of respondent corporation. The intra-corporate matter of the
resignation of petitioner as Member of the Board of Directors and President of
respondent corporation has long been settled without issue. "The Board of
Directors of respondent corporation has likewise long settled the sale by
petitioner of all his shares, rights and interests in favor of the corporation. No
controversy arose out of this transaction. The jurisdiction of the Securities and
Exchange Commission therefore need not be invoked on this matter." (p. 196,
Rollo.)
The petition is impressed with merit.

48
Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and exclusive
jurisdiction to hear and decide cases involving—
"b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders, members, or associates; between any or all of
them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; x x x" (Italics supplied.)
"SEC. 41. Power to acquire own shares.—A stock corporation shall have
the.power to purchase or acquire its own shares for a legitimate corporate
purpose or purposes, including but not limited to the following cases: Provided,
That the corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired;
"1. To eliminate fractional shares arising out of stock dividends;

This case involves an intra-corporate controversy because the parties are a "2. To collect or compromise an indebtedness to the corporation, arising out of
stockholder and the corporation. As correctly observed by the trial court, the unpaid subscription, in a delinquency sale, and to purchase delinquent shares
perfection of the agreement to sell Fajilan's participation and interests in sold during said sale; and
BEDECO and the execution of the promissory note for payment of the price of
the sale did not remove the dispute from the coverage of Section 5(b) of P.D. No. "3. To pay dissenting or withdrawing stockholders entitled to payment for their
902, as amended, for both the said agreement (Annex C) and the promissory shares under the provisions of this Code,"
note (Annex D) arose from intra-corporate relations. Indeed, all the signatories
of both documents were stockholders of the corporation at the time of signing "Sec. 12. Corporate liquidation. xxx.
the same. It was an intra-corporate transaction, hence, this suit is an intra-
corporate controversy.
xxx xxx xxx

Fajilan's offer to resign as president and director "effective as soon as my shares

"Except by decrease of capital stock and as otherwise allowed by this Code, no
and interests thereto (sic) are sold and fully paid" (Annex A-1, p. 239, Rollo)
corporation shall distribute any of its assets or property except upon lawful
implied that he would remain a stockholder until his shares and interests were
dissolution and after payment of all its debts and liabilities, (77a, 89a, 16a)."
fully paid for, for one cannot be a director or president of a corporation unless he
is also a stockholder thereof. The fact that he was replaced as president of the
These provisions of the Corporation Code should be deemed written into the
corporation did not necessar ily mean that he ceased to be a stockholder
agreement between the corporation and the stockholders even if there is no
considering how the corporation failed to complete payment of the
express reference to them in the promissory note. The principle is well settled
consideration for the purchase of his shares of stock and interests in the
that an existing law enters into and forms part of a valid contract without need
goodwill of the business. There has been no actual transfer of his shares to the
for the parties' expressly making reference to it (Lakas ng Manggagawang
corporation. In the books of the corporation he is still a stockholder.
Makabayan vs. Abiera, 36 SCRA 437).
Fajilan's suit against the corporation to enforce the latter's promissory note or
The requirement of unrestricted retained earnings to cover the shares is based
compel the corporation to pay for his shareholdings is cognizable by the SEC
on the trust fund doctrine which means that the capital stock, property and
alone which shall determine whether such payment will not constitute a
other assets of a corporation are regarded as equity in trust for the payment of
distribution of corporate assets to a stockholder in preference over creditors of
corporate creditors. The reason is that creditors of a corporation are preferred
the corporation. The SEC has exclusive supervision, control and regulatory
over the stockholders in the distribution of corporate assets. There can be no
jurisdiction to investigate whether the corporation has unrestricted retained
distribution of assets among the stockholders without first paying corporate
earnings to cover the payment for the shares, and whether the purchase is for a
creditors. Hence, any disposition of corporate funds to the prejudice of creditors
legitimate corporate purpose as provided in Sections 41 and 122 of the
is null and void. "Creditors of a corporation have the right to assume that so long
Corporation Code, which reads as follows:
as there are outstanding debts and liabilities, the board of directors will not use

49
the assets of the corporation to purchase its own stock . . ."(Steinberg vs.
Velasco, 52 Phil. 953.)

WHEREFORE, the petition for certiorari is granted, The decision of the Court of
Appeals is reversed and set aside. The order of the trial court dismissing the
complaint for lack of jurisdiction is hereby reinstated. No costs.

SO ORDERED.

Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

Petition granted. Decision set aside.

Note.—Disputes involving controversies between and among stockholders fall

within the original and exclusive jurisdiction of the Securities and Exchange
Commission under Section 6 of Presidential Decree No. 902-A. (Abejo vs. Dela
Cruz, 149 SCRA 654).

50
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-19761 January 29, 1923
PHILIPPINE TRUST COMPANY, as assignee in insolvency of "La Cooperativa
Naval Filipina," plaintiff-appellee,
vs.
MARCIANO RIVERA, defendant-appellant.
CORPORATIONS; DIMINUTION OF CAPITAL.—A corporation has no
power to release an original subscriber to its capital stock from the obligation of
paying for his shares, without a valuable consideration. for such release; and as
against creditors a reduction of the capital stock can take place only in the
manner and under the conditions prescribed by law.
APPEAL from a judgment of the Court of First Instance of Manila. Concepcion, J.
The facts are stated in the opinion of the court.
Araneta and Zaragoza for appellant.
Ross and Lawrence for appellee.
STREET, J.:
This action was instituted on November 21, 1921, in the Court of First Instance of
Manila, by the Philippine Trust Company, as assignee in insolvency of La
Cooperativa Naval Filipina, against Marciano Rivera, for the purpose of recovering
a balance of P22,500, alleged to be due upon defendant's subscription to the
capital stock of said insolvent corporation. The trial judge having given judgment
in favor of the plaintiff for the amount sued for, the defendant appealed.
It appears in evidence that in 1918 the Cooperativa Naval Filipina was duly
incorporated under the laws of the Philippine Islands, with a capital of P100,000,
divided into one thousand shares of a par value of P100 each. Among the
incorporators of this company was numbered the defendant Mariano Rivera,
who subscribed for 450 shares representing a value of P45,000, the remainder of
the stock being taken by other persons. The articles of incorporation were duly
registered in the Bureau of Commerce and Industry on October 30 of the same
year.
In the course of time the company became insolvent and went into the hands of
the Philippine Trust Company, as assignee in bankruptcy; and by it this action was
instituted to recover one-half of the stock subscription of the defendant, which
admittedly has never been paid.
The reason given for the failure of the defendant to pay the entire subscription
is, that not long after the Cooperativa Naval Filipina had been incorporated, a
meeting of its stockholders occurred, at which a resolution was adopted to the
effect that the capital should be reduced by 50 per centum and the subscribers
released from the obligation to pay any unpaid balance of their subscription in
excess of 50 per centum of the same. As a result of this resolution it seems to
have been supposed that the subscription of the various shareholders had been
cancelled to the extent stated; and fully paid certificate were issued to each
shareholders for one-half of his subscription. It does not appear that the
formalities prescribed in section 17 of the Corporation Law (Act No. 1459), as
amended, relative to the reduction of capital stock in corporations were
observed, and in particular it does not appear that any certificate was at any time
filed in the Bureau of Commerce and Industry, showing such reduction.
His Honor, the trial judge, therefore held that the resolution relied upon the
defendant was without effect and that the defendant was still liable for the
unpaid balance of his subscription. In this we think his Honor was clearly right.
It is established doctrine that subscription to the capital of a corporation
constitute a find to which creditors have a right to look for satisfaction of their
claims and that the assignee in insolvency can maintain an action upon any
unpaid stock subscription in order to realize assets for the payment of its debts.
(Velasco vs. Poizat, 37 Phil., 802.) A corporation has no power to release an
original subscriber to its capital stock from the obligation of paying for his
shares, without a valuable consideration for such release; and as against
creditors a reduction of the capital stock can take place only in the manner an
under the conditions prescribed by the statute or the charter or the articles of
incorporation. Moreover, strict compliance with the statutory regulations is
necessary (14 C. J., 498, 620).
In the case before us the resolution releasing the shareholders from their
obligation to pay 50 per centum of their respective subscriptions was an
51
attempted withdrawal of so much capital from the fund upon which the
company's creditors were entitled ultimately to rely and, having been effected
without compliance with the statutory requirements, was wholly ineffectual.

The judgment will be affirmed with cost, and it is so ordered.

Araullo, C. J., Malcolm, Avanceña, Villamor, Ostrand, Johns, and Romualdez, JJ.,
concur.

52
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-30460 March 12, 1929
C. H. STEINBERG, as Receiver of the Sibuguey Trading Company,
Incorporated, plaintiff-appellant,
vs.
GREGORIO VELASCO, ET AL., defendants-appellees.
1.WHAT CREDITORS MAY ASSUME.—The creditors of a corporation have
the right to assume that so long as there are debts and liabilities, the board of
directors of the corporation will not use its assets to purchase its own stock or to
declare dividends to its stockholders when the corporation is insolvent.
2.DUTIES OF DIRECTORS.—The directors of a corporation are bound to
care for its property and manage its affairs in good faith, and for a violation of
their duties resulting in waste of its assets or injury to its property, they are liable
to account the same as any other trustee.
3.LIABILITY OF DIRECTORS.—If the directors of a corporation do acts
clearly beyond their power, by reason of which a loss ensued, or dispose of its
property without authority, they will be required to make good the loss out of
their private estate.
4.IGNORANCE IS NO DEFENSE.—A director of a corporation is bound to
exercise ordinary skill and judgment and cannot excuse his negligence or unlawf
ul acts on the ground of ignorance or inexperience.
APPEAL from a judgment of the Court of First Instance of Zamboanga. Summers, J.
The facts are stated in the opinion of the court.
Frank H. Young for appellant.
Pablo Lorenzo and Delfin Joven for appellees.
STATEMENT
Plaintiff is the receiver of the Sibuguey Trading Company, a domestic
corporation. The defendants are residents of the Philippine Islands.
It is alleged that the defendants, Gregorio Velasco, as president, Felix del Castillo,
as vice-president, Andres L. Navallo, as secretary-treasurer, and Rufino Manuel,
as director of Trading Company, at a meeting of the board of directors held on
July 24, 1922, approved and authorized various lawful purchases already made of
a large portion of the capital stock of the company from its various stockholders,
thereby diverting its funds to the injury, damage and in fraud of the creditors of
the corporation. That pursuant to such resolution and on March 31, 1922, the
corporation purchased from the defendant S. R. Ganzon 100 shares of its capital
stock of the par value of P10, and on June 29, 1922, it purchased from the
defendant Felix D. Mendaros 100 shares of the par value of P10, and on July 16,
1922, it purchased from the defendant Felix D. Mendaros 100 shares of the par
value of P10, each, and on April 5, 1922, it purchased from the defendant Dionisio
Saavedra 10 shares of the same par value, and on June 29, 1922, it purchased
from the defendant Valentin Matias 20 shares of like value. That the total amount
of the capital stock unlawfully purchased was P3,300. That at the time of such
purchase, the corporation had accounts payable amounting to P13,807.50, most
of which were unpaid at the time petition for the dissolution of the corporation
was financial condition, in contemplation of an insolvency and dissolution.
As a second cause of action, plaintiff alleges that on July 24, 1922, the officers
and directors of the corporation approved a resolution for the payment of
P3,000 as dividends to its stockholders, which was wrongfully done and in bad
faith, and to the injury and fraud of its creditors. That at the time the petition for
the dissolution of the corporation was presented it had accounts payable in the
sum of P9,241.19, "and practically worthless accounts receivable."
Plaintiff prays judgment for the sum of P3,300 from the defendants Gregorio
Velasco, Felix del Castillo, Andres L. Navallo and Rufino Manuel, personally as
members of the Board of Directors, or for the recovery from the defendants S. R.
Ganzon, of the sum of P1,000, from the defendant Felix D. Mendaros, P2,000,
and from the defendant Dionisio Saavedra, P100, and under his second cause of
action, he prays judgment for the sum of P3,000, with legal interest against the
board of directors, and costs.
For answer the defendants Felix del Castillo, Rufino Manuel, S. R. Ganzon,
Dionisio Saavedra and Valentin Matias made a general and specific denial.
53
In his amended answer, the defendant Gregorio Velasco admits paragraphs, 1, 2
and 3 of each cause of action of the complaint, and that the shares mentioned in
paragraph 4 of the first cause of action were purchased, but alleges that they
were purchased by virtue of a resolution of the board of directors of the
corporation "when the business of the company was going on very well." That
the defendant is one of the principal shareholders, and that about the same time,
he purchase other shares for his own account, because he thought they would
bring profits. As to the second cause of action, he admits that the dividends
described in paragraph 4 of the complaint were distributed, but alleges that such
distribution was authorized by the board of directors, "and that the amount
represented by said dividends really constitutes a surplus profit of the
corporation," and as counterclaim, he asks for judgment against the receiver for
P12,512.47 for and on account of his negligence in failing to collect the accounts.
Although duly served, the defendant Mendaros did not appear or answer. The
defendant Navallo was not served, and the case against him was dismissed.
April 30, 1928, the case was tried and submitted on a stipulation of facts, based
upon which the lower court dismissed plaintiff's complaint, and rendered
judgment for the defendants, with costs against the plaintiff, and absolved him
from the cross-complaint of the defendant Velasco, and on appeal, the plaintiff
assigns the following errors:
1. In holding that the Sibuguey Trading Company, Incorporated, could
legally purchase its own stock.
2. In holding that the Board of Directors of the said Corporation could
legally declared a dividend of P3,000, July 24, 1922.
JOHNS, J.:
It is stipulated that on July 24, 1922, the directors of the corporation approved
the purchase of stocks as follows:
One hundred shares from S. R. Ganzon for P1,000;
One hundred shares from Felix D. Mendaros at the same price; which purchase
was made on June 29, 1922; another
One hundred shares from Felix D. Mendaros at the same price on July 16, 1922;
Ten shares from Dionisio Saavedra at the same price on June 29, 1922.
That during such times, the defendant Gregorio Velasco purchased 13 shares for
the corporation for P130; Felix del Castillo — 42 shares for P420; Andres Navallo
— 15 shares for P150; and the defendant Mendaros — 10 shares for P100. That
during the time these various purchases were made, the total amount of
subscribed and paid up capital stock of the corporation was P10,030, out of the
authorized capital stock 2,000 shares of the par value of P10 each.
Paragraph 4 of the stipulation also recites:
Be it also admitted as a fact that the time of the said purchases there
was a surplus profit of the corporation above-named of P3,314.72.
Paragraph 5 is as follows:
That at the time of the repeatedly mentioned various purchases of the
said capital stock were made, the said corporation had Accounts Payable
in the total amount of P13,807.50 as shown by the statement of the
corporation, dated June 30, 1922, and the Accounts Receivable in the
sum of P19,126.02 according to the books, and that the intention of the
Board of Directors was to resell the stocks purchased by the
corporations at a sum above par for each stock, this expectation being
justified by the then satisfactory and sound financial condition of the
business of the corporation.
It is also stipulated that on September 11, 1923, when the petition for the
dissolution of the corporation was presented to the court, according to a
statement made June 30, 1923, it has accounts payable aggregating P9,41.19, and
accounts receivable for P12,512.47.
Paragraph 7 of the stipulation recites:
That the same defendants, mentioned in paragraph 2 of this stipulation
of facts and in the same capacity, on the same date of July 24, 1922, and
at the said meeting of the said Board of Directors, approved and
authorized by resolution the payment of dividends to its stockholders, in
the sum of three thousand pesos (P3,000), Philippine currency, which
payments were made at different dates, between September 30, 1922,
and May 12, 1923, both dates inclusive, at a time when the corporation
54
 had accounts less in amount than the accounts receivable, which
resolution was based upon the balance sheet made as June 30, 1922,
said balance sheet showing that the corporation had a surplus of
P1,069.41, and a profit on the same date of P2,656.08, or a total surplus
amount of P3,725.49, and a reserve fund of P2,889.23 for bad and
doubtful accounts and depreciation of equipment, thereby leaving a
balance of P3,314.72 of net surplus profit after paying this dividend.
It is also stipulated at a meeting of the board of directors held on July 24, 1922, as
follows:
6. The president and manager submitted to the Board of Directors his
statement and balance sheet for the first semester ending June 30, 1922
and recommended that P3,000 — out of the surplus account be set
aside for dividends payable, and that payments be made in installments
so as not to effect the financial condition of the corporation. That
stockholders having outstanding account with the corporation should
settle first their accounts before payments of their dividends could be
made. Mr. Castillo moved that the statement and balance sheet be
approved as submitted, and also the recommendations of the president.
Seconded by Mr. Manuel. Approved.
Paragraph 8 of the stipulation is as follows:
That according to the balance sheet of the corporation, dated June 30,
1923, it had accounts receivable in the sum of P12,512.47, due from
various contractor and laborers of the National Coal Company, and also
employees of the herein corporation, which the herein receiver, after his
appointment on February 28, 1924, although he made due efforts by
personally visiting the location of the corporation, and of National Coal
Company, at its offices, at Malangas, Mindanao, and by writing
numerous letters of demand to the debtors of the corporation, in order
to collect these accounts receivable, he was unable to do so as most of
them were without goods or property, and he could not file any suit
against them that might have any property, for the reason that he had
no funds on hand with which to pay the filing and sheriff fees to
Malangas, and other places of their residences.
From all of which, it appears that on June 30, 1922, the board of directors of the
corporation authorized the purchase of, purchased and paid for, 330 shares of
the capital stock of the corporation at the agreed price of P3,300, and that at the
time the purchase was made, the corporation was indebted in the sum of
P13,807.50, and that according to its books, it had accounts receivable in the sum
of P19,126.02. That on September 11, 1923, when the petition was filed for its
dissolution upon the ground that it was insolvent, its accounts payable
amounted to P9,241.19, and its accounts receivable P12,512.47, or an apparent
asset of P3,271.28 over and above its liabilities. But it will be noted that there is
no stipulation or finding of facts as to what was the actual cash value of its
accounts receivable. Neither is there any stipulation that those accounts or any
part of them ever have been or will be collected, and it does appear that after his
appointment on February 28, 1924, the receiver made a diligent effort to collect
them, and that he was unable to do so, and it also appears from the minutes of
the board of directors that the president and manager "recommended that
P3,000 — out of the surplus account to be set aside for dividends payable, and
that payments be made in installments so as not to effect the financial condition
of the corporation."
If in truth and in fact the corporation had an actual bona fide surplus of P3,000
over and above all of its debt and liabilities, the payment of the P3,000 in
dividends would not in the least impair the financial condition of the corporation
or prejudice the interests of its creditors.
It is very apparent that on June 24, 1922, the board of directors acted on
assumption that, because it appeared from the books of the corporation that it
had accounts receivable of the face value of P19,126.02, therefore it had a surplus
over and above its debts and liabilities. But as stated there is no stipulation as to
the actual cash value of those accounts, and it does appear from the stipulation
that on February 28, 1924, P12,512.47 of those accounts had but little, if any,
value, and it must be conceded that, in the purchase of its own stock to the
amount of P3,300 and in declaring the dividends to the amount of P3,000, the
real assets of the corporation were diminished P6,300. It also appears from
paragraph 4 of the stipulation that the corporation had a "surplus profit" of
P3,314.72 only. It is further stipulated that the dividends should "be made in
installments so as not to effect financial condition of the corporation." In other
words, that the corporation did not then have an actual bona fide surplus from
which the dividends could be paid, and that the payment of them in full at the
time would "affect the financial condition of the corporation."
It is, indeed, peculiar that the action of the board in purchasing the stock from
the corporation and in declaring the dividends on the stock was all done at the
same meeting of the board of directors, and it appears in those minutes that the
both Ganzon and Mendaros were formerly directors and resigned before the
55
board approved the purchase and declared the dividends, and that out of the
whole 330 shares purchased, Ganzon, sold 100 and Mendaros 200, or a total of
300 shares out of the 330, which were purchased by the corporation, and for
which it paid P3,300. In other words, that the directors were permitted to resign
so that they could sell their stock to the corporation. As stated, the authorized
capital stock was P20,000 divided into 2,000 shares of the par value of P10 each,
which only P10,030 was subscribed and paid. Deducting the P3,300 paid for the
purchase of the stock, there would be left P7,000 of paid up stock, from which
deduct P3,000 paid in dividends, there would be left P4,000 only. In this situation
and upon this state of facts, it is very apparent that the directors did not act in
good faith or that they were grossly ignorant of their duties.
Upon each of those points, the rule is well stated in Ruling Case Law, vol. 7, p.
473, section 454 where it is said:
General Duty to Exercise Reasonable Care. — The directors of a
corporation are bound to care for its property and manage its affairs in
good faith, and for a violation of these duties resulting in waste of its
assets or injury to the property they are liable to account the same as
other trustees. Are there can be no doubt that if they do acts clearly
beyond their power, whereby loss ensues to the corporation, or dispose
of its property or pay away its money without authority, they will be
required to make good the loss out of their private estates. This is the
rule where the disposition made of money or property of the
corporation is one either not within the lawful power of the corporation,
or, if within the authority of the particular officer or officers.
And section 458 which says:
Want of Knowledge, Skill, or Competency. — It has been said that
directors are not liable for losses resulting to the corporation from want
of knowledge on their part; or for mistake of judgment, provided they
were honest, and provided they are fairly within the scope of the
powers and discretion confided to the managing body. But the
acceptance of the office of a director of a corporation implies a
competent knowledge of the duties assumed, and directors cannot
excuse imprudence on the ground of their ignorance or inexperience;
and if they commit an error of judgment through mere recklessness or
want of ordinary prudence or skill, they may be held liable for the
consequences. Like a mandatory, to whom he has been likened, a
director is bound not only to exercise proper care and diligence, but
ordinary skill and judgment. As he is bound to exercise ordinary skill and
judgment, he cannot set up that he did not possess them.
Creditors of a corporation have the right to assume that so long as there are
outstanding debts and liabilities, the board of directors will not use the assets of
the corporation to purchase its own stock, and that it will not declare dividends
to stockholders when the corporation is insolvent.
The amount involved in this case is not large, but the legal principles are
important, and we have given them the consideration which they deserve.
The judgment of the lower court is reversed, and (a), as to the first cause of
action, one will be entered for the plaintiff and against the defendant S. R.
Ganzon for the sum of P1,000, with legal interest from the 10th of February, 1926,
and against the defendant Felix D. Medaros for P2,000, with like interests, and
against the defendant Dionisio Saavedra for P100, with like interest, and against
each of them for costs, each on their primary liability as purchasers of stock, and
(b) against the defendants Gregorio Velasco, Felix del Castillo and Rufino
Manuel, personally, as members of the board of directors of the Sibuguey
Trading Company, Incorporated, as secondarily liable for the whole amount of
such stock sold and purchased as above stated, and on the second cause of
action, judgment will be entered (c) for the plaintiff and jointly and severally
against the defendants Gregorio Velasco, Felix del Castillo and Rufino Manuel,
personally, as members of the board of directors of the Sibuguey Trading
Company, Incorporated, for P3,000, with interest thereon from February 10,
1926, at the rate of 6 per cent per annum, and costs. So ordered.
Johnson, Street, Malcolm, Ostrand, Romualdez and Villa-Real, JJ., concur.
56
 Republic of the Philippines provide that FLADC would pay for the taxes arising from the assignment, and
SUPREME COURT that it should have been expressly provided in the deed of assignment, such
Manila alleged ambiguity can only be resolved against the Ongs for it was their lawyer,
the late Atty. John Uy, who prepared the Deed of Assignment. Where the
SECOND DIVISION provisions of a contract are ambiguous, such ambiguity must be construed
against the party who drafted the same.
G.R. No. 144476 February 1, 2002
PETITIONS for review of a decision and a resolution of the Court of
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T. Appeals.
ONG, WILLIE T. ONG, And JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP., The facts are stated in the opinion of the Court.
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, And the
SECURITIES AND EXCHANGE COMMISSION, respondents. Estelito P. Mendoza and Feria, Feria, Lugtu, LaO’, Noche for
petitioners in G.R. No. 144476.
x-----------------------x
Gonzalez, Batiller, Bilog & Associates for petitioner Willy Ong.
G.R. No. 144629
Aquilino L. Pimentel III for First Landlink Asia Dev’t. Corp.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, And INTRALAND RESOURCES DEVELOPMENT Arturo Santos for Masagana.
CORP., petitioners,
vs. Tan, Acut & Madrid for respondents in G.R. No. 144476.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG And JULIA ONG ALONZO, respondents.
DECISION

Civil Law; Contracts; In the interpretation of contracts, “if the terms of a

BUENA, J.:
contract are clear and leave no doubt upon the intention of the contracting
parties, the liberal meaning of its stipulation shall control.”—In the interpretation
Consolidated Petitions for Review of 1.) the Decision of the Court of Appeals1 in
of contracts, “if the terms of a contract are clear and leave no doubt upon the
CA-G.R. SP No. 49056 dated October 5, 1999, which affirmed with modifications
intention of the contracting parties, the liberal meaning of its stipulation shall
the Order dated September 11, 1998, issued by the SEC En Banc in SEC Case No.
control.” (Art. 1370, Civil Code) Thus, the FLADC should shoulder all obligations,
598 and 601, confirming the rescission of the Pre-Subscription Agreement; and
such as taxes, legal fees, notarial fees and expenses of registration, for the
2.) the Resolution of the Court of Appeals dated August 17, 2000 which denied
conveyance to be registered and the title to the property placed in the name of
the motions for reconsideration filed by the private parties herein, except
FLADC.
Masagana Telamart, Inc.
Same; Same; Where the provisions of a contract are ambiguous, such
The antecedent facts of the case, as summarized by the Court of Appeals are as
ambiguity must be construed against the party who drafted the same.—If the
follows:
Ongs find ambiguity in the said stipulation in that the same allegedly does not

57
"As one traverses Taft Avenue in Pasay City, one will see the Masagana Citimall, a
commercial complex owned and managed by the First Landlink Asia
Development Corporation (FLADC) (p. 127, 520 and 211, Rollo). It was not long
ago when this commercial complex, then unfinished, was threatened with
incompletion when its owner found it in financial distress in the amount
of P190,000,000.00 for being indebted to the Philippine National Bank (PNB),
(pp. 520 and 212, Rollo). That was in 1994 (Ibid.)
"FLADC was then fully owned by the Tiu Group composed of David S. Tiu, Cely Y.
Tiu, Moly Yu Gaw, Belen See Yu, D. Terence Y. Tiu, John Yu and Lourdes C. Tiu (p.
211, Rollo). In order to recover from its floundering finances, the Ong Group
composed of Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L. Ong, William T.
Ong and Julie Ong Alonzo, were invited by the Tius to invest in FLADC (pp. 211
and 520, Rollo). Hence, the execution of a Pre-Subscription Agreement by and
between the Tiu and Ong Groups on August 15, 1994 (pp. 211-216, Rollo).
"By the Pre-Subscription Agreement, both parties agreed to maintain equal
shareholdings in FLADC with the Ongs investing cash while the Tius contributing
property (pp. 213-214, Rollo). Specifically, the Ongs were to subscribe to 1 million
shares of FLADC at a par value of P100.00 per share while the Tius were to
subscribe to 549,800 shares more of FLADC at a par value of P100.00 per share
over and above their previous subscription of 450,200 shares in order to
complete a subscription of 1 million shares (Ibid.). Commensurate to their
proposed subscriptions, the Ongs were to pay P100,000,000.00 in cash (p.213,
Rollo), while the Tius were to contribute the following properties by way of
separate Deeds of Assignments:
"1. A four-storey building described in Transfer Certificate of Title No. 15587
registered in the name of Intraland Resources and Development Corporation (a
corporation wholly owned by the Tius) and valued at P20,000,000.00;
"2. A 1,902.30 square meter parcel of land covered by Transfer Certificate of Title
No. 15587 in the name of Masagana Telamart, Inc. (also a corporation owned by
the Tius) and valued at P30,000,000.00; and
"3. A 151 square meter parcel of land adjacent to the properties covered by
Transfer Certificate of Title Nos. 132493 and 132494 and valued at P4,980,000.00
(pp. 212 and 214, Rollo).
"Also for purposes of equality, the parties agreed that 6 directors of FLADC were
to be nominated from the Ong Group, while 5 directors thereof were to be
nominated from the Tiu Group (p. 213, Rollo). It was also agreed that the
positions of President and Secretary of FLADC shall be held by the Ongs, while
the positions of Vice-President and Treasurer thereof shall be held by the Tius
(Ibid.).
"In order to liquidate FLADC's outstanding P190,000,000.00 loan from the PNB,
the parties to the Pre-Subscription Agreement proposed payment thereof with
the P100,000,000.00 cash to be invested by the Ongs to FLADC and with the
available funds of FLADC derived from:
"1. Reimbursement of costs of improvements received from tenants on the
spaces leased to them;
"2. Receipts from reservations to lease; and
"3. Receipts for deposit or advance rentals from tenants (pp. 213-214, Rollo).
"In order to comply with the Pre-Subscription Agreement, the necessary increase
in capital stock of FLADC was applied for and duly approved (pp. 184-187, Rollo).
The Ongs subscribed to 1 million shares thereof at a par value of P100.00 per
share, or P100,000,000.00 (p. 185, Rollo). Intraland Resources and Development
Corporation executed the requisite Deed of Assignment over a 4-storey building
it owned in favor of FLADC and was duly credited with 200,000 shares therefor in
FLADC (Ibid; pp. 837-838, Rollo).
"Masagana Telamart, Inc. executed a Deed of Assignment over the 1,902.30
square meter property in favor of FLADC and delivered the owner's copy of the
transfer certificate of title of the same as well as the possession thereof to the
latter (pp. 221-226, Rollo). Title over the 151 square meter property was also
transferred in the name of FLADC (pp. 1062-1063, Rollo).
"FLADC's articles of incorporation were also duly amended increasing the
number of its directors from seven (7) to eleven (11), six (6) of which were
nominated by the Ong Group, while the rest were nominated by the Tiu Group
(pp. 188-189, Rollo). Later, Wilson T. Ong and Juanita Tan Ong were elected
President and Secretary, respectively, while David S. Tiu and Cely Yao Tiu were
elected Vice-President and Treasurer, respectively (pp. 191-192, Rollo)
"The P190,000,000.00 loan from the PNB was also settled, but not quite in
accord with the provisions of the Pre-Subscription Agreement (pp.437-441,
58
Rollo). In lieu of the FLADC funds which were supposed to be used as partial
payment for said loan per Pre-Subscription Agreement, the Ongs had to
pay P70,000,000.00 more aside from their P100,000,000.00 subscription
payment, and the Tius had to advance P20,000,000.00 in cash, which amount
was loaned to them by the former (Ibid.).
"The controversy between the two parties arose when the Ongs refused to
credit the number of FLADC shares in the name of Masagana Telamart, Inc.
commensurate to its 1,902.30 square meter property contribution; also when
they refused to credit the number of FLADC shares in favor of the Tius
commensurate to their 151 square meter property contribution; and when David
S. Tiu and Cely Y. Tiu were proscribed from assuming and performing their duties
as Vice-President and Treasurer, respectively of FLADC (pp. 132-136, Rollo). These
became the basis of the Tius' unilateral rescission of the Pre-Subscription
Agreement on February 23, 1996 (p. 867, rollo)."2
On February 27, 1996, the Tius sought the Securities and Exchange Commission
(SEC) confirmation of their rescission of the Pre-Subscription Agreement. Their
complaint was docketed as SEC Case No. 02-96-5269.
On May 19, 1997, after the Tiu Group, Masagana Telamart, Inc., Intraland
Resources and Development Corporation, the Ong Group and FLADC were heard
on their respective claims regarding the propriety of the Pre-Subscription
Agreement's rescission, SEC Hearing Officer Rolando G. Andaya, Jr., rendered a
decision thereon confirming the rescission as follows:
"WHEREFORE, judgment is hereby rendered confirming the rescission of the Pre-
Subscription Agreement, and consequently ordering:
"(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
"(b) FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for 1,000,000
shares of FLADC;
"(c) The plaintiffs to submit with the Securities and Exchange
Commission amended articles of incorporation of FLADC to conform
with this decision;
"(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,
132494, 134066 (formerly 15587), 135325 and 134204 and any other title
or deed in the name of FLADC, failing in which said titles are declared
void;
"(e) The Register of Deeds to issue new certificates of titles in favor of
the plaintiffs and to cancel the annotation of the Pre-Subscription
Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587).
"(f) The individual defendants, individually and collectively, their agents
and representatives, to desist from exercising or performing any and all
acts pertaining to stockholder, director or officer of FLADC or in any
manner intervene in the management and affairs of FLADC;
"(g) The individual defendants, jointly and severally, to return to FLADC
interest payment in the amount of P8,866,669.00 and all interest
payments as well as any payments on principal received from
the P70,000,000.00 inexistent loan, plus the legal rate of interest
thereon from the date of their receipt of such payment, until fully paid;
"(h) The plaintiff David Tiu to pay individual defendants the sum
of P20,000,000.00 representing his loan from said defendants plus legal
interest from the date of receipt of such amount.
"SO ORDERED."3
On motion of the Ong Group, the aforequoted decision was later partially
reconsidered in an omnibus order issued by SEC Hearing Officer Manolito S.
Soller on November 24, 1997, the decretal portion of which in part reads:
"WHEREFORE, premises considered, judgment is hereby rendered as follows:
"1. The Decision of this Commission dated May 19, 1997 is partially reconsidered
only insofar as the investment amounting to P70 million which is hereby declared
not as premium on capital stock but a liability of FLADC or advances of the
defendants made in favor of FLADC, and that the interest paid on account
thereof is hereby declared legal and valid;
"x x x x x x x x x
59
"SO ORDERED."4
Both the Ong and Tiu Groups appealed the aforequoted Omnibus Order to the
SEC en banc. Their respective appeals were docketed as SEC Case Nos. 598 and
601. On September 11, 1998, the SEC en banc issued an order, the decretal
portion of which reads:
"WHEREFORE, judgment is hereby rendered CONFIRMING the omnibus Order
dated 24 November 1997 insofar as it confirms the rescission of the Pre-
Subscription Agreement and REVERSING the same insofar as it held that the
seventy million (P70 M) paid by the Ong Group over and above the par value of
the one million (1,000,000) shares of stocks of FLADC which they had subscribed
as loan and not premium.
"Accordingly,
"1. The subscription contract entered into by the Ong group and the
corporation is hereby declared rescinded, the latter is ordered to cancel
the one million (1,000,000) shares subscription of the Ong Group in
FLADC, and FLADC shall return the amount of one hundred and seventy
million pesos (P170 M) to the Ong Group;
"2. The Tiu Group shall pay the twenty million pesos (P20 M) to the Ong
group which was loaned to them by the latter;
"3. The Ong Group, individually and collectively, their agents and
representatives, are hereby ordered to desist from exercising or
performing any and all acts pertaining to stockholders, directors or
officers of FLADC or in any manner intervening in the management and
affairs of FLADC;
"4. The Ong Group, jointly and severally, are hereby ordered to return to
FLADC the interest payment on the seventy million pesos (P70 M) in the
amount of eight million and eight hundred sixty-six thousand, and six
hundred sixty-nine pesos (P8,866,669.00) and all additional interest
payments thereafter, as well as any payments on the principal received
for the seventy million pesos (P70M) inexistent loan.
"No pronouncement as to cost and damages.
"SO ORDERED."5
From the said Order of the SEC En Banc, the Ongs appealed to the Court of
Appeals, by way of a petition for review under Rule 43 of the 1997 Rules of Civil
Procedure.
On October 5, 1999, the Court of Appeals issued the Decision subject of these
petitions for review, the decretal portion of which reads:
"WHEREFORE, the Order dated September 11, 1998 issued by the Securities and
Exchange Commission En Banc in SEC AC CASE NOS. 598 and 601 confirming the
rescission of the Pre-Subscription Agreement dated August 15, 1994 is hereby
AFFIRMED, subject to the following MODIFICATIONS:
"1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and property
contributions of the parties therein.
a. Ong Group - P100,000,000.00 cash contribution for one (1) million shares in
First Landlink Asia Development Corporation at a par value of P100.00 per share;
b. Tiu Group:
1.) P45,020,000.00 original cash contribution for 450,200 shares in First
Landlink Asia Development Corporation at a par value of P100.00 per
share;
2.) A four-storey building described in Transfer Certificate of Title No.
15587 in the name of Intraland Resources and Development Corporation
valued at P20,000,000.00 for 200,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share.
3.) A 1,902.30 square meter parcel of land covered by Transfer
Certificate of Title No. 15587 in the name of Masagana Telamart, Inc.
valued at P30,000,000.00 for 300,000 shares in First Landlink Asia
Development Corporation at a par value of P100.00 per share.
"2. Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof is
hereby ordered transferred to the Tiu Group.
60
 "3. First Landlink Asia Development Corporation is hereby
ordered to pay the amount of P70,000,000.00 that was
advanced to it by the Ong Group upon the finality of this
decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.
"4. The Tius are hereby ordered to pay the amount
of P20,000,000.00 loaned them by the Ongs upon the finality of
this decision. Should the former incur in delay in the payment
thereof, it shall pay the legal interest thereon pursuant to
Article 2209 of the New Civil Code.
"SO ORDERED."6
The Court of Appeals arrived at the said decision after finding that rescission and
specific performance as provided in Art. 1191 of the New Civil Code, may
alternatively be availed of in this case. The question is who between the
contending parties may avail of the alternative remedies when both of them
violated the provisions of the contract, their Pre-Subscription Agreement. The
Court of Appeals also found that the Ongs were indeed preventing the Tius from
assuming the duties and responsibilities of the position of Vice-President and
Treasurer of FLADC. The Ongs also violated the Pre-subscription agreement
when they did not credit to Masagana Telamart, Inc. the number of shares in
FLADC commensurate to its property contribution (1,902.30 sq. m.), despite the
execution by the Tius of the Deed of Assignment over said property. The Court of
Appeals also stated that the records also reveal the following violations on the
Tius' part: 1.) While there is, on record, a Deed of Assignment over the 151 sq. m.
parcel of land in favor of FLADC, said Deed was not executed by the Tius in favor
of FLADC but by the Lichaucos; and 2.) the Tius did not turn over to the Ong
Group the entire amount of FLADC's funds in violation of the Pre-Subscription
Agreement which stipulated that the former grants to the latter, the
management and administration of the regular business of FLADC upon the
agreement's execution. The Court of Appeals also found that the Tius were
diverting rentals due to FLADC into their own MATTERCO account which rentals
appear to have not been remitted to FLADC up to now. Considering the
foregoing, the Court of Appeals concluded that the two groups can no longer
work harmoniously together and deemed it proper to confirm the rescission and
for the Ongs and the Tius to liquidate FLADC in accordance with their respective
cash and property contribution. The Court of Appeals also resolved the question
of the nature of the P70 M paid by the Ongs in excess of 1 million shares they
acquired from FLADC, ruling that the same is an advance made by the Ongs in
favor of FLADC, and not a premium or paid-in surplus on the actual value of 1
million shares, and that no interest thereon may be awarded as there is no
evidence on record which shows that at the time the P70M was advanced to
FLADC, the parties agreed that the same shall earn interest.
On August 17, 2000, the Court of Appeals issued a Resolution which denied the
private parties' motions for reconsideration.
The Ong Group and the Tiu Group both filed their respective petitions for review
subject of these consolidated cases.
Except for the fourth assigned error in the Ongs' petition (G.R. No. 144476) and
sub-paragraphs (vi) and (vii) of the second assigned error in the Tius’ petition
(G.R. No. 144629), which are well taken, We find both petitions to be without
merit.
In their Petition, docketed as G.R. No. 144476, the Ongs raise the following
assignment of errors:
"I
"The Court of Appeals erred in ruling that the ‘Pre-Subscription Agreement’ of
the parties dated August 15, 1994 may be rescinded under Article 1191 of the New
Civil Code.
"a. Rescission is applicable only to reciprocal obligations and
the ‘Pre-Subscription Agreement’ does not provide for
reciprocity; hence, the remedy of rescission is not available.
"b. Rescission is not applicable when ‘rights’ over the subject
matter of the rescission have been acquired by third persons.
"c. Rescission is only applicable in case of substantial and
fundamental breach.
"II
"The Court of Appeals erred in finding that the Ongs violated the ‘Pre-
Subscription Agreement’ in the following manner:
61
"a. The Ongs prevented the Tius from assuming the duties and responsibilities of
the Vice-President and Treasurer of FLADC by not providing them with adequate
offices.
"b. By not crediting Masagana Telamart, Inc. with 300,000 shares corresponding
to the value of the 1,902.30 square meters property covered by TCT No. 15587.
"III
"The Court of Appeals erred in confirming rescission of the ‘Pre-Subscription
Agreement’ dated August 15, 1994 and the ‘liquidation’ of FLADC ‘for practical
reasons,’ and to prevent ‘further squabbles and numerous litigations,’ reasons
unknown in law.
"IV
"The Court of Appeals erred in not awarding interest on the loan of respondent
David S. Tiu from petitioner Ong Yong in the amount of P20 million and the P70
million advanced by the Ongs to FLADC.
"V
"The Court of Appeals erred in not awarding costs and damages to the Ongs."
On the first issue, the Court of Appeals did not err in ruling that the "Pre-
Subscription Agreement" of the parties dated August 15, 1994 may be rescinded
under Article 1191 of the New Civil Code.
In paragraph (a) of the first assigned error, the Ongs allege that rescission is
applicable only to reciprocal obligations and the "Pre-Subscription Agreement"
does not provide for reciprocity, hence, the remedy of rescission is not available.
The Ongs cited the case of Songcuan vs. IAC, (191 SCRA 28) to illustrate their
point that "As in the Songcuan case, there are here two (2) separate and distinct
obligations each independent of the other – i.) the obligation to subscribe to,
and to pay, 50% of the increased capital stock of FLADC; and ii.) the obligation to
install the Ongs and the Tius as members of the Board of Directors and to certain
corporate positions, but only after the Ongs and the Tius have subscribed each
to 50% of the increased capital stock of FLADC."
In this petition, in lieu of Art. 1191,7 the Ongs invoke Articles 1156 and 1159 of the
New Civil Code which state –
"Art. 1156. An obligation is a juridical necessity to give, to do or not to do.
"Art. 1159. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith."
and that should there be any violation, those who failed to fulfill their obligations
should be required to perform their obligations under the agreement.
Contrary to the Ongs' assertion, the Songcuan case does not apply squarely to
this case. In the Songcuan case, this Court ruled that Art. 1191 to rescind the right
of the Alviars to repurchase does not apply because their corresponding
obligations can hardly be called reciprocal because the obligation of the Alviars
to lease to Songcuan the subject premise arises only after the latter had
reconveyed the realties to them. On the other hand, in the instant case, the
obligations of the two (2) groups to pay 50% of the increased capital stock of
FLADC and to install them as members of the Board of Directors and to certain
corporate positions are simultaneous and arise upon the execution of the pre-
subscription agreement.
The Ongs illustrate reciprocity in the following manner: In a contract of sale, the
correlative duty of the obligation of the seller to deliver the property is the
obligation of the buyer to pay the agreed price.8
In the case at bar, the correlative obligation of the Tius to let the Ongs have and
exercise the functions of the positions of President and Secretary is the
obligation of the Ongs to let the Tius have and exercise the functions of Vice-
President and Treasurer. In this regard, the Court of Appeals aptly stated, and we
quote:
"It cannot be denied that the Pre-Subscription Agreement contains reciprocal
obligations owing to the fact that the parties thereto agreed to maintain parity
not only in their shareholdings in FLADC but also with regard to their standing in
FLADC (pp. 214, 662, 708-710, 715-716, 1914, Rollo). In fine, each party has the
obligation to remain equal with the other on every matter pertaining to FLADC.
Herein lies the reciprocity in the Pre-Subscription Agreement."9
62
Moreover, the Ongs are now estopped from denying the applicability of Art. 1191
to the present controversy. As correctly observed by the Court of Appeals in its
Resolution dated August 17, 2000, which denied the Ongs' motion for
reconsideration:
"Petitioners keep on harping for the Pre-Subscription Agreement's specific
performance yet they also actually failed to give a legal basis therefor. Why then
must they deny that the Tiu Group has a right to ask for rescission of their
agreement per Article 1191 of the Civil Code (pp. 1141-1145, Rollo) when they
themselves invoke the same law as basis for asking the specific performance of
the same agreement (pp.1156-1159, Rollo)"10
In paragraph (b) of the first assigned error, the Ongs allege that rescission is not
applicable when "rights" over the subject matter of the rescission have been
acquired by third persons. The Ongs refer to Arts. 1191 and 1385. 11
The Ongs argue that the payment on subscription of P100 million by the Ongs is
not to the Tius and the payment of P54.98 million by the Tius is not to the Ongs,
but to FLADC, the corporation, which is distinct and separate from the Ongs and
the Tius notwithstanding the fact that they may be the only stockholders.
Pursuant to Arts. 1191 and 1385, continue the Ongs, the payment made by the
two (2) groups have come to be legally owned and possessed by FLADC, the
corporation, a third person, who did not act in bad faith. So that any alleged
violation of the Pre-Subscription Agreement would have no consequence on the
respective amounts paid by the two (2) groups on their subscription to FLADC, a
third party.
We are not convinced.
The reliance of the Ongs on Article 1385 is misplaced. We agree with the Tius that
the things which are the object of the Pre-Subscription Agreement – one million
shares of stock subscribed to by the Ong Group, the additional 549,800 shares
subscribed to by the Tius, and the corporate positions mentioned above – are
not in the possession of third persons, but are in the possession of the parties to
the Pre-Subscription Agreement. In any case, FLADC is not a third person in
relation to the Pre-Subscription Agreement though not named as a party. FLADC
is deemed a party to the agreement by virtue of stipulations pour autrie clearly
and deliberately conferring on it a favor or benefit which it subsequently
accepted. (Art. 1311, Civil Code)12 Such benefit was in the form of the payments
made by the parties for their subscription to shares of stock in FLADC, which
FLADC accepted.
In paragraph (c) of the first assigned error, the Ongs allege that rescission is only
applicable in case of substantial and fundamental breach. The Ongs contend that
the substantial and fundamental aspects of the Pre-Subscription Agreement
between the two (2) groups are their commitment to subscribe to their
respective numbers of shares and to pay corresponding amount thereof. The
Ongs say that they have accomplished their part but not the Tius; and that their
alleged breach of the agreement in their alleged failure to provide adequate
offices to David Tiu as Vice-President and Cely Yao Tiu, as Treasurer, is hardly
substantial and fundamental because stockholders become Vice-President or
Treasurer of a corporation by election, not by virtue of office facilities he/she may
have been provided.
The Ongs' contention is without merit. Suffice it to state that what makes a
stockholder an officer of a corporation is not simply the fact of his election but,
more important, his ability to perform the powers and functions of that office. As
will be discussed in the next assigned error, the Ongs indeed prevented the Tius
from exercising the powers and functions of their office. We rule, therefore, that
such breach of the agreement on the part of the Ongs is substantial and
fundamental.
On the second assigned error, the Court of Appeals did not err in finding that the
Ongs violated the "Pre-Subscription Agreement" (a.) when it prevented the Tius
from assuming the duties and responsibilities of the Vice-President and Treasurer
of FLADC by not providing them with adequate offices, and (b.) when it did not
credit Masagana with 300,000 shares corresponding to the value of its 1,902.30
sq. m. property contribution.
On paragraph (a), this Court takes exception to the phrase "by not providing
them with adequate offices." This is not the only reason but only one of the
reasons cited by the Court of Appeals in concluding that the Ongs violated the
pre-subscription agreement when they prevented the Tius from assuming the
duties and responsibilities of the Vice-President and Treasurer of FLADC. The
discussion made by the Court of Appeals on this point is correct, very clear and
enlightening, and we quote:
"A reading of the records, which to date comprises more than 2,100 pages,
reveal that the Ongs were indeed preventing the Tius from assuming the duties
and responsibilities of the position of Vice-President and Treasurer of FLADC. This
is highlighted by the fact that the Ongs' attempt to provide David S. Tiu and Cely
Y. Tiu with executive offices before the filing of the complaint a quo, was merely
half-hearted as evidenced by the delay in providing for said offices despite
63
repeated demands therefor (pp. 844-845, 862-868, 877-878, 895-896, 999-1000,
Rollo), and by the need to pass a board resolution when none is necessary in
order to provide executive offices for the FLADC President and his staff (pp. 936-
937, Rollo). Another fact which shows that the Tius were being prevented from
assuming their responsibilities is the criminal case for theft filed by the Ongs
against David S. Tiu (pp. 856-859, Rollo). Why must there be a need for the Tius
to act surreptitiously in order to have a copy of FLADC's records made if they
were not actively being prevented from inspecting the same? Anyway, for all
intents and purposes, the Ongs admit that they were preventing the Tius from
assuming the responsibilities of Vice-President and Treasurer of FLADC. This was
made via their reply to the Tiu's letter rescinding the Pre-Subscription
Agreement, which in part reads:
'As to your contention that the ONG GROUP has failed to accord you, the elected
Vice-President of FLADC, and your wife, the elected treasurer of FLADC, the
powers vested in you by the by-laws, allow me to remind you that in accordance
with the Pre-Subscription Agreement, ‘the First Party (TIU GROUP) hereby grants
to the Second Part (ONG GROUP) the management and administration of the
regular business of the corporation upon the execution of this documents (sic).’
Notwithstanding this fact, the ONG GROUP has always made you a co-signatory
to the bank accounts of the corporation; however, to the great prejudice and
damage of the corporation you have, more often than not, either purposely
delayed or refused to affix your signature to checks in payment for the valid
obligations of the corporation. Moreover, from the start, the corporation has
given your wife, who is the Treasurer of FLADC, a space in our office but she has
seldom come to hold office there. Despite this, we have already acceded to your
demand that your wife be given a room in lieu of the space provided for
her. Furthermore, pursuant to the by-laws, both the Vice-President and the
Treasurer are to perform duties which may be assigned to them by the Board of
Directors and/or the President. (p. 2049, Rollo; underscoring supplied)'
"The Pre-Subscription Agreement provides that the position of Vice-President
and Treasurer of FLADC shall be nominated from the Tiu Group (p. 213, Rollo).
Despite the provision in the agreement turning over the management and
administration of FLADC to the Ong Group (p. 215, Rollo), there is nothing in the
agreement which states that the elected Vice-President and Treasurer of FLADC
cannot or must not be allowed to assume the responsibilities of their respective
office. From the tenor of the aforequoted reply to the Tius' letter of rescission, it
is evident that the Ongs have reduced the positions of Vice-President and
Treasurer of FLADC to mere figure heads."13
The Court of Appeals did not err in arriving at the same conclusion like the three
(3) tribunals below (Hearing Officer Andaya, Hearing Officer Soller and the
SEC En Banc), that the Ongs excluded the Tius from the corporation by
preventing them from participating in its operation and financial affairs.
In paragraph (b) of the second assigned error, the Ongs maintain that their
group cannot be faulted for not crediting Masagana with 300,000 shares
corresponding to the value of its 1,902.30 sq. m. property contribution, because
the Deed of Assignment over the said property executed by Masagana in favor
of FLADC was patently incomplete (not dated, no instrumental witness signed
the Deed and the Acknowledgement was not executed, because the Tius asked
that the execution of the document be not completed) and that the necessary
documentary stamp taxes, and capital gains and transfer taxes had not been
paid, such that FLADC could not process with the SEC the application regarding
the exchange of the said property for shares of stock in the corporation.
The issue boils down to the question of "Who has the obligation to pay the taxes
incident to the assignment?"
We rule that FLADC, the assignee, has the obligation to pay the taxes incident to
the assignment. The Court of Appeals did not err in holding that:
"xxx The provisions on this matter in the Pre-Subscription Agreement is clear
that upon the execution of the Deed of Assignment thereon in favor of FLADC,
Masagana Telamart, Inc. shall be credited with the number of shares in FLADC
commensurate to the value thereof of P30,000,000.00 (see paragraphs 14-15, 17
of the Pre-Subscription Agreement, p. 214, Rollo). Since the Deed of Assignment
over this property has already been executed in favor of FLADC, and the owner's
duplicate of the title and possession thereof have already been delivered to
FLADC (pp. 221-226, 563, Rollo), the Ongs should have credited 300,000 shares of
FLADC at a par value of P100.00 per share in the name of Masagana Telamart,
Inc. The transfer of the title to said property in FLADC's name is another matter
which is governed by the Deed of Assignment itself and not the Pre-Subscription
Agreement (pp. 221-222, Rollo)."14
The Deed of Assignment stipulates:
"The ASSIGNEE (FLADC) hereby accepts said assignment and assumes all the
obligations of performing all the terms and conditions including but not limited
to, the transfer of the said parcel of land in the name of First Landlink Asia
Development Corporation within a reasonable time." (Emphasis supplied)
64
Said stipulation does not enumerate nor exclude any obligation on the part of
the assignee for purposes of transferring the property in its name. Instead, the
Deed stipulates in simple language "all the obligations of performing all the
terms and conditions including, but not limited to, the transfer of the said parcel
of land in the name of (FLADC)." It imposes no obligation at all on the part of the
assignor for purposes of transferring the parcel of land in the name of FLADC.
In the interpretation of contracts, "if the terms of a contract are clear and leave
no doubt upon the intention of the contracting parties, the liberal meaning of its
stipulation shall control." (Art. 1370, Civil Code). Thus, the FLADC should shoulder
all obligations, such as taxes, legal fees, notarial fees and expenses of
registration, for the conveyance to be registered and the title to the property
placed in the name of FLADC.
If the Ongs find ambiguity in the said stipulation in that the same allegedly does
not provide that FLADC would pay for the taxes arising from the assignment, and
that it should have been expressly provided in the deed of assignment, such
alleged ambiguity can only be resolved against the Ongs for it was their lawyer,
the late Atty. John Uy, who prepared the Deed of Assignment.15 Where the
provisions of a contract are ambiguous, such ambiguity must be construed
against the party who drafted the same.16
At any rate, the intention of the parties could not have been to impose on
Masagana the obligation to pay said taxes. As explained by the Tius in their
Comment –
"xxx for such imposition is not consistent with the fundamental concept of
'equality' on which the Pre-Subscription Agreement is based. If Masagana were
to pay the taxes and other expenses for the transfer of its 1,902.30 sq. m.
property contribution to FLADC, Masagana would, in effect, be paying more
than P30 million, the agreed valuation of the said property contribution, for
300,000 shares of stock in FLADC. Thus, assuming the Ong Group's computation
of Masagana's net gain on the assignment is correct, i.e., P14 million, and
Masagana were to pay 35% of P14 million (P4.9 million) in taxes for such
assignment, in addition to the amount of P570,690.00 in documentary stamp
taxes, Masagana would be paying P35,470,690.00 for 300,000 shares of stock in
FLADC, instead of only P30 million. This could not have been the intention of the
parties."17
The Ongs presented as proof that the Tius acknowledged their liability for the
payment of the taxes, the following letter-reply dated April 27, 1995 of Mr. David
Tiu to Mr. Wilson T. Ong's request for him to remit payment for documentary
stamp tax:
"With respect to your request for the remittance of P570,690.00 representing 1-
1/2% of documentary stamps on the assignment of the land with an area of
1,902.30 sq. m. described in TCT No. 134066, we are willing to remit the same
after our proposed meeting, together with Atty. John Uy and Atty. A. Santos
regarding the possible tax liability which we have earlier discussed with you."18
The contents of the said letter were satisfactorily explained by Mr. Tiu as simply a
diplomatic way of denying any tax liability on the transfer, precisely the reason
behind the need for a meeting between the lawyers of the two (2) groups:
"Hearing Officer:
"Okay, you may explain that.
"A In this letter that I mentioned, April 27, this is only my diplomatic way of
denying or telling the Ong Group that it is not part of our agreement that I will
pay this amount. Because it's clearly written in the Deed of Assignment that it is
the assignee (that) who will pay the documentary stamps and other taxes to be
able to transfer the parcel of land in the name of FLADC. That is why it is a
meeting with both our lawyers." (TSN, 15 April 1996, p. 34)
"Atty. Santos:
"Q In that letter, you made mention of a meeting to be held between Atty.
Santos and Atty. Uy. The Atty. Santos being referred there, is this Atty. Santos,
this representation?
"A Yes, Sir, you are the lawyer I'm referring. (TSN, 15 April 1996, pp. 43-44)19
Sub-paragraph (c) of the second assigned error, that the Tius, not the Ongs,
violated the Pre-Subscription Agreement, shall be discussed together with the
Tius' Assignment of Errors in G.R. No. 144629.
On the third assigned error, the Ongs allege that "the Court of Appeals erred in
confirming rescission of the Pre-Subscription Agreement and the liquidation of
FLADC 'for practical reasons,' and to prevent 'further squabbles and numerous
litigations,' reasons unknown in law." Allegedly, it is an error for the Court of
65
Appeals to order the transfer to the Tiu Group whatever remains of the assets of
the FLADC and the management thereof, upon the return to each group of their
respective cash and property contribution. The Ongs maintain that the two (2)
groups' payment for the shares of stocks belong to the corporation, no longer to
the Ongs or Tius; and even if the Ongs and Tius were the only stockholders, they
do not have the authority to transfer cash or properties of FLADC to themselves,
for that would be misappropriation. The Ongs further cite Sec. 122 of the
Corporation Code to support their claim that the order of the Court of Appeals
for the return of the parties' contribution (distribution of FLADC assets, in the
words of the Ongs) is prohibited, thus:
"Sec. 122. Corporate Liquidation. - xxx
"Except by decrease of capital stock and as otherwise allowed by this Code, no
corporation shall distribute any of its assets or property except upon lawful
dissolution and after payment of all its debts and liabilities."
The Ongs also question the order of the Court of Appeals to transfer to the Tius
the Masagana Citimall (the asset which would remain after moving out cash and
property to the Ongs and Tius), "the corporation's priceless jewel," when it was
they who caused the venture to flourish because of their P190 million
contribution and their management thereof.
We find the Ongs' contentions to be without merit.
The Tius counter, among others, that: "When the Ong Group invested their P170
million for 50% of the shares of FLADC, and loaned Mr. Tiu P20 million to enable
FLADC to pay the P190 million PNB loan, the mall leasing business was already in
place, and all the Ong Group had to do was continue the administration of the
mall already started by the Tiu Group, and oversee the collection of rentals which
were supposed to be remitted to the Treasurer, but which the Ong Group
refused to do. For the Ong Group to disregard the valuable contributions of the
Tiu Group and monopolize the credit for FLADC's success is plain arrogance."
As discussed in the first assigned error, the Court of Appeals correctly confirmed
the rescission of the Pre-Subscription Agreement on the basis of Art. 1191 of the
Civil Code. It could have relied on the said provision and nonetheless stood on
valid ground. It, however, judiciously took into account the special circumstances
of the case and further justified its decision confirming the rescission of the Pre-
Subscription Agreement on the basis of its perception that the two groups "can
no longer work harmoniously together" and that "to pit them together in the
management of FLADC will only result to further squabbles and numerous
litigation."
Moreover, what the Court of Appeals ordered was not corporate liquidation
upon lawful dissolution under Sec. 122 of the Corporation Code, as cited by the
Ong Group. The Court of Appeals clarified in its Resolution promulgated on
August 17, 2000 that "in ordering liquidation, the Court does not mean its
dissolution as provided in the Corporation Code." 20 The prohibition, therefore,
under Section 122 against distribution of assets or properties of the corporation
does not apply.
As a legal consequence of rescission, the order of the Court of Appeals to return
the cash and property contribution of the parties is based on law, hence, cannot
be considered an act of misappropriation. For how can the rescission of the Pre-
Subscription Agreement be implemented without returning to the two groups
whatever they delivered to the corporation in accordance with the Agreement?
With regard to the order of the Court of Appeals transferring to the Tiu Group
whatever remains of the assets of FLADC and the management thereof, the
same is but an inevitable consequence of the rescission of the Pre-Subscription
Agreement. Restoration of the parties to status quo ante dictates that the
building constructed on the two (2) existing lots of FLADC, the remaining asset
of FLADC, be transferred to the Tiu Group. The status quo ante immediately prior
to the execution of the Pre-Subscription Agreement was that the Tius, then
wholly owning FLADC, had control and custody over this remaining asset.
On the fourth assignment of error, we find the same to be well taken. Indeed,
the Court of Appeals erred in ruling that: "Since no period was stipulated for the
return thereof (the P20 million loan extended to the Tius and the P70 million the
Ongs advanced to FLADC), the Court resolves to fix the same upon the finality of
this Decision (See Article 1197, Civil Code 21). Failure of the Tius to pay the same
upon the finality of this decision shall make them liable for legal interests
thereon pursuant to Article 2209 of the New Civil Code."
We agree with the Ongs that since no period was stipulated for the return of
the P20 million loan they extended to the Tius, the same should earn 12% interest
per annum and the period of payment of interest thereon should reckon from
the time of judicial (or extrajudicial) demand, which was, from April 23, 1996,
when the Ongs filed their Answer, and not upon the finality of this Decision.
66
In Eastern Shipping Lines, Inc. vs. Court of Appeals22 and affirmed in Gomez vs.
Court of Appeals (Sept. 21, 2000, G.R. No. 120747) and Catungal vs. Hao, (March
22, 2001, G.R. No. 134972), among other cases, this Court discussed at length the
rate of interest, as well as the accrual thereof in awarding interest in the concept
of actual and compensatory damages and held that:
"II
"The Court of Appeals erred in relaxing the application of the laws and
jurisprudence on rescission of reciprocal obligations and in ordering the
liquidation of FLADC obviously on the basis of its mistaken perception:

"1. When the obligation is breached, and it consists in the payment of a sum of "i) That in 1994, prior to the entry of the Ong Group in FLADC,
money, i.e., a loan or forbearance of money, the interest due should be that the Masagana Citimall was threatened with incompletion;
which may have been stipulated in writing.23 Furthermore, the interest due shall
itself earn legal interest from the time it is judicially demanded. In the absence of "ii) That at that time, FLADC was in financial distress in the
stipulation, the rate of interest shall be 12% per annum to be computed from amount of P190 million for being indebted to PNB;
default, i.e., from judicial or extrajudicial demand under and subject to the
provisions of Article 116924 of the Civil Code."
"iii) That the Tiu Group invited the Ong Group to come in as
stockholders for FLADC to recover from its floundering
However, we do not deem it fit that the ruling in Eastern Shipping Lines, Inc. finances;
should also apply to the P70 million that the Ongs advanced to FLADC. This is
because the Ongs themselves, in the Board Resolution (Exhibit "16") that was
"iv) That the Pre-Subscription Agreement was entered into by
approved in the meeting of the Board of Directors of FLADC held on June 19,
the parties in order to rescue FLADC from financial distress, i.e.,
1996 (during which the Tiu group was absent), authorized payment of 10%
for the purpose of settling its P190 million indebtedness to PNB;
interest per annum on the said P70 million. Thus, as to the P70 million, the FLADC
should be made to pay only 10% interest per annum and not 12%, the period to be
"v) That under the circumstances, Masagana Citimall will not be
reckoned from June 19, 1996.
what it is today were it not for the money that the Ong Group
invested;
The matter of why the P70 million paid by the Ongs should be adjudged as an
advance and not a premium or paid-in surplus shall be taken up in G.R. No.
"vi) That the Tiu Group violated the Pre-Subscription Agreement
144629, the petition filed by the Tius.
since the deed of assignment over the 151 sq. m. lot was not
executed by the Tiu Group but by the Lichaucos in favor of
On the fifth assigned error, the Ongs allege that the Court of Appeals erred in not
FLADC, hence, the Tiu Group cannot be credited with the
ordering the Tius to pay costs and damages to the Ongs for the filing of this
number of shares commensurate to the value of said lot and
baseless and unwarranted suit. Considering all the foregoing which shows that
will not, therefore, be able to equal the Ong Group's one million
the case filed by the Tius for confirmation of the rescission of the pre-
subscription in FLADC;
subscription agreement, is meritorious, it is obviously no longer necessary to
discuss this issue.
"vii) That the Tiu Group were pulling a fast one on the Ong
Group by their 'alleged' 151 sq. m. property contribution in
In their Petition, docketed as G.R. No. 144629, the Tius raise the following
exchange for 49,800 shares in FLADC;
Assignment of Errors:
"viii) That the Tiu Group did not turn over to the Ong Group the
"I
entire amount of FLADC funds;

"The Court of Appeals erred in ordering the liquidation of FLADC instead of

merely ordering the restitution of the parties' respective investments.
67
 "ix) That the Tiu Group, by unilaterally rescinding the Pre-
Subscription Agreement, are now trying to oust the Ong Group
from enjoying the fruits of their P190 million investment in
FLADC, and that this is ingratitude at its height;
"x) That the Tiu Group were diverting rentals due to FLADC into
their own MATERRCO account which rentals appear to have not
been remitted to FLADC up to now; and
"xi) That the P70 million paid by the Ong Group was an advance
and not a premium on capital."
On their first assigned error, the Tius allege that the Court of Appeals erred in
ordering the liquidation of FLADC instead of merely ordering the restitution of
the parties' respective investments. The Tius continue: "To rescind is 'to declare a
contract as though it never were.' It is not merely to terminate it and release the
parties from further obligations to each other but to abrogate it from the
beginning and restore parties to their relative position which they would have
occupied had no contract ever been made (Ocampo vs. Court of Appeals, 233
SCRA 551)."25The Tius also contend that the liquidation of the profits of FLADC
and the distribution thereof to the parties offend the very essence of rescission
which merely requires mutual restoration in consonance with the basic principle
that when an obligation has been extinguished, it is the duty of the court to
require the parties to surrender whatever they may have received from the other
so that they may be restored, as far as practicable, to their original situation. In
support thereof, the Tius cite the following cases: Floro Enterprises, Inc. vs. Court
of Appeals, 249 SCRA 354 [1995], citing Agustin vs. Court of Appeals, 186 SCRA
375 [1990]; Magdalena Estate, Inc. vs. Myrich, 71 Phil., 344 [1941]; Po Pauco vs.
Siguenza, et al., 49 Phil. 404 [1926].
On the other hand, the Ongs, in their Comment also question the order of the
Court of Appeals in its Decision for the rescission and liquidation of FLADC and
for the return to the Ongs of their P190 million, and nothing more. The Ongs ask
what became of the profits earned and the additional assets acquired by FLADC
through the efforts of the Ongs, and the P190 million they invested in FLADC.
To the above queries of the Ongs, it is precisely for those reasons that the Court
of Appeals in its Resolution of August 17, 2000, clarified thus:
"xxx. While the Court in the case at bench ordered the rescission of the Pre-
Subscription Agreement, it did not, however, order restitution of what the
parties contributed pursuant thereto. What the Court ordered was the
liquidation of FLADC in accordance with the actual amount of investment each
party made in FLADC (pp. 18-19 and 24 of Decision; pp. 1045-1046 and 1050,
Rollo). Restitution and liquidation are two different things. Liquidation includes
both the profits and losses each party derived within the duration of their
respective investment (see Sibal, Philippine Legal Encyclopedia, p. 531; Black's
Law Dictionary, p. 839; De Leon, The Corporation Code of the Philippines
Annotated, 1997 ed., p. 705, citing 16 Fletcher, p. 658). Contrary therefore to
Willie Ong's contention that the Ongs will simply receive a return of their money
without any fruits or interest, the decision assures them that they (the Ong and
Tiu Groups) will have a bountiful return of their respective investments derived
from the profits of the corporation."26
With regard to the Tius' allegations, the same are without merit. As cited by the
Tius themselves, "it is the duty of the court to require the parties to surrender
whatever they may have received from the other so that they may be
restored, as far as practicable, to their original situation." Restoration of the
parties to their relative position which they would have occupied had no contract
ever been made is not practicable nor possible because we cannot turn back the
hands of time when the mall was only "nearing completion" in 1994, when the
mall was not fully tenanted yet and they had an existing loan of P190 million with
PNB with an interest of 19% per annum. But the Masagana Citimall is now
completely constructed/finished, the P190 million loan fully paid without their
having to pay enormous interest, and the Tius cannot deny that the Ongs are
partly to be credited for the success of the venture. What the Tius want the
Court to order would have been fair and just had there been no fault on their
part as would be discussed in the second assigned error, and had they come to
Court with clean hands because he who comes to Court must come with clean
hands.27 If, as the Tius espouse, the Court would simply order the return of
the P190 million of the Ongs, then, the Tius would be unjustly enriched at the
expense of the Ongs. Under the law, no one shall unjustly enrich himself at the
expense of another. "Niguno non deue enriquecerse tortizamente condaño de
otro."
On their second assigned error, the Tius allege that the Court of Appeals erred in
relaxing the application of the laws and jurisprudence on rescission of reciprocal
obligations and ordering the liquidation of FLADC on the basis of its mistaken
perception.
Subparagraphs i-iv, and ix, being interrelated, shall be discussed jointly. The Tius
allege that contrary to the Court of Appeals' findings:
68
 i.) In 1994, prior to the entry of the Ong Group in FLADC, the Masagana P 8,942,093.49 on a quarterly basis; and
Citimall was never threatened with incompletion;
P 2,980,697.03 on a monthly basis.
ii.) Prior to the execution of the Pre-Subscription Agreement, FLADC was
not in financial distress; "x x x xxx xxx

iii.) The Tiu Group invited the Ong Group to come in as stockholders of "c. For the same P190 Million loan, and in addition to the above-mentioned
FLADC to expand the company's leasing business; interest payments, the semi-annual amortization for the PNB loan would have
been P18,825,459.97 per payment and should have been payable as follows:
iv.) It is not true that the Pre-Subscription Agreement was entered into
by the parties in order to rescue FLADC from financial distress, i.e., for April 29, 1996 - initial payment
the purpose of settling its P190 million indebtedness to PNB;
October 29, 1996 - 2nd payment
ix.) It is the Tiu Group, not the Ong Group, who were ousted from
enjoying the fruits of their investment in FLADC, hence, it is the Tiu April 29, 1997 - 3rd payment
Group who are the victims of ingratitude;
October 29, 1997 - 4th payment
We are not persuaded. The Court of Appeals did not have any mistaken
perception.
April 29, 1998 - 5th payment

Granting that the Masagana Citimall was not threatened with incompletion in
October 29, 1998 - 6th payment
1994, it would have gone off to a bad start had not the Ongs come in with P190
million which was used to pay the Tius' loan with the PNB. The said loan would
April 29, 1999 - 7th payment
have meant payment of 19% interest per annum. As presented by the Ongs in
their Comment:28
October 29, 1999 - 8th payment
"d. As of July 18, 1994, FLADC had already drawn a total amount
of P188,254,599.77 from the credit line and was paying interest thereon at the April 29, 2000 - 9th payment
rate of 19.00% per annum or close to P3 Million every month.
October 29, 2000 - final payment
"From the above-mentioned facts, assuming that FLADC would no longer draw
on its remaining credit line to complete the building, the following indisputable "d. Again, had the Ongs not invested in FLADC in August 1994, then by the time
conclusions may be reached: FLADC would have made its initial amortization payment of P18,825,459.97 on
April 29, 1996, it would have been paying interest in the total amount
"a. At 19% interest per annum, the interest payments alone for of P59,613,940.60 (P2,980,697.03/month x 20 months).
the P188,254,599.77 existing loan of FLADC with the PNB would be equivalent to
the following amount: "Again, even assuming that the mall which FLADC was building was already
completed, it was impossible to generate these amounts from the mall operation
P35,768,373.96 on an annual basis; for that short period of time.

69
"e. Clearly, the Tius were constrained to invite a partner to rescue FLADC from its
inevitable bankruptcy."
With the above illustration of the Ongs, it became incumbent upon the Tius to
counter it by showing how it would have been able to generate such income as
would enable FLADC to pay interest and loan amortization without P190 million
infused by another group. This the Tius failed to do. All the Tius made was their
bare allegation that the Mall was already more than 50% tenanted at that time,
and was capable of paying the interests and amortization.
The Tius' claim – that they invited the Ongs to come in as stockholders of FLADC
to expand the company's leasing business – does not also appear to be true.
Were this the case, they should have used the new capital infusion of the Ongs to
purchase adjoining properties and/or erect a new building that could be
connected with the existing structure of FLADC. The Ongs put it in the following
manner: "A close reading of the Pre-Subscription Agreement belies the claims of
the Tius. The reality, as clearly appearing in the said agreement, is that the parties
intended to fully liquidate29 the P190 million loan of FLADC with PNB so that the
company could continue to operate on a clean slate without the need of paying
enormous interests. The reason is simple. Since the Tius were not able to attract
enough lessees to occupy the Citimall, they knew that they would not be able to
raise enough funds to pay its loan with PNB. Thus, the Tius invited the Ongs
primarily for two reasons: [1] to pay off FLADC's obligation with PNB, and [2] to
help the Tius fill up the Citimall with new lessees."
The Court also notes that while it was the Tius who started the corporation, they
acquiesced to the arrangement that the President should come from the Ong
Group and the Board of Directors shall comprise of six (6) members from the
Ongs, and only five (5) from the Tius. If the Tius were not desperate or in
financial distress why should they agree to such an arrangement when, as
claimed by the Tius, (Petition, p. 74, Rollo, G.R. No. 144629, p. 171), the appraised
value of the entire property of FLADC as of 1994 was P420.3 million? If the FLADC
had enough funds, why did it have to borrow P70 million from the Ongs to be
used in paying the P190 million loan with PNB? Therefore, we also agree with the
Court of Appeals when it held that:
"The Tius, in unilaterally rescinding the Pre-subscription Agreement, are now
trying to oust the Ongs from enjoying the fruits of their P190 million investment
in FLADC. This is ingratitude at its height, xxx."30
As to sub-paragraph (v.) suffice it to say that none of the two groups may claim
that their group's business acumen, hard work, and dedication account for what
Masagana Citimall is today because both of the groups contributed
money/property and labor thereto.
As to sub-paragraphs (vi) and (vii), the Court of Appeals indeed erred in finding
that the Tiu Group violated the Pre-Subscription Agreement since the deed of
assignment over the 151 sq. m. lot was not executed by the Tiu Group but by the
Lichaucos in favor of FLADC. Hence, the Tiu Group cannot be credited with the
number of shares commensurate to the value of said lot and will not, therefore,
be able to equal the Ong Group's one million subscription in FLADC.
We do not agree with the following discussion of the Court of Appeals on this
point:
"Under the Pre-Subscription Agreement, the Tius were obliged to execute a
Deed of Assignment over a 151 square meter parcel of land in favor of FLADC as
payment of 49,800 shares thereof at a par value of P100.00 per share (see
paragraphs 14, 15 and 17 of the Pre-Subscription Agreement, p. 214, Rollo). While
there is on record a Deed of Assignment thereon in favor of FLADC (pp. 308-312,
Rollo), said Deed of Assignment was not executed by the Tius in favor of FLADC.
The Deed of Assignment was executed by the Lichaucos in favor of FLADC (Ibid).
If ever somebody has to be credited with the number of shares commensurate
to the value of the 151 square meter property, it will not be the Tius but the
Lichaucos.
"Per the Pre-Subscription Agreement, the 151 square meter property shall be
used by the Tius to acquire a number of shares in FLADC in order to equal the 1
million subscription of the Ongs in FLADC (supra). It turned out, however, that
the 151 square meter property was acquired by FLADC for a consideration
of P900,000.00 (see paragraph 5 of Deed of Assignment, p. 309, Rollo). It will
therefore be iniquitous were the Ongs to credit the Tius the number of shares in
FLADC commensurate to the value of the 151 square meter property when the
Tius did not contribute the same for the purpose of acquiring shares in FLADC.
The deed assigning this property to FLADC was executed by the Lichaucos for a
consideration which FLADC itself paid. Said deed was executed even before the
Pre-Subscription Agreement was entered into between the parties.
Consequently, the Tius cannot be credited with the number of shares
commensurate to the value of the 151 square meter property and will not
therefore be able to equal the Ongs' 1 million subscription in FLADC in
70
accordance with their undertaking in the Pre-Subscription Agreement (see
paragraph 14 of Pre-Subscription Agreement, p. 214, Rollo)."31
The Tius aver that the direct transfer of the property from the Lichaucos to
FLADC did not prejudice the Ongs or FLADC. According to the Tius, what is
important is that they obtained title to the 151 sq. m. property in the name of
FLADC after the execution of the Pre-Subscription Agreement, and possession
thereof has already been turned over to the corporation. Per the Tius, they
cannot be denied full credit for such property contribution, without unjustly
enriching the Ongs and FLADC which are now exercising control over the said
property.
The Tius make the following explanations:
"During the brief negotiations that culminated in the execution of the Pre-
Subscription Agreement, the Tiu Group informed the Ong Group that as early as
March 1994 they had acquired from the Lichauco family another adjoining
property consisting of 151 sq. m. which was actually intended for the expansion
of the mall. They disclosed to the Ong Group that the Deed of Assignment over
the said property was placed in the name of FLADC and was to be directly
transferred from the Lichauco family to the corporation. This is precisely the
reason why the property was described in the Pre-Subscription Agreement as
'[t]he lot under Transfer Certificate No. ______ with an area of 150 sq. m., more
or less xxx,' clearly indicating that all that the parties were waiting for, at the
time they were discussing the terms of the Pre-Subscription Agreement, was the
issuance of the title to the said lot.
"The Ong Group were (sic) fully aware of the real status of the 151 sq. m.
property when they agreed to consider it as one of the property contributions of
the Tiu Group in payment for their additional subscription in FLADC." 32
The Tius' contentions on this issue are well taken. We do not see why the
Lichaucos, and not the Tius, should be credited with the number of shares
commensurate to the value of the 151 sq. m. property. The Lichaucos are not
parties to the Pre-Subscription Agreement and are not even demanding that they
be credited with such shares in exchange for the said property. Just like this
property, the 1,902.30 sq. m. parcel of land in the name of Masagana Telamart,
Inc. (also a corporation owned by the Tius), was also acquired by the Tius before
the execution of the Pre-Subscription Agreement. The fact that the 1,902.30 sq.
m. property was acquired by the Tius beforehand does not prejudice the Ongs,
as shown by the Ongs' non-objection to crediting the Masagana Telamart, Inc.
with the commensurate number of shares, subject only to the Tius' payment of
the expenses for the transfer of the title in the name of FLADC. So, too, in the
case of the 151 sq. m. property, the fact that the Deed of Assignment between
the Lichaucos and the FLADC was executed prior to the execution of the Pre-
Subscription Agreement does not prejudice the Ongs. Therefore, the Tius should
be credited with 49,800 shares in FLADC for this property contribution, pursuant
to the Pre-Subscription Agreement.
Sub-paragraph (viii) of the second assigned error states that the Tius turned over
to the Ong Group the entire amount of FLADC funds mentioned in paragraph 5 of
the Pre-Subscription Agreement33 The Tius have the following explanation: "xxx
sometime in August 1994, the total amount of these available funds had not yet
been determined. Consequently, in lieu of these funds, which amounted
to P5,840,089.12, P1,.30,002.63(sic) of which had been earlier remitted to FLADC,
Mr. Tiu paid the same using the P20 million he borrowed from Mr. Ong Yong.
Such payment dispensed with the need to remit the said funds to FLADC." 34 Why
should Mr. Tiu pay P20 million if he only needs to remit P5.8 million?
At any rate, assuming that the Tius' claim on this point, is true, the same is not
reason enough to alter the order of the Court of Appeals for the liquidation of
FLADC.
On sub-paragraph (x), the Tius maintain that they never siphoned any rentals due
to FLADC to their MATERRCO account. In fact, the Tius continue, the trumped-up
criminal charges filed by the Ongs against Mr. and Mrs. Tiu regarding the
aforesaid act of siphoning FLADC funds, filed during the pendency of the
rescission case with the SEC to harass the Tius, were dismissed by the DOJ in its
Resolution dated 15 Feb. 1999.
The argument fails to persuade. The dismissal of the said criminal case does not
necessarily mean that no act of siphoning FLADC funds was committed by the
Tius. The following excerpts from the testimony of Mr. David Tiu on cross-
examination shows otherwise:
"Q Mr. Tiu, of course, you will admit that during the transition period, you were
already operating Masagana Superstore, is that not correct?
"A Yes, partly we are occupying a portion of the building.
"Q Of course, Masagana Superstore was operated by Matterco, Inc. of which you
were the president?
71
"A Yes, Ma'am.
"Q And I understand also that Matterco, Inc. is wholly owned or majority owned
by the Tius?
"A Yes, Ma'am.
"Q Is it wholly owned by the Tius?
"A Majority owned.
"Q Mr. Tiu, I am showing to you a rental receipt no. 067 of Mercury Drug
Corporation which is a tenant of FLADC. This rental receipt is a receipt of
Masagana Superstore operated by Matterco., Inc. Do you affirm that this receipt
was issued by Masagana Superstore operated by Matterco, Inc. and that the
rental here pertains to a rental due from Mercury Drugstore which is a tenant of
FLADC?
"A This was mistakenly deposited at Masagana account.
"x x x xxx xxx
"Q May I show you another receipt likewise issued by Masagana Superstore
operated by Matterco, Inc. dated October 5, 1994. Will you please tell me if this
another account, another payment that was mistakenly deposited to the account
of Masagana?
"A This is also one of these . . . Because during the time . . . (TSN, March 5, 1997,
pp. 88-91, a certified true copy of which forms part of Annex "N" and marked as
Annex "N-3")35
Finally, the Tius disagree with the Court of Appeals' characterization of the P70
million paid by the Ongs to FLADC. The Tius allege that the P70 million paid by
the Ongs in excess of the actual par value of one million shares they acquired
from FLADC was a premium on capital and not an advance. The Tius contend that
the receipt, Exh. "4," the Ongs' own exhibit, is quite clear that the amount
of P170 million was the agreed price for the Ong Group's subscription to one
million shares in FLADC representing 50% of the capital stock of the corporation.
Exh. "4," reads:
"Received from Mr. Ong Yong the amount of TWENTY MILLION PESOS
(P20,000,000.00) in full payment of the agreed price of ONE HUNDRED SEVENTY
MILLION PESOS (P170,000,000.00) representing his group's FIFTY PERCENT
(50%) share in First Landlink Asia Development Corporation."
The Tius explain that the excess payment of P70 million, considering that the par
value of the one million shares subscribed by the Ongs was only P100 million,
at P100 per share, in corporation law, is called "paid-in surplus" or premium.
We are not convinced. This issue was very well discussed by the Court of
Appeals, and we agree and quote:
"But the available funds of FLADC were not enough to cover the P90,000,000.00
more needed to pay the PNB loan because all there was of FLADC's funds at the
time was P5,840,089.12 (pp. 734-735, Rollo). It was then, therefore, that the Ongs
advanced P70,000,000.00 in cash to FLADC while the Tius
advanced P20,000,000.00 in cash, an amount they also had to borrow from the
Ongs (pp. 437-441, Rollo).
"The Pre-Subscription Agreement is explicit in its terms - that the Ongs agreed to
pay P100,000,000.00 only for 1 million shares in FLADC at a par value of P100.00
per share (p. 211, Rollo). FLADC's application for an increase in capital stock
shows that the par value of each of its shares is P100.00 only (pp. 185-186, Rollo).
The same application also shows that the Ongs subscribed to 1 million shares of
FLADC at a par value of P100.00 per share (Ibid). There is nothing in the
application which shows that FLADC's shares are to be sold at a premium or at an
amount higher than the stated par value per share (Ibid).
"The receipt which states that the Ongs paid P170,000,000.00 for a 50% share in
FLADC must not be construed to mean that the Ongs paid P170,000,000.00 for
one million shares in FLADC, thereby making the P70,000,000.00 thereof a
premium or paid-in-surplus on the actual par value of 1 million shares (p. 182,
Rollo). To treat the P70,000,000.00 as premium would not only have the effect
of modifying the Pre-Subscription Agreement, but would actually novate it (see
Article 1291 (1), New civil Code).
"To allow a novation of the Pre-Subscription Agreement in this manner would
negate or contravene the very intention of the parties in entering into the Pre-
Subscription Agreement which is to maintain EQUALITY between them.
72
"The Tius, in filing the complaint for rescission a quo, rely heavily on the Pre- 1. the P20 million loan extended by the Ongs to the Tius shall earn
Subscription Agreement and even emphasized that it was entered into with the interest at twelve percent (12%) per annum to be computed from the
intention of maintaining EQUALITY as regards the parties standing in FLADC (pp. time of judicial demand which is from April 23, 1996;
127-136, Rollo). If the Court were to allow the P70,000,000.00 to be classified as
premium or paid-in-surplus, then the Tius' theory will altogether crumble. The 2. the P70 million advanced by the Ongs to the FLADC shall earn interest
respective valuation of the properties to be used as payment of the Tius' 1 million at ten percent (10%) per annum to be computed from the date of the
share in FLADC which were presented in evidence to prove that said properties FLADC Board Resolution which is June 19, 1996; and
are worth more than the agreed value thereof in the Pre-Subscription
Agreement, and therefore when added to the P45,020,000.00 paid up capital, 3. The Tius shall be credited with 49,800 shares in FLADC for their
are worth more than 1 million shares in FLADC, is of no consequence (pp. 1023- property contribution, specifically, the 151 sq. m. parcel of land.
1047-A, Rollo). The same valuations have been made AFTER the Pre-Subscription
Agreement was entered into and does not therefore reflect the actual value of
SO ORDERED.
the properties at the time the Pre-Subscription Agreement was entered into (p.
1046, Rollo).
Bellosillo, (Chairman), Mendoza, Quisumbing, and De Leon, Jr., JJ., concur.
"The Tius also claim that the P70,000,000.00 cannot be treated as an advance
because there was no board resolution authorizing FLADC to incur such an
obligation (pp. 764-767, Rollo). As pointed out by SEC Hearing Official Soller, the
fact that no board resolution was passed allowing FLADC to incur such an
obligation is immaterial, it appearing that there was also no board resolution
authorizing FLADC to secure a P20,000,000.00 advance from the Tius (p. 367,
Rollo). What matters then and now is that the P190,000,000.00 loan from PNB
was finally settled in order for FLADC to resume its business without fear of
foreclosure of its properties.

"Besides, at the time the Ongs invested in FLADC, they knew that the same was
in financial distress.1âwphi1 Why would the Ongs buy the shares of FLADC for 70%
more than their actual par value of P100.00 per share, when to do so would not
be in consonance with what a prudent man would do under the same
circumstances?"36

Except for the issue regarding the rate of interest and reckoning period for the
payment thereof, and that the Tius should be credited with 49,800 shares of
FLADC for their 151 sq. m. lot property contribution, we find no other error in the
assailed Decision which was judiciously rendered by the Court of Appeals.

WHEREFORE, the decision appealed from is hereby AFFIRMED with the following
MODIFICATIONS:

73
 Republic of the Philippines
SUPREME COURT
Manila
SPECIAL SECOND DIVISION
G.R. No. 144476 April 8, 2003
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIE ONG ALONZO, petitioners,
vs.
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, INTRALAND RESOURCES DEVELOPMENT CORP.,
MASAGANA TELAMART, INC., REGISTER OF DEEDS OF PASAY CITY, and the
SECURITIES AND EXCHANGE COMMISSION, respondents.
x-----------------------------x
G.R. No. 144629 April 8, 2003
DAVID S. TIU, CELY Y. TIU, MOLY YU GAW, BELEN SEE YU, D. TERENCE Y. TIU,
JOHN YU, LOURDES C. TIU, and INTRALAND RESOURCES DEVELOPMENT
CORP., petitioners,
vs.
ONG YONG, JUANITA TAN ONG, WILSON T. ONG, ANNA L. ONG, WILLIAM T.
ONG, WILLIE T. ONG, and JULIA ONG ALONZO, respondents.
Civil Procedure; Pleadings and Practice; Motions; Motion for
Reconsideration; A motion for reconsideration is not pro-forma for the reason
alone that it reiterates the arguments earlier passed upon and rejected by the
appellate court.—The procedural rule on pro-forma motions pointed out by the
Tius should not be blindly applied to meritorious motions for reconsideration. As
long as the same adequately raises a valid ground (i.e., the decision or final order
is contrary to law), this Court has to evaluate the merits of the arguments to
prevent an unjust decision from attaining finality. In Security Bank and Trust
Company vs. Cuenca, we ruled that a motion for reconsideration is not pro-forma
for the reason alone that it reiterates the arguments earlier passed upon and
rejected by the appellate court. We explained there that a movant may raise the
same arguments, if only to convince this Court that its ruling was erroneous.
Moreover, the rule (that a motion is pro-forma if it only repeats the arguments in
the previous pleadings) will not apply if said arguments were not squarely passed
upon and answered in the decision sought to be reconsidered.
Civil Law; Contracts; Parties; Contracts take effect only between the
parties, their assigns and heirs.—Article 1311 of the Civil Code provides that
“contracts take effect only between the parties, their assigns and heirs . . .”
Therefore, a party who has not taken part in the transaction cannot sue or be
sued for performance or for cancellation thereof, unless he shows that he has a
real interest affected thereby.
Corporation Law; Corporation Code; Remedies; The Corporation Code,
SEC Rules and even the Rules of Court provide for appropriate and adequate intra-
corporate remedies, other than rescission.—The Corporation Code, SEC rules and
even the Rules of Court provide for appropriate and adequate intra-corporate
remedies, other than rescission, in situations like this. Rescission is certainly not
one of them, specially if the party asking for it has no legal personality to do so
and the requirements of the law therefor have not been met. A contrary doctrine
will tread on extremely dangerous ground because it will allow just any
stockholder, for just about any real or imagined offense, to demand rescission of
his subscription and call for the distribution of some part of the corporate assets
to him without complying with the requirements of the Corporation Code.
Same; Same; Trust Fund Doctrine; This doctrine is the underlying principle
in the procedure for the distribution of capital assets.—The Trust Fund Doctrine,
first enunciated by this Court in the 1923 case of Philippine Trust Co. vs. Rivera
provides that subscriptions to the capital stock of a corporation constitute a fund
to which the creditors have a right to look for the satisfaction of their claims. This
doctrine is the underlying princi ple in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution
of corporate capital only in three instances: (1) amendment of the Articles of
Incorporation to reduce the authorized capital stock, (2) purchase of redeemable
shares by the corporation, regardless of the existence of unrestricted retained
earnings, and (3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent
requirements therefor are complied with.
Same; Same; Same; The distribution of corporate assets and property
cannot be made to depend on the whims and caprices of the stockholders, officers
and directors of the corporation, or by the court.—The distribution of corporate
74
assets and property cannot be made to depend on the whims and caprices of the
stockholders, officers or directors of the corporation, or even, for that matter,
on the earnest desire of the court a quo “to prevent further squabbles and
future litigations” unless the indispensable conditions and procedures for the
protection of corporate creditors are followed. Otherwise, the “corporate
peace” laudably hoped for by the court will remain nothing but a dream because
this time, it will be the creditors’ turn to engage in “squabbles and litigations”
should the court order an unlawful distribution in blatant disregard of the Trust
Fund Doctrine.
Same; Same; “Business Judgment Rule”; Definition.—Truth to tell, a
judicial order to decrease capital stock without the assent of FLADC’s directors
and stockholders is a violation of the “business judgment rule” which states that:
xxx xxx xxx (C)ontracts intra vires entered into by the board of directors are
binding upon the corporation and courts will not interfere unless such contracts
are so unconscionable and oppressive as to amount to wanton destruction to
the rights of the minority, as when plaintiffs aver that the defendants (members
of the board), have concluded a transaction among themselves as will result in
serious injury to the plaintiffs stockholders.
Same; Same; Same; Rationale; The social contract in the corporate family
to decide the course of the corporate business has been vested in the board and
not with courts.—Courts and other tribunals are wont to override the business
judgment of the board mainly because, courts are not in the business of
business, and the laissez faire rule or the free enterprise system prevailing in our
social and economic set-up dictates that it is better for the State and its organs
to leave business to the businessmen; especially so, when courts are ill-equipped
to make business decisions. More importantly, the social contract in the
corporate family to decide the course of the corporate business has been vested
in the board and not with courts.
MOTIONS FOR RECONSIDERATION of the decision of the Supreme Court and
MOTION for issuance of Writ of Execution in the Supreme Court.
The facts are stated in the resolution of the Court.
Feria, Feria, Lugtu, La’O, Noche and Estelito P. Mendoza for petitioners.
Tan, Acut & Lopez for respondents.
Gonzales, Batiller, Bilog & Associates for Willie Ong.
Aquilino L. Pimentel III for Landlink, etc.
Arturo Santos for Masagana. Ong Yong vs. Tiu, 401 SCRA 1, G.R. No. 144476,
G.R. No. 144629 April 8, 2003
RESOLUTION
CORONA, J.:
Before us are the (1) motion for reconsideration, dated March 15, 2002, of
petitioner movants Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William
Ong, Willie Ong and Julia Ong Alonzo (the Ongs); (2) motion for partial
reconsideration, dated March 15, 2002, of petitioner movant Willie Ong seeking a
reversal of this Court's Decision,1 dated February 1, 2002, in G.R. Nos. 144476 and
144629 affirming with modification the decision2 of the Court of Appeals, dated
October 5, 1999, which in turn upheld, likewise with modification, the decision of
the SEC en banc, dated September 11, 1998; and (3) motion for issuance of writ of
execution of petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D.
Terence Y. Tiu, John Yu and Lourdes C. Tiu (the Tius) of our February 1, 2002
Decision.
A brief recapitulation of the facts shows that:
In 1994, the construction of the Masagana Citimall in Pasay City was
threatened with stoppage and incompletion when its owner, the First
Landlink Asia Development Corporation (FLADC), which was owned by
the Tius, encountered dire financial difficulties. It was heavily indebted
to the Philippine National Bank (PNB) for P190 million. To stave off
foreclosure of the mortgage on the two lots where the mall was being
built, the Tius invited Ong Yong, Juanita Tan Ong, Wilson T. Ong, Anna L.
Ong, William T. Ong and Julia Ong Alonzo (the Ongs), to invest in FLADC.
Under the Pre-Subscription Agreement they entered into, the Ongs and
the Tius agreed to maintain equal shareholdings in FLADC: the Ongs
were to subscribe to 1,000,000 shares at a par value of P100.00 each
while the Tius were to subscribe to an additional 549,800 shares at
P100.00 each in addition to their already existing subscription of 450,200
shares. Furthermore, they agreed that the Tius were entitled to
nominate the Vice-President and the Treasurer plus five directors while
the Ongs were entitled to nominate the President, the Secretary and six
75
 directors (including the chairman) to the board of directors of FLADC.
Moreover, the Ongs were given the right to manage and operate the
mall.
Accordingly, the Ongs paid P100 million in cash for their subscription to
1,000,000 shares of stock while the Tius committed to contribute to FLADC a
four-storey building and two parcels of land respectively valued at P20 million
(for 200,000 shares), P30 million (for 300,000 shares) and P49.8 million (for
49,800 shares) to cover their additional 549,800 stock subscription therein. The
Ongs paid in another P70 million3 to FLADC and P20 million to the Tius over and
above their P100 million investment, the total sum of which (P190 million) was
used to settle the P190 million mortgage indebtedness of FLADC to PNB.
The business harmony between the Ongs and the Tius in FLADC, however, was
shortlived because the Tius, on February 23, 1996, rescinded the Pre-Subscription
Agreement. The Tius accused the Ongs of (1) refusing to credit to them the
FLADC shares covering their real property contributions; (2) preventing David S.
Tiu and Cely Y. Tiu from assuming the positions of and performing their duties as
Vice-President and Treasurer, respectively, and (3) refusing to give them the
office spaces agreed upon.
According to the Tius, the agreement was for David S. Tiu and Cely S. Tiu to
assume the positions and perform the duties of Vice-President and Treasurer,
respectively, but the Ongs prevented them from doing so. Furthermore, the
Ongs refused to provide them the space for their executive offices as Vice-
President and Treasurer. Finally, and most serious of all, the Ongs refused to give
them the shares corresponding to their property contributions of a four-story
building, a 1,902.30 square-meter lot and a 151 square-meter lot. Hence, they felt
they were justified in setting aside their Pre-Subscription Agreement with the
Ongs who allegedly refused to comply with their undertakings.
In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact
assumed the positions of Vice-President and Treasurer of FLADC but that it was
they who refused to comply with the corporate duties assigned to them. It was
the contention of the Ongs that they wanted the Tius to sign the checks of the
corporation and undertake their management duties but that the Tius shied
away from helping them manage the corporation. On the issue of office space,
the Ongs pointed out that the Tius did in fact already have existing executive
offices in the mall since they owned it 100% before the Ongs came in. What the
Tius really wanted were new offices which were anyway subsequently provided
to them. On the most important issue of their alleged failure to credit the Tius
with the FLADC shares commensurate to the Tius' property contributions, the
Ongs asserted that, although the Tius executed a deed of assignment for the
1,902.30 square-meter lot in favor of FLADC, they (the Tius) refused to pay P
570,690 for capital gains tax and documentary stamp tax. Without the payment
thereof, the SEC would not approve the valuation of the Tius' property
contribution (as opposed to cash contribution). This, in turn, would make it
impossible to secure a new Transfer Certificate of Title (TCT) over the property in
FLADC's name. In any event, it was easy for the Tius to simply pay the said
transfer taxes and, after the new TCT was issued in FLADC's name, they could
then be given the corresponding shares of stocks. On the 151 square-meter
property, the Tius never executed a deed of assignment in favor of FLADC. The
Tius initially claimed that they could not as yet surrender the TCT because it was
"still being reconstituted" by the Lichaucos from whom the Tius bought it. The
Ongs later on discovered that FLADC had in reality owned the property all along,
even before their Pre-Subscription Agreement was executed in 1994. This meant
that the 151 square-meter property was at that time already the corporate
property of FLADC for which the Tius were not entitled to the issuance of new
shares of stock.
The controversy finally came to a head when this case was commenced 4 by the
Tius on February 27, 1996 at the Securities and Exchange Commission (SEC),
seeking confirmation of their rescission of the Pre-Subscription Agreement. After
hearing, the SEC, through then Hearing Officer Rolando G. Andaya, Jr., issued a
decision on May 19, 1997 confirming the rescission sought by the Tius, as follows:
WHEREFORE, judgment is hereby rendered confirming the rescission of
the Pre-Subscription Agreement, and consequently ordering:
(a) The cancellation of the 1,000,000 shares subscription of the
individual defendants in FLADC;
(b) FLADC to pay the amount of P170,000,000.00 to the individual
defendants representing the return of their contribution for 1,000,000
shares of FLADC;
(c) The plaintiffs to submit with (sic) the Securities and Exchange
Commission amended articles of incorporation of FLADC to conform
with this decision;
(d) The defendants to surrender to the plaintiffs TCT Nos. 132493,
132494, 134066 (formerly 15587), 135325 and 134204 and any other title
76
 or deed in the name of FLADC, failing in which said titles are declared
void;
(e) The Register of Deeds to issue new certificates of titles in favor of
the plaintiffs and to cancel the annotation of the Pre-Subscription
Agreement dated 15 August 1994 on TCT No. 134066 (formerly 15587);
(f) The individual defendants, individually and collectively, their agents
and representatives, to desist from exercising or performing any and all
acts pertaining to stockholder, director or officer of FLADC or in any
manner intervene in the management and affairs of FLADC;
(g) The individual defendants, jointly and severally, to return to FLADC
interest payment in the amount of P8,866,669.00 and all interest
payments as well as any payments on principal received from the
P70,000,000.00 inexistent loan, plus the legal rate of interest thereon
from the date of their receipt of such payment until fully paid;
(h) The plaintiff David Tiu to pay individual defendants the sum of
P20,000,000.00 representing his loan from said defendants plus legal
interest from the date of receipt of such amount.
SO ORDERED.5
On motion of both parties, the above decision was partially reconsidered but
only insofar as the Ongs' P70 million was declared not as a premium on capital
stock but an advance (loan) by the Ongs to FLADC and that the imposition of
interest on it was correct.6
Both parties appealed7 to the SEC en banc which rendered a decision on
September 11, 1998, affirming the May 19, 1997 decision of the Hearing Officer.
The SEC en banc confirmed the rescission of the Pre-Subscription Agreement but
reverted to classifying the P70 million paid by the Ongs as premium on capital
and not as a loan or advance to FLADC, hence, not entitled to earn interest.8
On appeal, the Court of Appeals (CA) rendered a decision on October 5, 1999,
thus:
WHEREFORE, the Order dated September 11, 1998 issued by the
Securities and Exchange Commission En Banc in SEC AC CASE NOS. 598
and 601 confirming the rescission of the Pre-Subscription Agreement
dated August 15, 1994 is hereby AFFIRMED, subject to the following
MODIFICATIONS:
1. The Ong and Tiu Groups are ordered to liquidate First Landlink Asia
Development Corporation in accordance with the following cash and
property contributions of the parties therein.
(a) Ong Group – P100,000,000.00 cash contribution for one (1)
million shares in First Landlink Asia Development Corporation at
a par value of P100.00 per share;
(b) Tiu Group:
1) P45,020,000.00 original cash contribution for
450,200 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share;
2) A four-storey building described in Transfer
Certificate of Title No. 15587 in the name of Intraland
Resources and Development Corporation valued at
P20,000,000.00 for 200,000 shares in First Landlink
Asia Development Corporation at a par value of
P100.00 per share;
3) A 1,902.30 square-meter parcel of land covered by
Transfer Certificate of Title No. 15587 in the name of
Masagana Telamart, Inc. valued at P30,000,000.00 for
300,000 shares in First Landlink Asia Development
Corporation at a par value of P100.00 per share.
2) Whatever remains of the assets of the First Landlink Asia
Development Corporation and the management thereof is (sic) hereby
ordered transferred to the Tiu Group.
3) First Landlink Asia Development Corporation is hereby ordered to pay
the amount of P70,000,000.00 that was advanced to it by the Ong
Group upon the finality of this decision. Should the former incur in delay
in the payment thereof, it shall pay the legal interest thereon pursuant
to Article 2209 of the New Civil Code.
77
 4) The Tius are hereby ordered to pay the amount of P20,000,000.00
loaned them by the Ongs upon the finality of this decision. Should the
former incur in delay in the payment thereof, it shall pay the legal
interest thereon pursuant to Article 2209 of the New Civil Code.
SO ORDERED.9
An interesting sidelight of the CA decision was its description of the rescission
made by the Tius as the "height of ingratitude" and as "pulling a fast one" on the
Ongs. The CA moreover found the Tius guilty of withholding FLADC funds from
the Ongs and diverting corporate income to their own MATTERCO
account.10 These were findings later on affirmed in our own February 1, 2002
Decision which is the subject of the instant motion for reconsideration.11
But there was also a strange aspect of the CA decision. The CA concluded that
both the Ongs and the Tius were in pari delicto (which would not have legally
entitled them to rescission) but, "for practical considerations," that is, their
inability to work together, it was best to separate the two groups by rescinding
the Pre-Subscription Agreement, returning the original investment of the Ongs
and awarding practically everything else to the Tius.
Their motions for reconsideration having been denied, both parties filed
separate petitions for review before this Court.
In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al., the Ongs
argued that the Tius may not properly avail of rescission under Article 1191 of the
Civil Code considering that the Pre-Subscription Agreement did not provide for
reciprocity of obligations; that the rights over the subject matter of the
rescission (capital assets and properties) had been acquired by a third party
(FLADC); that they did not commit a substantial and fundamental breach of their
agreement since they did not prevent the Tius from assuming the positions of
Vice-President and Treasurer of FLADC, and that the failure to credit the 300,000
shares corresponding to the 1,902.30 square-meter property covered by TCT No.
134066 (formerly 15587) was due to the refusal of the Tius to pay the required
transfer taxes to secure the approval of the SEC for the property contribution
and, thereafter, the issuance of title in FLADC's name. They also argued that the
liquidation of FLADC may not legally be ordered by the appellate court even for
so called "practical considerations" or even to prevent "further squabbles and
numerous litigations," since the same are not valid grounds under the
Corporation Code. Moreover, the Ongs bewailed the failure of the CA to grant
interest on their P70 million and P20 million advances to FLADC and David S. Tiu,
respectively, and to award costs and damages.
In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al., the Tius, on
the other hand, contended that the rescission should have been limited to the
restitution of the parties' respective investments and not the liquidation of
FLADC based on the erroneous perception by the court that: the Masagana
Citimall was threatened with incompletion since FLADC was in financial distress;
that the Tius invited the Ongs to invest in FLADC to settle its P190 million loan
from PNB; that they violated the Pre-Subscription Agreement when it was the
Lichaucos and not the Tius who executed the deed of assignment over the 151
square-meter property commensurate to 49,800 shares in FLADC thereby failing
to pay the price for the said shares; that they did not turn over to the Ongs the
entire amount of FLADC funds; that they were diverting rentals from lease
contracts due to FLADC to their own MATTERCO account; that the P70 million
paid by the Ongs was an advance and not a premium on capital; and that, by
rescinding the Pre-Subscription Agreement, they wanted to wrestle away the
management of the mall and prevent the Ongs from enjoying the profits of their
P190 million investment in FLADC.
On February 1, 2002, this Court promulgated its Decision (the subject of the
instant motions), affirming the assailed decision of the Court of Appeals but with
the following modifications:
1. the P20 million loan extended by the Ongs to the Tius shall earn
interest at twelve percent (12%) per annum to be computed from the
time of judicial demand which is from April 23, 1996;
2. the P70 million advanced by the Ongs to the FLADC shall earn interest
at ten percent (10%) per annum to be computed from the date of the
FLADC Board Resolution which is June 19, 1996; and
3. the Tius shall be credited with 49,800 shares in FLADC for their
property contribution, specifically, the 151 sq. m. parcel of land.
This Court affirmed the fact that both the Ongs and the Tius violated their
respective obligations under the Pre-Subscription Agreement. The Ongs
prevented the Tius from assuming the positions of Vice-President and Treasurer
of the corporation. On the other hand, the Decision established that the Tius
failed to turn over FLADC funds to the Ongs and that the Tius diverted rentals
due to FLADC to their MATTERCO account. Consequently, it held that rescission
78
was not possible since both parties were in pari delicto. However, this Court
agreed with the Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would only lead to
further "squabbles and numerous litigations" between the parties.
On March 15, 2002, the Tius filed before this Court a Motion for Issuance of a Writ
of Execution on the grounds that: (a) the SEC order had become executory as
early as September 11, 1998 pursuant to Sections 1 and 12, Rule 43 of the Rules of
Court; (b) any further delay would be injurious to the rights of the Tius since the
case had been pending for more than six years; and (c) the SEC no longer had
quasi-judicial jurisdiction under RA 8799 (Securities Regulation Code). The Ongs
filed their opposition, contending that the Decision dated February 1, 2002 was
not yet final and executory; that no good reason existed to issue a warrant of
execution; and that, pursuant to Section 5.2 of RA 8799, the SEC retained
jurisdiction over pending cases involving intra-corporate disputes already
submitted for final resolution upon the effectivity of the said law.
Aside from their opposition to the Tius' Motion for Issuance of Writ of Execution,
the Ongs filed their own "Motion for Reconsideration; Alternatively, Motion for
Modification (of the February 1, 2002 Decision)" on March 15, 2002, raising two
main points: (a) that specific performance and not rescission was the proper
remedy under the premises; and (b) that, assuming rescission to be proper, the
subject decision of this Court should be modified to entitle movants to their
proportionate share in the mall.
On their first point (specific performance and not rescission was the proper
remedy), movants Ong argue that their alleged breach of the Pre-Subscription
Agreement was, at most, casual which did not justify the rescission of the
contract. They stress that providing appropriate offices for David S. Tiu and Cely
Y. Tiu as Vice-President and Treasurer, respectively, had no bearing on their
obligations under the Pre-Subscription Agreement since the said obligation (to
provide executive offices) pertained to FLADC itself. Such obligation arose from
the relations between the said officers and the corporation and not any of the
individual parties such as the Ongs. Likewise, the alleged failure of the Ongs to
credit shares of stock in favor of the Tius for their property contributions also
pertained to the corporation and not to the Ongs. Just the same, it could not be
done in view of the Tius' refusal to pay the necessary transfer taxes which in turn
resulted in the inability to secure SEC approval for the property contributions and
the issuance of a new TCT in the name of FLADC.
Besides, according to the Ongs, the principal objective of both parties in entering
into the Pre-Subscription Agreement in 1994 was to raise the P190 million
desperately needed for the payment of FLADC's loan to PNB. Hence, in this light,
the alleged failure to provide office space for the two corporate officers was no
more than an inconsequential infringement. For rescission to be justified, the law
requires that the breach of contract should be so "substantial or fundamental"
as to defeat the primary objective of the parties in making the agreement. At any
rate, the Ongs claim that it was the Tius who were guilty of fundamental
violations in failing to remit funds due to FLADC and diverting the same to their
MATTERCO account.
The Ongs also allege that, in view of the findings of the Court that both parties
were guilty of violating the Pre-Subscription Agreement, neither of them could
resort to rescission under the principle of pari delicto. In addition, since the cash
and other contributions now sought to be returned already belong to FLADC, an
innocent third party, said remedy may no longer be availed of under the law.
On their second point (assuming rescission to be proper, the Ongs should be
given their proportionate share of the mall), movants Ong vehemently take
exception to the second item in the dispositive portion of the questioned
Decision insofar as it decreed that whatever remains of the assets of FLADC and
the management thereof (after liquidation) shall be transferred to the Tius. They
point out that the mall itself, which would have been foreclosed by PNB if not for
their timely investment of P190 million in 1994 and which is now worth about P1
billion mainly because of their efforts, should be included in any partition and
distribution. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them, amounted to
the unjust enrichment of the Tius and ran contrary to our own pronouncement
that the act of the Tius in unilaterally rescinding the agreement was "the height
of ingratitude" and an attempt "to pull a fast one" as it would prevent the Ongs
from enjoying the fruits of their P190 million investment in FLADC. It also
contravenes this Court's assurance in the questioned Decision that the Ongs and
Tius "will have a bountiful return of their respective investments derived from
the profits of the corporation."
Willie Ong filed a separate "Motion for Partial Reconsideration" dated March 8,
2002, pointing out that there was no violation of the Pre-Subscription Agreement
on the part of the Ongs; that, after more than seven years since the mall began
its operations, rescission had become not only impractical but would also
adversely affect the rights of innocent parties; and that it would be highly
79
inequitable and unfair to simply return the P100 million investment of the Ongs and
give the remaining assets now amounting to about P1 billion to the Tius.
The Tius, in their opposition to the Ongs' motion for reconsideration, counter
that the arguments therein are a mere re-hash of the contentions in the Ongs'
petition for review and previous motion for reconsideration of the Court of
Appeals' decision. The Tius compare the arguments in said pleadings to prove
that the Ongs do not raise new issues, and, based on well-settled
jurisprudence,12 the Ongs' present motion is therefore pro-forma and did not
prevent the Decision of this Court from attaining finality.
On January 29, 2003, the Special Second Division of this Court held oral
arguments on the respective positions of the parties. On February 27, 2003, Dr.
Willie Ong and the rest of the movants Ong filed their respective memoranda. On
February 28, 2003, the Tius submitted their memorandum.
We grant the Ongs' motions for reconsideration.
This is not the first time that this Court has reversed itself on a motion for
reconsideration. In Philippine Consumers Foundation, Inc. vs. National
Telecommunications Commission,13 this Court, through then Chief Justice Felix V.
Makasiar, said that its members may and do change their minds, after a re-study
of the facts and the law, illuminated by a mutual exchange of views. 14 After a
thorough re-examination of the case, we find that our Decision of February 1,
2002 overlooked certain aspects which, if not corrected, will cause extreme and
irreparable damage and prejudice to the Ongs, FLADC and its creditors.
The procedural rule on pro-forma motions pointed out by the Tius should not be
blindly applied to meritorious motions for reconsideration. As long as the same
adequately raises a valid ground15 (i.e., the decision or final order is contrary to
law), this Court has to evaluate the merits of the arguments to prevent an unjust
decision from attaining finality. In Security Bank and Trust Company vs.
Cuenca,16 we ruled that a motion for reconsideration is not pro-forma for the
reason alone that it reiterates the arguments earlier passed upon and rejected by
the appellate court. We explained there that a movant may raise the same
arguments, if only to convince this Court that its ruling was erroneous.
Moreover, the rule (that a motion is pro-forma if it only repeats the arguments in
the previous pleadings) will not apply if said arguments were not squarely passed
upon and answered in the decision sought to be reconsidered. In the case at bar,
no ruling was made on some of the petitioner Ongs' arguments. For instance, no
clear ruling was made on why an order distributing corporate assets and
property to the stockholders would not violate the statutory preconditions for
corporate dissolution or decrease of authorized capital stock. Thus, it would
serve the ends of justice to entertain the subject motion for reconsideration
since some important issues therein, although mere repetitions, were not
considered or clearly resolved by this Court.
Going now to the merits, we resolve whether the Tius could legally rescind the
Pre-Subscription Agreement. We rule that they could not.
FLADC was originally incorporated with an authorized capital stock of 500,000
shares with the Tius owning 450,200 shares representing the paid-up capital.
When the Tius invited the Ongs to invest in FLADC as stockholders, an increase of
the authorized capital stock became necessary to give each group equal (50-50)
shareholdings as agreed upon in the Pre-Subscription Agreement. The
authorized capital stock was thus increased from 500,000 shares to 2,000,000
shares with a par value of P100 each, with the Ongs subscribing to 1,000,000
shares and the Tius to 549,800 more shares in addition to their 450,200 shares to
complete 1,000,000 shares. Thus, the subject matter of the contract was the
1,000,000 unissued shares of FLADC stock allocated to the Ongs. Since these
were unissued shares, the parties' Pre-Subscription Agreement was in fact a
subscription contract as defined under Section 60, Title VII of the Corporation
Code:
Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the fact
that the parties refer to it as a purchase or some other contract (Italics
supplied).
A subscription contract necessarily involves the corporation as one of the
contracting parties since the subject matter of the transaction is property owned
by the corporation – its shares of stock. Thus, the subscription contract
(denominated by the parties as a Pre-Subscription Agreement) whereby the
Ongs invested P100 million for 1,000,000 shares of stock was, from the viewpoint
of the law, one between the Ongs and FLADC, not between the Ongs and the
Tius. Otherwise stated, the Tius did not contract in their personal capacities with
the Ongs since they were not selling any of their own shares to them. It was
FLADC that did.
Considering therefore that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on the
80
ground of breach of contract filed by the Tius in their personal capacities will not
prosper. Assuming it had valid reasons to do so, only FLADC (and certainly not
the Tius) had the legal personality to file suit rescinding the subscription
agreement with the Ongs inasmuch as it was the real party in interest therein.
Article 1311 of the Civil Code provides that "contracts take effect only between
the parties, their assigns and heirs…" Therefore, a party who has not taken part
in the transaction cannot sue or be sued for performance or for cancellation
thereof, unless he shows that he has a real interest affected thereby.17
In their February 28, 2003 Memorandum, the Tius claim that there are two
contracts embodied in the Pre-Subscription Agreement: a shareholder's
agreement between the Tius and the Ongs defining and governing their
relationship and a subscription contract between the Tius, the Ongs and FLADC
regarding the subscription of the parties to the corporation. They point out that
these two component parts form one whole agreement and that their terms and
conditions are intrinsically related and dependent on each other. Thus, the
breach of the shareholders' agreement, which was allegedly the consideration
for the subscription contract, was also a breach of the latter.
Aside from the fact that this is an entirely new angle never raised in any of their
previous pleadings until after the oral arguments on January 29, 2003, we find
this argument too strained for comfort. It is obviously intended to remedy and
cover up the Tius' lack of legal personality to rescind an agreement in which they
were personally not parties-in-interest. Assuming arguendo that there were two
"sub-agreements" embodied in the Pre-Subscription Agreement, this Court fails
to see how the shareholders agreement between the Ongs and Tius can, within
the bounds of reason, be interpreted as the consideration of the subscription
contract between FLADC and the Ongs. There was nothing in the Pre-
Subscription Agreement even remotely suggesting such alleged
interdependence. Be that as it may, however, the Tius are nevertheless not the
proper parties to raise this point because they were not parties to the
subscription contract between FLADC and the Ongs. Thus, they are not in a
position to claim that the shareholders agreement between them and the Ongs
was what induced FLADC and the Ongs to enter into the subscription contract. It
is the Ongs alone who can say that. Though FLADC was represented by the Tius
in the subscription contract, FLADC had a separate juridical personality from the
Tius. The case before us does not warrant piercing the veil of corporate fiction
since there is no proof that the corporation is being used "as a cloak or cover for
fraud or illegality, or to work injustice."18
The Tius also argue that, since the Ongs represent FLADC as its management,
breach by the Ongs is breach by FLADC. This must also fail because such an
argument disregards the separate juridical personality of FLADC.
The Tius allege that they were prevented from participating in the management
of the corporation. There is evidence that the Ongs did prevent the rightfully
elected Treasurer, Cely Tiu, from exercising her function as such. The records
show that the President, Wilson Ong, supervised the collection and receipt of
rentals in the Masagana Citimall;19 that he ordered the same to be deposited in
the bank;20 and that he held on to the cash and properties of the
corporation.21 Section 25 of the Corporation Code prohibits the President from
acting concurrently as Treasurer of the corporation. The rationale behind the
provision is to ensure the effective monitoring of each officer's separate
functions.
However, although the Tius were adversely affected by the Ongs' unwillingness
to let them assume their positions, rescission due to breach of contract is
definitely the wrong remedy for their personal grievances. The Corporation Code,
SEC rules and even the Rules of Court provide for appropriate and adequate intra-
corporate remedies, other than rescission, in situations like this. Rescission is
certainly not one of them, specially if the party asking for it has no legal
personality to do so and the requirements of the law therefor have not been
met. A contrary doctrine will tread on extremely dangerous ground because it
will allow just any stockholder, for just about any real or imagined offense, to
demand rescission of his subscription and call for the distribution of some part of
the corporate assets to him without complying with the requirements of the
Corporation Code.
Hence, the Tius, in their personal capacities, cannot seek the ultimate and
extraordinary remedy of rescission of the subject agreement based on a less
than substantial breach of subscription contract. Not only are they not parties to
the subscription contract between the Ongs and FLADC; they also have other
available and effective remedies under the law.
All this notwithstanding, granting but not conceding that the Tius possess the
legal standing to sue for rescission based on breach of contract, said action will
nevertheless still not prosper since rescission will violate the Trust Fund Doctrine
and the procedures for the valid distribution of assets and property under the
Corporation Code.
81
The Trust Fund Doctrine, first enunciated by this Court in the 1923 case
of Philippine Trust Co. vs. Rivera,22provides that subscriptions to the capital stock
of a corporation constitute a fund to which the creditors have a right to look for
the satisfaction of their claims.23 This doctrine is the underlying principle in the
procedure for the distribution of capital assets, embodied in the Corporation
Code, which allows the distribution of corporate capital only in three instances:
(1) amendment of the Articles of Incorporation to reduce the authorized capital
stock,24(2) purchase of redeemable shares by the corporation, regardless of the
existence of unrestricted retained earnings,25 and (3) dissolution and eventual
liquidation of the corporation. Furthermore, the doctrine is articulated in Section
41 on the power of a corporation to acquire its own shares26 and in Section 122 on
the prohibition against the distribution of corporate assets and property unless
the stringent requirements therefor are complied with.27
The distribution of corporate assets and property cannot be made to depend on
the whims and caprices of the stockholders, officers or directors of the
corporation, or even, for that matter, on the earnest desire of the court a quo "to
prevent further squabbles and future litigations" unless the indispensable
conditions and procedures for the protection of corporate creditors are
followed. Otherwise, the "corporate peace" laudably hoped for by the court will
remain nothing but a dream because this time, it will be the creditors' turn to
engage in "squabbles and litigations" should the court order an unlawful
distribution in blatant disregard of the Trust Fund Doctrine.
In the instant case, the rescission of the Pre-Subscription Agreement will
effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since rescission of a subscription agreement is not one of the
instances when distribution of capital assets and property of the corporation is
allowed.
Contrary to the Tius' allegation, rescission will, in the final analysis, result in the
premature liquidation of the corporation without the benefit of prior dissolution
in accordance with Sections 117, 118, 119 and 120 of the Corporation Code. 28 The
Tius maintain that rescinding the subscription contract is not synonymous to
corporate liquidation because all rescission will entail would be the simple
restoration of the status quo ante and a return to the two groups of their cash
and property contributions. We wish it were that simple. Very noticeable is the
fact that the Tius do not explain why rescission in the instant case will not
effectively result in liquidation. The Tius merely refer in cavalier fashion to the
end-result of rescission (which incidentally is 100% favorable to them) but turn a
blind eye to its unfair, inequitable and disastrous effect on the corporation, its
creditors and the Ongs.
In their Memorandum dated February 28, 2003, the Tius claim that rescission of
the agreement will not result in an unauthorized liquidation of the corporation
because their case is actually a petition to decrease capital stock pursuant to
Section 38 of the Corporation Code. Section 122 of the law provides that
"(e)xcept by decrease of capital stock…, no corporation shall distribute any of its
assets or property except upon lawful dissolution and after payment of all its
debts and liabilities." The Tius claim that their case for rescission, being a petition
to decrease capital stock, does not violate the liquidation procedures under our
laws. All that needs to be done, according to them, is for this Court to order (1)
FLADC to file with the SEC a petition to issue a certificate of decrease of capital
stock and (2) the SEC to approve said decrease. This new argument has no merit.
The Tius' case for rescission cannot validly be deemed a petition to decrease
capital stock because such action never complied with the formal requirements
for decrease of capital stock under Section 33 of the Corporation Code. No
majority vote of the board of directors was ever taken. Neither was there any
stockholders meeting at which the approval of stockholders owning at least two-
thirds of the outstanding capital stock was secured. There was no revised
treasurer's affidavit and no proof that said decrease will not prejudice the
creditors' rights. On the contrary, all their pleadings contained were alleged acts
of violations by the Ongs to justify an order of rescission.
Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of a
certificate of decrease of stock. Decreasing a corporation's authorized capital
stock is an amendment of the Articles of Incorporation. It is a decision that only
the stockholders and the directors can make, considering that they are the
contracting parties thereto. In this case, the Tius are actually not just asking for a
review of the legality and fairness of a corporate decision. They want this Court to
make a corporate decision for FLADC. We decline to intervene and order
corporate structural changes not voluntarily agreed upon by its stockholders and
directors.
Truth to tell, a judicial order to decrease capital stock without the assent of
FLADC's directors and stockholders is a violation of the "business judgment rule"
which states that:
82
 xxx xxx xxx (C)ontracts intra vires entered into by the board of directors
are binding upon the corporation and courts will not interfere unless
such contracts are so unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority, as when plaintiffs aver
that the defendants (members of the board), have concluded a
transaction among themselves as will result in serious injury to the
plaintiffs stockholders.29
The reason behind the rule is aptly explained by Dean Cesar L. Villanueva, an
esteemed author in corporate law, thus:
Courts and other tribunals are wont to override the business judgment
of the board mainly because, courts are not in the business of business,
and the laissez faire rule or the free enterprise system prevailing in our
social and economic set-up dictates that it is better for the State and its
organs to leave business to the businessmen; especially so, when courts
are ill-equipped to make business decisions. More importantly, the social
contract in the corporate family to decide the course of the corporate
business has been vested in the board and not with courts.30
Apparently, the Tius do not realize the illegal consequences of seeking rescission
and control of the corporation to the exclusion of the Ongs. Such an act infringes
on the law on reduction of capital stock. Ordering the return and distribution of
the Ongs' capital contribution without dissolving the corporation or decreasing
its authorized capital stock is not only against the law but is also prejudicial to
corporate creditors who enjoy absolute priority of payment over and above any
individual stockholder thereof.
Stripped to its barest essentials, the issue of rescission in this case is not difficult
to understand. If rescission is denied, will injustice be inflicted on any of the
parties? The answer is no because the financial interests of both the Tius and the
Ongs will remain intact and safe within FLADC. On the other hand, if rescission is
granted, will any of the parties suffer an injustice? Definitely yes because the
Ongs will find themselves out in the streets with nothing but the money they had
in 1994 while the Tius will not only enjoy a windfall estimated to be anywhere
from P450 million to P900 million31 but will also take over an extremely profitable
business without much effort at all.
Another very important point follows. The Court of Appeals and, later on, our
Decision dated February 1, 2002, stated that both groups were in pari delicto,
meaning, that both the Tius and the Ongs committed breaches of the Pre-
Subscription Agreement. This may be true to a certain extent but, judging from
the comparative gravity of the acts separately committed by each group, we find
that the Ongs' acts were relatively tame vis-à-vis those committed by the Tius in
not surrendering FLADC funds to the corporation and diverting corporate
income to their own MATTERCO account. The Ongs were right in not issuing to
the Tius the shares corresponding to the four-story building and the 1,902.30
square-meter lot because no title for it could be issued in FLADC's name, owing
to the Tius' refusal to pay the transfer taxes. And as far as the 151 square-meter
lot was concerned, why should FLADC issue additional shares to the Tius for
property already owned by the corporation and which, in the final analysis, was
already factored into the shareholdings of the Tius before the Ongs came in?
We are appalled by the attempt by the Tius, in the words of the Court of Appeals,
to "pull a fast one" on the Ongs because that was where the problem precisely
started. It is clear that, when the finances of FLADC improved considerably after
the equity infusion of the Ongs, the Tius started planning to take over the
corporation again and exclude the Ongs from it. It appears that the Tius' refusal
to pay transfer taxes might not have really been at all unintentional because, by
failing to pay that relatively small amount which they could easily afford, the Tius
should have expected that they were not going to be given the corresponding
shares. It was, from every angle, the perfect excuse for blackballing the Ongs. In
other words, the Tius created a problem then used that same problem as their
pretext for showing their partners the door. In the process, they stood to be
rewarded with a bonanza of anywhere between P450 million to P900 million in
assets (from an investment of only P45 million which was nearly foreclosed by
PNB), to the extreme and irreparable damage of the Ongs, FLADC and its
creditors.
After all is said and done, no one can close his eyes to the fact that the Masagana
Citimall would not be what it has become today were it not for the timely
infusion of P190 million by the Ongs in 1994. There are no ifs or buts about it.
Without the Ongs, the Tius would have lost everything they originally invested in
said mall. If only for this and the fact that this Resolution can truly pave the way
for both groups to enjoy the fruits of their investments — assuming good faith
and honest intentions — we cannot allow the rescission of the subject
subscription agreement. The Ongs' shortcomings were far from serious and
certainly less than substantial; they were in fact remediable and correctable
under the law. It would be totally against all rules of justice, fairness and equity
to deprive the Ongs of their interests on petty and tenuous grounds.
83
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of
petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong,
Willie Ong and Julie Ong Alonzo and the motion for partial reconsideration,
dated March 15, 2002, of petitioner Willie Ong are hereby GRANTED. The Petition
for Confirmation of the Rescission of the Pre-Subscription Agreement docketed
as SEC Case No. 02-96-5269 is hereby DISMISSED for lack of merit. The unilateral
rescission by the Tius of the subject Pre-Subscription Agreement, dated August
15, 1994, is hereby declared as null and void.

The motion for the issuance of a writ of execution, dated March 15, 2002, of
petitioners David S. Tiu, Cely Y. Tiu, Moly Yu Gow, Belen See Yu, D. Terence Y. Tiu,
John Yu and Lourdes C. Tiu is hereby DENIED for being moot.

Accordingly, the Decision of this Court, dated February 1, 2002, affirming with
modification the decision of the Court of Appeals, dated October 5, 1999, and the
SEC en banc, dated September 11, 1998, is hereby REVERSED.

Costs against the petitioner Tius.

SO ORDERED.

Bellosillo, (Chairman), Quisumbing, and Callejo, Sr., JJ., concur.

84
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-30646 January 30, 1929
THE GOVERNMENT OF THE PHILIPPINE ISLANDS, petitioner,
vs.
THE MANILA RAILROAD COMPANY and JOSE PAEZ as Manager of said
Company, respondents.
MANDAMUS, WRIT OF; WILL NOT BE GRANTED TO COERCE THE
PERFORMANCE OF AN ACT WHICH THE LAW DOES NOT SPECIFICALLY ENJOIN AS A
DUTY RESULTING FROM AN OFFICE, TRUST OR STATION, OR AS A RESULT OF
SOME OFFICIAL DUTY; CHARTER, RIGHTS UNDER, DISCUSSED.—Held, under the
facts stated and by reason of the charter of the respondent company, that
mandamus will not be issued to require it to provide and equip its telegraph
poles with crosspieces sufficient to carry six telegraph wires of the Government.
The charter of a corporation is a contract between three parties: (a) Between the
state and the corporation, (b) between the stockholders and the state, and (c)
between the corporation and the stockholders. The state cannot require the perf
ormance of a duty on the part of a corporation or entity, contrary to the
provisions of the charter of said corporation or entity.
ORIGINAL ACTION in the Supreme Court. Mandamus.
The facts are stated in the opinion of the court.
Attorney-General Jaranilla for petitioner.
Jose Abreu for respondents.
JOHNSON, J.:
This is a petition in the Supreme Court of the extraordinary legal writ
of mandamus presented by the Government of the Philippine Islands, praying
that the writ be issued to compel the Manila Railroad Company and Jose Paez, as
its manager, to provide and equip the telegraph poles of said company between
the municipality of Paniqui, Province of Tarlac, and the Municipality of San
Fernando, Province of La Union, with crosspieces for six telegraph wires
belonging to the Government, which, it is alleged, are necessary for public
service between said municipalities.
The only question raised by the petition is whether the dependant company is
required to provide and equip its telegraph poles with crosspieces to carry six
telegraph wires of the Government, or whether it is only required to furnish
poles with crosspieces sufficient to carry four wires only.
It is admitted that the present poles and crosspieces between said municipalities
are sufficient to carry four telegraph wires and that they do now carry four
telegraph wires, by virtue of an agreement between the respondents and the
Bureau of the Posts of the Philippine Government. It is admitted that the poles
and not sufficient to carry six telegraph wires.
The petitioner relies upon the provisions of section 84 of act No. 1459. Act No.
1459 is the General Corporation Law and was adopted by the United States
Philippine Commission on March 1, 1906. (Vol. 5, Pub. Laws, pp. 224-268.) Section
84 of the said Act provides:
The railroad corporation shall establish along the whole length of the
road a telegraph line for the use of the railroad. The posts of this line
may be used for Government wires and shall be of sufficient length and
strength and equipped with sufficient crosspiece to carry the number of
wires which the Government may consider necessary for the public
service. The establishment, protection, and maintenance of the wires
and stations necessary for the public service shall be at the cost of the
Government. (Vol. 5, P. L., p. 247.)
The plaintiff contends that under said section 84 the defendant company is
required to erect and maintain posts for its telegraph wires, of sufficient length
and strength, and equipped with sufficient crosspieces to carry the number of
wires which the Government may consider necessary for the public service, and
that six wires are now necessary for the public service.
The respondents answered by a general and special defense. In their special
defense they contend that section 84 of Act No. 1459 has been repealed by
section 1, paragraph 8 of Act No. 1510 of the United States Philippine Commission
(vol. 5, P. L., pp. 350-358), and that under the provisions of said Act No. 1510 the
Government is entitled to place on the poles of the company four wires only. Act
No. 1510 is the charter of the Manila Railroad Company. It was adopted by the
85
United States Philippine Commission on July 7, 1906. Section 1, paragraph 8, of
said Act No. 1510 provides:
8. The grantee (the Manila Railroad Company) shall have the right to
construct and operate telegraph, telephone, and electrical transmission
lines over said railways for the use of the railways and their business,
and also, with the approval of the Secretary of War, for public service
and commercial purposes but these latter privileges shall be subject to
the following provisions:
In the construction of telegraph or telephone lines along the right of
way the grantee (the Manila Railroad Company) shall erect and maintain
poles with sufficient space thereon to permit the Philippine
Government, at the expense of said Government, to place, operate, and
maintain four wires for telegraph, telephone, and electrical transmission
for any Government purposes between the termini of the lines of
railways main or branch; and the Philippine Government reserves to
itself the right to construct, maintain, and operate telegraph, telephone,
or electrical transmission lines over the right of way of said railways for
commercial military, or government purposes, without unreasonably
interfering with the construction, maintenance, and operation by the
grantee of its railways, telegraph, telephone, and electrical transmission
lines.
To answer the question above stated, it becomes necessary to determine
whether section 84 of Act No. 1459 is applicable to the Manila Railroad Company,
or whether the manila Railroad Company is governed by section 1, paragraph 8,
of Act No. 1510. As has been said, Act No. 1459 is a general law applicable to
corporations generally, while Act No. 1510 is the charter of the Manila Railroad
Company and constitute a contract between it and the Government.
Inasmuch as Act No. 1510 is the charter of Manila Railroad Company and
constitute a contract between it and the Governmemnt, it would seem that the
company is governd by its contract and not by the provisions of any general law
upon questions covered by said contract. From a reading of the said charter or
contract it would be seen that there is no indication that the Government
intended to impose upon said company any other conditions as obligations not
expressly found in said charter or contract. If that is true, then certainly the
Government cannot impose upon said company any conditions or obligations
found in any general law, which does not expressly modify said contract.
Section 84 of the Corporation Law (Act No. 1459) was intended to apply to all
railways in the Philippine Islands which did not have a special charter contract.
Act No. 1510 applies only to the Manila Railroad Company, one of the
respondents, and being a special charter of said company, its adoption had the
effect of superseding the provisions of the general Corporation Law which are
applicable to railraods in general. The special charter (Act No. 1510) had the
effect of superseding the general Corporation Law upon all matters covered by
said special charter. Said Act, inasmuch as it contained a special provision relating
to the erection of telegraph and telephone poles, and the number of wires which
the Government might place thereon, superseded the general law upon that
question.
Act No. 1510 is a special charter of the respondent company. It constitutes a
contract between the respondent company and the state; and the state and the
grantee of a charter are equally bound by its provisions. For the state to impose
an obligation or a duty upon the respondent company, which is not expressly
provided for in the charter (Act No. 1510), would amount to a violation of said
contract between the state and the respondent company. The provisions of Act
No. 1459 relating to the number of wires which the Government may place upon
the poles of the company are different and more enerous than the provisions of
the charter upon the same question. Therefore, to allow the plaintiff to require
of the respondent company a compliance with said section 84 of Act No. 1459,
would be to require of the respondent company and the performance of an
obligation which is not imposed upon it by its charter. The charter of a
corporation is a contract between three parties: (a) it is a contract between the
state and the corporation to which the charter is granted; (b) it is a contact
between the stockholders and the state and (c) it is also a contract between the
corporation and its stockholders. (Cook on Corporations, vol. 2, sec. 494 and
cases cited.)
The question is not whether Act No. 1510 repealed Act No. 1459; but whether,
after the adoption of Act No. 1510, the respondents are obliged to comply with
the special provision above mentioned, contained in Act No. 1459. We must
answer that question in the native. Both laws are still in force, unless otherwise
repealed. Act No. 1510 is applicable to respondents upon the question before us,
while Act No. 1459 is not applicable.
The petitioner, in view of all the foregoing facts and the law applicable thereto,
has not shown itself entitled to the remedy prayed for. The prayer of the petition
must, therefore, be denied. And without any finding as to costs, it is so ordered.
86
Street, Malcolm, Villamor, Ostrand, Johns, Romualdez and Villa-Real, JJ., concur.

87
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. 41570 September 6, 1934
RED LINE TRANSPORTATION CO., petitioner-appellant,
vs.
RURAL TRANSIT CO., LTD., respondent-appellee.
1.PUBLIC SERVICE ; AUTHORITY OP PUBLIC SERVICE COMMISSION TO
AUTHORIZE A CORPORATION TO ASSUME THE NAME OF ANOTHER.—There is no
law that empowers the Public Service Commission or any court in this jurisdiction
to authorize one corporation to assume the name of another corporation as a
trade name. Both the Rural Transit Company, Ltd., and the Bachrach Motor Co.,
Inc., are Philippine corporations and the very law of their creation and continued
existence requires each to adopt and certify a distinctive name.
2.ID.; ID.; CHANGE OP CORPORATION'S NAME.—The incorporators
"constitute a body politic and corporate under the name stated in the
certificate." (Section 11, Act No. 1459, as amended.) A corporation has the power
"of succession by its corporate name." (Section 13, ttrid.) The name of a
corporation is therefore essential to its existence. It cannot change its name
except in the manner provided by the statute. By that name alone is it authorized
to transact business.
3.ID. ; ID. ; ID.—The law gives a corporation no express or implied
authority to assume another name that is unappropriated; still less that of
another corporation, which is expressly set apart for it and protected by the law.
If any corporation could assume at pleasure as an unregistered trade name the
name of another corporation, this practice would result in confusion and open
the door to frauds and evasions and difficulties of administration and
supervision.
4.ID.; ID.; ID.; POLICY OP THE LAW.—The policy of the law as expressed
in our corporation statute and the Code of Commerce is clearly against such a
practice. (Cf. Scarsdale Pub. Co.Colonial Press vs. Carter, 116 New York
Supplement, 731; Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois
[Appellate Courts], 428, 434.)
REVIEW of an order of the Public Service Commission. Cruz, Commissioner.
The facts are stated in the opinion of the court.
L. D. Lockwood for appellant.
Ohnick and Opisso for appellee.
BUTTE, J.:
This case is before us on a petition for review of an order of the Public Service
Commission entered December 21, 1932, granting to the Rural Transit Company,
Ltd., a certificate of public convenience to operate a transportation service
between Ilagan in the Province of Isabela and Tuguegarao in the Province of
Cagayan, and additional trips in its existing express service between Manila
Tuguegarao.
On June 4, 1932, the Rural Transit Company, Ltd., a Philippine corporation, filed
with the Public Company Service Commission an application in which it is stated
in substance that it is the holder of a certificate or public convenience to operate
a passenger bus service between Manila and Tuguegarao; that it is the only
operator of direct service between said points and the present authorized
schedule of only one trip daily is not sufficient; that it will be also to the public
convenience to grant the applicant a certificate for a new service between
Tuguegarao and Ilagan.
On July 22, 1932, the appellant, Red Line Transportation Company, filed an
opposition to the said application alleging in substance that as to the service
between Tuguegarao and Ilagan, the oppositor already holds a certificate of
public convenience and is rendering adequate and satisfactory service; that the
granting of the application of the Rural Transit Company, Ltd., would not serve
public convenience but would constitute a ruinous competition for the oppositor
over said route.
After testimony was taken, the commission, on December 21, 1932, approved the
application of the Rural Transit Company, Ltd., and ordered that the certificate of
public convenience applied for be "issued to the applicant Rural Transit
Company, Ltd.," with the condition, among others, that "all the other terms and
conditions of the various certificates of public convenience of the herein
applicant and herein incorporated are made a part hereof."
88
On January 14, 1933, the oppositor Red Line Transportation Company filed a JUDGE. I do not know what is in your mind by not telling the real
motion for rehearing and reconsideration in which it called the commission's applicant in this case?
attention to the fact that there was pending in the Court of First Instance of
Manila case N. 42343, an application for the voluntary dissolution of the A. It is the Rural Transit Company, Ltd.
corporation, Rural Transit Company, Ltd. Said motion for reconsideration was set
down for hearing on March 24, 1933. On March 23, 1933, the Rural Transit JUDGE. As an entity by itself and not by the Bachrach Motor Company?
Company, Ltd., the applicant, filed a motion for postponement. This motion was
verified by M. Olsen who swears "that he was the secretary of the Rural Transit
A. I do not know. I have not given that phase of the matter much
Company, Ltd., in the above entitled case." Upon the hearing of the motion for
thought, as in previous occassion had not necessitated.
reconsideration, the commission admitted without objection the following
documents filed in said case No. 42343 in the Court of First Instance of Manila for
JUDGE. In filing this application, you filed it for the operator on that
the dissolution of the Rural Transit Company, Ltd. the petition for dissolution
line? Is it not!
dated July 6, 1932, the decision of the said Court of First Instance of Manila,
dated February 28, 1933, decreeing the dissolution of the Rural Transit Company,
Ltd. A. Yes, sir.

At the trial of this case before the Public Service Commission an issue was raised JUDGE. Who is that operator?
as to who was the real party in interest making the application, whether the
Rural Transit Company, Ltd., as appeared on the face of the application, or the A. The Rural Transit Company, Ltd.
Bachrach Motor Company, Inc., using name of the Rural Transit Company, Ltd.,
as a trade name. The evidence given by the applicant's secretary, Olsen, is JUDGE. By itself, or as a commercial name of the Bachrach Motor
certainly very dubious and confusing, as may be seen from the following: Company?

Q. Will you please answer the question whether it is the Bachrach A. I cannot say.
Motor Company operating under the trade name of the Rural Transit
Company, Limited, or whether it is the Rural Transit Company, Limited in ESPELETA. The Rural Transit Company, Ltd., is a corporation duly
its own name this application was filed? established in accordance with the laws of the Philippine Islands.

A. The Bachrach Motor Company is the principal stockholder. JUDGE. According to the records of this commission the Bachrach
Motor Company is the owner of the certificates and the Rural Transit
Q. Please answer the question. Company, Ltd., is operating without any certificate.

ESPELETA. Objecion porque la pregunta ya ha sido contestada. JUDGE. If you filed this application for the Rural Transit Company, Ltd.,
and afterwards it is found out that the Rural Transit Company, Ltd., is
JUEZ. Puede contestar. not an operator, everything will be turned down.

A. I do not know what the legal construction or relationship JUDGE. My question was, when you filed this application you evidently
existing between the two. made it for the operator?

A. Yes, sir.

89
 JUDGE. Who was that operator you had in mind?
A. According to the status of the ownership of the certificates of
the former Rural Transit Company, the operator was the operator
authorized in case No. 23217 to whom all of the assets of the former
Rural Transit Company were sold.
JUDGE. Bachrach Motor Company?
A. All actions have been prosecuted in the name of the Rural
Transit Company, Ltd.
JUDGE. You mean the Bachrach Motor Company, Inc., doing business
under the name of the Rural Transit Company, Ltd.?
A. Yes, sir.
LOCKWOOD. I move that this case be dismissed, your Honor, on the
ground that this application was made in the name of one party but the
real owner is another party.
ESPELETA. We object to that petition.
JUDGE. I will have that in mind when I decide the case. If I agree with
you everything would be finished.
The Bachrach Motor Company, Inc., entered no appearance and ostensibly took
no part in the hearing of the application of the Rural Transit Company, Ltd. It may
be a matter of some surprise that the commission did not on its own motion
order the amendment of the application by substituting the Bachrach Motor
Company, Inc., as the applicant. However, the hearing proceeded on the
application as filed and the decision of December 2, 1932, was rendered in favor
of the Rural Transit Company, Ltd., and the certificate ordered to be issued in its
name, in the face of the evidence that the said corporation was not the real party
in interest. In its said decision, the commission undertook to meet the objection
by referring to its resolution of November 26, 1932, entered in another case. This
resolution in case No. 23217 concludes as follows:
Premises considered we hereby authorize the Bachrach Motor Co., Inc.,
to continue using the name of "Rural Transit Co., Ltd.," as its trade name
in all the applications, motions or other petitions to be filed in this
commission in connection with said business and that this authority is
given retroactive effect as of the date, of filing of the application in this
case, to wit, April 29, 1930.
We know of no law that empowers the Public Service Commission or any court in
this jurisdiction to authorize one corporation to assume the name of another
corporation as a trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and the very law of their
creation and continued existence requires each to adopt and certify a distinctive
name. The incorporators "constitute a body politic and corporate under the name
stated in the certificate." (Section 11, Act No. 1459, as amended.) A corporation
has the power "of succession by its corporate name." (Section 13, ibid.) The name
of a corporation is therefore essential to its existence. It cannot change its name
except in the manner provided by the statute. By that name alone is it authorized
to transact business. The law gives a corporation no express or implied authority
to assume another name that is unappropriated: still less that of another
corporation, which is expressly set apart for it and protected by the law. If any
corporation could assume at pleasure as an unregistered trade name the name
of another corporation, this practice would result in confusion and open the
door to frauds and evasions and difficulties of administration and supervision.
The policy of the law expressed in our corporation statute and the Code of
Commerce is clearly against such a practice. (Cf. Scarsdale Pub. Co. Colonial
Press vs. Carter, 116 New York Supplement, 731; Svenska Nat. F. i. C. vs. Swedish
Nat. Assn., 205 Illinois [Appellate Courts], 428, 434.)
The order of the commission of November 26, 1932, authorizing the Bachrach
Motor Co., Incorporated, to assume the name of the Rural Transit Co., Ltd.
likewise in corporated, as its trade name being void, and accepting the order of
December 21, 1932, at its face as granting a certificate of public convenience to
the applicant Rural Transit Co., Ltd., the said order last mentioned is set aside and
vacated on the ground that the Rural Transit Company, Ltd., is not the real party
in interest and its application was fictitious.
In view of the dissolution of the Rural Transit Company, Ltd. by judicial decree of
February 28, 1933, we do not see how we can assess costs against said
respondent, Rural Transit Company, Ltd.
Malcolm, Villa-Real, Imperial and Goddard, JJ., concur.
90
 Republic of the Philippines
SUPREME COURT
Manila
EN BANC
G.R. No. L-26370 July 31, 1970
PHILIPPINE FIRST INSURANCE COMPANY, INC., plaintiff-appellant,
vs.
MARIA CARMEN HARTIGAN, CGH, and O. ENGKEE, defendants-appellees.
Corporation law; Corporations; Change of name; Corporation may change
its name.—There is nothing in Section 18 of the Corporation Law which prohibits
a corporation from changing its name. The inference is clear that such a change
is allowed, for if the legislature had intended to enjoin corporations from
changing names, it would have expressly stated so in this section or in any other
provision of the law.
Same; Same; Same; How change of name may be effected.—A
corporation may change its name by merely amending its charter in the manner
prescribed by law.
Same; Same; Same; Change of name does not dissolve corporation.—The
change of name of a corporation does not result in its dissolution. The changing
of the name of a corporation is no more the creation of a corporation than the
changing of the name of a natural person is the begetting of a natural person.
The act, in both cases, would seem to be what the language which we use to
designate it imports—a change of name and not a change of being.
Same; Same; Same; When change of corporate name is effective.—The
approval by the stockholders of the amendment of the articles of incorporation
changing the corporate name does not automatically change the name of the
corporation as of that date. To be effective, Section 18 of the Corporation Law
requires that a copy of the articles of incorporation as amended, duly certified to
be correct by the president and the secretary of the corporation and a majority
of the board of directors or trustees, shall be filed with the Securities & Exchange
Commissioner and it is only from the time of such filing, that the corporation
shall have the same powers and it and the members and stockholders thereof
shall thereafter be subject to the same liabilities as if such amendment had been
embraced in the original articles of incorporation.
APPEAL from a decision of the Court of First Instance of Manila. Morfe, J.
The facts are stated in the opinion of the Court.
Bausa, Ampil & Suarez for plaintiff-appellant.
Nicasio E. Martin for defendants-appellees.
BARREDO, J.:
Appeal from the decision dated 6 October 1962 of the Court of First Instance of
Manila — dismissing the action in its Civil Case No. 48925 — brought by the
herein plaintiff-appellant Philippine First Insurance Co., Inc. to the Court of
Appeals which could, upon finding that the said appeal raises purely questions of
law, declared itself without jurisdiction to entertain the same and, in its
resolution dated 15 July 1966, certified the records thereof to this Court for
proper determination.
The antecedent facts are set forth in the pertinent portions of the resolution of
the Court of Appeals referred to as follows:
According to the complaint, plaintiff was originally organized as
an insurance corporation under the name of 'The Yek Tong Lin
Fire and Marine Insurance Co., Ltd.' The articles of incorporation
originally presented before the Security and Exchange
Commissioner and acknowledged before Notary Public Mr. E. D.
Ignacio on June 1, 1953 state that the name of the corporation
was 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.' On
May 26, 1961 the articles of incorporation were amended
pursuant to a certificate of the Board of Directors dated March
8, 1961 changing the name of the corporation to 'Philippine First
Insurance Co., Inc.'.
91
The complaint alleges that the plaintiff Philippine First
Insurance Co., Inc., doing business under the name of 'The Yek
Tong Lin Fire and Marine Insurance Co., Lt.' signed as co-maker
together with defendant Maria Carmen Hartigan, CGH, a
promissory note for P5,000.00 in favor of the China Banking
Corporation payable within 30 days after the date of the
promissory note with the usual banking interest; that the
plaintiff agreed to act as such co-maker of the promissory note
upon the application of the defendant Maria Carmen Hartigan,
CGH, who together with Antonio F. Chua and Chang Ka Fu,
signed an indemnity agreement in favor of the plaintiff,
undertaking jointly and severally, to pay the plaintiff damages,
losses or expenses of whatever kind or nature, including
attorney's fees and legal costs, which the plaintiff may sustain
as a result of the execution by the plaintiff and co-maker of
Maria Carmen Hartigan, CGH, of the promissory note above-
referred to; that as a result of the execution of the promissory
note by the plaintiff and Maria Carmen Hartigan, CGH, the China
Banking Corporation delivered to the defendant Maria Carmen
Hartigan, CGH, the sum of P5,000.00 which said defendant
failed to pay in full, such that on August 31, 1961 the same was.
renewed and as of November 27, 1961 there was due on
account of the promissory note the sum of P4,559.50 including
interest. The complaint ends with a prayer for judgment against
the defendants, jointly and severally, for the sum of P4,559.50
with interest at the rate of 12% per annum from November 23,
1961 plus P911.90 by way of attorney's fees and costs.
Although O. Engkee was made as party defendant in the
caption of the complaint, his name is not mentioned in the body
of said complaint. However, his name Appears in the Annex A
attached to the complaint which is the counter indemnity
agreement supposed to have been signed according to the
complaint by Maria Carmen Hartigan, CGH, Antonio F. Chua and
Chang Ka Fu.
In their answer the defendants deny the allegation that the
plaintiff formerly conducted business under the name and style
of 'The Yek Tong Lin Fire and Marine Insurance Co., Ltd.' They
admit the execution of the indemnity agreement but they claim
that they signed said agreement in favor of the Yek Tong Lin
Fire and Marine Insurance Co., Ltd.' and not in favor of the
plaintiff. They likewise admit that they failed to pay the
promissory note when it fell due but they allege that since their
obligation with the China Banking Corporation based on the
promissory note still subsists, the surety who co-signed the
promissory note is not entitled to collect the value thereof from
the defendants otherwise they will be liable for double amount
of their obligation, there being no allegation that the surety has
paid the obligation to the creditor.
By way of special defense, defendants claim that there is no
privity of contract between the plaintiff and the defendants and
consequently, the plaintiff has no cause of action against them,
considering that the complaint does not allege that the plaintiff
and the 'Yek Tong Lin Fire and Marine Insurance Co., Ltd.' are
one and the same or that the plaintiff has acquired the rights of
the latter. The parties after the admission of Exhibit A which is
the amended articles of incorporation and Exhibit 1 which is a
demand letter dated August 16, 1962 signed by the manager of
the loans and discount department of the China Banking
Corporation showing that the promissory note up to said date
in the sum of P4,500.00 was still unpaid, submitted the case for
decision based on the pleadings.
Under date of 6 October 1962, the Court of First Instance of Manila rendered the
decision appealed. It dismissed the action with costs against the plaintiff
Philippine First Insurance Co., Inc., reasoning as follows:
... With these undisputed facts in mind, the parties correctly
concluded that the issues for resolution by this Court are as
follows:
(a) Whether or not the plaintiff is the real party in interest that
may validly sue on the indemnity agreement signed by the
defendants and the Yek Tong Lin Fire & Marine Insurance Co.,
Ltd. (Annex A to plaintiff's complaint ); and
(b) Whether or not a suit for indemnity or reimbursement may
under said indemnity agreement prosper without plaintiff
having yet paid the amount due under said promissory note.
92
In the first place, the change of name of the Yek Tong Lin Fire &
Marine Insurance Co., Ltd. to the Philippines First Insurance Co.,
Inc. is of dubious validity. Such change of name in effect
dissolved the original corporation by a process of dissolution
not authorized by our corporation law (see Secs. 62 and 67,
inclusive, of our Corporation Law). Moreover, said change of
name, amounting to a dissolution of the Yek Tong Lin Fire &
Marine Insurance Co., Ltd., does not appear to have been
effected with the written note or assent of stockholders
representing at least two-thirds of the subscribed capital stock
of the corporation, a voting proportion required not only for
the dissolution of a corporation but also for any amendment of
its articles of incorporation (Secs. 18 and 62, Corporation Law).
Furthermore, such change of corporate name appears to be
against public policy and may be effected only by express
authority of law (Red Line Transportation Co. v. Rural Transit
Co., Ltd., 60 Phil. 549, 555; Cincinnati Cooperage Co., Ltd. vs.
Vate, 26 SW 538, 539; Pilsen Brewing Co. vs. Wallace, 125 NE
714), but there is nothing in our corporation law authorizing the
change of corporate name in this jurisdiction.
In due time, the Philippine First Insurance Company, Inc. moved for
In the second place, assuming that the change of name of the
reconsideration of the decision aforesaid, but said motion was denied on
Yek Tong Lin Fire & Marine Insurance Co. Ltd., to Philippines
December 3, 1962 in an order worded thus:
pine First Insurance Co., Inc., as accomplished on March 8, 1961,
is valid, that would mean that the original corporation, the Yek
Tong Lin Fire & Marine Insurance Co., Ltd., became dissolved
and of no further existence since March 8, 1961, so that on May
15, 1961, the date the indemnity agreement, Annex A, was
executed, said original corporation bad no more power to enter
into any agreement with the defendants, and the agreement
entered into by it was ineffective for lack of capacity of said
dissolved corporation to enter into said agreement. At any rate,
even if we hold that said change of name is valid, the fact
remains that there is no evidence showing that the new entity,
the Philippine First Insurance Co., Inc. has with the consent of
the original parties, assumed the obligations or was assigned
the rights of action in the original corporation, the Yek Tong Lin
Fire & Marine Insurance Co., Ltd. In other words, there is no
evidence of conventional subrogation of the Plaintiffs in the
rights of the Yek Tong Lin Fire & Marine Insurance Co., Ltd.
under said indemnity agreement (Arts. 1300, 1301, New Civil
Code). without such subrogation assignment of rights, the
herein plaintiff has no cause of action against the defendants,
and is, therefore, not the right party in interest as plaintiff.
Last, but not least, assuming that the said change of name was
legal and operated to dissolve the original corporation, the
dissolved corporation, must pursuant to Sec. 77 of our
corporation law, be deemed as continuing as a body corporate
for three (3) years from March 8, 1961 for the purpose of
prosecuting and defending suits. It is, therefore, the Yek Tong
Lin Fire & Marine Insurance Co., Ltd. that is the proper party to
sue the defendants under said indemnity agreement up to
March 8, 1964.
Having arrived at the foregoing conclusions, this Court need not
squarely pass upon issue (b) formulated above.
WHEREFORE, plaintiff's action is hereby dismissed, with costs
against the plaintiff.
The motion for reconsideration, dated November 8, 1962, raises
no new issue that we failed to consider in rendering our
decision of October 6, 1962. However, it gives us an opportunity
to amplify our decision as regards the question of change of
name of a corporation in this jurisdiction.
We find nothing in our Corporation Law authorizing a change of
name of a corporation organized pursuant to its provisions. Sec.
18 of the Corporation Law authorizes, in our opinion,
amendment to the Articles of Incorporation of a corporation
only as to matters other than its corporate name. Once a
corporation is organized in this jurisdiction by the execution and
registration of its Articles of Incorporation, it shall continue to
exist under its corporate name for the lifetime of its corporate
existence fixed in its Articles of Incorporation, unless sooner
legally dissolved (Sec. 11, Corp. Law). Significantly, change of
name is not one of the methods of dissolution of corporations
93
expressly authorized by our Corporation Law. Also significant is
the fact that the power to change its corporate name is not one
of the general powers conferred on corporations in this
jurisdiction (Sec. 13, Corp. Law). The enumeration of corporate
powers made in our Corporation Law implies the exclusion of all
others (Thomas v. West Jersey R. Co., 101 U.S. 71, 25 L. ed. 950).
It is obvious, in this connection, that change of name is not one
of the powers necessary to the exercise of the powers
conferred on corporations by said Sec. 13 (see Sec. 14, Corp.
Law).
To rule that Sec. 18 of our Corporation Law authorizes the
change of name of a corporation by amendment of its Articles
of Incorporation is to indulge in judicial legislation. We have
examined the cases cited in Volume 13 of American
Jurisprudence in support of the proposition that the general
power to alter or amend the charter of a corporation
necessarily includes the power to alter the name of a
corporation, and find no justification for said conclusion arrived
at by the editors of American Jurisprudence. On the contrary,
the annotations in favor of plaintiff's view appear to have been
based on decisions in cases where the statute itself expressly
authorizes change of corporate name by amendment of its
Articles of Incorporation. The correct rule in harmony with the
provisions of our Corporation Law is well expressed in an
English case as follows:
After a company has been completely register
without defect or omission, so as to be
incorporated by the name set forth in the deed
of settlement, such incorporated company has
not the power to change its name ... Although
the King by his prerogative might incorporate
by a new name, and the newly named
corporation might retain former rights, and
sometimes its former name also, ... it never
appears to be such an act as the corporation
could do by itself, but required the same
power as created the corporation. (Reg. v.
Registrar of Joint Stock Cos 10 Q.B. 839, 59
E.C.L. 839).
The contrary view appears to represent the minority doctrine,
judging from the annotations on decided cases on the matter.
The movant invokes as persuasive precedent the action of the
Securities Commissioner in tacitly approving the Amended,
Articles of Incorporation on May 26, 1961. We regret that we
cannot in good conscience lend approval to this action of the
Securities and Exchange Commissioner. We find no justification,
legal, moral, or practical, for adhering to the view taken by the
Securities and Exchange Commissioner that the name of a
corporation in the Philippines may be changed by mere
amendment of its Articles of Incorporation as to its corporate
name. A change of corporate name would serve no useful
purpose, but on the contrary would most probably cause
confusion. Only a dubious purpose could inspire a change of a
corporate. name which, unlike a natural person's name, was
chosen by the incorporators themselves; and our Courts should
not lend their assistance to the accomplishment of dubious
purposes.
WHEREFORE, we hereby deny plaintiff's motion for
reconsideration, dated November 8, 1962, for lack of merit.
In this appeal appellant contends that —
I
THE TRIAL COURT ERRED IN HOLDING THAT IN THIS
JURISDICTION, THERE IS NOTHING IN OUR CORPORATION LAW
AUTHORIZING THE CHANGE OF CORPORATE NAME;
II
THE TRIAL COURT ERRED IN DECLARING THAT A CHANGE OF
CORPORATE NAME APPEARS TO BE AGAINST PUBLIC POLICY;
III
94
 THE TRIAL COURT ERRED IN HOLDING THAT A CHANGE OF
CORPORATE NAME HAS THE LEGAL EFFECT OF DISSOLVING
THE ORIGINAL CORPORATION:
IV
THE TRIAL COURT ERRED IN HOLDING THAT THE CHANGE OF
NAME OF THE YEK TONG LIN FIRE & MARINE INSURANCE CO.,
LTD. IS OF DUBIOUS VALIDITY;
V
THE TRIAL COURT ERRED IN HOLDING THAT THE APPELLANT
HEREIN IS NOT THE RIGHT PARTY INTEREST TO SUE
DEFENDANTS-APPELLEES;
IV
THE TRIAL COURT FINALLY ERRED IN DISMISSING THE
COMPLAINT.
Appellant's Position is correct; all the above assignments of error are well taken.
The whole case, however, revolves around only one question. May a Philippine
corporation change its name and still retain its original personality and
individuality as such?
The answer is not difficult to find. True, under Section 6 of the Corporation Law,
the first thing required to be stated in the Articles of Incorporation of any corn
corporation is its name, but it is only one among many matters equally if not
more important, that must be stated therein. Thus, it is also required, for
example, to state the number and names of and residences of the incorporators
and the residence or location of the principal office of the corporation, its term
of existence, the amount of its capital stock and the number of shares into which
it is divided, etc., etc.
On the other hand, Section 18 explicitly permits the articles of incorporation to
be amended thus:
Sec. 18. — Any corporation may for legitimate corporate
purpose or purposes, amend its articles of incorporation by a
majority vote of its board of directors or trustees and the vote
or written assent of two-thirds of its members, if it be a
nonstock corporation or, if it be a stock corporation, by the
vote or written assent of the stockholders representing at least
two-thirds of the subscribed capital stock of the
corporation Provided, however, That if such amendment to the
articles of incorporation should consist in extending the
corporate existence or in any change in the rights of holders of
shares of any class, or would authorize shares with preferences
in any respect superior to those of outstanding shares of any
class, or would restrict the rights of any stockholder, then any
stockholder who did not vote for such corporate action may,
within forty days after the date upon which such action was
authorized, object thereto in writing and demand Payment for
his shares. If, after such a demand by a stockholder, the
corporation and the stockholder cannot agree upon the value
of his share or shares at the time such corporate action was
authorized, such values all be ascertained by three disinterested
persons, one of whom shall be named by the stockholder,
another by the corporation, and the third by the two thus
chosen. The findings of the appraisers shall be final, and if their
award is not paid by the corporation within thirty days after it is
made, it may be recovered in an action by the stockholder
against the corporation. Upon payment by the corporation to
the stockholder of the agreed or awarded price of his share or
shares, the stockholder shall forthwith transfer and assign the
share or shares held by him as directed by the
corporation: Provided, however, That their own shares of stock
purchased or otherwise acquired by banks, trust companies,
and insurance companies, should be disposed of within six
months after acquiring title thereto.
Unless and until such amendment to the articles of
incorporation shall have been abandoned or the action
rescinded, the stockholder making such demand in writing shall
cease to be a stockholder and shall have no rights with respect
to such shares, except the right to receive payment therefor as
aforesaid.
A stockholder shall not be entitled to payment for his shares
under the provisions of this section unless the value of the
95
 corporate assets which would remain after such payment
would be at least equal to the aggregate amount of its debts
and liabilities and the aggregate par value and/or issued value of
the remaining subscribed capital stock.
A copy of the articles of incorporation as amended, duly
certified to be correct by the president and the secretary of the
corporation and a majority of the board of directors or trustees,
shall be filed with the Securities and Exchange Commissioner,
who shall attach the same to the original articles of
incorporation, on file in his office. From the time of filing such
copy of the amended articles of incorporation, the corporation
shall have the same powers and it and the members and
stockholders thereof shall thereafter be subject to the same
liabilities as if such amendment had been embraced in the
original articles of incorporation: Provided, however, That
should the amendment consist in extending the corporate life,
the extension shall not exceed 50 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: And
provided, further, That nothing in this section shall be construed
to authorize any corporation to increase or diminish its capital
stock or so as to effect any rights or actions which accrued to
others between the time of filing the original articles of
incorporation and the filing of the amended articles.
The Securities and, Exchange Commissioner shall be entitled to collect and
receive the sum of ten pesos for filing said copy of the amended articles of
incorporation. Provided, however, That when the amendment consists in
extending the term of corporate existence, the Securities and Exchange
Commissioner shall be entitled to collect and receive for the filing of its amended
articles of incorporation the same fees collectible under existing law for the filing
of articles of incorporation. The Securities & Exchange Commissioner shall not
hereafter file any amendment to the articles of incorporation of any bank,
banking institution, or building and loan association unless accompanied by a
certificate of the Monetary Board (of the Central Bank) to the effect that such
amendment is in accordance with law. (As further amended by Act No. 3610, Sec.
2 and Sec. 9. R.A. No. 337 and R.A. No. 3531.)
It can be gleaned at once that this section does not only authorize corporations
to amend their charter; it also lays down the procedure for such amendment;
and, what is more relevant to the present discussion, it contains provisos
restricting the power to amend when it comes to the term of their existence and
the increase or decrease of the capital stock. There is no prohibition therein
against the change of name. The inference is clear that such a change is allowed,
for if the legislature had intended to enjoin corporations from changing names, it
would have expressly stated so in this section or in any other provision of the
law.
No doubt, "(the) name (of a corporation) is peculiarly important as necessary to
the very existence of a corporation. The general rule as to corporations is that
each corporation shall have a name by which it is to sue and be sued and do all
legal acts. The name of a corporation in this respect designates the corporation
in the same manner as the name of an individual designates the person." 1 Since
an individual has the right to change his name under certain conditions, there is
no compelling reason why a corporation may not enjoy the same right. There is
nothing sacrosanct in a name when it comes to artificial beings. The sentimental
considerations which individuals attach to their names are not present in
corporations and partnerships. Of course, as in the case of an individual, such
change may not be made exclusively. by the corporation's own act. It has to
follow the procedure prescribed by law for the purpose; and this is what is
important and indispensably prescribed — strict adherence to such procedure.
Local well known corporation law commentators are unanimous in the view that
a corporation may change its name by merely amending its charter in the manner
prescribed by law. 2 American authorities which have persuasive force here in this
regard because our corporation law is of American origin, the same being a sort
of codification of American corporate law, 3 are of the same opinion.
A general power to alter or amend the charter of a corporation
necessarily includes the power to alter the name of the
corporation. Ft. Pitt Bldg., etc., Assoc. v. Model Plan Bldg., etc.,
Assoc., 159 Pa. St. 308, 28 Atl. 215; In re Fidelity Mut. Aid Assoc.,
12 W.N.C. (Pa.) 271; Excelsior Oil Co., 3 Pa. Co. Ct. 184; Wetherill
Steel Casting Co., 5 Pa. Co. Ct. 337.
xxx xxx xxx
Under the General Laws of Rhode Island, c 176, sec. 7, relating
to an increase of the capital stock of a corporation, it is
96
 provided that 'such agreement may be amended in any other
particular, excepting as provided in the following section',
which relates to a decrease of the capital stock This section has
been held to authorize a change in the name of a
corporation. Armington v. Palmer, 21 R.I. 109, 42 Atl. 308, 43,
L.R.A. 95, 79 Am. St. Rep. 786. (Vol. 19, American and English
Annotated Cases, p. 1239.)
Fletcher, a standard authority on American an corporation law also says:
Statutes are to be found in the various jurisdictions dealing with
the matter of change in corporate names. Such statutes have
been subjected to judicial construction and have, in the main,
been upheld as constitutional. In direct terms or by necessary
implication, they authorize corporations new names and
prescribe the mode of procedure for that purpose. The same
steps must be taken under some statutes to effect a change in a
corporate name, as when any other amendment of the
corporate charter is sought .... When the general law thus deals
with the subject, a corporation can change its name only in the
manner provided. (6 Fletcher, Cyclopedia of the Law of Private
Corporations, 1968 Revised Volume, pp. 212-213.) (Emphasis
supplied)
The learned trial judge held that the above-quoted proposition are not supported
by the weight of authority because they are based on decisions in cases where
the statutes expressly authorize change of corporate name by amendment of
the articles of incorporation. We have carefully examined these authorities and
We are satisfied of their relevance. Even Lord Denman who has been quoted by
His Honor from In Reg. v. Registrar of Joint Stock Cos. 10, Q.B., 59 E.C.L. maintains
merely that the change of its name never appears to be such an act as the
corporation could do for itself, but required ;the same Power as created a
corporation." What seems to have been overlooked, therefore, is that the
procedure prescribes by Section 18 of our Corporation Law for the amendment
of corporate charters is practically identical with that for the incorporation itself
of a corporation.
In the appealed order of dismissal, the trial court, made the observation that,
according to this Court in Red Line Transportation Co. v. Rural Transit Co., Ltd., 60
Phil, 549, 555, change of name of a corporation is against public policy. We must
clarify that such is not the import of Our said decision. What this Court held in
that case is simply that:
We know of no law that empowers the Public Service
Commission or any court in this jurisdiction to authorize one
corporation to assume the name of another corporation as a
trade name. Both the Rural Transit Company, Ltd., and the
Bachrach Motor Co., Inc., are Philippine corporations and the
very law of their creation and continued existence requires each
to adopt and certify a distinctive name. The incorporators
'constitute a body politic and corporate under the name stated
in the certificate.' (Section 11, Act No. 1459, as amended.) A
corporation has the power 'of succession by its corporate
name.' (Section 13, ibid.) The name of a corporation is therefore
essential to its existence. It cannot change its name except in
the manner provided by the statute. By that name alone is it
authorized to transact business. The law gives a corporation no
express or implied authority to assume another name that is
unappropriated; still less that of another corporation, which is
expressly set apart for it and protected by the law. If any
corporation could assume at pleasure as an unregistered trade
name the name of another corporation, this practice would
result in confusion and open the door to frauds and evasions
and difficulties of administration and supervision. The policy of
the law as expressed our corporation statute and the Code of
Commerce is clearly against such a practice. (Cf. Scarsdale Pub.
Co. — Colonial Press vs. Carter, 116 New York Supplement, 731;
Svenska Nat. F. i. C. vs. Swedish Nat. Assn., 205 Illinois
[Appellate Courts], 428, 434.)
In other words, what We have held to be contrary to public policy is the use by
one corporation of the name of another corporation as its trade name. We are
certain no one will disagree that such an act can only "result in confusion and
open the door to frauds and evasions and difficulties of administration and
supervision." Surely, the Red Line case was not one of change of name.
Neither can We share the posture of His Honor that the change of name of a
corporation results in its dissolution. There is unanimity of authorities to the
contrary.
97
An authorized change in the name of a corporation has no more
effect upon its identity as a corporation than a change of name
of a natural person has upon his identity. It does not affect the
rights of the corporation or lessen or add to its obligations.
After a corporation has effected a change in its name it should
sue and be sued in its new name .... (13 Am. Jur. 276-277, citing
cases.)
A mere change in the name of a corporation, either by the
legislature or by the corporators or stockholders under
legislative authority, does not, generally speaking, affect the
identity of the corporation, nor in any way affect the rights,
privileges, or obligations previously acquired or incurred by it.
Indeed, it has been said that a change of name by a corporation
has no more effect upon the identity of the corporation than a
change of name by a natural person has upon the identity of
such person. The corporation, upon such change in its name, is
in no sense a new corporation, nor the successor of the original
one, but remains and continues to be the original corporation. It
is the same corporation with a different name, and its character
is in no respect changed. ... (6 Fletcher, Cyclopedia of the Law
of Private Corporations, 224-225, citing cases.)
The change in the name of a corporation has no more effect
upon its identity as a corporation than a change of name of a
natural person has upon his identity. It does not affect the
rights of the corporation, or lessen or add to its obligations.
England. — Doe v. Norton, 11 M. & W. 913, 7 Jur. 751, 12 L. J. Exch.
418.
United States. — Metropolitan Nat. Bank v. Claggett, 141 U.S. 520,
12 S. Ct. 60, 35 U.S. (L. ed.) 841.
Alabama. — Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So.
670; North Birmingham Lumber Co. v. Sims, 157 Ala. 595, 48 So.
84.
Connecticut. — Trinity Church v. Hall, 22 Com. 125.
Illinois. — Mt. Palatine Academy v. Kleinschnitz 28 III, 133; St.
Louis etc. R. Co. v. Miller, 43 Ill. 199; Reading v. Wedder, 66 III. 80.
Indiana. — Rosenthal v. Madison etc., Plank Road Co., 10 Ind. 358.
Kentucky. — Cahill v. Bigger, 8 B. Mon. 211; Wilhite v. Convent of
Good Shepherd, 177 Ky. 251, 78 S. W. 138.
Maryland. — Phinney v. Sheppard & Enoch Pratt Hospital, 88 Md.
633, 42 Atl. 58, writ of error dismissed, 177 U.S. 170, 20 S. Ct. 573,
44 U.S. (L. ed.) 720.
Missouri. — Dean v. La Motte Lead Co., 59 Mo. 523.
Nebraska. — Carlon v. City Sav. Bank, 82 Neb. 582, 188 N. W.
334. New York First Soc of M.E. Church v. Brownell, 5 Hun 464.
Pennsylvania. — Com. v. Pittsburgh, 41 Pa. St. 278.
South Carolina. — South Carolina Mut Ins. Co. v. Price 67 S.C. 207,
45 S.E. 173.
Virginia. — Wilson v. Chesapeake etc., R. Co., 21 Gratt
654; Wright-Caesar Tobacco Co. v. Hoen, 105 Va. 327, 54 S.E. 309.
Washington. — King v. Ilwaco R. etc., Co., 1 Wash. 127. 23 Pac.
924.
Wisconsin. — Racine Country Bank v. Ayers, 12 Wis. 512.
The fact that the corporation by its old name makes a format
transfer of its property to the corporation by its new name does
not of itself show that the change in name has affected a
change in the identity of the corporation. Palfrey v.
Association for Relief, etc., 110 La. 452, 34 So. 600. The fact that
a corporation organized as a state bank afterwards becomes a
national bank by complying with the provisions of the National
Banking Act, and changes its name accordingly, has no effect on
its right to sue upon obligations or liabilities incurred to it by its
98
 former name. Michigan Ins. Bank v. Eldred 143 U.S. 293, 12 S. Ct.
450, 36 U.S. (L. ed.) 162.
A deed of land to a church by a particular name has been held
not to be affected by the fact that the church afterwards took a
different name. Cahill v. Bigger, 8 B. Mon (ky) 211.
A change in the name of a corporation is not a divestiture of
title or such a change as requires a regular transfer of title to
property, whether real or personal, from the corporation under
one name to the same corporation under another
name. McCloskey v. Doherty, 97 Ky. 300, 30 S. W. 649. (19
American and English Annotated Cases 1242-1243.)
As was very aptly said in Pacific Bank v. De Ro 37 Cal. 538, "The
changing of the name of a corporation is no more the creation
of a corporation than the changing of the name of a natural
person is the begetting of a natural person. The act, in both
cases, would seem to be what the language which we use to
designate it imports — a change of name, and not a change of
being.
Having arrived at the above conclusion, We have agree with appellant's pose
that the lower court also erred in holding that it is not the right party in interest
to sue defendants-appellees. 4 As correctly pointed out by appellant, the
approval by the stockholders of the amendment of its articles of incorporation
changing the name "The Yek Tong Lin Fire & Marine Insurance Co., Ltd." to
"Philippine First Insurance Co., Inc." on March 8, 1961, did not automatically
change the name of said corporation on that date. To be effective, Section 18 of
the Corporation Law, earlier quoted, requires that "a copy of the articles of
incorporation as amended, duly certified to be correct by the president and the
secretary of the corporation and a majority of the board of directors or trustees,
shall be filed with the Securities & Exchange Commissioner", and it is only from
the time of such filing, that "the corporation shall have the same powers and it
and the members and stockholders thereof shall thereafter be subject to the
same liabilities as if such amendment had been embraced in the original articles
of incorporation." It goes without saying then that appellant rightly acted in its
old name when on May 15, 1961, it entered into the indemnity agreement, Annex
A, with the defendant-appellees; for only after the filing of the amended articles
of incorporation with the Securities & Exchange Commission on May 26, 1961, did
appellant legally acquire its new name; and it was perfectly right for it to file the
present case In that new name on December 6, 1961. Such is, but the logical
effect of the change of name of the corporation upon its actions.
Actions brought by a corporation after it has changed its name
should be brought under the new name although for the
enforcement of rights existing at the time the change was
made. Lomb v. Pioneer Sav., etc., Co., 106 Ala. 591, 17 So.
670: Newlan v. Lombard University, 62 III. 195; Thomas v. Visitor
of Frederick County School, 7 Gill & J (Md.) 388; Delaware, etc., R.
Co. v. Trick, 23 N. J. L. 321; Northumberland Country Bank v. Eyer,
60 Pa. St. 436; Wilson v. Chesapeake etc., R. Co., 21 Gratt (Va.)
654.
The change in the name of the corporation does not affect its
right to bring an action on a note given to the corporation
under its former name. Cumberland College v. Ish, 22. Cal.
641; Northwestern College v. Schwagler, 37 Ia. 577. (19 American
and English Annotated Cases 1243.)
In consequence, We hold that the lower court erred in dismissing appellant's
complaint. We take this opportunity, however, to express the Court's feeling
that it is apparent that appellee's position is more technical than otherwise.
Nowhere in the record is it seriously pretended that the indebtedness sued upon
has already been paid. If appellees entertained any fear that they might again be
made liable to Yek Tong Lin Fire & Marine Insurance Co. Ltd., or to someone else
in its behalf, a cursory examination of the records of the Securities & Exchange
Commission would have sufficed to clear up the fact that Yek Tong Lin had just
changed its name but it had not ceased to be their creditor. Everyone should
realize that when the time of the courts is utilized for cases which do not involve
substantial questions and the claim of one of the parties, therein is based on
pure technicality that can at most delay only the ultimate outcome necessarily
adverse to such party because it has no real cause on the merits, grave injustice
is committed to numberless litigants whose meritorious cases cannot be given all
the needed time by the courts. We address this appeal once more to all members
of the bar, in particular, since it is their bounden duty to the profession and to
our country and people at large to help ease as fast as possible the clogged
dockets of the courts. Let us not wait until the people resort to other means to
secure speedy, just and inexpensive determination of their cases.
99
WHEREFORE, judgment of the lower court is reversed, and this case is remanded
to the trial court for further proceedings consistent herewith With costs against
appellees.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Fernando,

Teehankee and Villamor, JJ., concur.

100
 Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION
G.R. No. L-28351 July 28, 1977
UNIVERSAL MILLS CORPORATION, petitioner,
vs.
UNIVERSAL TEXTILE MILLS, INC., respondent.
Securities and Exchange Commission; Business Names; The business
names “Universal Mills Corporation” and “Universal Textile Mills, Inc.” though not
identical are so similar as to cause confusion to the general public, particularly
where the former included the manufacture, dyeing and selling of fabrics of all
kinds in which the latter had been engaged for more than a decade ahead of the
petitioner.—The corporate names in question are not identical, but they are
indisputably so similar that even under the test of “reasonable care and
observation as the public generally are capable of using and may be expected to
exercise” invoked by appellant We are apprehensive confusion will usually arise,
considering that under the second amendment of its articles of incorporation of
August 14, 1964, appellant included among its primary purposes the
“manufacturing, dyeing, finishing and selling of fabrics of all kinds” in which
respondent had been engaged for more than a decade ahead of petitioner.
Factually, the Commission found existence of such confusion, and there is
evidence to support its conclusion. Since respondent is not claiming damages in
this proceeding, it is, of course immaterial whether or not appellant has acted in
good faith, but We cannot perceive why of all names, it had to choose a name
already being used by another firm engaged in practically the same business for
more than a decade enjoying well earned patronage and goodwill, when there
are so many other appropriate names it could possibly adopt without arousing
any suspicion as to its motive and, more importantly, any degree of confusion in
the mind of the public which could mislead even its own customers, existing or
prospective.
APPEAL from the order of the Securities and Exchange Commission.
The facts are stated in the opinion of the Court
Emigdio G. Tanjuatco for petitioner.
Picazo, Santayana, Reyes, Tayao & Alfonso for respondent.
BARREDO, J.:
Appeal from the order of the Securities and Exchange Commission in S.E.C. Case
No. 1079, entitled In the Matter of the Universal Textile Mills, Inc. vs. Universal
Mills Corporation, a petition to have appellant change its corporate name on the
ground that such name is "confusingly and deceptively similar" to that of
appellee, which petition the Commission granted.
According to the order, "the Universal Textile Mills, Inc. was organ on December
29, 1953, as a textile manufacturing firm for which it was issued a certificate of
registration on January 8, 1954. The Universal Mills Corporation, on the other
hand, was registered in this Commission on October 27, 1954, under its original
name, Universal Hosiery Mills Corporation, having as its primary purpose the
"manufacture and production of hosieries and wearing apparel of all kinds." On
May 24, 1963, it filed an amendment to its articles of incorporation changing its
name to Universal Mills Corporation, its present name, for which this Commission
issued the certificate of approval on June 10, 1963.
The immediate cause of this present complaint, however, was the occurrence of
a fire which gutted respondent's spinning mills in Pasig, Rizal. Petitioner alleged
that as a result of this fire and because of the similarity of respondent's name to
that of herein complainant, the news items appearing in the various
metropolitan newspapers carrying reports on the fire created uncertainty and
confusion among its bankers, friends, stockholders and customers prompting
petitioner to make announcements, clarifying the real Identity of the corporation
whose property was burned. Petitioner presented documentary and testimonial
evidence in support of this allegation.
On the other hand, respondent's position is that the names of
the two corporations are not similar and even if there be some
similarity, it is not confusing or deceptive; that the only reason
that respondent changed its name was because it expanded its
business to include the manufacture of fabrics of all kinds; and
that the word 'textile' in petitioner's name is dominant and
prominent enough to distinguish the two. It further argues that
101
 petitioner failed to present evidence of confusion or deception
in the ordinary course of business; that the only supposed
confusion proved by complainant arose out of an extraordinary
occurrence — a disastrous fire. (pp. 16-&17, Record.)
Upon these premises, the Commission held:
From the facts proved and the jurisprudence on the matter, it
appears necessary under the circumstances to enjoin the
respondent Universal Mills Corporation from further using its
present corporate name. Judging from what has already
happened, confusion is not only apparent, but possible. It does
not matter that the instance of confusion between the two
corporate names was occasioned only by a fire or an
extraordinary occurrence. It is precisely the duty of this
Commission to prevent such confusion at all times and under all
circumstances not only for the purpose of protecting the
corporations involved but more so for the protection of the
public.
In today's modern business life where people go by tradenames
and corporate images, the corporate name becomes the more
important. This Commission cannot close its eyes to the fact
that usually it is the sound of all the other words composing the
names of business corporations that sticks to the mind of those
who deal with them. The word "textile" in Universal Textile
Mills, Inc.' can not possibly assure the exclusion of all other
entities with similar names from the mind of the public
especially so, if the business they are engaged in are the same,
like in the instant case.
This Commission further takes cognizance of the fact that when
respondent filed the amendment changing its name to
Universal Mills Corporation, it correspondingly filed a written
undertaking dated June 5, 1963 and signed by its President, Mr.
Mariano Cokiat, promising to change its name in the event that
there is another person, firm or entity who has obtained a prior
right to the use of such name or one similar to it. That promise
is still binding upon the corporation and its responsible officers.
(pp. 17-18, Record.)
It is obvious that the matter at issue is within the competence of the Securities
and Exchange Commission to resolve in the first instance in the exercise of the
jurisdiction it used to possess under Commonwealth Act 287 as amended by
Republic Act 1055 to administer the application and enforcement of all laws
affecting domestic corporations and associations, reserving to the courts only
conflicts of judicial nature, and, of course, the Supreme Court's authority to
review the Commissions actuations in appropriate instances involving possible
denial of due process and grave abuse of discretion. Thus, in the case at bar,
there being no claim of denial of any constitutional right, all that We are called
upon to determine is whether or not the order of the Commission enjoining
petitioner to its corporate name constitutes, in the light of the circumstances
found by the Commission, a grave abuse of discretion.
We believe it is not. Indeed, it cannot be said that the impugned order is arbitrary
and capricious. Clearly, it has rational basis. The corporate names in question are
not Identical, but they are indisputably so similar that even under the test of
"reasonable care and observation as the public generally are capable of using
and may be expected to exercise" invoked by appellant, We are apprehensive
confusion will usually arise, considering that under the second amendment of its
articles of incorporation on August 14, 1964, appellant included among its
primary purposes the "manufacturing, dyeing, finishing and selling of fabrics of
all kinds" in which respondent had been engaged for more than a decade ahead
of petitioner. Factually, the Commission found existence of such confusion, and
there is evidence to support its conclusion. Since respondent is not claiming
damages in this proceeding, it is, of course, immaterial whether or not appellant
has acted in good faith, but We cannot perceive why of all names, it had to
choose a name already being used by another firm engaged in practically the
same business for more than a decade enjoying well earned patronage and
goodwill, when there are so many other appropriate names it could possibly
adopt without arousing any suspicion as to its motive and, more importantly, any
degree of confusion in the mind of the public which could mislead even its own
customers, existing or prospective. Premises considered, there is no warrant for
our interference.
As this is purely a case of injunction, and considering the time that has elapsed
since the facts complained of took place, this decision should not be deemed as
foreclosing any further remedy which appellee may have for the protection of its
interests.
WHEREFORE, with the reservation already mentioned, the appealed decision is
affirmed. Costs against petitioners.
102
Fernando (Chairman), Antonio, Aquino, Concepcion Jr. and Santos, JJ., concur.

103
 Republic of the Philippines Same; Same; Words and Phrases; The additional words in a corporation’s
SUPREME COURT name—“Ang Mga Kaanib” and “Sa Bansang Pilipinas, Inc.”—which are merely
Manila descriptive of and also referring to the members, or kaanib, of a pre-existing
corporation who are likewise residing in the Philippines, can hardly serve as an
FIRST DIVISION effective differentiating medium necessary to avoid confusion or difficulty in
distinguishing the former from the latter.—The additional words “Ang Mga
G.R. No. 137592 December 12, 2001 Kaanib” and “Sa Bansang Pilipinas, Inc.” in petitioner’s name are, as correctly
observed by the SEC, merely descriptive of and also referring to the members, or
kaanib, of respondent who are likewise residing in the Philippines. These words
ANG MGA KAANIB SA IGLESIA NG DIOS KAY KRISTO HESUS, H.S.K. SA BANSANG
can hardly serve as an effective differentiating medium necessary to avoid
PILIPINAS, INC.,petitioner,
confusion or difficulty in distinguishing petitioner from respondent. This is
vs.
especially so, since both petitioner and respondent corporations are using the
IGLESIA NG DIOS KAY CRISTO JESUS, HALIGI AT SUHAY NG
same acronym—H.S.K.; not to mention the fact that both are espousing religious
KATOTOHANAN, respondent.
beliefs and operating in the same place. Parenthetically, it is well to mention that
the acronym H.S.K. used by petitioner stands for “Haligi at Saligan ng
Legal Ethics; Attorneys; Due Process; The negligence of counsel binds the
Katotohanan.”
client, except where the reckless or gross negligence of the counsel deprives the
client of due process of law.—As a general rule, the negligence of counsel binds
Same; Same; Same; The only difference between the corporate names of
the client. This is based on the rule that any act performed by a lawyer within the
petitioner and respondent are the words “Saligan” and “Suhay,” which words are
scope of his general or implied authority is regarded as an act of his client. An
synonymous—both mean ground, foundation or support.—Significantly, the only
exception to the foregoing is where the reckless or gross negligence of the
difference between the corporate names of petitioner and respondent are the
counsel deprives the client of due process of law. Said exception, however, does
words SALIGAN and SUHAY. These words are synonymous—both mean ground,
not obtain in the present case.
foundation or support. Hence, this case is on all fours with Universal Mills
Corporation v. Universal Textile Mills, Inc., where the Court ruled that the
Corporation Law; Actions; Prescription; The failure of a party to raise
corporate names Universal Mills Corporation and Universal Textile Mills, Inc., are
prescription before the Securities and Exchange Commission can only be
undisputably so similar that even under the test of “reasonable care and
construed as a waiver of that defense.—Likewise, the issue of prescription, which
observation” confusion may arise.
petitioner raised for the first time on appeal to the Court of Appeals, is
untenable. Its failure to raise prescription before the SEC can only be construed
Same; Same; Freedom of Religion; Ordering a religious society or
as a waiver of that defense. At any rate, the SEC has the authority to de-register
corporation to change its corporate name is not a violation of its constitutionally
at all times and under all circumstances corporate names which in its estimation
guaranteed right to religious freedom.—We need not belabor the fourth issue
are likely to spawn confusion. It is the duty of the SEC to prevent confusion in the
raised by petitioner. Certainly, ordering petitioner to change its corporate name
use of corporate names not only for the protection of the corporations involved
is not a violation of its constitutionally guaranteed right to religious freedom. In
but more so for the protection of the public.
so doing, the SEC merely compelled petitioner to abide by one of the SEC
guidelines in the approval of partnership and corporate names, namely its
Same; Corporate Names; Parties organizing a corporation must choose a
undertaking to manifest its willingness to change its corporate name in the event
name at their peril.—Parties organizing a corporation must choose a name at
another person, firm, or entity has acquired a prior right to the use of the said
their peril; and the use of a name similar to one adopted by another corporation,
firm name or one deceptively or confusingly similar to it.
whether a business or a nonprofit organization, if misleading or likely to injure in
the exercise of its corporate functions, regardless of intent, may be prevented by
PETITION for review on certiorari of a decision of the Court of Appeals.
the corporation having a prior right, by a suit for injunction against the new
corporation to prevent the use of the name.
104

The facts are stated in the opinion of the Court
YNARES-SANTIAGO, J.:
1
This is a petition for review assailing the Decision dated October 7, 1997 and the
Resolution dated February 16, 1999 2 of the Court of Appeals in CA-G.R. SP No.
40933, which affirmed the Decision of the Securities and Exchange and
Commission (SEC) in SEC-AC No. 539.3
Respondent Iglesia ng Dios Kay Cristo Jesus, Haligi at Suhay ng
Katotohanan (Church of God in Christ Jesus, the Pillar and Ground of Truth), 4 is a
non-stock religious society or corporation registered in 1936. Sometime in 1976,
one Eliseo Soriano and several other members of respondent corporation
disassociated themselves from the latter and succeeded in registering on March
30, 1977 a new non-stock religious society or corporation, named Iglesia ng Dios
Kay Kristo Hesus, Haligi at Saligan ng Katotohanan.
On July 16, 1979, respondent corporation filed with the SEC a petition to compel
the Iglesia ng Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its
corporate name, which petition was docketed as SEC Case No. 1774. On May 4,
1988, the SEC rendered judgment in favor of respondent, ordering the Iglesia ng
Dios Kay Kristo Hesus, Haligi at Saligan ng Katotohanan to change its corporate
name to another name that is not similar or identical to any name already used
by a corporation, partnership or association registered with the Commission.5 No
appeal was taken from said decision.
It appears that during the pendency of SEC Case No. 1774, Soriano, et al., caused
the registration on April 25, 1980 of petitioner corporation, Ang Mga Kaanib sa
Iglesia ng Dios Kay Kristo Hesus, H.S.K, sa Bansang Pilipinas. The acronym "H.S.K."
stands for Haligi at Saligan ng Katotohanan.6
On March 2, 1994, respondent corporation filed before the SEC a petition,
docketed as SEC Case No. 03-94-4704, praying that petitioner be compelled to
change its corporate name and be barred from using the same or similar name
on the ground that the same causes confusion among their members as well as
the public.
Petitioner filed a motion to dismiss on the ground of lack of cause of action. The
motion to dismiss was denied. Thereafter, for failure to file an answer, petitioner
was declared in default and respondent was allowed to present its evidence ex
parte.
On November 20, 1995, the SEC rendered a decision ordering petitioner to
change its corporate name. The dispositive portion thereof reads:
PREMISES CONSIDERED, judgment is hereby rendered in favor of the
petitioner (respondent herein).
Respondent Mga Kaanib sa Iglesia ng Dios Kay Kristo Jesus (sic), H.S.K.
sa Bansang Pilipinas (petitioner herein) is hereby MANDATED to change
its corporate name to another not deceptively similar or identical to the
same already used by the Petitioner, any corporation, association,
and/or partnership presently registered with the Commission.
Let a copy of this Decision be furnished the Records Division and the
Corporate and Legal Department [CLD] of this Commission for their
records, reference and/or for whatever requisite action, if any, to be
undertaken at their end.
SO ORDERED.7
Petitioner appealed to the SEC En Banc, where its appeal was docketed as SEC-AC
No. 539. In a decision dated March 4, 1996, the SEC En Banc affirmed the above
decision, upon a finding that petitioner's corporate name was identical or
confusingly or deceptively similar to that of respondent's corporate name. 8
Petitioner filed a petition for review with the Court of Appeals. On October 7,
1997, the Court of Appeals rendered the assailed decision affirming the decision
of the SEC En Banc. Petitioner's motion for reconsideration was denied by the
Court of Appeals on February 16, 1992.
Hence, the instant petition for review, raising the following assignment of errors:
I
THE HONORABLE COURT OF APPEALS ERRED IN CONCLUDING THAT
PETITIONER HAS NOT BEEN DEPRIVED OF ITS RIGHT TO PROCEDURAL DUE
105
PROCESS, THE HONORABLE COURT OF APPEALS DISREGARDED THE
JURISPRUDENCE APPLICABLE TO THE CASE AT BAR AND INSTEAD RELIED ON
TOTALLY INAPPLICABLE JURISPRUDENCE.
II
THE HONORABLE COURT OF APPEALS ERRED IN ITS INTERPRETATION OF THE
CIVIL CODE PROVISIONS ON EXTINCTIVE PRESCRIPTION, THEREBY RESULTING
IN ITS FAILURE TO FIND THAT THE RESPONDENT'S RIGHT OF ACTION TO
INSTITUTE THE SEC CASE HAS SINCE PRESCRIBED PRIOR TO ITS INSTITUTION.
III
THE HONORABLE COURT OF APPEALS FAILED TO CONSIDER AND PROPERLY
APPLY THE EXCEPTIONS ESTABLISHED BY JURISPRUDENCE IN THE APPLICATION
OF SECTION 18 OF THE CORPORATION CODE TO THE INSTANT CASE.
IV
THE HONORABLE COURT OF APPEALS FAILED TO PROPERLY APPRECIATE THE
SCOPE OF THE CONSTITUTIONAL GUARANTEE ON RELIGIOUS FREEDOM,
THEREBY FAILING TO APPLY THE SAME TO PROTECT PETITIONER'S RIGHTS.9
Invoking the case of Legarda v. Court of Appeals,10 petitioner insists that the
decision of the Court of Appeals and the SEC should be set aside because the
negligence of its former counsel of record, Atty. Joaquin Garaygay, in failing to
file an answer after its motion to dismiss was denied by the SEC, deprived them
of their day in court.
The contention is without merit. As a general rule, the negligence of counsel
binds the client. This is based on the rule that any act performed by a lawyer
within the scope of his general or implied authority is regarded as an act of his
client.11 An exception to the foregoing is where the reckless or gross negligence
of the counsel deprives the client of due process of law. 12 Said exception,
however, does not obtain in the present case.
In Legarda v. Court of Appeals, the effort of the counsel in defending his client's
cause consisted in filing a motion for extension of time to file answer before the
trial court. When his client was declared in default, the counsel did nothing and
allowed the judgment by default to become final and executory. Upon the
insistence of his client, the counsel filed a petition to annul the judgment with
the Court of Appeals, which denied the petition, and again the counsel allowed
the denial to become final and executory. This Court found the counsel grossly
negligent and consequently declared as null and void the decision adverse to his
client.
The factual antecedents of the case at bar are different. Atty. Garaygay filed
before the SEC a motion to dismiss on the ground of lack of cause of action.
When his client was declared in default for failure to file an answer, Atty.
Garaygay moved for reconsideration and lifting of the order of default. 13 After
judgment by default was rendered against petitioner corporation, Atty. Garaygay
filed a motion for extension of time to appeal/motion for reconsideration, and
thereafter a motion to set aside the decision.14
Evidently, Atty. Garaygay was only guilty of simple negligence. Although he failed
to file an answer that led to the rendition of a judgment by default against
petitioner, his efforts were palpably real, albeit bereft of zeal.15
Likewise, the issue of prescription, which petitioner raised for the first time on
appeal to the Court of Appeals, is untenable. Its failure to raise prescription
before the SEC can only be construed as a waiver of that defense. 16 At any rate,
the SEC has the authority to de-register at all times and under all circumstances
corporate names which in its estimation are likely to spawn confusion. It is the
duty of the SEC to prevent confusion in the use of corporate names not only for
the protection of the corporations involved but more so for the protection of the
public.17
Section 18 of the Corporation Code provides:
Corporate Name. — No corporate name may be allowed by the
Securities and Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or
to any other name already protected by law or is patently deceptive,
confusing or is contrary to existing laws. When a change in the
corporate name is approved, the Commission shall issue an amended
certificate of incorporation under the amended name.
Corollary thereto, the pertinent portion of the SEC Guidelines on Corporate
Names states:
106
 (d) If the proposed name contains a word similar to a word already used
as part of the firm name or style of a registered company, the proposed
name must contain two other words different from the name of the
company already registered;
Parties organizing a corporation must choose a name at their peril; and the use
of a name similar to one adopted by another corporation, whether a business or
a nonprofit organization, if misleading or likely to injure in the exercise of its
corporate functions, regardless of intent, may be prevented by the corporation
having a prior right, by a suit for injunction against the new corporation to
prevent the use of the name.18
Petitioner claims that it complied with the aforecited SEC guideline by adding not
only two but eight words to their registered name, to wit: "Ang Mga Kaanib" and
"Sa Bansang Pilipinas, Inc.," which, petitioner argues, effectively distinguished it
from respondent corporation.
The additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc." in
petitioner's name are, as correctly observed by the SEC, merely descriptive of
and also referring to the members, or kaanib, of respondent who are likewise
residing in the Philippines. These words can hardly serve as an effective
differentiating medium necessary to avoid confusion or difficulty in
distinguishing petitioner from respondent. This is especially so, since both
petitioner and respondent corporations are using the same acronym —
H.S.K.;19 not to mention the fact that both are espousing religious beliefs and
operating in the same place. Parenthetically, it is well to mention that the
acronym H.S.K. used by petitioner stands for "Haligi at Saligan ng Katotohanan."20
Then, too, the records reveal that in holding out their corporate name to the
public, petitioner highlights the dominant words "IGLESIA NG DIOS KAY KRISTO
HESUS, HALIGI AT SALIGAN NG KATOTOHANAN," which is strikingly similar to
respondent's corporate name, thus making it even more evident that the
additional words "Ang Mga Kaanib" and "Sa Bansang Pilipinas, Inc.", are merely
descriptive of and pertaining to the members of respondent corporation. 21
Significantly, the only difference between the corporate names of petitioner and
respondent are the words SALIGAN and SUHAY. These words are synonymous —
both mean ground, foundation or support. Hence, this case is on all fours
with Universal Mills Corporation v. Universal Textile Mills, Inc.,22 where the Court
ruled that the corporate names Universal Mills Corporation and Universal Textile
Mills, Inc., are undisputably so similar that even under the test of "reasonable
care and observation" confusion may arise.
Furthermore, the wholesale appropriation by petitioner of respondent's
corporate name cannot find justification under the generic word rule. We agree
with the Court of Appeals' conclusion that a contrary ruling would encourage
other corporations to adopt verbatim and register an existing and protected
corporate name, to the detriment of the public.
The fact that there are other non-stock religious societies or corporations using
the names Church of the Living God, Inc., Church of God Jesus Christ the Son of
God the Head, Church of God in Christ & By the Holy Spirit, and other similar
names, is of no consequence. It does not authorize the use by petitioner of the
essential and distinguishing feature of respondent's registered and protected
corporate name.23
We need not belabor the fourth issue raised by petitioner. Certainly, ordering
petitioner to change its corporate name is not a violation of its constitutionally
guaranteed right to religious freedom. In so doing, the SEC merely compelled
petitioner to abide by one of the SEC guidelines in the approval of partnership
and corporate names, namely its undertaking to manifest its willingness to
change its corporate name in the event another person, firm, or entity has
acquired a prior right to the use of the said firm name or one deceptively or
confusingly similar to it.
WHEREFORE, in view of all the foregoing, the instant petition for review is
DENIED. The appealed decision of the Court of Appeals is AFFIRMED in toto.
SO ORDERED.
Davide, Jr., C .J ., Kapunan and Pardo, JJ ., concur.
Puno, J ., on official leave.
107
 Republic of the Philippines "Liceo de Manila," "Liceo de Baleno" (in Baleno Masbate), "Liceo de Masbate,"
SUPREME COURT "Liceo de Albay." "Lyceum" is in fact as generic in character as the word
Manila "university." In the name of the petitioner, "Lyceum" appears to be a substitute
for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee"
THIRD DIVISION frequently denotes a secondary school or a college. It may be (though this is a
question of fact which we need not resolve) that the use of the word "Lyceum"
may not yet be as widespread as the use of "university," but it is clear that a not
inconsiderable number of educational institutions have adopted "Lyceum" or
"Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a
school or institution of learning, it is not unnatural to use this word to designate
an entity which is organized and operating as an educational institution.
G.R. No. 101897. March 5, 1993.

Same; Same; Same; Trademarks; "Secondary meaning," defined.—In

LYCEUM OF THE PHILIPPINES, INC., petitioner, vs. COURT OF APPEALS, LYCEUM
Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary
OF APARRI, LYCEUM OF CABAGAN, LYCEUM OF CAMALANIUGAN, INC., LYCEUM
meaning was elaborated in the following terms: "x x x a word or phrase originally
OF LALLO, INC., LYCEUM OF TUAO, INC., BUHI LYCEUM, CENTRAL LYCEUM OF
incapable of exclusive appropriation with reference to an article on the market,
CATANDUANES, LYCEUM OF SOUTHERN PHILIPPINES, LYCEUM OF EASTERN
because geographically or otherwise descriptive, might nevertheless have been
MINDANAO, INC. and WESTERN PANGASINAN LYCEUM, INC., respondents.
used so long and so exclusively by one producer with reference to his article
that, in that trade and to that branch of the purchasing public, the word or
Corporation Law; Names; Fact that other schools use "Lyceum" as part of
phrase has come to mean that the article was his product."
their school's name is not a deceptive use thereof relative to Lyceum of the
Philippines.—We do not consider that the corporate names of private
Same; Same; Same; Same; Lyceum of the Philippines has not gained
respondent institutions are "identical with, or deceptively or confusingly similar"
exclusive use of "Lyceum" by long passage of time.—We agree with the Court of
to that of the petitioner institution. True enough, the corporate names of private
Appeals. The number alone of the private respondents in the case at bar
respondent entities all carry the word "Lyceum" but confusion and deception are
suggests strongly that petitioner's use of the word "Lyceum" has not been
effectively precluded by the appending of geographic names to the word
attended with the exclusivity essential for applicability of the doctrine of
"Lyceum." Thus, we do not believe that the "Lyceum of Aparri" can be mistaken
secondary meaning. It may be noted also that at least one of the private
by the general public for the Lyceum of the Philippines, or that the "Lyceum of
respondents, i.e., the Western Pangasinan Lyceum, Inc., used the term "Lyceum"
Camalaniugan" would be confused with the Lyceum of the Philippines.
seventeen (17) years before the petitioner registered its own corporate name
with the SEC and began using the word "Lyceum." It follows that if any
Same; Same; Words and Phrases; "Lyceum" is a generic name.—
institution had acquired an exclusive right to the word "Lyceum," that institution
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which
would have been the Western Pangasinan Lyceum, Inc. rather than the petitioner
in turn referred to a locality on the river Ilissius in ancient Athens "comprising an
institution.
enclosure dedicated to Apollo and adorned with fountains and buildings erected
by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by
PETITION for review of the decision of the Court of Appeals.
the philosopher Aristotle and his followers for teaching." In time, the word
"Lyceum" became associated with schools and other institutions providing
public lectures and concerts and public discussions. Thus today, the word The facts are stated in the opinion of the Court.
"Lyceum" generally refers to a school or an institution of learning. While the
Latin word "lyceum" has been incorporated into the English language, the word Quisumbing, Torres & Evangelista Law Offices and Ambrosio Padilla for
is also found in Spanish (liceo) and in French (lycee). As the Court of Appeals petitioner.
noted in its Decision, Roman Catholic schools frequently use the term; e.g.,
108
Antonio M. Nuyles and Purungan, Chato, Chato, Tarriela & Tan Law Offices for The doctrine of secondary meaning originated in the field of trademark law. Its
respondents. application has, however, been extended to corporate names sine the right to
use a corporate name to the exclusion of others is based upon the same principle
Froilan Siobal for Western Pangasinan Lyceum. which underlies the right to use a particular trademark or tradename. In
Philippine Nut Industry, Inc. v. Standard Brands, Inc., the doctrine of secondary
SYLLABUS meaning was elaborated in the following terms: " . . . a word or phrase originally
incapable of exclusive appropriation with reference to an article on the market,
because geographically or otherwise descriptive, might nevertheless have been
1. CORPORATION LAW; CORPORATE NAMES; REGISTRATION OF PROPOSED
used so long and so exclusively by one producer with reference to his article
NAME WHICH IS IDENTICAL OR CONFUSINGLY SIMILAR TO THAT OF ANY
that, in that trade and to that branch of the purchasing public, the word or
EXISTING CORPORATION, PROHIBITED; CONFUSION AND DECEPTION
phrase has come to mean that the article was his product." The question which
EFFECTIVELY PRECLUDED BY THE APPENDING OF GEOGRAPHIC NAMES TO THE
arises, therefore, is whether or not the use by petitioner of "Lyceum" in its
WORD "LYCEUM". — The Articles of Incorporation of a corporation must, among
corporate name has been for such length of time and with such exclusivity as to
other things, set out the name of the corporation. Section 18 of the Corporation
have become associated or identified with the petitioner institution in the mind
Code establishes a restrictive rule insofar as corporate names are concerned:
of the general public (or at least that portion of the general public which has to
"Section 18. Corporate name. — No corporate name may be allowed by the
do with schools). The Court of Appeals recognized this issue and answered it in
Securities an Exchange Commission if the proposed name is identical or
the negative: "Under the doctrine of secondary meaning, a word or phrase
deceptively or confusingly similar to that of any existing corporation or to any
originally incapable of exclusive appropriation with reference to an article in the
other name already protected by law or is patently deceptive, confusing or
market, because geographical or otherwise descriptive might nevertheless have
contrary to existing laws. When a change in the corporate name is approved, the
been used so long and so exclusively by one producer with reference to this
Commission shall issue an amended certificate of incorporation under the
article that, in that trade and to that group of the purchasing public, the word or
amended name." The policy underlying the prohibition in Section 18 against the
phrase has come to mean that the article was his produce (Ana Ang vs. Toribio
registration of a corporate name which is "identical or deceptively or confusingly
Teodoro, 74 Phil. 56). This circumstance has been referred to as the
similar" to that of any existing corporation or which is "patently deceptive" or
distinctiveness into which the name or phrase has evolved through the
"patently confusing" or "contrary to existing laws," is the avoidance of fraud
substantial and exclusive use of the same for a considerable period of time. . . .
upon the public which would have occasion to deal with the entity concerned,
No evidence was ever presented in the hearing before the Commission which
the evasion of legal obligations and duties, and the reduction of difficulties of
sufficiently proved that the word 'Lyceum' has indeed acquired secondary
administration and supervision over corporations. We do not consider that the
meaning in favor of the appellant. If there was any of this kind, the same tend to
corporate names of private respondent institutions are "identical with, or
prove only that the appellant had been using the disputed word for a long period
deceptively or confusingly similar" to that of the petitioner institution. True
of time. . . . In other words, while the appellant may have proved that it had been
enough, the corporate names of private respondent entities all carry the word
using the word 'Lyceum' for a long period of time, this fact alone did not amount
"Lyceum" but confusion and deception are effectively precluded by the
to mean that the said word had acquired secondary meaning in its favor because
appending of geographic names to the word "Lyceum." Thus, we do not believe
the appellant failed to prove that it had been using the same word all by itself to
that the "Lyceum of Aparri" can be mistaken by the general public for the
the exclusion of others. More so, there was no evidence presented to prove that
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confusion will surely arise if the same word were to be used by other educational
confused with the Lyceum of the Philippines.
institutions. Consequently, the allegations of the appellant in its first two
assigned errors must necessarily fail." We agree with the Court of Appeals. The
2. ID.; ID.; DOCTRINE OF SECONDARY MEANING; USE OF WORD "LYCEUM," NOT
number alone of the private respondents in the case at bar suggests strongly
ATTENDED WITH EXCLUSIVITY. — It is claimed, however, by petitioner that the
that petitioner's use of the word "Lyceum" has not been attended with the
word "Lyceum" has acquired a secondary meaning in relation to petitioner with
exclusivity essential for applicability of the doctrine of secondary meaning.
the result that word, although originally a generic, has become appropriable by
Petitioner's use of the word "Lyceum" was not exclusive but was in truth shared
petitioner to the exclusion of other institutions like private respondents herein.
with the Western Pangasinan Lyceum and a little later with other private
109
respondent institutions which registered with the SEC using "Lyceum" as part of
their corporation names. There may well be other schools using Lyceum or Liceo
in their names, but not registered with the SEC because they have not adopted
the corporate form of organization.
3. ID.; ID.; MUST BE EVALUATED IN THEIR ENTIRETY TO DETERMINE WHETHER
THEY ARE CONFUSINGLY OR DECEPTIVELY SIMILAR TO ANOTHER CORPORATE
ENTITY'S NAME. — petitioner institution is not entitled to a legally enforceable
exclusive right to use the word "Lyceum" in its corporate name and that other
institutions may use "Lyceum" as part of their corporate names. To determine
whether a given corporate name is "identical" or "confusingly or deceptively
similar" with another entity's corporate name, it is not enough to ascertain the
presence of "Lyceum" or "Liceo" in both names. One must evaluate corporate
names in their entirety and when the name of petitioner is juxtaposed with the
names of private respondents, they are not reasonably regarded as "identical" or
"confusingly or deceptively similar" with each other.
DECISION
FELICIANO, J p:
Petitioner is an educational institution duly registered with the Securities and
Exchange Commission ("SEC"). When it first registered with the SEC on 21
September 1950, it used the corporate name Lyceum of the Philippines, Inc. and
has used that name ever since.
On 24 February 1984, petitioner instituted proceedings before the SEC to compel
the private respondents, which are also educational institutions, to delete the
word "Lyceum" from their corporate names and permanently to enjoin them
from using "Lyceum" as part of their respective names.
Some of the private respondents actively participated in the proceedings before
the SEC. These are the following, the dates of their original SEC registration
being set out below opposite their respective names:
Western Pangasinan Lyceum — 27 October 1950
Lyceum of Cabagan — 31 October 1962
Lyceum of Lallo, Inc. — 26 March 1972
Lyceum of Aparri — 28 March 1972
Lyceum of Tuao, Inc. — 28 March 1972
Lyceum of Camalaniugan — 28 March 1972
The following private respondents were declared in default for failure to file an
answer despite service of summons:
Buhi Lyceum;
Central Lyceum of Catanduanes;
Lyceum of Eastern Mindanao, Inc.; and
Lyceum of Southern Philippines
Petitioner's original complaint before the SEC had included three (3) other
entities:
1. The Lyceum of Malacanay;
2. The Lyceum of Marbel; and
3. The Lyceum of Araullo
The complaint was later withdrawn insofar as concerned the Lyceum of
Malacanay and the Lyceum of Marbel, for failure to serve summons upon these
two (2) entities. The case against the Liceum of Araullo was dismissed when that
school motu proprio change its corporate name to "Pamantasan ng Araullo."
The background of the case at bar needs some recounting. Petitioner had
sometime before commenced in the SEC a proceeding (SEC-Case No. 1241)
against the Lyceum of Baguio, Inc. to require it to change its corporate name and
to adopt another name not "similar [to] or identical" with that of petitioner. In
an Order dated 20 April 1977, Associate Commissioner Julio Sulit held that the
corporate name of petitioner and that of the Lyceum of Baguio, Inc. were
substantially identical because of the presence of a "dominant" word, i.e.,
"Lyceum," the name of the geographical location of the campus being the only
word which distinguished one from the other corporate name. The SEC also
110
noted that petitioner had registered as a corporation ahead of the Lyceum of
Baguio, Inc. in point of time, 1 and ordered the latter to change its name to
another name "not similar or identical [with]" the names of previously registered
entities.
The Lyceum of Baguio, Inc. assailed the Order of the SEC before the Supreme
Court in a case docketed as G.R. No. L-46595. In a Minute Resolution dated 14
September 1977, the Court denied the Petition for Review for lack of merit. Entry
of judgment in that case was made on 21 October 1977. 2
Armed with the Resolution of this Court in G.R. No. L-46595, petitioner then
wrote all the educational institutions it could find using the word "Lyceum" as
part of their corporate name, and advised them to discontinue such use of
"Lyceum." When, with the passage of time, it became clear that this recourse
had failed, petitioner instituted before the SEC SEC-Case No. 2579 to enforce
what petitioner claims as its proprietary right to the word "Lyceum." The SEC
hearing officer rendered a decision sustaining petitioner's claim to an exclusive
right to use the word "Lyceum." The hearing officer relied upon the SEC ruling in
the Lyceum of Baguio, Inc. case (SEC-Case No. 1241) and held that the word
"Lyceum" was capable of appropriation and that petitioner had acquired an
enforceable exclusive right to the use of that word.
On appeal, however, by private respondents to the SEC En Banc, the decision of
the hearing officer was reversed and set aside. The SEC En Banc did not consider
the word "Lyceum" to have become so identified with petitioner as to render use
thereof by other institutions as productive of confusion about the identity of the
schools concerned in the mind of the general public. Unlike its hearing officer,
the SEC En Banc held that the attaching of geographical names to the word
"Lyceum" served sufficiently to distinguish the schools from one another,
especially in view of the fact that the campuses of petitioner and those of the
private respondents were physically quite remote from each other. 3
Petitioner then went on appeal to the Court of Appeals. In its Decision dated 28
June 1991, however, the Court of Appeals affirmed the questioned Orders of the
SEC En Banc. 4 Petitioner filed a motion for reconsideration, without success.
Before this Court, petitioner asserts that the Court of Appeals committed the
following errors:
1. The Court of Appeals erred in holding that the Resolution of the Supreme
Court in G.R. No. L-46595 did not constitute stare decisis as to apply to this case
and in not holding that said Resolution bound subsequent determinations on the
right to exclusive use of the word Lyceum.
2. The Court of Appeals erred in holding that respondent Western Pangasinan
Lyceum, Inc. was incorporated earlier than petitioner.
3. The Court of Appeals erred in holding that the word Lyceum has not acquired a
secondary meaning in favor of petitioner.
4. The Court of Appeals erred in holding that Lyceum as a generic word cannot
be appropriated by the petitioner to the exclusion of others. 5
We will consider all the foregoing ascribed errors, though not necessarily
seriatim. We begin by noting that the Resolution of the Court in G.R. No. L-46595
does not, of course, constitute res adjudicata in respect of the case at bar, since
there is no identity of parties. Neither is stare decisis pertinent, if only because
the SEC En Banc itself has re-examined Associate Commissioner Sulit's ruling in
the Lyceum of Baguio case. The Minute Resolution of the Court in G.R. No. L-
46595 was not a reasoned adoption of the Sulit ruling.
The Articles of Incorporation of a corporation must, among other things, set out
the name of the corporation. 6 Section 18 of the Corporation Code establishes a
restrictive rule insofar as corporate names are concerned:
"SECTION 18. Corporate name. — No corporate name may be allowed by the
Securities an Exchange Commission if the proposed name is identical or
deceptively or confusingly similar to that of any existing corporation or to any
other name already protected by law or is patently deceptive, confusing or
contrary to existing laws. When a change in the corporate name is approved, the
Commission shall issue an amended certificate of incorporation under the
amended name." (Emphasis supplied)
The policy underlying the prohibition in Section 18 against the registration of a
corporate name which is "identical or deceptively or confusingly similar" to that
of any existing corporation or which is "patently deceptive" or "patently
confusing" or "contrary to existing laws," is the avoidance of fraud upon the
public which would have occasion to deal with the entity concerned, the evasion
of legal obligations and duties, and the reduction of difficulties of administration
and supervision over corporations. 7
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We do not consider that the corporate names of private respondent institutions
are "identical with, or deceptively or confusingly similar" to that of the petitioner
institution. True enough, the corporate names of private respondent entities all
carry the word "Lyceum" but confusion and deception are effectively precluded
by the appending of geographic names to the word "Lyceum." Thus, we do not
believe that the "Lyceum of Aparri" can be mistaken by the general public for the
Lyceum of the Philippines, or that the "Lyceum of Camalaniugan" would be
confused with the Lyceum of the Philippines.
Etymologically, the word "Lyceum" is the Latin word for the Greek lykeion which
in turn referred to a locality on the river Ilissius in ancient Athens "comprising an
enclosure dedicated to Apollo and adorned with fountains and buildings erected
by Pisistratus, Pericles and Lycurgus frequented by the youth for exercise and by
the philosopher Aristotle and his followers for teaching." 8 In time, the word
"Lyceum" became associated with schools and other institutions providing
public lectures and concerts and public discussions. Thus today, the word
"Lyceum" generally refers to a school or an institution of learning. While the
Latin word "lyceum" has been incorporated into the English language, the word
is also found in Spanish (liceo) and in French (lycee). As the Court of Appeals
noted in its Decision, Roman Catholic schools frequently use the term; e.g.,
"Liceo de Manila," "Liceo de Baleno" (in Baleno, Masbate), "Liceo de Masbate,"
"Liceo de Albay." 9 "Lyceum" is in fact as generic in character as the word
"university." In the name of the petitioner, "Lyceum" appears to be a substitute
for "university;" in other places, however, "Lyceum," or "Liceo" or "Lycee"
frequently denotes a secondary school or a college. It may be (though this is a
question of fact which we need not resolve) that the use of the word "Lyceum"
may not yet be as widespread as the use of "university," but it is clear that a not
inconsiderable number of educational institutions have adopted "Lyceum" or
"Liceo" as part of their corporate names. Since "Lyceum" or "Liceo" denotes a
school or institution of learning, it is not unnatural to use this word to designate
an entity which is organized and operating as an educational institution.
It is claimed, however, by petitioner that the word "Lyceum" has acquired a
secondary meaning in relation to petitioner with the result that that word,
although originally a generic, has become appropriable by petitioner to the
exclusion of other institutions like private respondents herein.
The doctrine of secondary meaning originated in the field of trademark law. Its
application has, however, been extended to corporate names sine the right to
use a corporate name to the exclusion of others is based upon the same principle
which underlies the right to use a particular trademark or tradename. 10 In
Philippine Nut Industry, Inc. v. Standard Brands, Inc., 11 the doctrine of secondary
meaning was elaborated in the following terms:
" . . . a word or phrase originally incapable of exclusive appropriation with
reference to an article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so exclusively by one
producer with reference to his article that, in that trade and to that branch of the
purchasing public, the word or phrase has come to mean that the article was his
product." 12
The question which arises, therefore, is whether or not the use by petitioner of
"Lyceum" in its corporate name has been for such length of time and with such
exclusivity as to have become associated or identified with the petitioner
institution in the mind of the general public (or at least that portion of the
general public which has to do with schools). The Court of Appeals recognized
this issue and answered it in the negative:
"Under the doctrine of secondary meaning, a word or phrase originally incapable
of exclusive appropriation with reference to an article in the market, because
geographical or otherwise descriptive might nevertheless have been used so
long and so exclusively by one producer with reference to this article that, in that
trade and to that group of the purchasing public, the word or phrase has come
to mean that the article was his produce (Ana Ang vs. Toribio Teodoro, 74 Phil.
56). This circumstance has been referred to as the distinctiveness into which the
name or phrase has evolved through the substantial and exclusive use of the
same for a considerable period of time. Consequently, the same doctrine or
principle cannot be made to apply where the evidence did not prove that the
business (of the plaintiff) has continued for so long a time that it has become of
consequence and acquired a good will of considerable value such that its articles
and produce have acquired a well-known reputation, and confusion will result by
the use of the disputed name (by the defendant) (Ang Si Heng vs. Wellington
Department Store, Inc., 92 Phil. 448).
With the foregoing as a yardstick, [we] believe the appellant failed to satisfy the
aforementioned requisites. No evidence was ever presented in the hearing
before the Commission which sufficiently proved that the word 'Lyceum' has
indeed acquired secondary meaning in favor of the appellant. If there was any of
this kind, the same tend to prove only that the appellant had been using the
disputed word for a long period of time. Nevertheless, its (appellant) exclusive
use of the word (Lyceum) was never established or proven as in fact the
evidence tend to convey that the cross-claimant was already using the word
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'Lyceum' seventeen (17) years prior to the date the appellant started using the
same word in its corporate name. Furthermore, educational institutions of the
Roman Catholic Church had been using the same or similar word like 'Liceo de
Manila,' 'Liceo de Baleno' (in Baleno, Masbate), 'Liceo de Masbate,' 'Liceo de
Albay' long before appellant started using the word 'Lyceum'. The appellant also
failed to prove that the word 'Lyceum' has become so identified with its
educational institution that confusion will surely arise in the minds of the public if
the same word were to be used by other educational institutions.
In other words, while the appellant may have proved that it had been using the
word 'Lyceum' for a long period of time, this fact alone did not amount to mean
that the said word had acquired secondary meaning in its favor because the
appellant failed to prove that it had been using the same word all by itself to the
exclusion of others. More so, there was no evidence presented to prove that
confusion will surely arise if the same word were to be used by other educational
institutions. Consequently, the allegations of the appellant in its first two
assigned errors must necessarily fail." 13 (Underscoring partly in the original and
partly supplied)
We agree with the Court of Appeals. The number alone of the private
respondents in the case at bar suggests strongly that petitioner's use of the
word "Lyceum" has not been attended with the exclusivity essential for
applicability of the doctrine of secondary meaning. It may be noted also that at
least one of the private respondents, i.e., the Western Pangasinan Lyceum, Inc.,
used the term "Lyceum" seventeen (17) years before the petitioner registered its
own corporate name with the SEC and began using the word "Lyceum." It
follows that if any institution had acquired an exclusive right to the word
"Lyceum," that institution would have been the Western Pangasinan Lyceum,
Inc. rather than the petitioner institution.
exclusive use thereof. Petitioner's use of the word "Lyceum" was not exclusive
but was in truth shared with the Western Pangasinan Lyceum and a little later
with other private respondent institutions which registered with the SEC using
"Lyceum" as part of their corporation names. There may well be other schools
using Lyceum or Liceo in their names, but not registered with the SEC because
they have not adopted the corporate form of organization.
We conclude and so hold that petitioner institution is not entitled to a legally
enforceable exclusive right to use the word "Lyceum" in its corporate name and
that other institutions may use "Lyceum" as part of their corporate names. To
determine whether a given corporate name is "identical" or "confusingly or
deceptively similar" with another entity's corporate name, it is not enough to
ascertain the presence of "Lyceum" or "Liceo" in both names. One must evaluate
corporate names in their entirety and when the name of petitioner is juxtaposed
with the names of private respondents, they are not reasonably regarded as
"identical" or "confusingly or deceptively similar" with each other.
WHEREFORE, the petitioner having failed to show any reversible error on the
part of the public respondent Court of Appeals, the Petition for Review is
DENIED for lack of merit, and the Decision of the Court of Appeals dated 28 June
1991 is hereby AFFIRMED. No pronouncement as to costs.
SO ORDERED.
Bidin, Davide, Jr., Romero and Melo, JJ ., concur.
Gutierrez, Jr., J ., on terminal leave.

In this connection, petitioner argues that because the Western Pangasinan

Lyceum, Inc. failed to reconstruct its records before the SEC in accordance with
the provisions of R.A. No. 62, which records had been destroyed during World
War II, Western Pangasinan Lyceum should be deemed to have lost all rights it
may have acquired by virtue of its past registration. It might be noted that the
Western Pangasinan Lyceum, Inc. registered with the SEC soon after petitioner
had filed its own registration on 21 September 1950. Whether or not Western
Pangasinan Lyceum, Inc. must be deemed to have lost its rights under its original
1933 registration, appears to us to be quite secondary in importance; we refer to
this earlier registration simply to underscore the fact that petitioner's use of the
word "Lyceum" was neither the first use of that term in the Philippines nor an

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