Corp Law Case Digests | Atty.

Hofilena | 2014

CORPLAW DIGEST SET 6 1. Lanuza vs. CA

G.R. No. 131394. March 28, 2005
Ayson 1. Lanuza vs. CA
Dela Cruz 2. Garcia vs. Jomouad Case:
Gervacio 3. Batangas Laguna vs. Bitanga PMMSI was incorporated in 1952 with 700 founder shares and 76
Hourani 4. Villa Rey vs. Ferrer common shares as capital stock. However, private respondents and
Lapuz 5. Edward Nell Co. vs. Pacific their predecessors who were in control of PMMSI registered the
Ledesma 6. Caltex vs. PNOC company’s stock and transfer book for the first time in 1978,
Leveriza 7. Laguna Trans v. SSS
recording thirty-three (33) common shares as the only issued and
Lua 8. AD Santos vs. Vasquez
outstanding shares of PMMSI. In 1982, the heirs of one of the
Lim 9. PHIVIDEC vs. CA
original incorporators, Juan Acayan, filed a petition with the
Miranda 10. Sundowner vs. Drilon
Securities and Exchange Commission (SEC) for the registration of
Molaer 11. Central Azucarera vs. CA
Pacamarra 12. Pepsi-Cola vs. NLRC their property rights over one hundred (120) founders’ shares and
Rivera 13. Manlimos vs. NLRC twelve (12) common shares owned by their father. The SEC hearing
Rovero 14. Filipinas Port Services vs. NLRC (1991) officer held that the heirs of Acayan were entitled to the claimed
Rubinos 15. Filipinas Port Services vs. NLRC (1989) shares and called for a special stockholders’ meeting to elect a new
Rubio 16. Gelano vs. CA
set of officers.The SEC En Banc affirmed the decision. As a result,
San Juan 17. Alabang Dev. Corp. vs. Alabang Hills
the shares of Acayan were recorded in the stock and transfer book.
Santos, F. 18. Chung Ka Bio vs. IAC
Santos, R. 19. Manuel Dulay Enterprises vs. CA
So Chan 20. Sergio Naguiat vs. NLRC On 06 May 1992, a special stockholders’ meeting was held to elect a
Sorongon 21. San Juan Structural vs. CA new set of directors. Private respondents thereafter filed a petition
Tamondong 22. Ong Yong vs. Tiu with the SEC questioning the validity of the 06 May 1992
Torcuator 23. Valley Golf v. Vda. De Caram stockholders’ meeting, alleging that the quorum for the said meeting
Velena 24. Marshall-Wells vs. Elser
should not be based on the 165 issued and outstanding shares as
Yogue 25. Home Insurance vs. Eastern Shipping
Zerrudo 26. Mentholatum vs. Mangaliman per the stock and transfer book, but on the initial subscribed capital
stock of seven hundred seventy-six (776) shares, as reflected in the
1952 Articles of Incorporation.

The SC ruled that the basis should be the Article of Incorporation,

hence the quorum should be based on the number of 776 shares.
The articles of incorporation are binding, not only on the corporation,
but also on its shareholders. In the instant case, the articles of
incorporation indicate that at the time of incorporation, the
incorporators were bona fide stockholders of seven hundred (700)
founders’ shares and seventy-six (76) common shares. However, a
stock and transfer book, like other corporate books and records, is
not in any sense a public record, and thus is not exclusive evidence

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
of the matters and things which ordinarily are or should be written
therein. In fact, it is generally held that the records and minutes of a
corporation are not conclusive even against the corporation but are
prima facie evidence only, and may be impeached or even
contradicted by other competent evidence. Thus, parol evidence may
be admitted to supply omissions in the records or explain
ambiguities, or to contradict such records.
In the instant case, no less than the articles of incorporation declare
the incorporators to have in their name the founders and several
common shares. Thus, to disregard the contents of the articles of
incorporation would be to pretend that the basic document which
legally triggered the creation of the corporation does not exist and
accordingly to allow great injustice to be caused to the incorporators
and their heirs.
Facts:
• In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was
incorporated, with seven hundred (700) founders’ shares and
seventy-six (76) common shares as its initial capital stock
subscription reflected in the articles of incorporation. However,
private respondents and their predecessors who were in control of
PMMSI registered the company’s stock and transfer book for the
first time in 1978, recording thirty-three (33) common shares as the
only issued and outstanding shares of PMMSI. Sometime in 1979,
a special stockholders’ meeting was called and held on the basis of
what was considered as a quorum of twenty-seven (27) common
shares, representing more than two-thirds (2/3) of the common
shares issued and outstanding.
• In 1982, the heirs of one of the original incorporators, Juan
Acayan, filed a petition with the Securities and Exchange
Commission (SEC) for the registration of their property rights over
one hundred (120) founders’ shares and twelve (12) common
shares owned by their father. The SEC hearing officer held that
the heirs of Acayan were entitled to the claimed shares and called
for a special stockholders’ meeting to elect a new set of
officers.The SEC En Banc affirmed the decision. As a result, the
shares of Acayan were recorded in the stock and transfer book.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
• On 06 May 1992, a special stockholders’ meeting was held to elect
a new set of directors. Private respondents thereafter filed a
petition with the SEC questioning the validity of the 06 May 1992
stockholders’ meeting, alleging that the quorum for the said
meeting should not be based on the 165 issued and outstanding
shares as per the stock and transfer book, but on the initial
subscribed capital stock of seven hundred seventy-six (776)
shares, as reflected in the 1952 Articles of Incorporation.
• The petition was dismissed. Appeal was made to the SEC En
Banc, which granted said appeal. Petitioners, who are PMMSI
stockholders, filed a petition for review with the Court of Appeals.
The Court of Appeals held that for purposes of transacting
business, the quorum should be based on the outstanding capital
stock as found in the articles of incorporation. Hence the instant
petition.
Issues:
• Whether or not it is the company’s stock and transfer book, or
its 1952 Articles of Incorporation, which determines
stockholders’ shareholdings, and provides the basis for
computing the quorum.
Held:
• The basis is the AOI.
• The articles of incorporation has been described as one that
defines the charter of the corporation and the contractual
relationships between the State and the corporation, the
stockholders and the State, and between the corporation and its
stockholders.
• There is no gainsaying that the contents of the articles of
incorporation are binding, not only on the corporation, but also on
its shareholders. In the instant case, the articles of incorporation
indicate that at the time of incorporation, the incorporators were
bona fide stockholders of seven hundred (700) founders’ shares
and seventy-six (76) common shares. Hence, at that time, the
corporation had 776 issued and outstanding shares.
• On the other hand, a stock and transfer book is the book which
records the names and addresses of all stockholders arranged
Corp Law Case Digests | Atty. Hofilena | 2014

alphabetically, the installments paid and unpaid on all stock for PMMSI cannot be used as the sole basis for determining the
which subscription has been made, and the date of payment quorum as it does not reflect the totality of shares which have been
thereof; a statement of every alienation, sale or transfer of stock subscribed, more so when the articles of incorporation show a
made, the date thereof and by and to whom made; and such other significantly larger amount of shares issued and outstanding as
entries as may be prescribed by law. A stock and transfer book is compared to that listed in the stock and transfer book.
necessary as a measure of precaution, expediency and • In the instant case, no less than the articles of incorporation
convenience since it provides the only certain and accurate declare the incorporators to have in their name the founders and
method of establishing the various corporate acts and transactions several common shares. Thus, to disregard the contents of the
and of showing the ownership of stock and like matters. articles of incorporation would be to pretend that the basic
• However, a stock and transfer book, like other corporate books and document which legally triggered the creation of the corporation
records, is not in any sense a public record, and thus is not does not exist and accordingly to allow great injustice to be caused
exclusive evidence of the matters and things which ordinarily are or to the incorporators and their heirs.
should be written therein. In fact, it is generally held that the
records and minutes of a corporation are not conclusive even Final Verdict: WHEREFORE, the petition is DENIED and the
against the corporation but are prima facie evidence only, and may assailed Decision is AFFIRMED.
be impeached or even contradicted by other competent evidence.
Thus, parol evidence may be admitted to supply omissions in the
records or explain ambiguities, or to contradict such records.
• In 1980, Batas Pambansa Blg. 68, otherwise known as “The
Corporation Code of the Philippines” supplanted Act No. 1459. BP
Blg. 68 provides:
Sec. 52. Quorum in meetings.- Unless otherwise provided for
in this Code or in the by-laws, a quorum shall consist of the
stockholders representing a majority of the outstanding
capital stock or majority of the members in the case of non-
stock corporation.
• Thus, quorum is based on the totality of the shares which have
been subscribed and issued, whether it be founders’ shares or
common shares. In the instant case, two figures are being pitted
against each other— those contained in the articles of
incorporation, and those listed in the stock and transfer book.
• To base the computation of quorum solely on the obviously
deficient, if not inaccurate stock and transfer book, and completely
disregarding the issued and outstanding shares as indicated in the
articles of incorporation would work injustice to the owners and/or
successors in interest of the said shares. This case is one
instance where resort to documents other than the stock and
transfer books is necessary. The stock and transfer book of

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
2. GARCIA vs JOMOUAD
[GRN 133969 January 26, 2000]
Validity of Transfers
Petitioner: Nemesio Garcia
Respondents: Spouses Jose and Sally Atinon, Nicolas Jomouad (Ex-
Sheriff)
CASE:
In this petition for review on certiorari, petitioner seeks the reversal of
the CA and Resolution denying petitioner's motion for
reconsideration of said decision. In assailing the decision of the CA,
petitioner mainly argues that the appellate court erroneously relied
on Section 63 of the Corporation Code in upholding the levy on the
subject certificate to satisfy the judgment debt of Dico in an earlier
civil case. The SC held that the transfer of the subject certificate
made by Dico to petitioner was not valid as to the spouses Atinon,
the judgment creditors, as the same still stood in the name of Dico,
the judgment debtor, at the time of the levy on execution. A bona
fide transfer of shares, not registered in the corporate books, is
not valid as against a subsequent lawful attachment of said
shares, regardless of whether the attaching creditor had actual
notice of said transfer or not. All transfers not so entered on the
books of the corporation are absolutely void; not because they
are without notice or fraudulent in law or fact, but because they
are made so void by statute.
FACTS:
Petitioner filed with the RTC of Cebu an action for injunction with
prayer for preliminary injunction against respondents spouses
Atinon and Nicolas Jomouad, e.x-oficio sheriff of Cebu.
Said action stemmed from an earlier case for collection of sum of
money, docketed as Civil Case No. CEB-10433, before the RTC,
Branch 10 of Cebu, filed by the spouses Atinon against Jaime
Dico.
o In that case (collection of sum of money), the trial court
rendered judgment ordering Dico to pay the spouses
Atinon the sum of P900,000.00 plus interests.
o After said judgment became final and executory,
respondent sheriff proceeded with its execution.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
o In the course thereof, the Proprietary Ownership
Certificate (POC) No. 0668 in the Cebu Country Club,
which was in the name of Dico, was levied on and
scheduled for public auction. Claiming ownership over
the subject certificate, petitioner filed the aforesaid action
for injunction with prayer for preliminary injunction to
enjoin respondents from proceeding with the auction.
After trial, the lower court rendered its Decision, dated 28 July
1995, dismissing petitioner's complaint for injunction for lack of
merit. On appeal, the CA affirmed in toto the decision of the RTC
upon finding that it committed no reversible error in rendering the
same.
Hence, this petition.
ISSUE: Whether a bona fide transfer of the shares of a corporation,
not registered or noted in the books of the corporation, is valid as
against a subsequent lawful attachment of said shares, regardless of
whether the attaching creditor had actual notice of said transfer or
not.
HELD & RATIO:
We hold that the transfer of the subject certificate made by Dico to
petitioner was not valid as to the spouses Atinon, the judgment
creditors, as the same still stood in the name of Dico, the judgment
debtor, at the time of the levy on execution.
Petitioner’s contention:
Petitioner avers that Dico, the judgment debtor of the spouses
Atinon, was employed as manager of his (petitioner's) Young
Auto Supply. In order to assist him in entertaining clients,
petitioner "lent" his POC, then bearing the number 1459, in the
Cebu Country Club to Dico so the latter could enjoy the "signing"
privileges of its members. The Club issued POC No. 0668 in the
name of Dico. Thereafter, Dico resigned as manager of
petitioner's business. Upon demand of petitioner, Dico returned
POC No. 0668 to him. Dico then executed a Deed of Transfer,
dated 18 November 1992, covering the subject certificate in
favor of petitioner. The Club was furnished with a copy of said
deed but the transfer was not recorded in the books of the Club
Corp Law Case Digests | Atty. Hofilena | 2014
because petitioner failed to present proof of payment of the
requisite capital gains tax.
In assailing the decision of the CA, petitioner mainly argues that
the appellate court erroneously relied on Section 63 of the
Corporation Code in upholding the levy on the subject certificate
to satisfy the judgment debt of Dico in Civil Case No. CEB-
14033.
Petitioner contends that the subject stock certificate, albeit in the
name of Dico, cannot be levied upon on execution to satisfy his
judgment debt because even prior to the institution of the case
for collection of sum of money against him:
1. The spouses Atinon had knowledge that Dico already
conveyed back the ownership of the subject certificate to
petitioner;
2. Dico executed a deed of transfer, dated 18 November 1992,
covering the subject certificate in favor of petitioner and the
Club was furnished with a copy thereof; and
3. Dico resigned as a proprietary member of the Club and his
resignation was accepted by the board of directors at their
meeting on 4 May 1993.
SC: Petition is without merit.
Legal Basis:
Section 63 of the Corporation Code reads:
o "Sec. 63 Certificate of stock and transfer of shares. - The
capital stock of corporations shall be divided into shares
for which certificates signed by the president or vice-
president, countersigned by the secretary or assistant
secretary, and sealed with the seal of the corporation
shall be issued in accordance with the by-laws. Shares
of stock so issued are personal property and may be
transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other
person legally authorized to make the transfer. No
transfer, however, shall be valid, except as between the
parties, until the transfer is recorded in the books of the
corporation showing the names of the parties to the
transaction, the date of the transfer, the number of the
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
certificate or certificates and the number of shares
transferred.
No shares of stock against which the corporation holds
any unpaid claim shall be transferable in the books of
the corporation."
Uson vs. Diosomito we held that the attachment prevails over the
unrecorded transfer stating thus -"[w]e think that the true
meaning of the language is, and the obvious intention of the
legislature in using it was, that all transfers of shares should be
entered, as here required, on the books of the corporation. And it
is equally clear to us that all transfers of shares not so entered
are invalid as to attaching or execution creditors of the assignors,
as well as to the corporation and to subsequent purchasers in
good faith, and, indeed, as to all persons interested, except the
parties to such transfers. All transfers not so entered on the
books of the corporation are absolutely void; not because they
are without notice or fraudulent in law or fact, but because they
are made so void by statute."
Major Point 1: Applying the foregoing jurisprudence in this case,
we hold that the transfer of the subject certificate made by Dico
to petitioner was not valid as to the spouses Atinon, the
judgment creditors, as the same still stood in the name of Dico,
the judgment debtor, at the time of the levy on execution.
Major Point 2:In addition, as correctly ruled by the CA, the entry
in the minutes of the meeting of the Club's board of directors
noting the resignation of Dico as proprietary member thereof
does not constitute compliance with Section 63 of the
Corporation Code. Said provision of law strictly requires the
recording of the transfer in the books of the corporation, and not
elsewhere, to be valid as against third parties.
Accordingly, the CA committed no reversible error in rendering
the assailed decision.
RULING: Petition DENIED.
Corp Law Case Digests | Atty. Hofilena | 2014
3.BATANGAS LAGUNA TAYABAS BUS COMPANY,
INC., v BITANGA
Validity of Transfers Stock and Transfer Book
CASE:
Potentianos owned 87.5% of the outstanding capital of
BLTB. Potentiano Group sold 21.1M of their shares (47.98% of total
outstanding shares) to BMB Property Holdings Inc (Bitanga as
President) P72.1M purchase price. Biting was elected as Chairman,
President and CEO replacing Potentiano. They scheduled a
stockholders meeting but Potentiano requested for postponement
due to no 30-day advance notice. May 19 meeting still pushed
through, Potential was re-elected to the Board of Directors. Bitanga
filed for TRO, SEC Hearing Panel granted saying there was no
quorum and Bitanga is still the legitimate Chairman of the Board in a
hold-over capacity. Potential Group filed with the SEC En Banc to
restrain the implementation. SEC En Banc granted it. CA reversed.
ISSUE: W/N SEC En Banc is wrong favouring the Potential Group.
— NO. There was a valid meeting, following the doctrine that a
transfer of shares is not valid unless recorded in the books of the
corporation. Transfer from Potentiano Group to Bitanga Group hasn't
been recorded yet thus shares of Potential still stand there were the
ones entitled to attend and vote at the May 19 stockholders meeting.
Until registration in accomplished, the transfer, though valid between
the parties, cannot be effective as against the corporation. The
unrecorded transferee, the Bitanga Group cannot vote nor be voted
for. The purpose of registration, therefore, is two-fold: to enable the
transferee to exercise all the rights of a stockholder, including the
right to vote and to be voted for, and to inform the corporation of any
change in share ownership so that it can ascertain the persons
entitled to the rights and subject to the liabilities of a stockholder.
Until the transfer is registered, the transferee is not a stockholder but
an outsider
FACTS:
• Potenciano family owned 87.5% of the outstanding capital of
Batangas Laguna Tayabas Bus Company Inc. (BLTB)
• Oct 1997 - Dolores, Max, Mercedelin Potenciano, Delfin Yorro,
Maya Industries Inc. entered into a Sale and Purchase Agreement
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
— sold 21,071,114 of their shares to to BMB Property Holdings
Inc, (Bitanga as President) representing 47.98% of the total
outstanding capital stock of BLTB
• Purchase price = P72.076,425
• Buyer guaranteed that it shall take over the management and
operations of BLTB but immediately surrender the same to the
sellers in case it fails to pay the balance of the purchase price on
the due date
• Stockholders meeting - new elected officers (Bitanga as Chairman
of the Board, President and CEO) replacing the Potencianos,
Yorro
Newly elected officers scheduled the annual stockholders meeting
•
but Potenciano wrote Bitanga requesting for a postponement of the
meeting due to absence of a 30-day advance notice — No
response from Bitanga
Day of the meeting (May 19), postponement notice published but
•
286 stockholders (representing 87% of the shares of stock)
attended and proceeded with the meeting
• Potenciano Group was re-elected to the Board of Directors
• Bitanga Group refused to relinquish their positions an continued to
act as directors and officers of BLTB
• Bitanga Group filed with SEC a Complaint for Damages and
Injunction; TRO — denied
• Potentiano Group also filed for damages and preliminary injunction
an TRO which the SEC granted, enjoining the Biting Group from
acting as officers and directors of the BLTB
• Bitanga Group filed for writ of preliminary injunction and TRO to
annul the stockholders meeting — SEC Hearing Panel GRANTED
upon posting a P20M bond; meeting VOID:
• (a) Potentiano had asked for its postponement due to
improper notice
• (b) NO QUORUM because BMB Holdings Inc owning
50.26% of BLTB shares was not present at the meeting
• ** Bitanga Board remains the legitimate Board in a hold-
over capacity
• Potentiano Group filed a petition for certiorari with the SEC En
Banc to restrain the implementation of the assailed order
• SEC issued writ of preliminary injunction against the Bitanga Group
after posting P20M bond
Corp Law Case Digests | Atty. Hofilena | 2014

• CA Decision - reversed the SEC Orders — in favor of Bitanga voting, must secure such a standing by having the transfer
Group, void meeting recorded on the corporate books.
- • Until the transfer is registered, the transferee is not a
stockholder but an outsider
ISSUES:
1. Whether or not SEC En Banc Order committed error in FINAL VERDICT: Petition is GRANTED. The CA decision reversed.
jurisdiction as to entitle Bitinga group to use certiorari
a. W/N there was a Valid meeting?

HELD & RATIO:

1. NO, CA wrong, SEC En Banc correct favoring the
Potentiano Group
• a. THERE WAS A VALID MEETING — doctrine that a transfer of
shares is not valid unless recorded in the books of the corporation
• The transfer of the shares of Potentiano Group to Bitnaga Group
has not yet been recorded in the books of the corporation
• Hence shares of Potenciano Group still stand, they were the
ones entitled to attend and vote at the stockholder’s meeting
of the BLTB on May 19
• Not correct to say that there was no quorum
• SEC En Banc correct to issue a writ of preliminary injunction
against the Biting group
• Until registration in accomplished, the transfer, though valid
between the parties, cannot be effective as against the corporation
• The unrecorded transferee, the Bitanga Group cannot vote nor
be voted for
• The purpose of registration, therefore, is two-fold: to enable
the transferee to exercise all the rights of a stockholder, including
the right to vote and to be voted for, and to inform the corporation
of any change in share ownership so that it can ascertain the
persons entitled to the rights and subject to the liabilities of a
stockholder
• Until challenged in a proper proceeding, a stockholder of record
has a right to participate in any meeting; his vote can be properly
counted to determine whether a stockholders’ resolution was
approved, despite the claim of the alleged transferee.
• On the other hand, a person who has purchased stock, and who
desires to be recognized as a stockholder for the purpose of

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
4. Villa Rey v. Ferrer
G.R. No. L-23893, October 29, 1968
CASE:
This is an appeal from the CFI of Manila where it is
disputed by Philtranco that Jose Villarama and Villa Rey Transit
violated the contract between them. The contract between them
was for the sale of a franchise to operate a public transportation
company of buses. The “Certificates of Public Convenience”
were sold to Philtranco on the condition that Jose Villarama
would not operate a public transportation company in
competition with Phltranco. It was shown eventually however
that
FACTS:
This is a three party appeal involving third party litigants. It
was appealed from the CFI of Manila. The assailed decision
declared void two certificates of public convenience. These
were in favor of a RES Eusebio Ferrer, who latter sold the
same to RES Pangasinan Transportation Co. The decision
declared that PET Villa Rey Transit was the lawful owner of
the certificates of public convenience. They were ordered to
pay 5,000 Pesos as attorney’s fees.
In 1959, Jose Villarama was an operator of a bus corp. It
was called Villa Rey Transit. This was pursuant to the
certificates of public convenience granted to him by Public
Service Commission. He operated 32 buses. He sold the
same to Pangasinan Transpo Co. otherwise known as
Pantranco. The sale was for 350,000 PHP and under the
condition that Jose Villarama would not reenter the undustry.
Then 3 months thereafter a new corporation was formed
called Villa Rey Transit. This was incorporated by several of
Jose Villarama’s relatives including his wife and brother’s
and sisters. Jose Villarama was the treasurer. It then within 5
months from its incorporation bought 49 Buses, tools and
equipment, and 5 Certificates of Public Convenience. The
entire transaction was premised on the approval of the PSC
or Public Service Commission (the body that issues
transportation franchises in the form of certificates of public
convenience.) The application was made. The PSC
provisionally approved the application.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
The Sheriff of Manila levied upon two of the certificates of
Public convenience pursuant to a write of execution. This
was in Favor or Eusebio Ferrer against a Valentin Fernando.
The sheriff registred this with the PSC. Then Ferrer sold the
two certificates to Pantranco. The PSC ordered that until the
issue over who actually owned the two certificates could be
disposed that it would be Pantranco who should operate the
same.
ISSUE: W/N Jose Vllarama is a distinct entity?
W/N the sale Ferrer made to the Pantranco was in fact Null
and Void?
RULING:
1. YES. Because Villarama actually discharged the
functions of a treasurer not as if he was actually the
treasurer of the corporation but as though the funds in
his charge were actually his own money. The
capitalization of the corporation was also apparently
entirely put up by Villarama. Villarama had also
comingled his personal funds with that of the
corporation. The actual subscribers of the stock had in
fact paid nothing. The court clarified though that while
Villarama was prohibited from operating a transportation
Company.
2. No, the court does not see enough evidentiary basis to
overturn the ruling of the court in holding that the
subsequent sale of the sheriff was void. The main
contention of the corporation Villa Rey are void was that
the sale was subject to the condition of the approval of
the same by the PSC. The conditional nature of the sale
though does not affect it’s validity.
Corp Law Case Digests | Atty. Hofilena | 2014
5.Edward J. Nell Company vs. Pacific Farms, Inc.
CASE:
Edward Company sold pumps to Insular Farms.
consequently when the latter defaulted in its payment, Edward Co.
proceeded against the property of Insular. However, it was
discovered that Insular Farms ha no leviable property since they
were all sold to Paciific Farms already. Edward Company then filed a
writ of execution on the properties of Pacific Farms on the theory that
Pacific Farms is a mere alter ego of Insular.
the issue is WON pacific is an alter ego of Insular.
the court ruled that there is neither proof nor allegation that Pacific
had expressly or impliedly agreed to assume the debt of Insular
Farms in favor of Edward. it is neither considered that the
transactions have resulted in the consolidation or merger of the
Insular Farms and appellee herein.
FACTS:
• Pacific Farms Inc. (Pacific) purchased as highest bidder from
a bank auction 1,000 shares of stock of Insular Farms for
P285,126.99 and BOD of Insular as reorganized, then
caused its assets, including its leasehold rights over a public
land in Bolinao, Pangasinan, to be sold to Insular for
P10,000.00 and paid for the other assets of Insular Farms.
• Dimalanta introduced to Roque petitioner Yulo as her best
friend and a good payer. Dimalanta told Roque that
petitioner wanted her checks encashed.
• In view of Josefina’s assurance that petitioner is trustworthy,
Myrna agreed to encash the checks.
• Edward J. Nell Co. (Edward) in Civil Case No. 58579 of the
Municipal Court of Manila against Insular Farms, Inc.
(Insular) a judgment for the sum of P1,853.80 unpaid
balance for a pump sold with interest plus P125 attorney's
fees and P84.00 as costs.
• When A writ of execution, issued after the judgment had
become final returned unsatisfied, stating that Insular Farms
had no leviable property.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
• Edward filed the present action against Pacific upon
the theory that Pacific is the alter ego of Insular Farms
• CA affirmed Municipal Court: dismissed the complaint
ISSUES:
1. Whether or not the Pacific Farms is an alter ego of
Insular Farms
HELD & RATIO:
1. NO, where one corporation sells or otherwise transfers all of
its assets to another corporation, the latter is not liable
for the debts and liabilities of the transferor
• Generally where one corporation sells or otherwise
transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the
transferor, except: (1) where the purchaser
expressly or impliedly agrees to assume such debts;
(2) where the transaction amounts to a
consolidation or merger of the corporations; (3)
where the purchasing corporation is merely a
continuation of the selling corporation; and (4)
where the transaction is entered into fraudulently in
order to escape liability for such debts.
• In the case at bar, there is neither proof nor
allegation that appellee had expressly or impliedly
agreed to assume the debt of Insular Farms in favor
of appellant, or that the appellee is a continuation of
Insular Farms, or that the sale of either the shares
of stock or the assets of Insular Farms to the
appellee has been entered into fraudulently, in order
to escape liability for the debt of the Insular Farms in
favor of appellant
• Neither is it claimed that these transactions
have resulted in the consolidation or merger of
the Insular Farms and appellee herein. On the
contrary, appellant's theory to the effect that
Corp Law Case Digests | Atty. Hofilena | 2014
appellee is an alter ego of the Insular Farms
negates such consolidation or merger, for a
corporation cannot be its own alter ego.
• Luzon Stevedoring Corporation (LUSTEVECO) assigned it’s
FINAL VERDICT: Petition is denied. The CA decision is affirmed.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
6. CALTEX vs. PNOC
Types of Acquisition and Transfers
CASE:
properties to PNOC, and part of the stipulation is for PNOC to
assume all obligations of LUSTEVECO (evidenced by the
―Agreement‖) including the claims of litigations that are to be found in
the Annexes of the Agreement. Prior to this assignment, Caltex had
a suit against LUSTEVECO which, Caltex won. However Caltex
could not issue a writ of execution against LUSTEVECO’s properties
since they have already been foreclosed by a mortgage of other
creditor banks. Caltex, learning of the assignment collects against
PNOC. PNOC refuses to pay arguing that Caltex is not a party in the
agreement between PNOC and LUSTEVECO. Caltex sued for
collection of money, and they won in the Trial Court. The Court of
Appeals reversed it since Caltex is not a real party in interest in the
contract.
The Supreme Court ruled in favor of Caltex since under the
Agreement of the Assignment of Property PNOC bound itself to the
obligations of LUSTEVECO and it expressly mentioned the suit
between Caltex and LUSTEVECO. Also if there would be no
stipulation mentioned above the assignment would fail for failure of
consideration and would be deemed as an assignment in fraud of
creditors. The only way the transfer can proceed without prejudice to
the creditors is to hold the assignee liable for the obligations of the
assignor.
CLV: The disposition of the assets of a corporation shall be deemed
to cover substantially all the corporate property and assets, if thereby
the corporation would be rendered incapable of continuing the
business or accomplishing the purposes for which it was
incorporated. Such a sale or disposition must be understood as valid
only if it does not prejudice the creditors of the assignor, which
necessarily implies that the assignee assumes the debts of the
assignor. Even under the provisions of the Civil Code, a creditor has
a real interest to go after any person to whom the debtor fraudulently
transferred its assets
Corp Law Case Digests | Atty. Hofilena | 2014
FACTS:
PSTC and Luzon Stevedoring Corporation
("LUSTEVECO") entered into an Agreement of
Assumption of Obligations ("Agreement"). The
Agreement provides that PSTC shall assume all
the obligations of LUSTEVECO with respect to the
claims enumerated in Annexes "A" and "B"
("Annexes") of the Agreement. The Agreement
also provides that PSTC shall control the conduct
of any litigation pending or which may be filed with
respect to the claims in the Annexes. The
Agreement further provides that LUSTEVECO
shall deliver to PSTC all papers and records of the
claims in the Annexes. Finally, the Agreement
provides that LUSTEVECO appoints and
constitutes PSTC as its attorney-in-fact to demand
and receive any claim out of the countersuits and
counterclaims arising from the claims in the
Annexes.
Among the actions enumerated in the Annexes
is Caltex (Phils.), Inc. v. Luzon Stevedoring
Corporation docketed as AC-G.R. CV No. 62613
which at that time was pending before the then
Intermediate Appellate Court (IAC). The case was
an appeal from the Decision by the then Court of
First Instance of Manila (CFI) directing
LUSTEVECO to pay Caltex P103,659.44 with
legal interest from the filing of the action until full
payment. In its 12 November 1985 Decision
The Regional Trial Court of Manila, Branch 12,
issued a writ of execution in favor of Caltex.
However, the judgment was not satisfied because
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
of the prior foreclosure of LUSTEVECO’s
properties. The Manila Bank Intramuros Branch
and the Traders Royal Bank Aduana Branch did
not respond to the notices of garnishment.
Caltex subsequently learned of the Agreement
between PSTC and LUSTEVECO. Caltex sent
successive demands to PSTC asking for the
satisfaction of the judgment rendered by the CFI.
PSTC requested for the copy of the records of AC-
G.R. CV No. 62613. Later, PSTC informed Caltex
that it was not a party to AC-G.R. CV No. 62613
and thus, PSTC would not pay LUSTEVECO’s
judgment debt. PSTC advised Caltex to demand
satisfaction of the judgment directly from
LUSTEVECO.
Caltex continued to send several demand letters
to PSTC. On 5 February 1992, Caltex filed a
complaint for sum of money against PSTC.
Caltex won the case in the Trial Court.
The Court of Appeals ruled that Caltex has no
personality to sue PSTC. The Court of Appeals
held that non-compliance with the Agreement
could only be questioned by the signatories to the
contract, namely, LUSTEVECO and PSTC. The
Court of Appeals stated that LUSTEVECO and
PSTC are the only parties who can file an action to
enforce the Agreement. The Court of Appeals
considered fatal the omission of LUSTEVECO, the
real party in interest, as a party defendant in the
case
ISSUES:
1. Whether PSTC is bound by the Agreement when it
assumed all the obligations of LUSTEVECO
Corp Law Case Digests | Atty. Hofilena | 2014
HELD & RATIO:
1. YES, Caltex may recover the judgment debt from PSTC not
because of a stipulation in Caltex’s favor but because the
Agreement provides that PSTC shall assume all the
obligations of LUSTEVECO. In this case, LUSTEVECO
transferred, conveyed and assigned to PSTC all of
LUSTEVECO’s business, properties and assets pertaining to
its tanker and bulk business "together with all the obligations
relating to the said business, properties and assets."
Contract states: Whereby ASSIGNOR transferred,
conveyed and assigned unto ASSIGNEE all of
ASSIGNOR’s business, properties and assets
appertaining to its tanker and bulk
all (sic) departments, together with all the
obligations relating to said business, properties
and assets;
When PSTC assumed all the properties, business
and assets of LUSTEVECO pertaining to
LUSTEVECO’s tanker and bulk business, PSTC
also assumed all of LUSTEVECO’s obligations
pertaining to such business. The assumption of
obligations was stipulated not only in the Agreement
of Assumption of Obligations but also in the
Agreement of Transfer. The Agreement
specifically mentions the case between
LUSTEVECO and Caltex, docketed as AC-G.R.
CV No. 62613, then pending before the IAC.
PSTC is bound by the Agreement. PSTC cannot
accept the benefits without assuming the obligations
under the same Agreement. PSTC cannot repudiate
its commitment to assume the obligations after
taking over the assets for that will amount to
defrauding the creditors of LUSTEVECO. It will also
result in failure of consideration since the
assumption of obligations is part of the consideration
for the transfer of the assets from LUSTEVECO to
PSTC. Failure of consideration will revert the assets
to LUSTEVECO for the benefit of the creditors of
LUSTEVECO. Thus, PSTC cannot escape from its
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
undertaking to assume the obligations of
LUSTEVECO as stated in the Agreement.
2. Even without the Agreement, PSTC is still
liable to Caltex.
While the Corporation Code allows the transfer of all
or substantially all the properties and assets of a
corporation, the transfer should not prejudice the
creditors of the assignor. The only way the transfer
can proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of the
assignor. The acquisition by the assignee of all or
substantially all of the assets of the assignor
necessarily includes the assumption of the
assignor’s liabilities, unless the creditors who did not
consent to the transfer choose to rescind the
transfer on the ground of fraud. To allow an assignor
to transfer all its business, properties and assets
without the consent of its creditors and without
requiring the assignee to assume the assignor’s
obligations will defraud the creditors. The
assignment will place the assignor’s assets beyond
the reach of its creditors.
Caltex could not enforce the judgment debt against
LUSTEVECO. The writ of execution could not be
satisfied because LUSTEVECO’s remaining
properties had been foreclosed by lienholders. In
addition, all of LUSTEVECO’s business, properties
and assets pertaining to its tanker and bulk business
had been assigned to PSTC without the knowledge
of its creditors. Caltex now has no other means of
enforcing the judgment debt except against PSTC.
If PSTC refuses to honor its written commitment to
assume the obligations of LUSTEVECO, there will
be fraud on the creditors of LUSTEVECO. PSTC
agreed to take over, and in fact took over, all the
assets of LUSTEVECO upon its express written
commitment to pay all obligations of LUSTEVECO
pertaining to those assets, including specifically the
claim of Caltex. LUSTEVECO no longer informed its
creditors of the transfer of all of its assets
Corp Law Case Digests | Atty. Hofilena | 2014
presumably because PSTC committed to pay all
such creditors. Such transfer, leaving the claims of
creditors unenforceable against the debtor, is
fraudulent and rescissible.12 To allow PSTC now to
welsh on its commitment is to sanction a fraud on
LUSTEVECO’s creditors.13
FINAL VERDICT:
WHEREFORE, we REVERSE and SET ASIDE the 31 May 2001
Decision and 9 November 2001 Resolution of the Court of
Appeals in CA-G.R. CV No. 46097. We AFFIRM the 1 June 1994
Decision of the Regional Trial Court of Manila, Branch 51, in Civil
Case No. 91-59512. Costs against respondent.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
7. LAGUNA TRANSPORTATION COMPANY v. SOCIAL
SECURITY SYSTEM
Petitioner is engaged in the business of providing bus lines in Biñan,
Laguna. It was incorporated under the Securities and Exchange
Commission on June 20, 1956. Petitioner now claims that it must be
exempt from the compulsory contributions as required by the Social
Security Act since it has only been in operation for less than two
years; thus, cannot be compelled to make contributions. However,
before its 1956 incorporation, petitioner was already engaged in the
business as a common carrier as far back as April 1, 1949. Because
of such, court ruled that petitioner cannot circumvent what the law
requires, solely on the basis of simply changing its organizational
form and hide behind the principle of corporations having a
personality separate and distinct from the members composing it.
While it is true that a corporation once formed is conferred a juridical
personality separate and district from the persons composing it, it is
but a legal fiction introduced for purposes of convenience and to
subserve the ends of justice. The concept cannot be extended to a
point beyond its reasons and policy, and when invoked in support of
an end subversive of this policy, will be disregarded by the courts.
Recit-ready
FACTS:
Petitioner is a domestic corporation duly organized and
existing under the laws of the Philippines, with principal
place of business at Biñan, Laguna.
Respondent served notice upon the petitioner requiring it to
register as member of the Social Security System and to
remit the premiums due from all the employees of the
petitioner and the contribution of the latter.
Sometime in 1949, the Biñan Transportation Co., a
corporation duly registered with the Securities and Exchange
Commission, sold part of the lines and equipment it operates
to Gonzalo Mercado, Artemio Mercado, Florentino Mata and
Dominador Vera Cruz. After the sale, the said vendees
formed an unregistered partnership under the name of
Laguna Transportation Company which continued to operate
Corp Law Case Digests | Atty. Hofilena | 2014

the lines and equipment bought from the Biñan Security Act and, therefore, subject to compulsory coverage
Transportation Company, in addition to new lines. thereunder.
Plaintiff requested for exemption from coverage by the
System on the ground that it started operation only on June o Section 9 of the Social Security Act, in part,
20, 1956, when it was registered with the Securities and provides:
Exchange Commission, however respondent disagreed.
The original partners forming the Laguna Transportation ―…The Commission may not compel any employer
Company, with the addition of two new members, organized to become a member of the System unless he shall have
a corporation known as the Laguna Transportation been in operation for at least two years…‖
Company, Inc., which was registered with the Securities and
Exchange Commission. The following diagram shows the
incorporators of the petitioner and their corresponding ISSUES:
shares: 2. Whether or not petitioner can be considered to be in
existence for at least two years for it to be compelled to
contribute under Section 9 of the Social Security Act.
Name No. of Amount Amount
Shares Subscribed Paid HELD & RATIO:
2. YES, to adopt petitioner's argument would defeat, rather
Dominador Cruz 333 shares P33,300.00 P9,160.81 than promote, the ends for which the Social Security Act was
enacted.
Maura Mendoza 333 shares 33,300.00 9,160.81
It is not disputed that the Laguna Transportation
Company, an unregistered partnership composed of
Gonzalo Mercado 66 shares 6,600.00 1,822.49
Gonzalo Mercado, Artemio Mercado, Florentina
Mata, and Dominador Vera Cruz, commenced the
Artemio Mercado 94 shares 9,400.00 2,565.90
operation of its business as a common carrier on
Florentino Mata 110 shares 11,000.00 3,021.54 April 1, 1949. These 4 original partners, with 2
others (Maura Mendoza and Sabina Borja) later
Sabina Borja 64 shares 6,400.00 converted the partnership into a corporate entity, by
registering its articles of incorporation with the
1,750.00
Securities and Exchange Commission on June 20,
1,000 shares P100,000.00 P27,481.55 1956. The firm name "Laguna Transportation
Company" was not altered, except with the addition
SSS believes that petitioner cannot be exempted because it of the word "Inc."
has been in actual operation for at least two years. The corporation continued the same transportation
On the basis of such resolution by respondent SSS, court business of the unregistered partnership, using the
ruled in favor of respondent; hence this instant petition. same lines and equipment. There was, in effect, only
Petitioner contests the said ruling on the ground that the a change in the form of the organization of the entity
lower court erred in holding that it is an employer engaged in engaged in the business of transportation of
business as a common carrier which had been in operation passengers. Hence, said entity as an employer
for at least 2 years prior to the enactment of the Social engaged in business, was already in operation for at

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
least 3 years prior to the enactment of the Social
Security Act on June 18, 1954 and for at least two
years prior to the passage of the amendatory act on
June 21, 1957.
Petitioner argues that, since it was registered as a
corporation with the Securities and Exchange
Commission only on June 20, 1956, it must be
considered to have been in operation only on said
date. While it is true that a corporation once formed
is conferred a juridical personality separate and
district from the persons composing it, it is but a
legal fiction introduced for purposes of convenience
and to subserve the ends of justice. The concept
cannot be extended to a point beyond its reasons
and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the
courts.
If any general rule can be laid down, in the present
state of authority, it is that a corporation will be
looked upon as a legal entity as a general rule, and
until sufficient reason to the contrary appears; but,
when the motion of legal entity is used to defeat
public convenience, justify wrong, protect fraud, or
defend crime, the law will regard the corporation as
an association of persons.
An employer could easily circumvent the statute by
simply changing his form of organization every other
year, and then claim exemption from contribution to
the System as required, on the theory that, as a new
entity, it has not been in operation for a period of at
least 2 years.
FINAL VERDICT: Petition is Dismissed and the lower court’s ruling
upheld.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
8. A.D. SANTOS INC V. VASQUEZ
Business Enterprise Transfers
CASE:
Respondent Ventura Vasquez was petitioner A.D. Santos
Inc’s taxi driver. While driving petitioner’s taxicab, respondent
vomited blood. He was confined at Sto. Tomas Hospital and was
admitted at the Quezon Institute. He was diagnosed with pulmonary
tuberculosis. He has not resumed work. Respondent filed a claim
with the Workmen’s Compensation Commission and the
Commission ordered petitioner to pay the claimant as compensation
and to reimburse his treatment expenses. Petitioner A.D. Santos Inc
alleged that respondent driver had no cause of action against
petitioner. The issue in this case is whether or not the claim for
compensation is directed against Amador Santos, not against
petitioner A.D. Santos Inc. The Court ruled that the claim for
compensation is directed against petitioner A.D. Santos Inc.
Petitioner categorically admitted that respondent was its taxi driver
and that the claimant contracted pulmonary tuberculosis by reason of
his employment. Petitioner cited the fact that respondent driver
worked for the City Cab operated by Amador Santos. This will not
detract from the validity of respondent's right to compensation. At
one time, Amador Santos was the sole owner and operator of the
City Cab. It was subsequently transferred to petitioner A.D. Santos,
Inc. in which Amador Santos was an officer. The mention by
respondent of Amador Santos as his employer in the course of his
testimony should not be allowed to confuse the facts relating to
employer-employee relationship for when the veil of corporate fiction
is made as a shield to perpetrate a fraud and/or confuse legitimate
issues (here, the relation of employer-employee), the same should
be pierced.
FACTS:
Respondent Ventura Vasquez was petitioner A.D. Santos
Inc’s taxi driver.
While driving petitioner’s taxicab, respondent vomited blood.
He was sent to petitioner company’s physician, Dr. Roman,
who treated him and sent him to Sto. Tomas Hospital where
he was confined then he was admitted at the Quezon
Corp Law Case Digests | Atty. Hofilena | 2014
Institute. Dr. Lirag diagnosed his ailment as pulmonary
tuberculosis.
He has not resumed work.
Respondent filed a claim with the Workmen’s Compensation
Commission and the Commission ordered petitioner to pay
the claimant the sum of P3,732.30 as compensation, to
reimburse the claimant the sum of P53.60 for his treatment
expenses, to provide claimant continuous medical services
and supplies, to pay attorney’s fees, and to pay the
Commission the sum of P43.00 as costs.
Petitioner A.D. Santos Inc alleged that respondent driver had
no cause of action against petitioner.
ISSUES:
Whether or not the claim for compensation is directed against
Amador Santos, not against petitioner A.D. Santos Inc
HELD & RATIO:
NO. The claim for compensation is directed against
petitioner A.D. Santos Inc.
Petitioner categorically admitted that respondent was its taxi
driver and that the claimant contracted pulmonary
tuberculosis by reason of his employment. Thus,
respondent’s cause of action against petitioner is complete.
Petitioner cited the fact that respondent driver worked for the
City Cab operated by Amador Santos.
This will not detract from the validity of respondent's right to
compensation.
At one time, Amador Santos was the sole owner and
operator of the City Cab. It was subsequently transferred to
petitioner A.D. Santos, Inc. in which Amador Santos was an
officer.
The mention by respondent of Amador Santos as his
employer in the course of his testimony should not be
allowed to confuse the facts relating to employer-employee
relationship for when the veil of corporate fiction is made as
a shield to perpetrate a fraud and/or confuse legitimate
issues (here, the relation of employer-employee), the same
should be pierced.
FINAL VERDICT: The decision under review is hereby affirmed.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
9. PHILIPPINE VETERANS INVESTMENT DEVELOPMENT
CORPORATION (PHIVIDEC) v. CA and VIOLETA BORRES
G.R. No. 85266 January 30, 1990
Equity Transfers
CASE:
PRI is a wholly-owned subsidiary of PHIVIDEC. PHIVIDEC sold PRI
to PHILSUCOM, which in turn created Panay and transferred the
operations of PRI to Panay. By virtue of this provision in the
agreement between PHIVIDEC and PHILSUCOM, the former had
expressly assumed liability for any claim arising before the turn-over
of PRI to PHILSUCOM. Days after the sale, private respondent
Violeta Borres was injured in an accident which was due to PRI’s
negligence. She sued for damages against PRI, Panay and
PHIVIDEC. The lower court held PHIVIDEC liable. The issue is
whether or not PHIVIDEC should be held liable to answer for the
liability of PRI to Borres. The Court held in favor of Borres. Under
PHIVIDEC’s agreement with PHILSUCOM, the former expressly
assumed liability for any claim arising before the turn-over of PRI.
Since the accident happened before that agreement and PRI ceased
to exist after the turn-over, it should follow that PHIVIDEC cannot
evade its liability for the injuries sustained by the private respondent
Borres. Also, the Doctrine of Piercing the Veil is applicable.
PHIVIDEC cannot set up the defense that PRI is a separate entity for
PHIVIDEC to evade from its liability to Borres, especially since PRI
already ceased to exist.
FACTS:
This case arose when Violeta M. Borres, private respondent
herein, was injured in an accident that was later held by the
trial and respondent courts to be due to the negligence of
Phividec Railways, Inc. (PRI).
PRI is owned by petitioner PHIVIDEC. Four days before the
accident, PHIVIDEC sold all its rights in PRI to the Philippine
Sugar Commission (PHILSUCOM).
o The agreement provided that “PHIVIDEC hereby
holds PHILSUCOM harmless from and against any
action, claim or liability that may arise out of or result
from acts or omissions, contracts or transactions
prior to the turn-over.”
Corp Law Case Digests | Atty. Hofilena | 2014
Two days later, PHILSUCOM caused the creation of a
wholly-owned subsidiary, the Panay Railways, Inc. (Panay),
to operate the railway assets acquired from PHIVIDEC.
Borres filed a complaint for damages against PRI and Panay
and impleaded PHIVIDEC as a third-party defendant.
The RTC held PRI negligent and so liable to the plaintiff for
damages. It also held that as PRI was a wholly-owned
subsidiary of PHIVIDEC, the latter should answer for PRI's
liability.
PHIVIDEC’s contention: PHIVIDEC and PRI are entirely
distinct and separate corporations although the latter is its
subsidiary. The transfer of the shares of stock of PRI to
PHILSUCOM did not divest PRI of its juridical personality. By
the same token, it is answerable for its own obligations,
which cannot be passed on to the petitioner as its own
liability.
The CA applied the Doctrine of Piercing the veil saying that
PRI is an alter ego of PHIVIDEC and the latter cannot evade
its obligation to Borres simply because PRI ceased to exist
when it was sold to PHILSUCOM (PRI was converted to
Panay). Also, by virtue of this provision in the agreement
between PHIVIDEC and PHILSUCOM, the former had
expressly assumed liability for any claim arising before the
turn-over of PRI to PHILSUCOM. And since the accident in
question took place before said turn-over, the only logical
conclusion is that PHIVIDEC should be solely liable for the
damages to the plaintiff in the case at bar.
ISSUE: Whether or not PHIVIDEC should be held liable to answer
for the liability of PRI to Borres
HELD & RATIO:
YES. Under PHIVIDEC’s agreement with PHILSUCOM, the
former expressly assumed liability for any claim arising before
the turn-over of PRI. Also, the Doctrine of Piercing the Veil is
applicable. PHIVIDEC cannot set up the defense that PRI is a
separate entity for PHIVIDEC to evade from its liability to
Borres, especially since PRI already ceased to exist.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
PHIVIDEC'S act of selling PRI to PHILSUCOM shows that
PHVIDEC had complete control of PRI's business. This
circumstance renders applicable the rule that if a parent-
holding company (PHIVIDEC in the present case) assumes
complete control of the operations of its subsidiary's
business, the separate corporate existence of the subsidiary
must be disregarded, such that the holding company will be
responsible for the negligence of the employees of the
subsidiary as if it were the holding company's own
employees.
It is clear from the evidence of record that by virtue of the
agreement between PHIVIDEC and PHILSUCOM,
particularly the stipulation exempting the latter from any
"claim or liability arising out of any act or transaction" prior to
the turn-over, PHIVIDEC had expressly assumed liability for
any claim against PRI. Since the accident happened before
that agreement and PRI ceased to exist after the turn-over, it
should follow that PHIVIDEC cannot evade its liability for the
injuries sustained by the private respondent.
A contrary conclusion would leave the private respondent
without any recourse for her legitimate claim. In the interest
of justice and equity, and to prevent the veil of corporate
fiction from denying her the reparation to which she is
entitled, that veil must be pierced and PHIVIDEC and PRI
regarded as one and the same entity.
FINAL VERDICT: Wherefore, the decision appealed from is affirmed
Corp Law Case Digests | Atty. Hofilena | 2014
10. SUNDOWNER DEVELOPMENT CORPORATION vs. DRILON
Effects on Employees of Corporation; Assets Only Transfers
CASE:
Mabuhay, Inc. leased the premises belonging to Santiago
Syjuco, Inc. but it failed to pay rentals and thus, was ejected from the
property. Subsequently, Syjuco leased the same premises to
petitioner Sundowner, Inc. wherein Mabuhay, Inc. executed a deed
of assignment of said assets and personal properties in favor of
Sundowner. Respondent NUWHRAIN picketed the leased premises
and denied Sundowner’s officers, employees and guests access to
and egress from said premises. Sundowner filed complaint for
damages with preliminary injunction and/or TRO. The Secretary of
Labor took cognizance of the case and requires all striking
employees to return to work and for respondent Mabuhay to accept
all returning employees pending final determination of the issue.
According to petitioner Sundowner, the theory of implied acceptance
and assumption of statutory wrong does not apply in this case,
instead, the prevailing doctrine that there is no law requiring bona
fide purchasers of the assets of an on-going concern to absorb in its
employ the employees of the latter should be applied in this case.
The issue in this case is whether or not Sundowner may be
compelled to absorb the employees of respondent Mabuhay.
NO. There is no law requiring a bona fide purchaser of assets of an
on-going concern to absorb in its employ the employees of the latter.
Unless expressly assumed, labor contracts such as employment
contracts and collective bargaining agreements are not enforceable
against a transferee of an enterprise, labor contracts being in
personam, thus binding only between the parties. In this case, it was
expressly provided in the deed of assignment that it was purely for
and in consideration of the sale/transfer and assignment of the
personal properties and assets of Hotel Mabuhay, Inc. listed. It is
clear that petitioner has no liability whatsoever to the employees of
Mabuhay and its responsibility if at all, is only to consider them for re-
employment. There can be no implied acceptance of the employees
of Mabuhay by petitioner and acceptance of statutory wrong as it is
expressly provided in the agreement that petitioner has no
commitment or duty to absorb them.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
FACTS:
Private respondent Hotel Mabuhay, Inc. (Mabuhay) leased
the premises belonging to Santiago Syjuco, Inc. located in
Ermita, Manila.
However, due to non-payment of rentals, a case for
ejectment was filed by Syjuco against Mabuhay in the
Metropolitan Trial Court of Manila.
Syjuco offered the said premises for lease to petitioner
Sundowner. The negotiation culminated with the execution
of the lease agreement. Mabuhay executed a deed of
assignment of said assets and personal properties in favor of
petitioner.
Respondent National Union of Workers in Hotel, Restaurant
and Allied Services (NUWHRAIN) picketed the leased
premises, barricaded the entrance to the leased premises
and denied petitioner's officers, employees and guests free
access to and egress from said premises.
A complaint for damages with preliminary injunction and/or
temporary restraining order was filed by petitioner. A TRO
was issued thereafter.
An order was issued by public respondent Secretary of
Labor assuming jurisdiction over the labor dispute pursuant
to the Labor Code and in the interim, requiring all striking
employees to return to work and for respondent Mabuhay to
accept all returning employees pending final determination of
the issue of the absorption of the former employees of
Mabuhay.
Petitioner Sundowner alleged that the theory of implied
acceptance and assumption of statutory wrong does not
apply in the instant case; that the prevailing doctrine that
there is no law requiring bona fide purchasers of the assets
of an on-going concern to absorb in its employ the
employees of the latter should be applied in this case; that
the order for absorption of the employees of Mabuhay as
well as the payment of their backwages is contrary to law.
ISSUES:
Corp Law Case Digests | Atty. Hofilena | 2014

3. Whether or not petitioner may be compelled to absorb provided in the agreement that petitioner has no
the employees of respondent Mabuhay (or Whether or not commitment or duty to absorb them.
the purchaser of the assets of an employer corporation can As an exception to the general rule provided above,
be considered a successor employer of the latter’s the purchaser of the assets or enterprise is liable to
employees) the employees if the transaction between the parties
is colored or clothed with bad faith but the Court
HELD & RATIO: found no bad faith in the circumstances of this case.
3. NO. As a general rule, there is no law requiring a bona The court finds no such duty on the part of petitioner
fide purchaser of assets of an on-going concern to and its failure to notify said employees cannot be an
absorb in its employ the employees of the latter. indicium of bad faith.
The rule is that unless expressly assumed, labor
contracts such as employment contracts and FINAL VERDICT: Petition is granted.
collective bargaining agreements are not
enforceable against a transferee of an enterprise,
labor contracts being in personam, thus binding only
between the parties.
A labor contract merely creates an action in
personally and does not create any real right which
should be respected by third parties.
This conclusion draws its force from the right of an
employer to select his employees and to decide
when to engage them as protected under our
Constitution, and the same can only be restricted by
law through the exercise of the police power.
In the deed of assignment that was executed by
Mabuhay in favor of petitioner, it is specifically
provided therein that the same is "purely for and in
consideration of the sale/transfer and assignment of
the personal properties and assets of Hotel
Mabuhay, Inc. listed . . . " and "in no way involves
any assumption or undertaking on the part of
Second Party (petitioner) of any debts or liabilities
whatsoever of Hotel Mabuhay, Inc."
It is clear that petitioner has no liability whatsoever
to the employees of Mabuhay and its responsibility if
at all, is only to consider them for re-employment in
the operation of the business in the same premises.
There can be no implied acceptance of the
employees of Mabuhay by petitioner and
acceptance of statutory wrong as it is expressly

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
11. CENTRAL AZUCARERA DEL DANAO V. CA
Business-Enterprise Transfers
There is no law requiring that the purchaser should absorb the
employees of the selling company. Well established is the principle
―that it is within the employer’s legitimate sphere of management
control of the business to adopt economic policies to make some
changes or adjustments in their organization or operations that would
insure profit to itself or protect the investments of its stockholders. As
in the exercise of such management prerogative, the employer may
merge or consolidate its business with another, or sell or dispose all
or substantially all of its assets and properties which may bring about
the dismissal or termination of its employees in the process
CASE:
Bana-ay, Cosculluela, and Palma (private respondents) were
employed by Central Azucarera del Danao (Central). Central then
sold its sugar mill properties to Danao Development which took over
the business. It later on hired the private respondents, but they were
later terminated from service. The private respondents now claim
separation pay against Central corresponding to the period prior to
the transfer of the business to Danao. Central alleges that the claim
should be directed to Danao as the purchasing corporation.
Untenable. True that closing out or cessation of operations is a valid
cause for termination of employees; but this case falls short of actual
―cessation.‖ There was merely disposition of all or substantially all of
the business of Central to Danao which continued the same. There
was thus merely a change of ownership. That being the case, upon
the transfer of the business to Danao, there was an illegal
termination of employees (without prior notice) such that would
entitle the latter to separation pay. There is no law requiring the
purchasing corporation to hire the old employees of the selling
corporation. In this case, what happened was the employees were
hired anew by Danao as new employer; this is an interruption of their
employment in the sugar central. That being the case, their claim is
against Central. (Source: Darvin’s)
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
FACTS:
Private respondents (Bana-ay, Conculluela and Palma) were
among the regular and permanent employees of Central Danao
On July 7, 1961, Central Danao sold its sugar mill properties and
other assets to Dadeco
Immediately thereafter, Dadeco took over the management and
operation of the purchased sugar mill properties
Dadeco hired Central Danao's regular and permanent
employees but in accordance with its own hiring and selection
policies
Bana-ay was hired by the new management after the lapse of 23
days from the date of sale; Cosculluela immediately the day after
the date of sale; and Palma, only on August 1, 1961
Bana-ay was terminated on December 15, 1961; Palma onJuly
10, 1966, and Cosculluela, on February 1, 1967.
Private respondents, along with eight others, filed separate
complaints for recovery of termination pay with damages against
Dadeco and Central Danao alleging that Dadeco maliciously,
and fraudulently dismissed them without justifiable cause or any
advance notice of separation
Dadeco denied liability for termination pay, asserting lack of
cause of action since Dadeco was not their employer for the
period in question.
On the other hand, Central Danao denied liability claiming that
the assets of Central Danao had already been sold to Dadeco
pursuant to the Deed of Sale of July 7, 1961; and that at the time
of their alleged termination, Dadeco was already their employer.
They were absorbed, re-employed and in fact, continued working
in the sugar mill upon Dadeco's takeover of the management
and operation.
RTC ruled in favor of the complainants ordering Central Danao
to pay private respondents. Complaints against DADECO were
dismissed. CA affirmed RTC’s decision
ISSUE: Whether or not a change of ownership or management of an
establishment or corporation by virtue of the sale or disposition of all
or substantially all of properties and assets operates to insulate the
selling corporation (Central Danao) from its obligation to its
employees under the Termination Pay Law.
Corp Law Case Digests | Atty. Hofilena | 2014
HELD & RATIO:
YES. Central Azucarera del Danao is liable.
Under the Termination Pay Law, an employee may be
terminated with or without just cause.
o If there is just cause, the employer is not required to
serve any notice nor pay termination pay to employees
concerned.
o If the termination is without just cause, the employer
must serve notice to the employee, otherwise the
employer is to pay termination pay, except where other
applicable statutes provide a different remedy as in
unfair labor practice.
It is within the employer's legitimate sphere of management
control of the business to adopt economic policies or make some
changes or adjustments in their organization or operations that
would insure profit to itself or protect the investment of its
stockholders.
o The employer may merge or consolidate its business
with another, or sell or dispose all or substantially all of
its assets and properties which may bring about the
dismissal or termination of its employees in the process.
o Such dismissal or termination should not be interpreted
in such a manner as to permit the employer to escape
payment of termination pay.
An innocent transferee of a business establishment has no
liability to the employees of the transferor to continue employing
them. Nor is the transferee liable for past unfair labor practices of
the previous owner, except, when the liability therefor is
assumed by the new employer under the contract of sale, or
when liability arises because of the new owner's participation in
thwarting or defeating the rights of the employees.
A judicious examination of the pertinent Deed of Sale reveals no
express stipulation whatsoever relative to the continued
employment by Dadeco of the former employees of Central
Danao.
And there is no law requiring that the purchaser should
absorb the employees of the selling company. The most that
the purchasing company may do, for reasons of public policy and
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
social justice, is to give preference to the qualified separated
employees of the selling company, who in their judgment are
necessary in the continued operation of the business
establishment.
While some of the employees were hired the day after the sale,
like private respondent Jose Cosculluela, other employees were
however hired only 23 days after. Clearly then, there was in fact,
an interruption of the employment of the private respondents in
the sugar central.
o In reality then, they were rehired anew by Dadeco, their
new employer.
The negotiations for the sale of the assets and properties of
Central Danao to Dadeco were held behind the back of the
employees who were taken by surprise upon the consummation
of the sale.
They were not formally notified of the impending sell-out to
Dadeco and its attendant consequences with respect to their
continued employment status under the purchasing company.
Technically, the employees were actually terminated and/or
separated from the service on the date of the sale, or on July 7,
1961. Worse, they were not at all given the required notice of
their termination.
Justice and equity dictate that private respondents be entitled to
their termination or separation pay corresponding to the number
of years of service with Central Danao until June 7, 1961.
Philippine Refining Company, Inc. vs. Garcia: "Except where
other applicable statutes provide differently, it is not the cause for
the dismissal but the employer's failure to serve notice upon the
employee that renders the employer answerable to the employee
for termination pay."
Hence, the untenability of petitioner's contention that private
respondents should have directed their claims for termination
pay solely against the Dadeco on the flimsy ground that at the
time of their alleged termination, there was no employee-
employer relations between them and Central Danao.
FINAL VERDICT: AFFIRMED.
Corp Law Case Digests | Atty. Hofilena | 2014
12. Pepsi Cola Distributors of the Philippines (PCD) vs. NLRC
Business Enterprise Transfers
CASE:
The case arose from the termination of the employment of Yute
when he was declared on AWOL. The facts showed that Yute
suffered a stomach ache while working in the bottling plant of Pepsi
in Butuan. He was advised by the company physician to rest for 25
days. He was only able to file a vacation leave for one day on that
same day. When he reported back to work, he was informed that his
employment was already terminated for failure to file a leave.
An illegal dismissal case was filed by Yute. The Labor Arbiter
rendered a decision in his favor. When his employment was
reinstated, PCD stopped payment of his payroll on the ground that it
already sold all its interests in PCPPI.
The Supreme Court held that although a corporation may have
ceased business operations and an entirely new company has
been organized to take over the same type of operations, it does
not necessarily follow that no one may now be held liable for
illegal acts committed by the earlier firm. Hence, the new entity
PCPPI is liable for reinstating the private respondent to his
former position.
FACTS:
In 1979, private respondent Yute started working as a
contractual maintenance electrician with Pepsi Cola Bottling
Company of the Philippines (PCBCP) in Butuan City.
When Pepsi Cola Distributors of the Philippines, Inc. (PCD)
took over the bottling company's manufacturing operations in
1981, he was absorbed as a regular employee.
In 1988, petitioner PCD terminated Yute on the grounds of
alleged abandonment of work and/or absence without leave.
Yute filed an illegal dismissal case before the NLRC Butuan
City.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
The Labor Arbiter rendered a decision which declared as
illegal the dismissal of private respondent and ordered
petitioner PCD to reinstate him with full backwages from the
time he was illegally dismissed up to the time of his actual
reinstatement without loss of seniority rights and privileges;
to pay private respondent attorney's fees equivalent to 10%
of the total monetary award. All other claims of private
respondent were dismissed by the Labor Arbiter for lack of
merit.
PCD appealed the Labor Arbiter's decision to the NLRC
(Fifth Division), Cagayan de Oro City. In the meanwhile,
PCD reinstated private respondent and included him in the
payroll effective on May 22, 1989.
33 days after he was included in the payroll, PCD stopped
payment of private respondent's salary on the ground that it
allegedly sold its business interest to Pepsi Cola Products
Philippines, Inc. (PCPPI) effective July 24, 1989.
PCCPI filed a manifestation of the change of ownership that
it is now the owner, manufacturer and operator of the
properties of PCD. PCCPI also invoked that it has a legal
personality separate and distinct from PCD.
In the stipulation of facts, both parties acceded to the facts
that on November 21, 2988, the private respondent, while he
was working, suffered a stomach ache. He applied for a 1
day vacation leave and he was advised by the company
physician to rest for 25 days.
Thereafter, he went to Magallanes, Agusan del Norte to take
the necessary rest. Later on December 9, 1988 he collected
his 13th month pay as he went also for check-up from the
company's physician and asked for a medical certificate. On
that day he met his immediate supervisor and informed (him
about) his illness and presented his medical certificate.
However, on December 16, 1988 while complainant reported
back for work, he was informed by his supervisor that his
services was (sic) already terminated effective December
15, 1988 for alleged absence without leave (AWOL) as there
was already an administrative investigation conducted by
management for the said AWOL.
Corp Law Case Digests | Atty. Hofilena | 2014

ISSUE:
FINAL VERDICT: The NLRC Decision was AFFIRMED.
Whether or not Pepsi Cola Products Philippines, Inc.
(PCPPI) is liable for the illegal acts of its predecessor-in-
interest PCD?

HELD:

YES. PCPPI is liable.

PCD may have ceased business operations and PPCPI

may be a new company but it does not necessarily
follow that no one may now be held liable for illegal acts
committed by the earlier firm. The complaint was filed
when PCD was still in existence. Pepsi-Cola never
stopped doing business in the Philippines. The same
soft drinks products sold in 1988 when the complaint
was initiated continue to be sold now. The sale of
products, purchases of materials, payment of
obligations, and other business acts did not stop at the
time PCD bowed out and PCPPI came into being. There
is no evidence presented showing that PCPPI, as the
new entity or purchasing company is free from any
liabilities incurred by the former corporation.

There is thus no grave abuse of discretion on the part of

public respondent NLRC when it ordered PCD and PCPPI to
reinstate private respondent to his former position without
loss of seniority rights, with full backwages from July 25,
1989 to his actual reinstatement, and to pay him 10% of the
monetary award as attorney's fees.

However, if reinstatement is no longer possible considering

the supervening facts and circumstances of the case,
coupled with the strained relationship between petitioner and
private respondent as a result of their adversarial positions
against each other in this case, more particularly petitioners
PCD and PCPPI which consistently refused to reinstate him,
private respondent should be awarded separation pay as an
alternative to reinstatement.

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
13. Manlimos v. NLRC
G.R. No. 113337 March 2, 1995
Equity Transfers
CASE:
Petitioners were regular employees of Super Mahogany
Plywood Corporation (SMPC). Few years later, a new
owner/management acquired complete ownership of the corporation.
Petitioners maintained that they remained regular employees
regardless of the change of management and their execution of the
Release and Waiver; that being a corporation, SMPC’s juridical
personality was unaffected even if ownership of its shares of stock
changed hands. SMPC countered that petitioners were deemed
legally terminated from their previous employment as evidenced by
the Release and Waiver and the filing of their applications for
employment with the new owner; that the new owner was well within
its legal right or prerogative in considering as terminated the
petitioners' probationary appointment.
W/N a transferee of a business is liable to continue
employing the employees of the transferor.
NO, an innocent transferee of a business establishment has
no liability to the employees of the transferor to continue employing
them. Where such transfer of ownership is in good faith, the
transferee is under no legal duty to absorb the transferor
employees as there is no law compelling such absorption. The
most that the transferee may do, for reasons of public policy and
social justice, is to give preference to the qualified separated
employees in the filling of vacancies in the facilities of the purchaser.
Since the petitioners were effectively separated from work due to a
bona fide change of ownership and they were accordingly paid their
separation pay, which they freely and voluntarily accepted, SMPC
was under no obligation to employ them; it may, however, give them
preference in the hiring. SMPC in fact hired, albeit on probationary
basis, all the petitioners.
FACTS:
The petitioners were among the regular employees of Super
Mahogany Plywood Corporation (SMPC).
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Few years later, a new owner/management group headed by
Alfredo Roxas acquired complete ownership of the
corporation.
Petitioners were advised of the change in ownership;
however, petitioners continued to work for the new owner
and were considered terminated, with their conformity, only
as of December 1991 when they received their separation
pay, 13th month pay, and all other benefits due them
computed as of the said month.
Each one executed a Release and Waiver.
The new owner then posted notice for the hiring of workers.
Petitioners were hired on probationary basis for 6 months.
Petitioners maintained that they remained regular employees
regardless of the change of management and their execution
of the Release and Waiver.
o They argue that being a corporation, the private
respondent's juridical personality was unaffected
even if ownership of its shares of stock changed
hands.
o Their signing of the Release and Waiver was of no
moment not only because the consideration was
woefully inadequate, but also because employees
who receive their separation pay are not barred from
contesting the legality of their dismissal, and that
quit claims executed by laborers is frowned upon for
being contrary to public policy.
SMPC contended that petitioners were deemed legally
terminated from their previous employment as evidenced by
the Release and Waiver and the filing of their applications for
employment with the new owner; that the new owner was
well within its legal right or prerogative in considering as
terminated the petitioners' probationary/temporary
appointment; and that the petitioners were not illegally
dismissed; hence, they are not entitled to the reliefs prayed
for.
ISSUES:
4. W/N a transferee of a business is liable to continue
employing the employees of the transferor.
Corp Law Case Digests | Atty. Hofilena | 2014

HELD & RATIO: o The most that the transferee may do, for
4. NO, an innocent transferee of a business establishment reasons of public policy and social
has no liability to the employees of the transferor to justice, is to give preference to the
continue employing them. qualified separated employees in the
A change of ownership in a business concern is not filling of vacancies in the facilities of the
proscribed by law. purchaser.
It is a well-recognized principle that it is within the o Since the petitioners were effectively
employer's legitimate sphere of management control separated from work due to a bona fide
of the business to adopt economic policies or make change of ownership and they were
some changes or adjustments in their organization accordingly paid their separation pay, which
or operations that would insure its profit or protect they freely and voluntarily accepted, SMPC
the investment of its stockholders. was under no obligation to employ them; it
As in the exercise of such management prerogative, may, however, give them preference in the
the employer may merge or consolidate its business hiring.
with another, or sell or dispose all or substantially all o SMPC in fact hired, albeit on probationary
of its assets and properties which may bring about basis, all the petitioners.
the dismissal or termination of its employees in the
process. Such dismissal or termination should not FINAL VERDICT: The instant petition is partly GRANTED. The
however be interpreted in such a manner as to challenged resolutions of public respondent National Labor Relations
permit the employer the very concept of social Commission (Fifth Division) are hereby MODIFIED.
justice.
In a number of cases, the rule has been laid
down that the sale or disposition must be
motivated by good faith as an element of
exemption from liability.
o An innocent transferee of a business
establishment has no liability to the
employees of the transfer or to continue
employing them. Nor is the transferee
liable for past unfair labor practices of the
previous owner, except, when the liability is
assumed by the new employer under the
contract of sale, or when liability arises
because of the new owner's participation in
thwarting or defeating the rights of the
employees.
Where such transfer of ownership is in good
faith, the transferee is under no legal duty to
absorb the transferor employees as there is no
law compelling such absorption.

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
14. FILIPINAS PORT SERVICES V. NLRC (1991)
CASE:
The different stevedoring and arrastre corporations operating
in the Port of Davao were integrated into a single dockhandlers
corporation, Filport. Employees then wanted to claim their retirement
benefits for the services they rendered even prior to the integration.
Filport filed a petition for certiorari with the Supreme Court docketed
as G.R. No. 85704, claiming that it is an entirely new corporation with
a separate juridical personality from the integrating corporations; and
that Filport is not a successor-employer, liable for the obligations of
private respondents' previous employers. respondent Filport being a
mere alter ego of the different merging companies has at the very
least, the obligation not only to absorb into its employ workers of the
dissolved companies, but also to absorb the length of service earned
by the absorbed employees from their former employers. Under the
circumstances, respondent-appellant is a successor-employer. As a
successor entity, it is answerable to the lawful obligations of the
predecessor employers, herein integrees. This Commission has so
held under the principle of 'substitution' that the successor firm is
liable to (sic) the obligations of the predecessor employer,
notwithstanding the change in management or even personality, of
the new contracting employer.
FACTS:
In view of the government policy which ordained that cargo
handling operations should be limited to only one cargo
handling operator-contractor for every port the different
stevedoring and arrastre corporations operating in the Port
of Davao were integrated into a single dockhandlers
corporation, known as the Davao Dockhandlers, Inc., which
was registered with the Securities and Exchange
Commission on July 13, 1976.
Due to the late receipt of its permit to operate at the Port of
Davao from the Bureau of Customs, Davao Dockhandlers,
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Inc., which was subsequently renamed Filport, actually
started its operation on February 16, 1977.
As a result of the merger, Filport to draw its personnel
complements from the merging operators, as follows: Sec.
118. Absorption of labor.—Subject to the provisions of the
immediate preceding section, and consistent with the actual
operational requirements of the new management, all labor
force together with its necessary personnel complement, of
the merging operators shall be absorbed by the merged or
integrated organization to constitute its labor
force. (Emphasis supplied)
On February 4,1987, private respondent Paterno Liboon and
18 others filed a complaint with the Department of Labor and
Employment Regional Office in Davao City, alleging that
they were employees of Filport since 1955 through 1958 up
to December 31, 1986 when they retired; that they were paid
retirement benefits computed from February 16,1977 up to
December 31, 1986 only; and that taking into consideration
their continuous length of service, they are entitled to be paid
retirement benefits differentials from the time they started
working with the predecessors of Filport up to the time they
were absorbed by the latter in 1977
Filport filed a petition for certiorari with the Supreme Court
docketed as G.R. No. 85704, claiming that it is an entirely
new corporation with a separate juridical personality from the
integrating corporations; and that Filport is not a successor-
employer, liable for the obligations of private respondents'
previous employers
ISSUE:
1. WON THE INTEGRATION CREATED NEW
CORPORATION.
HELD & RATIO:
In resolving the issues, the Labor Arbiter concludes as
follows:
Subsequent amendment of its Articles of
Incorporation highlighted by the renaming of
Corp Law Case Digests | Atty. Hofilena | 2014

the Davao Dockhandlers, Inc. to Filipinas known to the workers who came to know of its existence
Port Services, Inc. did not diminish the fact only at the hearing before the NLRC.
that the ownership and constituency of the
new corporation are basically Identical with
the previous owners.
It is, therefore, the considered view of this
Office that respondent Filport being a mere
alter ego of the different merging companies
has at the very least, the obligation not only
to absorb into its employ workers of the
dissolved companies, but also to absorb the
length of service earned by the absorbed
employees from their former employers.
Under the circumstances, respondent-
appellant is a successor-employer. As a
successor entity, it is answerable to the
lawful obligations of the predecessor
employers, herein integrees. This
Commission has so held under the principle
of 'substitution' that the successor firm is
liable to (sic) the obligations of the
predecessor employer, notwithstanding the
change in management or even personality,
of the new contracting employer."
Thus, granting that Filport had no contract whatsoever with
the private respondents regarding the services rendered by
them prior to February 16, 1977, by the fact of the merger, a
succession of employment rights and obligations had
occurred between Filport and the private respondents.
As earlier stated, it was mandated that Filport shall absorb
all labor force and necessary personnel complement of the
merging operators, thus, clearly indicating the intention to
continue the employer-employee relationships of the
individual companies with its employees through Filport.
The alleged memorandum of the PPA Assistant General
Manager exonerating Filport from any liability arising from
and as a result of the merger is contrary to public policy and
is violative of the workers' right to security of tenure. Said
memorandum was issued in response to a query of the PMU
Officer-in-Charge and was not even published nor made

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
15. FILIPINAS PORT v. NLRC (31 AUG 1989)
Effects on Employees of Corporation; Mergers and Consolidations
CASE:
Petitioners: Filipinas Port, Inc. Damasticor (FILPORT)
Respondent: National Labor Relations Commission and Silva
Private Respondent Silva, was employed by DAMASTICOR,
one of the 7 corporations engaging in arrastre and stevedoring
services in Davao Port. Subsequently, petitioner FILPORT was
established integrating into a single and unified service all existing
arrastre and stevedoring firms in the Port of Davao. Petitioner drew
its necessary labor force, together with its personnel complement,
from the merging operators. Of the employees absorbed, private
respondent was among them. Upon his retirement, private
respondent was paid his retirement pay corresponding only to the
period that he actually worked with petitioner FILPORT. His length of
service with DAMASTICOR was not included in the computation of
his retirement pay.
The main issue in this case is whether or not Filport is liable
for the differential retirement pay of private respondent earned by
him when he was still under the employment of Damasticor.
SC: NO. The employees of a predecessor-constituent
corporation (DAMASTICOR) cannot avail of their previous
tenure when determining their termination benefits with the
surviving corporation in the merger (FILPORT). (CLV)
FACTS:
Stevedoring and arrastre services for coastwise or domestic
cargoes loaded at Port of Davao were handled by several
cargo handling operators (7 Corporations). Included among
the 7 Corporations was Davao Maritime Stevedoring
Corporation or Damasticor.
During the existence of Damasticor, private respondent Silva
was employed by said company.
Subsequently, the government adopted a policy that there
should be only one cargo handling operator in every port.
Accordingly all the existing arrastre and stevedoring firms
which were then operating individually in the Port of Davao
were integrated into a single and unified service which
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
resulted in the formation of a new corporation known as the
Davao Dockhandlers, Inc, later changed to Filipinas Port
Service, Inc. (FILPORT)
Petitioner started its operation on 1977. By mandate,
however, of the Phililippine Ports Authority (PPA) A.O. 13-
77, petitioner drew its necessary labor force, together with its
personnel complement, from the merging operators. Of the
employees absorbed, private respondent was among them.
He continued to work until his retirement on 1987.
Upon his retirement, private respondent was paid his
retirement pay corresponding only to the period that he
actually worked with petitioner. His length of service with
DAMASTICOR was not included in the computation of his
retirement pay.
Private respondent filed a complaint against Damasticor with
DOLE.
Labor Arbiter rendered a Decision in favor of Private
Respondent and ordered FILPORT as the survivor-
employer to pay retirement pay to private respondent.
The complaint against DAMASTICOR is ordered Dismissed
inasmuch as said corporation no longer exists.
NLRC promulgated its Decision affirming the Labor Arbiter's
Decision stating that succession of employment rights and
obligations took place between petitioner and
DAMASTICOR.
ISSUES:
Whether or not the successor-in-interest of an employer (FILPORT)
is liable for the differential retirement pay of an employee (SILVA)
earned by him when he was still under the employment of the
predecessor-in-interest (DAMASTICOR).
HELD & RATIO:
NO. Filport is not liable for the differential retirement pay of
private respondent earned by him when he was still under the
employment of the predecessor-in-interest, Damasticor.
The employees of a predecessor-constituent corporation
cannot avail of their previous tenure when determining their
termination benefits with the surviving corporation in the
merger. (DOCTRINE)
Corp Law Case Digests | Atty. Hofilena | 2014
Petitioner's main contention is that the period of private
respondent's employment with DAMASTICOR should not be
considered in the computation of his retirement pay because
petitioner is not the successor-employer of private
respondent after DAMASTICOR.
A close scrutiny of the record of this case inevitably and
clearly shows that petitioner came into existence as a
juridical person only as a direct result of the merger among
different cargo handling operators. With that merger, Section
118, Article X of the General Guidelines on the Integration of
Arrastre/ Stevedoring Services issued by the PPA mandated
petitioner to draw its personnel complement from the
merging operators to constitute its labor force, thus:
o Sec. 118. Absorption of labor - Subject to the
provisions of the immediate preceding section, and
consistent with the actual operational requirements
of the new management, all labor force together with
its necessary personnel complement, of the merging
operators shall be absorbed by the merged or
integrated organization to constitute its labor force.
Petitioner claims that it cannot be considered a successor-in-
interest of the merged operators because of the
memorandum of the PPA:
o The new organization's liability shall be the payment
of salaries, benefits and all other money due the
employee as a result of his employment, starting on
the date of his service in the newly integrated
organization.
o the absorption of an employee into a newly
integrated organization does not include the carry
over of his length of service.
Petitioner cannot be held liable for the payment of the
retirement pay of private respondent while in the employ of
DAMASTICOR. It is the latter who is responsible for the
same as the labor contract of private respondent with
DAMASTICOR is in personam and cannot be passed on to
the petitioner.
FINAL VERDICT: Petition is granted.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
16. Gelano vs. CA
Liquidation pursued through a Trustee
CASE:
Insular Sawmill leased the property of Gelano spouses. On
the other hand, Carlos Gelano owed Insular Sawmill certain sum of
money. They had an agreement that Insular could deduct the same
from the monthly rentals of the leased premises until said cash
advances are fully paid. However spouses were not able to pay.
Insular filed a complaint for collection of money.
While the case was ongoing, Insular amended its Articles of
Incorporation to shorten its corporate existence of up to December 3,
1960 only. The amended Articles of Incorporation was filed with and
approved by SEC, but the trial court was not notified of the
amendment shortening the corporate existence and no substitution
party was ever made.
The spouses filed a motion to dismiss based on the grounds
that the case was prosecuted even after dissolution of Insular as a
corporation and that a defunct corporation cannot maintain any suit
for or against it without first complying with the requirements of the
winding up of the affairs of the corporation.
The Issue: Whether or not a corporation, whose corporate life
had ceased by the expiration of its term of existence, could still
continue prosecuting and defending suits after its dissolution and
beyond the period of three years provided for under Act No. 1459,
otherwise known as the Corporation law, to wind up its affairs,
without having undertaken any step to transfer its assets to a trustee
or assignee.
SC held YES. The Corporation can continue prosecuting. A
corporation that has a pending action and which cannot be
terminated within the three-year period after its dissolution is
authorized under Section 78 to convey all its property to
trustees to enable it to prosecute and defend suits by or against the
corporation beyond the Three-year period although private
respondent did not appoint any trustee, yet the counsel, who
prosecuted and defended the interest of the corporation in the instant
case and who in fact appeared in behalf of the corporation may be
considered a trustee of the corporation at least with respect to
the matter in litigation only
Corp Law Case Digests | Atty. Hofilena | 2014
FACTS:
Insular Sawmill is a corporation organized for the primary
purpose of carrying on a general lumber and sawmill
business. It is a corporation organized on September 17,
1945 with a corporate life of fifty (50) years, or up to
September 17, 1995,
Insular SawMill was leasing property of the Spouses Gelano.
On the other hand, Gelano owed the Insular SawMill certain
sum of money arising from:
o cash advances of the husband;
o a loan in China Bank which Insular executed jointly
with the husband; and
o credit purchases of lumber materials for the
spouses' residence.
Petitioner Carlos Gelano had agreement that Insular could
deduct the same from the monthly rentals of the leased
premises until said cash advances are fully paid. Out of the
aforementioned cash advances in the total sum of
P25,950.00, petitioner Carlos Gelano was able to pay only
P5,950.00 thereby leaving an unpaid balance of P20,000.00
which he refused to pay despite repeated demands by
private respondent.
Petitioner-wife Guillermina M. Gelano refused to pay on the
ground that said amount was for the personal account of her
husband asked for by, and given to him, without her
knowledge and consent and did not benefit the family.
Insular then filed a complaint for collection against the
spouses.
While the case was ongoing, Insular amended its Articles of
Incorporation to shorten its corporate existence of up to
December 3, 1960 only. The amended Articles of
Incorporation was filed with and approved by SEC, but the
trial court was not notified of the amendment shortening the
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
corporate existence and no substitution party was ever
made.
Almost 4 years after the dissolution of the corporation, the
trial court rendered a decision holding spouses liable for the
unpaid amount.
On appeal, the spouses filed a motion to dismiss based on
the grounds that the case was prosecuted even after
dissolution of Insular as a corporation and that a defunct
corporation cannot maintain any suit for or against it without
first complying with the requirements of the winding up of the
affairs of the corporation and the assignment of its property
rights within the required period. (note: The spouses
received the decision on August 24 1973 but the corporation
is already dissolved way back Dec 31, 1960.)
Incidentally, after the receipt of the spouses' motion to
dismiss, Insular through its former directors filed a Petition
for Receivership, which petition remains pending before the
lower court.
ISSUES:
1. Whether or not a corporation, whose corporate life had
ceased by the expiration of its term of existence, could
still continue prosecuting and defending suits after its
dissolution and beyond the period of three years
provided for under Act No. 1459, otherwise known as
the Corporation law, to wind up its affairs, without
having undertaken any step to transfer its assets to a
trustee or assignee.
HELD & RATIO:
1. YES. The Corporation can continue prosecuting.
2. The complaint in this case was filed on May 29, 1959 when
private respondent Insular Sawmill, Inc. was still existing.
While the case was being tried, the stockholders amended
its Articles of Incorporation by shortening the term of its
existence from December 31, 1995 to December 31, 1960,
Corp Law Case Digests | Atty. Hofilena | 2014

which was approved by the Securities and Exchange 78 of the Corporation Law and as such, private respondent Insular
Commission. Sawmill, Inc. could still continue prosecuting the present case even
beyond the period of three (3) years from the time of its dissolution.
3. In American corporate law, upon which our Corporation Law
was patterned, it is well settled that, unless the statutes
5. The word "trustee" as sued in the corporation statute must be
otherwise provide, all pending suits and actions by and
understood in its general concept which could include the
against a corporation are abated by a dissolution of the
counsel to whom was entrusted in the instant case, the
corporation. 5 Section 77 of the Corporation Law
prosecution of the suit filed by the corporation. The purpose in the
provides that the corporation shall "be continued as a
transfer of the assets of the corporation to a trustee upon its
body corporate for three (3) years after the time when it
dissolution is more for the protection of its creditor and stockholders.
would have been ... dissolved, for the purpose of
Debtors like the petitioners herein may not take advantage of the
prosecuting and defending suits By or against it ...," so
failure of the corporation to transfer its assets to a trustee, assuming
that, thereafter, it shall no longer enjoy corporate existence
it has any to transfer which petitioner has failed to show, in the first
for such purpose. For this reason, Section 78 of the same
place. To sustain petitioners' contention would be to allow them to
law authorizes the corporation, "at any time during said
enrich themselves at the expense of another, which all enlightened
three years ... to convey all of its property to trustees for
legal systems condemn.
the benefit of members, Stockholders, creditors and
other interested," evidently for the purpose, among others,
of enabling said trustees to prosecute and defend suits by or
against the corporation begun before the expiration of said
period.
3.When Insular Sawmill, Inc. was dissolved on December 31, 1960,
under Section 77 of the Corporation Law, it still has the right until
December 31, 1963 to prosecute in its name the present case. After
the expiration of said period, the corporation ceased to exist for all
purposes and it can no longer sue or be sued.

4. However, a corporation that has a pending action and which

cannot be terminated within the three-year period after its dissolution
is authorized under Section 78 to convey all its property to trustees
to enable it to prosecute and defend suits by or against the
corporation beyond the Three-year period although private
respondent did not appoint any trustee, yet the counsel who
prosecuted and defended the interest of the corporation in the instant
case and who in fact appeared in behalf of the corporation may be
considered a trustee of the corporation at least with respect to the
matter in litigation only. Said counsel had been handling the case
when the same was pending before the trial court until it was
appealed before the Court of Appeals and finally to this Court. We
therefore hold that there was a substantial compliance with Section

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
17. Alabang Development Corporation vs Alabang Hills Village
Association Inc. and Rafael Tinio (June 2, 2014)
The trustee of a corporation may continue to prosecute a case
commenced by the corporation within 3 years from its dissolution
until rendition of the final judgment, even if such judgment is
rendered beyond the three-year period allowed by Section 122.
However, there is nothing in the said cases which allows an already
defunct corporation to initiate a suit after the lapse of the said three
year period. To allow petitioner to initiate the subject complain and
pursue it until final judgment, on the ground that such complaint was
filed for the sole purpose of liquidating its assets would be to
circumvent the provisions of Section 122 of the Corporation Code.
CASE:
Alabang Development Corporation is the developer of Alabang Hills
Village. ADC filed a complaint for injunction and damages against
Alabang Hills Village Association Inc. upon learning that the latter
constructed a swimming pool and multi-purpose hall without its
consent and approval. ADC alleged that it still owned those parcels
of land. AHVAI however said in its answer that ADC no longer had
the capacity to sue since it no longer had juridical personality. Court
ruled that indeed, ADC no longer had the capacity to sue as a
corporation since it no longer had juridical personality as evidenced
by the fact that its corporate registration was revoked on May 26,
2003. Hence, based on Sec 122 of the Corporate Code, it only had 3
years or up to May 26, 2006 to prosecute or defend any suit by or
against it. The subject complaint however, was filed only on October
19, 2006, more than three years after such revocation.
FACTS:
Alabang Development Corporation (ADC) is the developer of
Alabang Hills Village. According to ADC, it still owns certain
parcels of land therein that are yet to be sold, as well as
those considered open spaces which have not yet been
donated to the local government of Muntinlupa City.
Sometime in September 2006, ADC learned that Alabang
Hills Village Association Inc (AHVAI) started the construction
of a multi-purpose hall and a swimming pool on one the
parcels of land still owned by ADC without the latter’s
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
consent and approval, and that despite demand, AHVAI
failed to desist from constructing said improvement.
ADC thus filed a Complaint for Injunction and Damages in
the RTC of Muntinlupa City against AHVAI and Rafael Tinio,
the President of AHVAI.
AHVAI in its Answer with Compulsory Counterclaim denied
ADC’s assertions and claimed that the latter has no legal
capacity to sue since its existence as a registered corporate
entity was revoked by the SEC on May 26, 2003. Thus, ADC
had no cause of action because by law, it is no longer the
absolute owner, but is merely holding the property in
question in trust for the benefit of AHVAI as beneficial owner
thereof; and that the subject lot is part of the open space
required by law to be provided in the subdivision.
o AHVAI this prayed that an order be issued divesting
ADC of the title of the property and declaring AHVAI
as owner thereof; and that ADC be made liable for
moral and exemplary damages and attorney’s fees.
ISSUES:
WON Alabang Development Corporation has the capacity to sue as
a corporation? – No.
HELD & RATIO:
AS held in the case of Columbia Pictures vs CA, the ―lack of capacity
to sue‖ refers to a plaintiff’s general disability to sue, such as on
account of minority, insanity, incompetence, lack of juridical
personality or any other general disqualifications of a party. Lack of
legal capacity to sue also means that the plaintiff is not in the
exercise of his civil rights, or does not have the necessary
qualification to appear in the case, or does not have the character or
representation he claims.
There is no dispute that petitioner’s corporate registration as revoked
on May 26, 2003. Based on Sec 122 of the Corporate Code, it has
three years, or until May 26, 2006 to prosecute or defend any suit by
or against it. The subject complaint however, was filed only on
October 19, 2006, more than three years after such revocation.
Corp Law Case Digests | Atty. Hofilena | 2014
SEC. 122. Corporate liquidation. – Every corporation whose charter
expires by its own limitation or is annulled by forfeiture or otherwise,
or whose corporate existence for other purposes is terminated in
any other manner, shall nevertheless be continued as a body
corporate for three (3) years after the time when it would have been
so dissolved, for the purpose of prosecuting and defending suits by
or against it and enabling it to settle and close its affairs, to dispose
of and convey its property and to distribute its assets, but not for
the purpose of continuing the business for which it was established.
At any time during said three (3) years, said corporation is
authorized and empowered to convey all of its property to trustees
for the benefit of stockholders, members, creditors, and other
persons in interest. From and after any such conveyance by the
corporation of its property in trust for the benefit of its stockholders,
members, creditors and others in interest, all interest which the
corporation had in the property terminates, the legal interest vests
in the trustees, and the beneficial interest in the stockholders,
members, creditors or other persons in interest.
Upon winding up of the corporate affairs, any asset distributable to
any creditor or stockholder or member who is unknown or cannot
be found shall be escheated to the city or municipality where such
assets are located.
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 Court has held that, ―It is to be noted that the time during which
the corporation, through its own officers, may conduct the liquidation
of its assets and sue and be sued as a corporation is limited to three
years from the time the period of dissolution commences; but there is
no time limit within which the trustees must complete a liquidation
placed in their hands. It is provided only (Corp. Law, Sec. 78 [now
Sec. 122]) that the conveyance to the trustees must be made within
the three-year period. It may be found impossible to complete the
work of liquidation within the three-year period or to reduce disputed
claims to judgment. The authorities are to the effect that suits by or
against a corporation abate when it ceased to be an entity capable of
suing or being sued; but trustees to whom the corporate assets have
been conveyed pursuant to the authority of Sec. 78 [now Sec. 122]
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
may sue and be sued as such in all matters connected with the
liquidation...‖
In the absence of trustees, this Court ruled: ―Still in the absence of a
board of directors or trustees, those having any pecuniary interest in
the assets, including not only the shareholders but likewise the
creditors of the corporation, acting for and in its behalf, might make
proper representations with the Securities and Exchange
Commission, which has primary and sufficiently broad jurisdiction in
matters of this nature, for working out a final settlement of the
corporate concerns.‖
It is likewise not disputed that the subject complaint was filed by
petitioner corporation and not by its directors or trustees. In fact, it is
even averred, albeit wrongly, in the first paragraph of the Complaint
that ―plaintiff is a duly organized and existing corporation under the
laws of the Philippines, with capacity to sue and be sued.‖
Jurisprudence provides the trustee of a corporation may continue to
prosecute a case commenced by the corporation within three years
from its dissolution until rendition of the final judgment, even if such
judgment is rendered beyond the three-year period allowed by
Section 122 of the Corporation Code. However, there is nothing in
the said cases which allows an already defunct corporation to initiate
a suit after the lapse of the said three-year period.
In the present case, petitioner filed its complaint not only after its
corporate existence was terminated but also beyond the three-year
period allowed by Section 122 of the Corporation Code. Thus, it is
clear that at the time of the filing of the subject complaint petitioner
lacks the capacity to sue as a corporation. To allow petitioner to
initiate the subject complaint and pursue it until final judgment, on the
ground that such complaint was filed for the sole purpose of
liquidating its assets, would be to circumvent the provisions of
Section 122 of the Corporation Code.
As to the last issue raised, the basic and pivotal issue in the instant
case is petitioner's capacity to sue as a corporation and it has
already been settled that petitioner indeed lacks such capacity.
Corp Law Case Digests | Atty. Hofilena | 2014
18. Chung Ka Bio v. IAC
reincorporation
CASE:
Syllabus: REINCORPORATION: the procedure on the sale of all or
substantially all of the assets of the corporation, allows stockholders
to transfer the assets and business enterprise of the dissolved
corporation to a newly registered entity bearing the same corporate
name.
PBM was incorporated in the year 1952 and then the term of
incorporation eventually expired. There was a deed of assignment
executed in favor of the new PBM in the process of reincorporation.
PET are stockholders of old PBM and filed a petition to liquidate
PBM. New PBM filed with SEC for a suspension of payment.
Issue: W/N PBM was dissolved or was it just reincorporated?
PBM was not dissolved, it was just reincorporated. there is the
presumption of regularity which must operate in favor of the private
respondents, who insist that the proper authorization as required by
the Corporation Law was duly obtained at a meeting called for the
purpose. the fact that although the deed of assignment was executed
in 1977, it was only in 1981 that it occurred to the petitioners to
question its validity. Non-filling of the by-laws will not result in the
automatic dissolution of the corporation.
FACTS:
Philippine Blooming Mills Company, Inc. was incorporated
on January 19, 1952, for a term of 25 years which expired on
January 19,1977
members of its board of directors executed a deed of
assignment of all of the accounts receivables, properties,
obligations and liabilities of the old PBM in favor of Chung
Siong Pek in his capacity as treasurer of the new PBM, then
in the process of reincorporation
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
new PMB was issued a certificate of incorporation by the
Securities and Exchange Commission. 3
Chung Ka Bio and the other petitioners herein, all
stockholders of the old PBM, filed with the SEC a petition for
liquidation (but not for dissolution) of both the old PBM and
the new PBM.
o Former had become legally non-existent for failure
to extend its corporate life and that the latter had
likewise been ipso facto dissolved for non-use of the
charter and continuous failure to operate within 2
years from incorporation.
o Dismissed for lack of a cause of action
Alfredo Ching, one of the members of the board of directors
of the old PBM who executed the deed of assignment, filed
with the Intermediate Appellate Court a separate petition for
certiorari
o SEC had gravely erred in not dismissing the petition
for liquidation since the action amounted to a quo
warranto proceeding which only the state could
institute through the Solicitor Genera
April 1, 1982, the new PBM and Alfredo Ching had filed
with the SEC a petition for suspension of payment, which
was opposed by Chung Ka Bio, et al., on the ground that
the SEC had no jurisdiction over a petition for suspension of
payments initiated by a mere individual
PET:
o 1. The board of directors of an already dissolved
corporation does not have the inherent power,
without the express consent of the stockholders, to
convey all its assets to a new corporation.
o 2. The new corporation is accountable for the said
assets to the stockholders of the dissolved
corporation who had not consented to the
conveyance of the same to the new corporation.
o 3. The new corporation has not substantially
complied with the two-year requirement of Section
22 of the new Corporation Code on non-user
because its stockholders never adopted a set of by-
laws.
Corp Law Case Digests | Atty. Hofilena | 2014
o 4. A quo warranto proceeding is no longer
necessary to dissolve a corporation which is already
"deemed dissolved" under Section 22 of the new
Corporation Code.
o 5. The Securities and Exchange Commission has no
jurisdiction over a petition for suspension of
payments filed by an individual only
PET: no stockholders' meeting was held and the 2/3 consent
vote was not obtained, there is no need for affirmative proof
ISSUES:
Whether or not the PBM was dissolved or was it just reincorporated?
HELD & RATIO:
PBM was reincorporated.
o there is the presumption of regularity which must operate in
favor of the private respondents, who insist that the proper
authorization as required by the Corporation Law was duly
obtained at a meeting called for the purpose. (That
authorization was embodied in a unanimous resolution dated
March 19, 1977, which was reproduced verbatim in the deed
of assignment.)
o there is nothing to prevent the stockholders from conveying
their respective shareholdings toward the creation of a new
corporation to continue the business of the old.
the fact that although the deed of assignment was executed
in 1977, it was only in 1981 that it occurred to the petitioners
to question its validity. All of four years had elapsed before
the petitioners filed their action for liquidation of both the old
and the new corporations, and during this period, the new
PBM was in full operation, openly and quite visibly
conducting the same business undertaken earlier by the old
dissolved PBM
The new corporation, like the old, employs as many as 2,000
persons, the same personnel who worked for the old
PBM. 14 Additionally, one of the petitioners, Chung Siong
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Pek was one of the directors who executed the deed of
assignment in favor of the old PBM and it was he also who
received the deeded assets on behalf and as treasurer of the
new PBM
the new PBM could not have had the slightest suspicion that
the petitioners would assert the right on which they now
base their suit, especially Chung Siong Pek, who in fact
acted not only as director of the old PBM but also as
treasurer of the new PBM in the transaction
the injury or prejudice in the event relief is granted is obvious
as all the transactions of the new PBM will have to be
undone, including credits extended and commitments made
to third parties in good faith.
Non-filing of the by-laws will not result in automatic
dissolution of the corporation
under the rules and regulations of the SEC, failure to file the
by-laws on time may be penalized merely with the imposition
of an administrative fine without affecting the corporate
existence of the erring firm.
SEC is empowered to "suspend or revoked, after proper
notice and hearing, the franchise or certificate of registration
of a corporation" on the ground inter alia of "failure to file by-
laws within the required period."
under the rules and regulations of the SEC, failure to file the
by-laws on time may be penalized merely with the imposition
of an administrative fine without affecting the corporate
existence of the erring firm.
in view of the findings that the new PBM has not been ipso
facto dissolved.
the respondent court justifies assumption by the SEC of
jurisdiction over the petition for suspension of payment
filed by the individual on the general principle against
multiplicity of suits.
It should be stressed in this connection that substantial
compliance with conditions subsequent will suffice to perfect
corporate personality.
FINAL VERDICT: WHEREFORE, the appealed decision is
AFFIRMED
Corp Law Case Digests | Atty. Hofilena | 2014
19. MANUEL DULAY ENTERPRISES, INC., VIRGILIO DULAY and
NEPOMUCENO REDOVAN v. COURT OF APPEALS, EDGARDO
PABALAN, MANUEL TORRES, JR., MARIA THERESA VELOS
and CATHERINE VELOSO
De Facto Close Corporation
CASE:
Petitioner Manuel Dulay Enterprises, Inc., a domestic close
corporation, owns a property called Dulay Apartment. By virtue of a
Board Resolution, Manuel Dulay (the company’s president, treasurer
and general manager) sold the property to private respondent
spouses Veloso; it was also agreed that Manuel Dulay had 2 years
within which to redeem the property.
Without Manuel’s knowledge, the Velosos mortgaged the
property to private respondent Torres. The Velosos assigned their
right to redeem the property to Manuel Dulay. However, neither part
was able to redeem the Dulay Apartment from Torres. Torres was
able to buy the property in an extrajudicial sale.
Petitioner Virgilio Dulay was alleging that Manuel Dulay was
never authorized to sell the property. The Board Resolution which
allegedly authorized the sale was without approval of all the
members of the board of directors.
The Court held that the Board Resolution binds petitioner
corporation. Manuel Dulay Enterprises, Inc. is a closed family
corporation where the incorporators and directors belong to one
single family. It cannot be concealed that Manuel Dulay as president,
treasurer and general manager almost had absolute control of the
corporation, and four-fifths (4/5) of its incorporators being close
relatives: three children and their father whose name identifies their
corporation.
Section 101 of the Corporation Code also applies. “Any
action by the directors of a close corporation without a meeting shall
nevertheless be deemed valid if xxx All the directors have actual or
implied knowledge of the action in question and none of them makes
prompt objection thereto in writing xxx” In this case, petitioner Virgilio
Dulay failed to make prompt objection to said Resolution.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
FACTS:
Petitioner Manuel Dulay Enterprises, Inc. owns a property
known as Dulay Apartment. The following are its directors:
o Manuel Dulay as president, treasurer and general
manager;
o Virgilio Dulay, vice-president;
o Linda Dulay
o Celia Dulay-Mendoza and
o Plaridel Jose, designated as secretary.
Petitioner corporation, through its president Manuel Dulay,
obtained various loans for the construction of its hotel project
from petitioner Virgilio Dulay. As a result of said loan,
petitioner Virgilio occupied one of the unit apartments while
at the same time managing the Dulay Apartment.
In 1976, by virtue of a Board Resolution, Manuel Dulay sold
the property to private respondent spouses Veloso as
evidenced by a Deed of Absolute Sale. They also executed
a Memorandum giving Manuel Dulay 2 years within which to
repurchase the property. This, however, was not annotated.
Private respondents, without Manuel Dulay’s knowledge,
mortgaged the property to private respondent Manuel
Torres.
Upon failure of Velosos to pay Torres, the property was sold
in an extrajudicial sale to Torres as the highest bidder.
Private respondent Veloso executed a Deed of Assignment
of the Right to Redeem in favor of Manuel Dulay, assigning
her right to repurchase the property. Unfortunately, neither
party was able to redeem, so Torres filed an Affidavit of
Consolidation of Ownership.
Torres then filed a petition for a writ of possession against
private respondent Velosos and Manuel Dulay.
Petitioner Virgilio Dulay intervened in the case alleging that
Manuel Dulay was never authorized by the petitioner
corporation to sell or mortgage the subject property.
Specifically, petitioners contend that the Court of Appeals
wrongly applied the doctrine of piercing the veil of
corporation entity, considering that the sale between Velosos
and Manuel Dulay had no binding effect on petitioner
corporation as the Board Resolution which allegedly
authorized the sale was without approval of all the
Corp Law Case Digests | Atty. Hofilena | 2014
members of the board of directors, and said Resolution
was prepared by a person not designated by the corporation
to be its secretary.
ISSUE: W/N the Board Resolution was valid and had binding effect
on petitioner corporation when said resolution was passed without
the approval of all the members of the board
HELD & RATIO: YES, the Board Resolution binds petitioner
corporation.
• Section 101 of the Corporation Code is applicable in this
case. It states that ―any action by the directors of a close
corporation without a meeting shall nevertheless be deemed
valid if xxx All the directors have actual or implied knowledge
of the action in question and none of them makes prompt
objection thereto in writing xxx‖
o In this case, petitioner Virgilio Dulay failed to
make prompt objection to said Resolution.
• Manuel Dulay Enterprises, Inc. is a closed family corporation
where the incorporators and directors belong to one single
family. It cannot be concealed that Manuel Dulay as
president, treasurer and general manager almost had
absolute control of the corporation, and four-fifths (4/5) of its
incorporators being close relatives: three children and their
father whose name identifies their corporation (despite the
corporation bearing the word ―Enterprise‖)
• Moreover, petitioner Virgilio Dulay actually carried out an
affidavit that he was a signatory witness to the execution of
the Deed of Absolute Sale in favor of Torres, indicating that
he was aware of the transaction between his father and
private respondent Velosos.
• Petitioner corporation then is liable for the act of Manuel
Dulay and the sale to private respondents of the property is
valid and binding.
FINAL VERDICT: Petition denied.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
20. SERGIO F. NAGUIAT v. NLRC
De Facto Close Corporation
CASE:
Clark Field Taxi, Inc. (CFTI) held a concessionaire’s contract
with the Army Air Force Exchange Services (AAFES) for the
operation of taxi services within Clark Air Base. Sergio Naguiat was
president of CFTI while Antolin Naguiat was VP. Like Naguiat
Enterprises, Inc., which was a trading firm, it was also a family-
owned corporation.
Respondents were employed by the CFTI taxicab drivers.
Respondents were terminated because of the phase-out of the
military bases in the Philippines. The AAFES drivers union, and the
CFTI held negotiations as regards to separation benefits: that the
separated drivers would be given P500 for every year as a
severance pay. Most of the fivers accepted this but some refused to
do so. Those who did not accept filed a complaint against Sergio
Naguiat under the name and style Naguiat Enterprises, AAFES and
AAFES union.
Liability:
2. Naguiat Enterprises: NOT LIABLE
3. Antolin Naguiat: NOT personally liable
4. Sergio Naguiat: SOLIDARILY LIABLE
Moreover, petitioners also conceded that both CFTI and Naguiat
Enterprises were ―close family corporations‖ owned by the Naguiat
family. Section 100, paragraph 5, (under Title XII on Close
Corporations) of the Corporation Code, states: ...
(5) To the extent that the stockholders are actively engage(d) in the
management or operation of the business and affairs of a close
corporation, the stockholders shall be personally liable to corporate
torts unless the corporation has obtained reasonably adequate
liability insurance.
DOCTRINE:
5. A director or officer maybe held solidarily
liable with a corporation by a specific provision of law because a
corporation, being a juridical entity, may act only through its
Corp Law Case Digests | Atty. Hofilena | 2014

directors and officers. Obligations incurred by them, acting as The respondents were regular
such corporation agents, are not theirs but the direct employees of DFTI who received wages on a
accountabilities of the corporation they represent. In the absence boundary basis.
of definite proof of who clearly are the officers of the corporation, They offered no evidence that Naguiat
the assumption falls on the President of the corporation. enterprises managed, supervised and controlled
their employment. They instead submitted
FACTS: documents which had to do with CFTI, not Naguiat
4. Clark Field Taxi, Inc. (CFTI) held a concessionaire’s Enterprises.
contract with the Army Air Force Exchange Services (AAFES) for Both CFTI and Naguiat Enterprises were close
the operation of taxi services within Clark Air Base. family corporations owned by the same
5. Sergio Naguiat was president of CFTI while Antolin family.
Naguiat was vice president. To the extent of the stockholders are
6. Like Naguiat Enterprises, Inc., which was a trading actively engaged in the management or business
firm, it was also a family-owned corporation. affairs of a close corporation, the stockholders shall
7. Respondents (Leonardo T. Galang, et. al. ; all be held to strict fiduciary duties to each other and
employees) were employed by the CFTI taxicab drivers. among themselves.
8. Respondents were terminated because of the Sergio Naguiat was a stockholder and
phase-out of the military bases in the Philippines. AAFES Taxi director of Naguiat Enterprises but, in supervising
Drivers Association, the drivers union, and the CFTI held the taxi driver and determining their employment
negotiations as regards to separation benefits. terms, he was carrying out his responsibility as
9. They arrived at an agreement that the separated president of CFTI.
drivers would be given P500 for every year as a severance pay. Moreover, petitioners also conceded
Most of the fivers accepted this but some refused to do so. that both CFTI and Naguiat Enterprises were ―close
10. Those who did not accept the initial severance pay family corporations‖ owned by the Naguiat family.
disaffiliated themselves with drivers union and through the Section 100, paragraph 5, (under Title XII on Close
National Organization of Workingmen (NOEM), they filed a Corporations) of the Corporation Code, states: ...
complaint against Sergio Naguiat under the name and style (5) To the extent that the stockholders are
Naguiat Enterprises, AAFES and AAFES union. actively engage(d) in the management or
operation of the business and affairs of a
close corporation, the stockholders shall be
ISSUES: personally liable to corporate torts unless
Whether or not Naguiat Enterprises, Sergio the corporation has obtained reasonably
Naguiat and Antolin Naguiat are liable. adequate liability insurance.

HELD & RATIO: DOCTRINE:

NO. A director or officer maybe held solidarily liable
Liability: with a corporation by a specific provision of
Naguiat Enterprises: NOT LIABLE law because a corporation, being a juridical
Antolin Naguiat: NOT personally liable entity, may act only through its directors and
Sergio Naguiat: SOLIDARILY LIABLE officers. Obligations incurred by them, acting

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
as such corporation agents, are not theirs
but the direct accountabilities of the
corporation they represent. In the absence
of definite proof of who clearly are the
officers of the corporation, the assumption
falls on the President of the corporation.
Other issues:
1. Amount of separation pay
A. Labor Arbiter correctly found that CFTI stopped the
taxi business because of the phase-out of the US
military bases, and NOT due to great financial loss
as the business was earning profitably at the time of
closure.
B. LC 283: separation pay = 1 month pay or at least 1/2
month pay/year of service, whichever is higher
C. NLRC did not commit GAD in ruling that
respondents were entitled to separation pay of $120
(half of $240 monthly pay) per year of service
2. Liability of NE, CFTI and officers
3. NE not liable
A. LA found that respondents were employees of CFTI
as they received salary from said office, etc. (upheld
by SC)
B. S. Naguiat was presumed to be managing and
controlling taxi business on behalf of NE; S. Naguiat,
in supervising taxi drivers, was carrying out his
responsibilities as CFTI
C. NE is a separate corporation completely (trading
business); it is neither respondents’ indirect
employer nor labor-only contractor
D. Constitution of CFTI-AAFES TDA provided that
members are CFTI employees and that for collective
bargaining purposes, the definite employer is CFTI
4. CFTI president solidarily liable [S. Naguiat]
A. A.C. Ransom Labor Union-CCLU v. NLRC – family-
owned corporation filed application for clearance to
cease operations. Backwages were computed;
however, none of the motions for execution could be
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
implemented for failure to find leviable assets. LA
granted union’s prayer that officers and agents be
personally held liable for payment of backwages.
NLRC however said that officers of a corporation are
not personally liable for official acts unless they
exceeded scope of authority. SC however reversed
NLRC and upheld LA, saying that if the policy of the
law were otherwise, the employer can have ways for
evading payment of backwages.
B. Employer – any person acting in the interest of an
employer, directly or indirectly (LC 212c)
C. Applying the ruling on A.C. Ransom, S. Naguiat falls
within the meaning of ―employer‖ who may be held
jointly and severally liable for the obligations of the
corporation to the dismissed employees
D. Both CFTI and NE were close family corporations
(Corp. Code Sec. 100, par. 5) [To the extent that the
stockholders are actively engaged in the
management or operation of the business
[…] Said stockholders shall be personally liable for
corporate torts unless the corporation has obtained
reasonably adequate liability insurance]
E. cf. MAM Realty Development v. NLRC: director /
officer may still be held solidarily liable with a
corporation by a specific provision of law
i. WON there was corporate tort. YES
ii. TORT – violation of a right given or the
omission of a duty imposed by law; breach
of legal duty
F. S. Naguiat is solidarily liable for corporate tort
because he actively engaged in CFTI’s management
or operation
5. CFTI VP not personally liable [A. Naguiat]
A. Was not shown that he acted in the capacity of a
GM
B. No evidence on the extent of his participation in the
management, operation of business
6. NOWM’s personality to represent respondents
A. Petitioners held in estoppel for not raising issue
before LA or NLRC
Corp Law Case Digests | Atty. Hofilena | 2014
7. No denial of due process since the Naguiats availed of the
chance to present positions before LA
FINAL VERDICT: Petition is PARTLY GRANTED as follows:
(1) Petitioner Clark Field Taxi, Incorporated, and Sergio F. Naguiat,
president and co-owner thereof, are ORDERED to pay, jointly
and severally, the individual respondents their separation pay
computed at US$120.00 for every year of service.
(2) Petitioner Sergio F. Naguiat Enterprises, Incorporated, and
Antolin T. Naguiat are ABSOLVED from liability in the payment of
separation pay.
Notes:
Dean CLV: The Dulay and Sergio F. Naguiat rulings demonstrate a
tendency that may be followed in the future:
(a) the coverage of ―close corporation‖ may expand beyond the
definition provided for in the Corporation Code; or
(b) principles pertaining peculiarly to close corporations under Title
XII of the Corporation Code would be expanded to apply even to
non-close corporation, i.e., de facto close corporations, or even
publicly-held corporations.
At any rate, with the statutory recognition of the strict close
corporation, it can be anticipated that the Supreme Court would by
jurisprudence expand the doctrines into and recognize the de facto
close corporations.
* BUT SEE: San Juan Structural v. CA
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
21. SAN JUAN STRUCTURAL AND STEEL FABRICATORS vs.
COURT OF APPEALS
Close Corporation
CASE:
San Juan Structural (San Juan) entered into a contract of
sale of a parcel of land with Motorich Sales Corporation (Motorich).
The said contract was entered through the treasurer of Motorich,
Nenita Gruenberg. P100,000 was advanced by San Juan. However,
on the day agreed upon to pay the balance and to deliver the title,
Nenita did not show up. Despite repeated demands, Nenita and
Motorich did not comply with the said contract.
Motorich in defense argued that Nenita was not authorized in
contracting with San Juan as there was no board resolution to effect
the said transaction.
San Juan on the other hand contended that Motorich is a
close corporation because Nenita was actually the wife of the
President of Motorich. Also, Nenita and her husband own 99.866%
of the corporation’s capital stocks. Thus, as a close corporation,
Nenita does not need any authorization from the corporate board.
Is Motorich a close corporation; thus, authorization is not
needed in order for Nenita to enter into such contract?
NO. The mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital stock of a
corporation is not itself sufficient ground for disregarding the
separate corporate personalities. So, too, a narrow distribution
of ownership does not, by itself, make a close corporation.
FACTS:
San Juan Structural and Steel Fabricators, Inc. (San Juan)
alleged that it entered into a contract of sale with Motorich
Sales Corporation (Motorich).
The said contract was entered through the Motorich’s
treasurer, Nenita Gruenberg.
The subject of the sale was a parcel of land owned by
Motorich. San Juan advanced P100,000 to Nenita as
earnest money.
On the day agreed upon for the payment of the balance and
where supposedly the title of the land will be delivered to
Motorich, Nenita did not show up.
Corp Law Case Digests | Atty. Hofilena | 2014

So, San Juan demanded from Nenita and Motorich to of record by not more than a specified number of
comply with the said contract. persons, not exceeding twenty (20); (2) All of the
Nenita and Motorich did not heed the subsequent demand of issued stock of all classes shall be subject to one or
San Juan to comply with the contract; hence, San Juan sued more specified restrictions on transfer permitted by
Motorich. this Title; and (3) The corporation shall not list in any
Motorich on the other hand argued that it is not bound by the stock exchange or make any public offering of any of
acts of its treasurer, Nenita, since her act in contracting with its stock of any class. Notwithstanding the foregoing,
San Juan was not authorized by the corporate board a corporation shall be deemed not a close
particularly a board resolution to that effect. corporation when at least two-thirds (2/3) of its
San Juan raised the issue that Nenita was actually the voting stock or voting rights is owned or controlled
wife of the President of Motorich. Also, Nenita and her by another corporation which is not a close
husband own 99.866% of the corporation’s capital corporation within the meaning of this Code. . . . .
stocks. As such, it is a close corporation and that makes
Nenita and the President as principal stockholders who In the case at bar, the articles of incorporation of
do not need any authorization from the corporate board. Motorich Sales Corporation does not contain any
Therefore, in this case, the corporate veil may be provision stating that (1) the number of stockholders
properly pierced. shall not exceed 20, or (2) a preemption of shares is
restricted in favor of any stockholder or of the
ISSUES: corporation, or (3) listing its stocks in any stock
5. Whether or not Motorich is a close corporation exchange or making a public offering of such stocks
considering that Nenita was actually the wife of the is prohibited. From its articles, it is clear that
President of Motorich where they own 99.866% of the Respondent Motorich is not a close corporation.
subscribed capital stock.
FINAL VERDICT: Petition is denied.
HELD & RATIO:
5. NO.
The mere ownership by a single stockholder or
by another corporation of all or nearly all of the
capital stock of a corporation is not itself
sufficient ground for disregarding the separate
corporate personalities. So, too, a narrow
distribution of ownership does not, by itself,
make a close corporation.
Section 96 of the Corporation Code defines a close
corporation as follows:
Sec. 96. Definition and Applicability of Title. — A
close corporation, within the meaning of this Code,
is one whose articles of incorporation provide that:
(1) All of the corporation's issued stock of all
classes, exclusive of treasury shares, shall be held

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
22. ONG YONG v. TIU
Deadlocks; Missed Opportunity
CASE:
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 PNB for P190M. To stave off foreclosure of the
mortgage on the two lots where the mall was being built, the Tius
invited the Ongs to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius agreed, among
others, 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. However, the Tius rescinded this as they accused
the Ongs of refusing to credit to them the FLADC shares covering
their real property contributions, among other reasons. The Court
ruled that the unilateral rescission by the Tius was void. First, they do
not have the legal capacity to do so as it should have been FLADC,
as the contract involved was a subscription contract, and necessarily
the other party is the corporation, which is FLADC, because it is its
stocks that are involved. Second and more importantly, the Tius
allege that they were prevented from participating in the
management of the corporation. Yes, this is true. However,
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. Third, 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.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
FACTS:
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 PNB for
P190M.
To stave off foreclosure of the mortgage on the two lots
where the mall was being built, the Tius invited the Ongs to
invest in FLADC.
Under the Pre-Subscription Agreement they entered into, the
Ongs and the Tius agreed:
o 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
o 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 directors (including the
chairman) to the board of directors of FLADC
o 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
million 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:
Corp Law Case Digests | Atty. Hofilena | 2014
o refusing to credit to them the FLADC shares
covering their real property contributions
o preventing David S. Tiu and Cely Y. Tiu from
assuming the positions of and performing their
duties as Vice-President and Treasurer, respectively
o refusing to give them the office spaces agreed upon
Ongs’ defense:
o 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 TCT over the
property in FLADC’s name
o 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
o 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
The controversy finally came to a head when this case was
commenced by the Tius on February 27, 1996 at 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.
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.
Both parties appealed to the SEC en banc which rendered a
decision on September 11, 1998, affirming the May 19, 1997
decision of the Hearing Officer.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
On appeal, the CA affirmed SEC’s Order, with modifications.
Their motions for reconsideration having been denied, both
parties filed separate petitions for review before this Court.
The SC already ruled in favor of the Tius, but the Ongs filed
a MR. The SC granted it.
ISSUES:
6. Whether or not the Tius could legally rescind the Pre-
Subscription Agreement.
HELD & RATIO:
6. NO, the Tius do not have the legal capacity to do so and
such would violate the Trust Fund Doctrine.
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.
o Thus, the subject matter of the contract
was the 1,000,000 unissued shares of
FLADC stock allocated to the Ongs.
o Since these were unissued shares, the
parties’ Pre-Subscription Agreement was in
fact a subscription contract as defined under
Section 60 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.
Corp Law Case Digests | Atty. Hofilena | 2014
o 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.
o 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.
o Considering therefore that the real
contracting parties to the subscription
agreement were FLADC and the Ongs
alone, a civil case for rescission on the
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.
o 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.
The Tius allege that they were prevented from
participating in the management of the corporation.
There is evidence that the Ongs did prevent the
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
rightfully elected Treasurer, Cely Tiu, from exercising
her function as such.
o 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.
o 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.
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.
o 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
Corp Law Case Digests | Atty. Hofilena | 2014
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.
o 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.
o 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.
FINAL VERDICT: The MR is granted in favor of the Ongs. The
petition for confirmation of rescission of the pre-subscription
agreement is dismissed.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
23. VALLEY GOLF & COUNTRY CLUB, INC.,
v.
ROSA O. VDA. DE CARAM,
G.R. No. 158805, April 16, 2009
CASE:
In 1961, the late Congressman Fermin Z. Caram, Jr. (Caram), the
husband of the present respondent, subscribed to purchased and
paid for in full one share (Golf Share) in the capital stock of Valley
Golf. Congressman Caram failed to settle his monthly membership
dues allegedly starting January 25, 1980. Because of this, Valley
Golf sent letters to Caram from 27 January 1986 until 3 May 1987.
The final letter being unanswered, his dues still delinquent, and
pursuant to its by law provisions (Article VIII, Sec. 1 and 3, see body
of digest for provisions), a lien was constituted on Caram’s shares,
which were sold at public auction to satisfy his delinquent accounts.
Caram died before the auction sale, or on Oct. 6, 1986.
Respondent filed an action for reconveyance claiming that they had
not been notified of the sale of the golf share. The SEC hearing
officer ruled that Sec. 67 of the Corp. Code providing that a share
stock could only be deemed delinquent and sold in an extrajudicial
sale at public auction only upon the failure of the stockholder to pay
the unpaid subscription or balance for the share. The section
could not have applied in Caram’s case since he had fully paid for
the Golf Share and he had been assessed not for the share itself but
for his delinquent club dues. Further, the hearing officer ruled that
according to Sec. 6 of the Corp. Code ―a provision creating a lien
upon shares of stock for unpaid debts, liabilities, or assessments of
stockholders to the corporation, should be embodied in the Articles
of Incorporation, and not merely in the by-laws‖. This was affirmed by
the SEC en banc, and by the CA.
The SC disagreed, and ruled that a more specific provision—Sec. 91
applied which establishes the right of a non-stock corporation such
as Valley Golf to expel a member through the forfeiture of the Golf
Share may be established in the by-laws alone, as is the situation in
this case.
HOWEVER. Although a non-stock corporation may validly terminate
membership for valid cause such as the instant case (non-payment
of debt/ membership dues) even if it is provided for in the by-laws
Corp Law Case Digests | Atty. Hofilena | 2014
alone and not in the articles--the nature of membership in Valley
Golf, having to purchase Golf Shares means that a property
right is attached to the membership, thus, termination of
membership even with valid cause has to be with due process.
There being no provision in the by-laws on the procedure for notice
and hearing, substantial justice must be met, giving Caram the
opportunity to be heard. However, as none was afforded and
considering the evident bad faith of Valley Golf in proceeding with
the sale, the sale of the golf share is void.
FACTS:
Valley Golf & Country Club (Valley Golf) is a duly constituted
non-stock, non-profit corporation which operates a golf
course. The members and their guests are entitled to play
golf on the said course and otherwise avail of the facilities
and privileges provided by Valley Golf. The shareholders are
likewise assessed monthly membership dues.
In 1961, the late Congressman Fermin Z. Caram, Jr.
(Caram), the husband of the present respondent,
subscribed to purchased and paid for in full one share
(Golf Share) in the capital stock of Valley Golf.
o He was issued Stock Certificate No. 389 dated 26
January 1961 for the Golf Share. The Stock
Certificate likewise indicates a par value of
P9,000.00.
Valley Golf would subsequently allege that beginning 25
January 1980, Caram stopped paying his monthly dues,
which were continually assessed until 31 June 1987.
o Valley Golf claims to have sent five (5) letters to
Caram concerning his delinquent account within
the period from 27 January 1986 until 3 May
1987, all forwarded to P.O. Box No. 1566, Makati
Commercial Center Post Office, the mailing address
which Caram allegedly furnished Valley Golf.
As it turned out, Caram had died on 6 October 1986.
Letters supposedly sent to Caram as Notice of Delinquency in
membership dues
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
The first letter informed Caram that his account as of 31
December 1985 was delinquent and that his club privileges
were suspended pursuant to Section 3, Article VII of the by-
laws of Valley Golf.
Despite such notice of delinquency, the second letter,
dated 26 August 1986, stated that should Caram’s account
remain unpaid for 45 days, his name would be ―included in
the delinquent list to be posted on the club’s bulletin board.‖
The third letter, dated 25 January 1987, again informed
Caram of his delinquent account and the suspension of his
club privileges.
The fourth letter, dated 7 March 1987, informed Caram that
should he fail to settle his delinquencies, then
totaling P7,525.45, within ten (10) days from receipt thereof
Valley Golf would exercise its right to sell the Golf Share to
satisfy the outstanding amount, again pursuant to the
provisions of the by-laws.
The final letter, dated 3 May 1987, issued a final deadline
until 31 May 1987 for Caram to settle his account, or
otherwise face the sale of the Golf Share to satisfy the
claims of Valley Golf.
(IMPORTANT NOTE: Valley Golf’s third and fourth demand letters dated 25
January 1987 and 7 March 1987, respectively, were both addressed to ―Est.
of Fermin Z. Caram, Jr.‖ The abbreviation ―Est.‖ can only be taken to refer
to ―Estate.‖ Unlike the first two demand letters, the third and fourth letters
were sent after Caram had died on 6 October 1986. However, the fifth and
final demand letter, dated 3 May 1987 or twenty-eight (28) days before the
sale, was again addressed to Fermin Caram himself and not to his estate, as
if he were still alive.)
Sale of Caram’s Golf Share and subsequent action filed by
respondent for reconveyance
The Golf Share was sold at public auction on 11 June
1987 for P25,000.00 after the Board of Directors had
authorized the sale in a meeting on 11 April 1987, and the
Notice of Auction Sale was published in the 6 June
1987 edition of the Philippine Daily Inquirer, pursuant to
Article VIII entitled ―Club Accounts,‖ which are reproduced
below:
Corp Law Case Digests | Atty. Hofilena | 2014
Section 1. Lien.—The Club has the first lien on the share of the
stockholder who has, in his/her/its name, or in the name of an
assignee, outstanding accounts and liabilities in favor of the Club
to secure the payment thereof.
xxx
Section 3. The account of any member shall be presented
to such member every month. If any statement of accounts
remains unpaid for a period forty-five (45) days after cut-off date,
said member maybe (sic) posted as deliqnuent (sic). No
delinquent member shall be entitled to enjoy the privileges of such
membership for the duration of the deliquency (sic). After the
member shall have been posted as delinquent, the Board may
order his/her/its share sold to satisfy the claims of the club; after
which the member loses his/her/its rights and privileges
permanently. No member can be indebted to the Club at any time
any amount in excess of the credit limit set by the Board of
Directors from time to time. The unpaid account referred to here
includes non-payment of dues, charges and other assessments
and non-payment for subscriptions
Meanwhile, respondent initiated intestate proceedings before
the Regional Trial Court (RTC) of Iloilo City, Branch 35, to
settle her husband’s estate.
o Unaware of the pending controversy over the Golf
Share, the Caram family and the RTC included the
same as part of Caram’s estate.
o The RTC approved a project of partition of Caram’s
estate on 29 August 1989. The Golf Share was
adjudicated to respondent, who paid the
corresponding estate tax due, including that on the
Golf Share.
It was only through a letter dated 15 May 1990 that
the heirs of Caram learned of the sale of the Golf Share
following their inquiry with Valley Golf about the share. After
a series of correspondence, the Caram heirs were
subsequently informed, in a letter dated 15 October 1990,
that they were entitled to the refund of P11,066.52 out of the
proceeds of the sale of the Golf Share, which amount had
been in the custody of Valley Golf since 11 June 1987
Respondent filed an action for reconveyance of the share
with damages before the Securities and Exchange
Commission (SEC) against Valley Golf
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
o On 15 November 1996, SEC Hearing Officer Elpidio
S. Salgado rendered a decision in favor of
respondent, ordering Valley Golf to convey
ownership of the Golf Share or in the alternative to
issue one fully paid share of stock of Valley Golf the
same class as the Golf Share to respondent.
Damages totaling P90,000.00 were also awarded to
respondent
o The SEC hearing officer noted that under Section
67, paragraph 2 of the Corporation Code, a share
stock could only be deemed delinquent and sold in
an extrajudicial sale at public auction only upon the
failure of the stockholder to pay the unpaid
subscription or balance for the share. The section
could not have applied in Caram’s case since he
had fully paid for the Golf Share and he had been
assessed not for the share itself but for his
delinquent club dues.
o The SEC hearing officer did entertain Valley Golf’s
argument that the sale of the Golf Share was
authorized under the by-laws. However, it was ruled
that pursuant to Section 6 of the Corporation
Code, ―a provision creating a lien upon shares of
stock for unpaid debts, liabilities, or assessments of
stockholders to the corporation, should be embodied
in the Articles of Incorporation, and not merely in the
by-laws, because Section 6 (par.1) prescribes that
the shares of stock of a corporation may have such
rights, privileges and restrictions as may be stated in
the articles of incorporation
The SEC en banc affirmed in toto the decision of the hearing
office, while the CA affirmed it, but deleted the award of
attorney’s fees.
Petitioner’s argument:
Corp Law Case Digests | Atty. Hofilena | 2014
Petitioner now argues that the by-laws of Valley Golf
authorizes the sale of delinquent shares and that the by-laws
constitute a valid law or contractual agreement between the
corporation and its stockholders or their respective
successors.
o Caram, by becoming a member of Valley Golf,
bound himself to observe its by-laws which
constitutes ―the rules and regulations or private laws
enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its
stockholders or members and directors and officers
with relation thereto and among themselves in their
relation to it.‖
As found by the SEC and the Court of Appeals, the Articles
of Incorporation of Valley Golf does not contain any provision
authorizing the corporation to create any lien on a member’s
Golf Share as a consequence of the member’s unpaid
assessments or dues to Valley Golf.
o However, such a provision is contained in its by-
laws submitted by Valley Golf in a certified copy of
the by-laws of Valley Golf in effect as of 11 June
1987.
ISSUE:
(Issue relevant under outline)
1. May a non-stock corporation seize and dispose of the membership
share of a fully-paid member on account of its unpaid debts to the
corporation when it is authorized to do so under the corporate by-
laws but not by the Articles of Incorporation (as provided for in Sec.
6; Sec. 68)?
Yes, for it is allowed under Sec. 91 governing non-stock
corporations.
HOWEVER.
2. Whether or not the sale in public auction of Caram’s golf share
pursuant to his failure to settle his dues with Valley Golf valid?
No. Although a non-stock corporation may validly terminate
membership for valid cause such as the instant case (non-
payment of debt/ membership dues) even if it is provided for in
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
the by-laws alone and not in the articles--the nature of
membership in Valley Golf, having to purchase Golf Shares
means that a property right is attached to the membership,
thus, termination of membership even with valid cause has to
be with due process. There being no provision in the by-laws on
the procedure for notice and hearing, substantial justice must
be met, giving Caram the opportunity to be heard. However, as
none was afforded and considering the evident bad faith of
Valley Golf in proceeding with the sale, the sale of the golf
share is void.
HELD:
On Issue 1:
The lower courts correctly noted that the procedure under
Section 67 of the Corporation Code for the stock corporation’s
recourse on unpaid subscriptions is inapt to a non-stock
corporation vis-à-vis a member’s outstanding dues.
The basic factual backdrops in the two situations are
disperate. In the latter, the member has fully paid for his
membership share, while in the former, the stockholder has
not yet fully paid for the share or shares of stock he subscribed
to, thereby authorizing the stock corporation to call on the
unpaid subscription, declare the shares delinquent and subject
the delinquent shares to a sale at public auction
Secondly, the two bodies below concluded that following
Section 6 of the Corporation Code, the lien on the Golf Share
in favor of Valley Golf is not valid, as the power to constitute
such a lien should be provided in the articles of incorporation,
and not merely in the by-laws. It provides:
o ―The shares of stock of stock corporation may be divided
into classes or series of shares, or both, any of which
classes or series of shares may have such rights, privileges
or restrictions as may be stated in the articles of
incorporation‖
However, there is a specific provision under the Title XI, on
Non-Stock Corporations of the Corporation Code dealing
Corp Law Case Digests | Atty. Hofilena | 2014
with termination of membership. Section 91 of the
Corporation Code provides:
o SEC. 91. Termination of membership.—Membership
shall be terminated in the manner and for the causes
provided in the articles of incorporation or the by-
laws. Termination of membership shall have the effect of
extinguishing all rights of a member in the corporation or in
its property, unless otherwise provided in the articles of
incorporation or the by-laws. (Emphasis supplied)
Clearly, the right of a non-stock corporation such as Valley
Golf to expel a member through the forfeiture of the Golf
Share may be established in the by-laws alone, as is the
situation in this case. Thus, both the SEC and the appellate
court are wrong in holding that the establishment of a lien
and the loss of the Golf Share consequent to the
enforcement of the lien should have been provided for in the
articles of incorporation.
. by-laws does not provide for a mode of notice to the member
On Issue 2:
General
ly in theory, a non-stock corporation has the power to effect
the termination of a member without having to constitute a
lien on the membership share or to undertake the elaborate
process of selling the same at public auction.
o The
articles of incorporation or the by-laws can very well
simply provide that the failure of a member to pay
the dues on time is cause for the board of directors
to terminate membership.
o Yet
Valley Golf was organized in such a way that
membership is adjunct to ownership of a share in
the club; hence the necessity to dispose of the share
to terminate membership.
Share
ownership introduces another dimension to the case—the
reality that termination of membership may also lead to the
infringement of property rights.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
o Even
though Valley Golf is a non-stock corporation, as
evinced by the fact that it is not authorized to
distribute to the holder of its shares dividends or
allotments of the surplus profits on the basis of
shares held, the Golf Share has an assigned value
reflected on the certificate of membership itself.
o Termin
ation of membership in Valley Golf does not merely
lead to the withdrawal of the rights and privileges of
the member to club properties and facilities but also
to the loss of the Golf Share itself for which the
member had fully paid.
There is no mode of notice provided for by the by-laws to the
delinquent member
The
before the board of directors puts up the Golf Share for sale,
yet the sale marks the termination of membership. Whatever
semblance of a notice that is afforded is bare at best,
ambiguous at most.
The
member is entitled to receive a statement of account every
month; however, the mode by which the member is to
receive such notice is not elaborated upon.
If the
member fails to pay within 45 days from the due date, Valley
Golf is immediately entitled to have the member ―posted as
delinquent.‖ While the assignation of ―delinquent status‖ is
evident enough, it is not as clear what the word ―posted‖
entails. Connotatively, the word could imply the physical
posting of the notice of delinquency within the club premises,
such as a bulletin board, which we recognize is often the
case. Still, the actual posting modality is uncertain from the
language of the by-laws.
The moment the member is ―posted as delinquent,‖ Valley
Golf is immediately enabled to seize the share and sell the
same, thereby terminating membership in the club
Corp Law Case Digests | Atty. Hofilena | 2014

In the absence of by-laws provisions, substantial justice must
be met; there being none afforded to Caram, the sale is void.
It may be conceded that the actions of Valley Golf were in
accord with the provisions of its by-laws on termination of
membership, vaguely defined as these are. Yet especially
since the termination of membership in Valley Golf is
inextricably linked to the deprivation of property rights over
the Golf Share, the emergence of such adverse
consequences make legal and equitable standards come to
fore.
It is unmistakably wise public policy to require that the
termination of membership in a non-stock corporation be
done in accordance with substantial justice. No matter how
one may precisely define such term, it is evident in this case
that the termination of Caram’s membership betrayed the
dictates of substantial justice.
Valley Golf alleges in its present petition that it was notified
of the death of Caram only in March of 1990 ( ows, weh?:p
), a claim which is reiterated in its Reply to respondent’s
Comment. Yet this claim is belied by the very demand
letters sent by Valley Golf to Caram’s mailing address.
proof that Valley Golf had known of Caram’s
death even prior to the auction sale.
Valley Golf acted in clear bad faith when it sent the final
notice to Caram under the pretense they believed him to be
still alive, when in fact they had very well known that he had
already died. That it was in the final notice that Valley Golf
had perpetrated the duplicity is especially blameworthy,
since it was that notice that carried the final threat that his
Golf Share would be sold at public auction should he fail to
settle his account on or before 31 May 1987.
Whatever the reason Caram was unable to respond to the
earlier notices, the fact remains that at the time of the final
notice, Valley Golf knew that Caram, having died and
gone, would not be able to settle the obligation himself,
yet they persisted in sending him notice to provide a
color of regularity to the resulting sale.
That reason alone, evocative as it is of the absence of
substantial justice in the sale of the Golf Share, is sufficient
to nullify the sale and sustain rulings of the SEC and the
Court of Appeals.

o The letters dated 25 January 1987 and 7 March FINAL VERDICT:

1987, both of which were sent within a few months WHEREFORE, the petition is DENIED. Costs against petitioners.
after Caram’s death are both addressed to ―Est. of
Fermin Z. Caram, Jr.;‖ and the abbreviation ―[e]st.‖
can only be taken to refer to ―estate.‖

o This is to be distinguished from the two earlier

letters, both sent prior to Caram’s death on 6
October 1986, which were addressed to Caram
himself.

o Inexplicably, the final letter dated 3 May 1987 was

again addressed to Caram himself, although the
fact that the two previous letters were directed at
the estate of Caram stands as incontrovertible

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
Corp Law Case Digests | Atty. Hofilena | 2014
24. MARSHALL WELLS INC. VS. HENRY ELSER
Foreign Courts have no capacity to sue if it did not comply with
Section 125 of Corp Code
RECIT READY:
Marshall Wells, a foreign corp, sued Henry Elser for an unpaid
balance. Elser filed demurrer to evidence stating that Marshall Wells,
a foreign Corp, did not comply with Section 125 for foreign courts to
transact business in the Philippines, thus, it has no capacity to sue in
our courts. The Court ruled that Henry Elser has no capacity to sue,
as Section 133 states so.
FACTS:
Marshall-Wells Company(foreign corp) sued Henry W. Elser
& Co., Inc., a domestic corporation, in the Court of First
Instance of Manila, for the unpaid balance of a bill of goods
amounting to P2,660.74, sold by plaintiff to defendant.
Defendant demurred to the complaint on the statutory
ground that the plaintiff has no legal capacity to sue stating
the said complaint does not show that the plaintiff has
complied with the laws of the Philippine Islands in that which
is required of foreign corporations desiring to do business in
the Philippine Islands, neither does it show that it was
authorized to do business in the Philippine Islands. (In
accordance to rules stated in Section 68 of Corporation Law,
which is now Section 125 of Corporation Code)
The demurrer was sustained by the trial judge.
ISSUE:
Whether or not Marshall Wells, as a foreign corporation, has the
capacity to sue Henry Elser (or whether or not Section 125 of
Corporation Code is a condition precedent to proceed with the
action)
HELD + RATIO:
NO, Marshall Wells has no capacity to sue. Trial court is correct in
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
ruling that Section 125 is a condition precedent for foreign
corporations to sue in Philippine courts.
Section 69 of Corporation Law (Section 133 now) states
"No foreign corporation shall be permitted to maintain
by itself or assignee any suit for the recovery of any
debt, claim, or demand whatever, unless it shall have
the license prescribed in section 68 of the law."
The law simply means that no foreign corporation shall be
permitted "to transact business in the Philippine Islands," as
this phrase is known in corporation law, unless it shall have
the license required by law, and, until it complies with the
law, shall not be permitted to maintain any suit in the local
courts. A contrary holding would bring the law to the verge of
unconstitutionality, a result which should be and can be
easily avoided.
The noncompliance of a foreign corporation with the statute
may be pleaded as an affirmative defense. Thereafter, it
must appear from the evidence, first, that the plaintiff is a
foreign corporation, second, that it is doing business in the
Philippines, and third, that it has not obtained the proper
license as provided by the statute.
NOTES: (Stat con issues only!)
Corporations have no legal status beyond the bounds of the
sovereignty by which they are created. A state may restrict the right
of a foreign corporation to engage in business within its limits, and to
sue in its courts. But by virtue of state comity, a corporation created
by the laws of one state is usually allowed to transact business in
other states and to sue in the courts of the forum.
The object of the statute was to subject the foreign corporation doing
business in the Philippines to the jurisdiction of its courts. The object
of the statute was not to prevent the foreign corporation from
performing single acts, but to prevent it from acquiring a domicile for
the purpose of business without taking the steps necessary to render
it amenable to suit in the local courts.
Corp Law Case Digests | Atty. Hofilena | 2014
25. Home Insurance Company v. Eastern Shipping Lines
G.R. No. L-34392; July 20, 1983
Effects of Failure To Obtain License
CASE:
Home Insurance Company is a foreign company
engaged in business in the Philippines without a license at the
time it entered into the insurance contracts with Eastern
Shipping Lines and N. V. Nedlloyd Lijnen. Black Hot Rolled
Copper Wire Rods were shipped on board SS Eastern Jupiter
(vessel owned by Eastern Shipping Lines). The shipment was
insured with Home Insurance Company. The coils arrived in bad
order hence, Home Insurance Company paid Phelps
Dodge(Consignee) by virtue of its insurance policy. In another
transaction, packages of service parts of farm equipment and
implements were shipped on board SS "NEDER RIJN"(owned by N.
V. Nedlloyd Lijnen). Likewise, the shipment arrived in bad order.
Hence, Home Insurance Company paid International Harvester
Macleod Inc(Consignee) by virtue of its insurance policy. Home
Insurance Company filed suits against Eastern Shipping Lines and
N. V. Nedlloyd Lijnen, or its agent Columbian Phil. Inc for recovery of
maritime damages. At the time Home Insurance Company filed
the complaints, it had already secured the necessary license to
conduct its insurance business in the Philippines. The lower
court dismissed the complaints stating that Home Insurance Co
failed to prove its capacity to sue.
The issues in this case are: 1) Whether or not Home
Insurance Company has the capacity to sue; and 2) Whether or
not the contracts entered into by Home Insurance Company
with the Eastern Shipping Lines and N. V. Nedlloyd Lijnen, or its
agent Columbian Phil. Inc. are null and void.
st
As for the 1 issue: Home Insurance Company has the
capacity to sue since at the time it filed the complaints against the
private respondents, it had already secured the necessary license to
conduct its insurance business in the Philippines. The lack of
capacity at the time of execution of the contracts was cured by
the subsequent registration of Home Insurance Company.
As for the 2nd issue: The contracts entered into by Home
Insurance Company despite having no license are VALID. The
prohibition against doing business without first securing a license is
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
now given penal sanction which is also applicable to other
violations of the Corporation Code under the general provisions of
Section 144 of the Code. It is, therefore, not necessary to declare
the contract null and void even as against the erring foreign
corporation. The penal sanction for the violation and the denial of
access to our courts and administrative bodies are sufficient from the
viewpoint of legislative policy (the primary purpose of our statute is to
compel a foreign corporation desiring to do business within the state
to submit itself to the jurisdiction of the courts of this state).
The contract itself is valid, but it is the standing to sue
of Home Insurance Company (foreign corporation) that is
missing, which can be remedied with the subsequent obtaining
of the license to do business.
FACTS:
1967: S. Kajita & Co., on behalf of Atlas Consolidated
Mining & Development Corporation, shipped on board the
SS "Eastern Jupiter' from Osaka, Japan, 2,361 coils of
"Black Hot Rolled Copper Wire Rods."
o The vessel is owned and operated by Eastern Shipping
Lines (Carrier).
o The shipment was covered by Bill of Lading No. O-MA-
9, with arrival notice to Phelps Dodge Copper
Products Corporation of the Philippines
(CONSIGNEE) at Manila.
o The shipment was insured with Home Insurance
Company against all risks.
o The coils discharged from the vessel were in bad
order.
o For the loss/damage suffered by the cargo, Home
Insurance Company paid the Phelps Dodge under its
insurance policy the amount of P3,260.44, by virtue of
which plaintiff became subrogated to the rights and
actions of the Phelps Dodge. Home Insurance Co
made demands for payment against the Eastern
Shipping Lines and the TRANSPORTATION
COMPANY for reimbursement of the aforesaid
amount but each refused to pay the same.
Corp Law Case Digests | Atty. Hofilena | 2014
1966: Hansa Transport Kontor shipped from Bremen,
Germany, 30 packages of Service Parts of Farm
Equipment and Implements on board SS "NEDER RIJN"
owned by N. V. Nedlloyd Lijnen, and represented in the
Philippines by its local agent, Columbian Philippines, Inc.
o The shipment was insured with Home Insurance Co.
o Seven packages discharged from the vessel were
found to be in bad order
o For the short-delivery of 1 package and the missing
items in 5 other packages, Home Insurance Co paid
the International Harvester Macleod Inc.
(Consignee) under its Insurance Cargo Policy by
virtue of which Home Insurance Co became
subrogated to the rights and actions of the
International Harvester. Demands were made on
Columbian Philippines, Inc and International
Harvester for reimbursement thereof but they
failed and refused to pay the same.
Home Insurance Company filed a case against Eastern
Shipping Lines.
Home Insurance Co made the following averment
regarding its capacity to sue:
The plaintiff is a foreign insurance company duly
authorized to do business in the Philippines through its
agent, Mr. VICTOR H. BELLO, of legal age and with
office address at Oledan Building, Ayala Avenue,
Makati, Rizal.
However, Eastern Shipping Lines denied the
allegations of Home Insurance Company, which
referred to the latter’s capacity to sue for lack of
knowledge or information sufficient to form a belief as
to the truth thereof.
Home Insurance Company was engaged in business
without a license.
o However, when the complaints in these two cases
were filed, Home Insurance Co had already
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
secured the necessary license to conduct its
insurance business in the Philippines. It could
already file suits.
Trial court dismissed the case of Home Insurance Co
stating that it failed to prove its capacity to sue.
o Lower court ruled that a suing foreign corporation,
like plaintiff, has to plead affirmatively and prove
either that the transaction upon which it bases its
complaint is an isolated one, or that it is licensed
to transact business in this country, failing which,
it will be deemed that it has no valid cause of
action. Home Insurance Co. is doing business in
the Philippines. Consequently, it must have a
license under Section 68 of the Corporation Law
before it can be allowed to sue.
ISSUE:
1. Whether or not Home Insurance Company has the
capacity to sue.
2. Whether or not the contracts entered into by Home
Insurance Company with the Eastern Shipping Lines and
N. V. Nedlloyd Lijnen, or its agent Columbian Phil. Inc. are
null and void.
RATIO:
1. Yes, Home Insurance Company has the capacity to
sue at the time it filed the complaints against Eastern
Shipping Lines and N. V. Nedlloyd Lijnen, or its agent
Columbian Phil. Inc. The lack of capacity at the time of
execution of the contracts was cured by the
subsequent registration of Home Insurance Company.
There is no question that the private respondents
should pay the obligations found by the trial court as
owing to the petitioner. Only the question of validity of
the contracts in relation to lack of capacity to sue
stands in the way of the petitioner being given the
affirmative relief it seeks. The Eastern Shipping Lines,
Corp Law Case Digests | Atty. Hofilena | 2014
et al’s obligation to pay under the terms of the
contracts has been proved.
The lack of capacity at the time of execution of the
contracts was cured by the subsequent
registration of Home Insurance Company.
Home Insurance Co was engaged in business without
a license. But, when the complaints in these two cases
were filed, Home Insurance had already secured the
necessary license to conduct its insurance business in
the Philippines. It could already file suits.
Hence, Home Insurance Co was telling the truth when
it averred in its complaints that it was a foreign
insurance company duly authorized to do business in
the Philippines through its agent Mr. Victor H. Bello.
PROCEDURAL ASPECT:
SC’s ruling that the lack of capacity at the time of the
execution of the contracts was cured by the
subsequent registration is also strengthened by the
procedural aspects of these cases.
Section 4, Rule 8 of the Rules of Court requires that:
"a party desiring to raise an issue as to the legal
existence of any party or the capacity of any
party to sue or be sued in a representative
capacity shall do so by specific denial, which
shall include such supporting particulars as are
particularly within the pleader's knowledge.”
Home Insurance Company averred in its complaints
that it is a foreign insurance company, that it is
authorized to do business in the Philippines, that its
agent is Mr. Victor H. Bello, and that its office address
is the Oledan Building at Ayala Avenue, Makati. These
are all the averments required by Section 4, Rule 8 of
the Rules of Court. Home Insurance Company
sufficiently alleged its capacity to sue. Eastern
Shipping Lines and N. V. Nedlloyd Lijnen, or its
agent Columbian Phil. Inc. countered either with an
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
admission of the Home Insurance Company's
jurisdictional averments or with a general denial based
on lack of knowledge or information sufficient to form a
belief as to the truth of the averments.
SC finds the general denials inadequate to attack the
foreign corporations lack of capacity to sue in the light
of its positive averment that it is authorized to do so.
Applying the Sec 4, Rule 8, at the very least, Eastern
Shipping Lines and N. V. Nedlloyd Lijnen, or its
agent Columbian Phil. Inc should have stated
particulars in their answers upon which a specific
denial of the Home Insurance Company's capacity to
sue could have been based or which could have
supported its denial for lack of knowledge. And yet,
even if the Home Insurance Co's lack of capacity to
sue was not properly raised as an issue by the
answers, Home Insurance Company introduced
documentary evidence that it had the authority to
engage in the insurance business at the time it filed the
complaints.
1. No, the contracts entered into by Home Insurance
Company with the Eastern Shipping Lines and N. V.
Nedlloyd Lijnen, or its agent Columbian Phil. Inc. are
NOT null and void.
The lower court applied Sec 68 and 69 of the old
Corporation Law to determine Home Insurance
Company’s capacity to sue and the validity of the
contracts, which it entered into. According to Sec 69 of
the Old Corporation Law:
Sec 69: No foreign corporation or corporation
formed, organized, or existing under any laws other
than those of the Philippine Islands shall be
permitted to transact business in the Philippine
Islands or maintain by itself or assignee any suit for
the recovery of any debt, claim, or demand
whatever, unless it shall have the license prescribed
Corp Law Case Digests | Atty. Hofilena | 2014
in the section immediately preceding. Any officer,
director, or agent of the corporation or any person
transacting business for any foreign corporation not
having the license prescribed shag be punished by
imprisonment for not less than six months nor more
than two years or by a fine of not less than two
hundred pesos nor more than one thousand pesos,
or by both such imprisonment and fine, in the
discretion of the court.
Insofar as transacting business without a license is
concerned, Section 69 of the Corporation Law
imposed a penal sanction-imprisonment for not less
than six months nor more than two years or
payment of a fine not less than P200.00 nor more
than P1,000.00 or both in the discretion of the
court. There is a penalty for transacting business
without registration.
And insofar as litigation is concerned, the foreign
corporation or its assignee may not maintain any
suit for the recovery of any debt, claim, or demand
whatever. The Corporation Law is silent on whether
or not the contract executed by a foreign
corporation with no capacity to sue is null and void
ab initio.
There are conflicting schools of thought with regard to
whether or not contracts entered into by foreign
corporations without capacity to sue is void or merely
voidable.
i. Where a contract which is entered into by a
foreign corporation without complying with
the local requirements of doing business is
rendered void either by the express terms of
a statute or by statutory construction, a
subsequent compliance with the statute by
the corporation will not enable it to maintain
an action on the contract.
ii. The very fact that the prohibition against
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
maintaining an action in the courts of the
state was inserted in the statute ought to be
conclusive proof that the legislature did not
intend or understand that contracts made
without compliance with the law were void.
The primary purpose of our statute is to
compel a foreign corporation desiring to do
business within the state to submit itself to
the jurisdiction of the courts of this state.
The Philippine Jurisprudence tends to lean
towards the 2nd view. A foreign corporation actually
doing business in the Philippines without license
to do so may be sued in our courts (Marshall Wells
Co. v. Henry W. Elser & Co).
There is no question that the contracts are
enforceable. The requirement of registration affects
only the remedy.
Batas Pambansa Blg. 68, the Corporation Code of the
Philippines has corrected the ambiguity caused by the
wording of Section 69 of the old Corporation Law.
Section 133 of the present Corporation Code provides:
SEC. 133. Doing business without a license.- No foreign
corporation transacting business in the Philippines
without a license, or its successors or assigns, shag be
permitted to maintain or intervene in any action, suit or
proceeding in any court or administrative agency in the
Philippines; but such corporation may be sued or
proceeded against before Philippine courts or
administrative tribunals on any valid cause of action
recognized under Philippine laws.
The old Section 69 has been reworded in terms of
non-access to courts and administrative agencies
in order to maintain or intervene in any action or
proceeding.
The prohibition against doing business without
first securing a license is now given penal sanction
which is also applicable to other violations of the
Corp Law Case Digests | Atty. Hofilena | 2014
Corporation Code under the general provisions of
Section 144 of the Code. It is, therefore, not
necessary to declare the contract null and void
even as against the erring foreign corporation. The
penal sanction for the violation and the denial of
access to our courts and administrative bodies are
sufficient from the viewpoint of legislative policy.
FINAL VERDICT:
Eastern Shipping Lines is ordered to pay the petitioner
the sum of P1,630.22 with interest.
N. V. Nedlloyd Lijnen, or its agent Columbian Phil. Inc.
is ordered to pay the petitioner the sum of P2,426.98
with interest.
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
26. THE MENTHOLATUM CO., et al., vs. ANACLETO
MANGALIMAN, et al. (1941)
Doing Business means a continuity of commercial dealings and
arrangements; performance of functions normally incident to the
purpose of the foreign corporation
CASE:
Petitioner company is a foreign company from Kansas that
produces a salve (similar to Vicks). Their products were sold in the
Philippines through Phil-American Drug Co.
They registered the trademark for ―Metholatum‖, for its
products. But upon discovering that respondents were selling a
similar product with the same name, size, and shape, they sued for
damages.
RTC ruled in their favor but CA reversed it on the ground of
capacity to institute a suit since they are a foreign corporation. CA’s
basis was Sec. 69 which stated that foreign corporations can only
institute actions for recovery of any demands or claims if they are
licensed pursuant to Sec. 68.
Issue is w/n petitioners can maintain such action without the
license? And/or can Phil-American Drug Corp.maintain the action for
them?
SC held in the negative saying that it is a foreign corporation
―doing business in the Philippines‖ so the license is required for it to
maintain an action here. ―Doing business‖ should be interpreted on a
case to case basis but generally, it means having a continuity of
dealings and exercise of functions that are normal incidents of the
corporation’s purpose and objects.
Phil-American Drug also cannot maintain the action as it only
has derivative authority from its principal. And since Mentholatum
Corp. was not licensed, it also cannot maintain the action.
But there was a dissent that this does not extend to matters
involving trade mark.
FACTS:
Petitioner is a foreign corporation (form Kansas) that
manufactures Mentholatum, a salve (like Vicks ) for colds,
etc. with Philippine-American Drug Co., Inc as its exclusive
distributing agent in the Philippines.
Corp Law Case Digests | Atty. Hofilena | 2014
Petitioner registered the word ―Mentholatum‖ as trademark
for its products with the Bureau of Commerce and Industry.
Mangaliman brothers (respondent) also sold a similar
product packed in the same size, color and shape as
Mentholatum product of petitioners.
Petitioner sued for damages on the ground of decease in
their sales and loss of goodwill and reputation of their
product in the market.
CFI ruled in favor of Petitioners.
CA reversed the decision. Since Mentholatum Co., through
Philippine-American Drug Co, has been doing business in
the Philippines by selling its products in the Phils. Since
1929, it has to secure a license first before it can institute an
action, based on Sec. 69 of the Corporation Law.
o Petitioner’s arguments: They don’t sell their
products personally. Phil-American Drug is merely
an importer and its sales are not for the account of
Mentholatum company. What the CA said are
conclusions of law.
o Respondent’s arguments: Phil-American Drug is
the exclusive distributing agent and that because of
this, petitioners are ―engaged in business‖ in the
Philippines and cannot institute action without
acquiring license required by Sec. 68 of Corp Law.
ISSUES:
1. W/N Petitioners can institute an action without securing a license
required in Sec. 69 of the Corporation Law?
2. W/N Philippine-American Drug Co., could institute the proceeding
by itself?
= essentially, what does ―doing business‖ in the Philippines mean?
Sec. 69 of Act. 1459 (old Corp Code): No foreign corporation or
corporation formed, organized, or existing under any laws other than
those of the Philippine Islands shall be permitted to transact
business in the Philippine Islands or maintain by itself or assignee
any suit for the recovery of any debt, claim, or demand whatever,
unless it shall have the license prescribed in the section immediately
preceding. Any officer, or agent of the corporation or any person
Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena
transacting business for any foreign corporation not having the
license prescribed shall be punished by imprisonment for not less
than six months nor more than two years or by a fine of not less than
two hundred pesos nor more than one thousand pesos, or by both
such imprisonment and fine, in the discretion of the court.
HELD & RATIO:
7. NO.
Law does not define what ―doing or engaging in‖
means. It’s considered on a case to case basis.
But the test applied was: whether the foreign
corporation is continuing the body or substance
of the business or enterprise for which it was
organized or whether it has been substantially
retired from it and turned it over to another.
o Implies a continuity of commercial dealings
and performance of acts or exercise of
functions normally incident to the
corporation’s purpose and object.
The complaint clearly stated that Philippine-
American Drug Co is the exclusive distributing
agent of the company. Such that whatever acts of
Phil-American Drug can be attributed to
Mentholatum.
And having not secured a license required by Sec.
68, petitioners cannot prosecute this action for the
violation of trade mark and unfair competition
8. NO.
Nor can Phil-American Drug maintain the action
since it cannot claim an independent standing in
court from its principal.
FINAL VERDICT: Petition is granted. The CA decision is reversed.
Notes:
Dissent, J. Moran:
- The ruling in Western Equipment & Supply Company vs.
Reyes provided that Sec. 69 of the Corporation Law does
not apply to suits for infringement of trademarks and
Corp Law Case Digests | Atty. Hofilena | 2014

unfair competition since he right o use corporate and rade

name of a foreign corporation is a property right (in rem)
which can be asserted in any courts of the world.
- Trade mark does not acknowledge any territorial boundaries
but extends to every mark where the goods have become
known and identified.

Ayson Dela Cruz Hourani Lapuz Ledesma Molaer Miranda Rivera Rubinos Rubio San Juan Santos Santos So Chan Sorongon Tamondong Torcuator Yogue Zerrudo Velena