WPM INTERNATIONAL TRADING, INC. and WARLITO P.
the records of the case do not support the lower courts’ finding that
MANLAPAZ, Petitioners, vs.
FE CORAZON LABAYEN, Respondent.
The respondent, Fe Corazon Labayen, is the owner of H.B.O. Systems
Consultants, a management and consultant firm. The petitioner, WPM
International Trading, Inc. (WPM), is a domestic corporation engaged in
the restaurant business, while Warlito P. Manlapaz (Manlapaz) is its
president.
Sometime in 1990, WPM entered into a management agreement with
the respondent, by virtue of which the respondent was authorized to
operate, manage and rehabilitate Quickbite, a restaurant owned and
operated by WPM. As part of her tasks, the respondent looked for a
contractor who would renovate the two existing Quickbite outlets in
Divisoria, Manila and Lepanto St., University Belt, Manila. Pursuant to
the agreement, the respondent engaged the services of CLN
Engineering Services (CLN) to renovate Quickbite-Divisoria at the cost
of ₱432,876.02.
Quickbite-Divisoria’s renovation was finally completed. However, out of
the ₱432,876.02 renovation cost, only the amount of ₱320,000.00 was
paid to CLN, leaving a balance of ₱112,876.02. CLN filed a complaint for
sum of money and damages before the RTC against the respondent and
Manlapaz, The RTC held that the respondent is entitled to indemnity
from Manlapaz. The RTC found that the corporation was just a business
conduit and that Manlapaz had complete control over WPM considering
that he is its chairman, president and treasurer at the same time. The
RTC thus concluded that Manlapaz is liable in his personal capacity. the
CA affirmed,
(1) whether WPM is a mere instrumentality, alter-ego, and
business conduit of Manlapaz; and
(2) whether Manlapaz is jointly and severally liable with WPM
to the respondent for reimbursement, damages and interest.
We have reviewed the records and found that the application of the
principle of piercing the veil of corporate fiction is unwarranted in the
present case.
e doctrine of piercing the corporate veil applies only in three (3) basic
instances, namely: a) when the separate and distinct corporate
personality defeats public convenience, as when the corporate fiction is
used as a vehicle for the evasion of an existing obligation; b) in fraud
cases, or when the corporate entity is used to justify a wrong, protect a
fraud, or defend a crime; or c) is used in alter ego cases, i.e., where a
corporation is essentially a farce, since it is a mere alter ego or business
conduit of a person, or where the corporation is so organized and
controlled and its affairs so conducted as to make it merely an
instrumentality, agency, conduit or adjunct of another corporation. 11
Piercing the corporate veil based on the alter ego theory requires the
concurrence of three elements, namely:
(1) Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
(2) Such control must have been used by the defendant to commit
fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
plaintiff’s legal right; and
(3) The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss complained of.
In the present case, the attendant circumstances do not establish that
WPM is a mere alter ego of Manlapaz.
Aside from the fact that Manlapaz was the principal stockholder of WPM,
records do not show that WPM was organized and controlled, and its
affairs conducted in a manner that made it merely an instrumentality,
agency, conduit or adjunct of Manlapaz
The mere ownership by a single stockholder of even all or nearly all of
the capital stocks of a corporation is not by itself a sufficient ground to
disregard the separate corporate personality. T
Manlapaz had control or domination over WPM or its finances. That
Manlapaz concurrently held the positions of president, chairman and
treasurer, or that the Manlapaz’s residence is the registered principal
office of WPM, are insufficient considerations to prove that he had
exercised absolute control over WPM.
In this connection, we stress that the control necessary to invoke the
instrumentality or alter ego rule is not majority or even complete stock
control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or
existence of its own, and is but a conduit for its principal. The control
must be shown to have been exercised at the time the acts complained
of took place. Moreover, the control and breach of duty must proximately
cause the injury or unjust loss for which the complaint is made.
Manlapaz is ABSOLVED.
NUCCIO SAVERIO and NS INTERNATIONAL INC., Petitioners, vs.
ALFONSO G. PUYAT, Respondnt.
On July 22, 1996, the respondent granted a loan to NSI. The loan was
made pursuant to the Memorandum of Agreement and Promissory Note
(MOA)5 between the respondent and NSI, represented by Nuccio. It was
agreed that the respondent would extend a credit line with a limit of
₱500,000.00 to NSI, to be paid within thirty (30) days from the time of
the signing of the document. he petitioners received a total amount of
₱300,000.00 and certain machineries intended for their fertilizer
processing plant business (business). The proposed business, however,
failed to materialize.
On several occasions, Nuccio made personal payments amounting to
₱600,000.00. However, as of December 16, 1999, the petitioners
allegedly had an outstanding balance of ₱460,505.86. When the
petitioners defaulted in the payment of the loan, the respondent filed a
collection suit with the RTC,
The petitioners refuted the respondent’s allegation and insisted that they
have already paid the loan, evidenced by the respondent’s receipt for
the amount of ₱600,000.00. They submitted that their remaining
obligation to pay the machineries’ value, if any, had long been
extinguished by their business’ failure to materialize.
the RTC found that aside from the cash loan, the petitioners’ obligation
to the respondent also covered the payment of the machineries’ value.
The petitioners appealed to the CA. There, they argued that in view of
the lack of proper accounting and the respondent’s failure to
substantiate his claims and that Nuccio by virtue of NSI’s separate and
distinct personality, he cannot be made solidarily liable with NSI. the CA
rendered a decision7 declaring the petitioners jointly and severally liable
for the amount that the respondent sought.
WON petitioners are jointly and severally liable for the amount
claimed.
Piercing the veil of corporate fiction is not justified.
Aside from the undisputed fact of Nuccio’s 40% shareholdings with NSI,
the RTC applied the piercing the veil doctrine based on the following
reasons. First, there was no board resolution authorizing Nuccio to enter
into a contract of loan. Second, the petitioners were represented by one
and the same counsel. Third, NSI did not object to Nuccio’s act of
contracting the loan.Fourth, the control over NSI was used to commit a
wrong or fraud. Fifth, Nuccio’s admission that "NS" in the corporate
name "NSI" means "Nuccio Saverio."
We are not convinced of the sufficiency of these cited reasons. In our
view, the RTC failed to provide a clear and convincing explanation why
the doctrine was applied. The records of the case, however, do not show
that Nuccio had control or domination over NSI’s finances.1âwphi1 The
mere fact that it was Nuccio who, in behalf of the corporation, signed the
MOA is not sufficient to prove that he exercised control over the
corporation’s finances. Neither the absence of a board resolution
authorizing him to contract the loan nor NSI’s failure to object thereto
supports this conclusion. It should be noted in this regard that while
Nuccio was the signatory of the loan and the money was delivered to
him, the proceeds of the loan were unquestionably intended for NSI’s
proposed business plan.
 UNION BANK OF THE PHILIPPINES, Petitioner, vs.
SPS. ALFREDO ONG AND SUSANA ONG and JACKSON LEE
the spouses Ong, for P12,500,000.00, sold their 974-square meter
lot located in Greenhills, San Juan, Metro Manila, together with the
house and other improvements standing thereon, to their co-
respondent, Jackson Lee (Lee, for short). The following day, Lee
registered the sale and was then issued Transfer Certificate of Title
(TCT)
At about this time, BMC had already availed itself of the credit
facilities, and had in fact executed a total of twenty-two (22)
promissory notes in favor of Union Bank.BMC filed a Petition for
Rehabilitation and for Declaration of Suspension of Payments with
the Securities and Exchange Commission (SEC). Union Bank
assailed the validity of the sale, alleging that the spouses Ong and
Lee entered into the transaction in question for the lone purpose of
fraudulently removing the property from the reach of Union Bank
and other creditors.
respondents, as defendants a quo, maintained, in the main, that
both contracts of sale and lease over the Greenhills property were
founded on good and valid consideration and executed in good faith.
the trial court, applying Article 1381 of the Civil Code, rendered
judgment for Union Bank, the Deed of Sale executed on October 22,
1991 by the spouses Ong in favor of Lee being declared null and
void. CA reversed and set aside the trial court's ruling.
whether or not the spouses Ong acted fraudently in selling
the disputed property?
It is true that respondent spouses, as surety for BMC, bound
themselves to answer for the latter’s debt. Nonetheless, for
purposes of recovering what the eventually insolvent BMC owed the
bank, it behooved the petitioner to show that it had exhausted all the
properties of the spouses Ong. It does not appear in this case that
the petitioner sought other properties of the spouses other than the
subject Greenhills property. The CA categorically said so. Absent
proof, therefore, that the spouses Ong had no other property except
their Greenhills home, the sale thereof to respondent Lee cannot
simplistically be considered as one in fraud of creditors.
EDUARDO V. LINTONJUA, JR. and ANTONIO K.
LITONJUA, Petitioners, vs.
ETERNIT CORPORATION (now ETERTON MULTI-RESOURCES
CORPORATION), ETEROUTREMER, S.A. and FAR EAST BANK
& TRUST COMPANY,
The Eternit Corporation (EC) is a corporation duly organized and
registered under Philippine laws. It had been engaged in the
manufacture of roofing materials and pipe products. Its
manufacturing operations were conducted on eight parcels of land
located in Mandaluyong City, Metro Manila which were covered by
TCTs under the name of Far East Bank & Trust Company, as
trustee. Ninety (90%) percent of the shares of stocks of EC were
owned by Eteroutremer S.A. Corporation (ESAC). Jack Glanville, an
Australian citizen, was the General Manager and President of EC,
while Claude Frederick Delsaux was the Regional Director for Asia
of ESAC. Both had their offices in Belgium.
In 1986, the management of ESAC grew concerned about the
political situation in the Philippines and wanted to stop its operations
in the country. The Committee for Asia of ESAC instructed Michael
Adams, a member of EC’s Board of Directors, to dispose of the eight
parcels of land. Adams engaged the services of realtor/broker Lauro
G. Marquez so that the properties could be offered for sale to
prospective buyers. Glanville later showed the properties to
Marquez.
Marquez thereafter offered the parcels of land and the
improvements thereon to Eduardo B. Litonjua, Jr. of the Litonjua &
Company, Inc. In a Letter dated September 12, 1986, Marquez
declared that he was authorized to sell the properties
for P27,000,000.00 and that the terms of the sale were subject to
negotiation.4 The Litonjua siblings then offered to buy the property
for P20,000,000.00 cash. Marquez apprised Glanville of the Litonjua
siblings’ offer and relayed the same to Delsaux in Belgium, but the
latter did not respond. It was only on February 12, 1987 that Delsaux
sent a telex to Glanville stating that, based on the "Belgian/Swiss
decision," the final offer was "US$1,000,000.00 and P2,500,000.00
to cover all existing obligations prior to final liquidation." 5 Litonjua, Jr.
accepted the counterproposal of Delsaux. The Litonjua brothers
deposited the amount of US$1,000,000.00 with the Security Bank &
Trust Company, Ermita Branch, and drafted an Escrow Agreement
to expedite the sale.7
Meanwhile, with the assumption of Corazon C. Aquino as President
of the Republic of the Philippines, the political situation in the
Philippines had improved. Marquez received a telephone call from
Glanville, advising that the sale would no longer proceed. the
Litonjuas, through counsel, wrote EC, demanding payment for
damages they had suffered on account of the aborted sale. EC,
however, rejected their demand.
The Litonjuas then filed a complaint for specific performance and
damages against EC (now the Eterton Multi-Resources Corporation)
and the Far East Bank & Trust Company, and ESAC in the RTC of
Pasig City.
WON EC is liable to petitioners?
No. Under Section 36 of the Corporation Code, a corporation may
sell or convey its real properties, subject to the limitations prescribed
by law and the Constitution, as follows:
SEC. 36. Corporate powers and capacity. – Every corporation
incorporated under this Code has the power and capacity:
7. To purchase, receive, take or grant, hold, convey, sell, lease,
pledge, mortgage and otherwise deal with such real and personal
property, including securities and bonds of other corporations, as the
transaction of a lawful business of the corporation may reasonably
and necessarily require, subject to the limitations prescribed by the
law and the Constitution.
The property of a corporation, however, is not the property of the
stockholders or members, and as such, may not be sold without
express authority from the board of directors.
While a corporation may appoint agents to negotiate for the sale of
its real properties, the final say will have to be with the board of
directors through its officers and agents as authorized by a board
resolution or by its by-laws.30 An unauthorized act of an officer of the
corporation is not binding on it unless the latter ratifies the same
expressly or impliedly by its board of directors.
In this case, the petitioners as plaintiffs below, failed to adduce in
evidence any resolution of the Board of Directors of respondent EC
empowering Marquez, Glanville or Delsaux as its agents, to sell, let
alone offer for sale, for and in its behalf, the eight parcels of land
owned by respondent EC including the improvements thereon.
When Delsaux finally responded to Glanville on February 12, 1987,
he made it clear that, based on the "Belgian/Swiss decision" the final
offer of respondent ESAC was US$1,000,000.00
plus P2,500,000.00 to cover all existing obligations prior to final
liquidation.42
While it is true that petitioners accepted the counter-offer of
respondent ESAC, respondent EC was not a party to the transaction
between them; hence, EC was not bound by such acceptance.
Admittedly, respondent ESAC owned 90% of the shares of stocks of
respondent EC; however, the mere fact that a corporation owns a
majority of the shares of stocks of another, or even all of such
shares of stocks, taken alone, will not justify their being treated as
one corporation.43
 PHILIPPINE OVERSEAS TELECOMMUNICATIONS CORPORATION
(POTC), PHILIPPINE COMMUNICATIONS SATELLITE CORPORATION
(PHILCOMSAT), Petitioners, vs.
SANDIGANBAYAN (3rd Division), REPUBLIC OF THE PHILIPPINES
represented by PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT
(PCGG), Respondents.
POTC and PHILCOMSAT aver that the Sandiganbayan committed grave
abuse of discretion amounting to lack or in excess of jurisdiction by affirming
the continued sequestration of the shares, disregarding the final and
executory Decision and Resolution of the Sandiganbayan dated 15 June
2005 and 7 September 2005 in Republic of the Phils. v. Sandiganbayan,
which already ruled on the ownership of the subject shares. In the aforesaid
case, the Court upheld the Compromise Agreement between the
government and llusorio. As a consequence, the government is now the
undisputed owner of 34.9% of the shares of stock of the sequestered
corporations. Pursuant to the final and executory Decision of the Court, there
is no longer need for the continued sequestration of POTC and
PHILCOMSAT. POTC and PHILCOMSAT cited the pronouncement of this
Court in Bataan Shipyard and Engineering Co., Inc. (BASECO) V. PCGG,
which held that, as the writ of sequestration is merely a conservatory
measure, thus, provisional and temporary in character, the final adjudication
of the Court, which finally disposed the sequestered shares, rendered the
writ unnecessary.
The POTC and PHILCOMSAT aver that while the PCGG has the power to
sequester, such power is merely provisional. The POTC and PHILCOMSAT
cite Executive Order No. 1, Section 3, which grants the PCGG the power to
take over sequestered properties provisionally, such that, after the
sequestered properties have been finally disposed of by the proper
authorities, the writ shall be lifted.
Ruling of the Sandiganbayan. On the other hand, as it held, the
Sandiganbayan posits that the sequestration of POTC and PHILCOMSAT
should not be lifted. The Sandiganbayan ruled in this wise: Executive Order
No. I declares that the sequestration of property the acquisition of which is
suspect shall last until the transactions leading to such acquisition can be
disposed of by the appropriate authorities. xxx.
The SC is in favor of POTC and PHILCOMSAT.
First, the threshold issue of whether or not the failure to properly implead
POTC and PHILCOMSAT as defendants in Civil Case No. 0009 is a fatal
jurisdictional error.
Section 26, Article XVIII of the Constitution mandates that if no judicial action
has been filed within six (6) months after the ratification of the 1987
Constitution, the writ of sequestration shall automatically be lifted. In the case
at bar, there was no judicial action filed against POTC and PHILCOMSAT.
There has never been any appropriate judicial action for reconveyance or
recovery ever instituted by the Republic against POTC and PHI LCOMSAT.
A perusal of the instant Complaint, docketed as Civil Case No. 0009 dated
22 July 1987, reveals that it was filed against private individuals, namely,
Jose L. Africa, Manuel H. Nieto, Jr., Ferdinand E. Marcos, Imelda R. Marcos,
Ferdinand R. Marcos, Jr., Roberto S. Benedicto, Juan Ponce Enrile,
Potenciano llusorio. Nowhere was POTC and PHILCOMSAT impleaded in
the Complaint.
Failure to implead POTC and PHILCOMSAT is a violation of the fundamental
principle that a corporation has a legal personality distinct and separate from
its stockholders; that, the filing of a complaint against a stockholder is not
ipso facto a complaint against the corporation.
Proceeding from the foregoing, as POTC and PHILCOMSAT were not
impleaded, there is no longer any existing sequestration on POTC and
PHILCOMSAT. The sequestration order over POTC and PHILCOMSAT was
automatically lifted six (6) months after the ratification of the 1987
Constitution on 2 February 1987 for failure to implead POTC and
PHILCOMSAT in CMI Case No. 0009 before the Sandiganbayan or before
any court for that matter. To recite Section 26, ArtIcle XVIII of the
Constitution, if no judicial action has been filed within six (6) months after the
ratification of the 1987 Constitution, the writ of sequestration shall
automatically be lifted. Note must be made of the fact that we do not here
touch our previous holding that Civil Case No. 0009 was flied within the 6-
month period. We now say that such notwithstanding, and as shown by the
facts on record, the POTC and PHILCOMSAT were not impleaded in the
Civil Case.
For one more reason should this Petition be granted. This concerns the
shares in petitioner corporations of Potenciano llusorio covered by the
Compromise Agreement entered into between llusorio and PCGG, which
was upheld by the Court In Republic of the Phils. v. Sandiganbayan, the
decision in which is now final and executory.
GENERAL CREDIT CORPORATION (now PENTA CAPITAL FINANCE
CORPORATION), Petitioner, vs.
ALSONS DEVELOPMENT and INVESTMENT CORPORATION and CCC
EQUITY CORPORATION, Respondents.
Petitioner General Credit Corporation (GCC), then known as Commercial
Credit Corporation (CCC), established CCC franchise companies in different
urban centers of the country. In furtherance of its business, GCC was able to
secure license from Central Bank (CB) and SEC to engage also in quasi-
banking activities. On the other hand, respondent CCC Equity Corporation
(EQUITY) was organized in by GCC for the purpose of, among other things,
taking over the operations and management of the various franchise
companies. At a time material hereto, respondent Alsons Development and
Investment Corporation (ALSONS) and the Alcantara family, each owned,
just like GCC, shares in the aforesaid GCC franchise companies, e.g., CCC
Davao and CCC Cebu.
ALSONS and the Alcantara family, sold their shareholdings in the CCC
franchise companies to EQUITY. EQUITY issued ALSONS et al., a "bearer"
promissory note for P2M with a one-year maturity date. 4 years later, the
Alcantara family assigned its rights and interests over the bearer note to
ALSONS which became the holder thereof. But even before the execution of
the assignment deal aforestated, letters of demand for interest payment were
already sent to EQUITY. EQUITY no longer then having assets or property to
settle its obligation nor being extended financial support by GCC, pleaded
inability to pay.
ALSONS, having failed to collect on the bearer note aforementioned, filed a
complaint for a sum of money8 against EQUITY and GCC. GCC is being
impleaded as party-defendant for any judgment ALSONS might secure
against EQUITY and, under the doctrine of piercing the veil of corporate
fiction, against GCC, EQUITY having been organized as a tool and mere
conduit of GCC.
According to EQUITY (cross-claim against GCC), it acted merely as
intermediary or bridge for loan transactions and other dealings of GCC to its
franchises and the investing public; and is solely dependent upon GCC for its
funding requirements. Hence, GCC is solely and directly liable to ALSONS,
the former having failed to provide EQUITY the necessary funds to meet its
obligations to ALSONS. GCC filed its ANSWER to Cross-claim, stressing
that it is a distinct and separate entity from EQUITY.
RTC, finding that EQUITY was but an instrumentality or adjunct of GCC and
considering the legal consequences and implications of such relationship,
rendered judgment for Alson. CA affirmed.
WON the doctrine of piercing the veil of corporate fiction be
applied to Equity Corporation? Or in other words, whether Equity
and GCC should both be regarded merely as an aggregate of
persons doing business enterprise?
YES. The Court held that the corporate veil of Equity Corporation be pierced.
The Court cites three basic areas where piercing the veil of corporate fiction
is allowed. First, when it is used to defeat public convenience to evade
existing operations or “equity piercing”; second, in fraud cases where it is
used to justify a wrong or “fraud piercing” and third, in alter ego cases where
the corporation is organized as to make it merely an instrumentality agency.
In this case, the Court has the right to pierce GCC’s corporate veil because
evidence point to the following facts: first, Equity is but an instrumentality of
GCC and has always been dependent on the latter for its operations,
second, the commonality of directors, stockholders and sharing of office
between the two companies shows that they should clearly be regarded
merely as an aggregate of persons in a business enterprise; third, the
establishment of Equity is primarily for GCC to circumvent Central Bank rules
specifically the Anti-Usury Law, using it as a conduit to its non-quasi bank
affiliates; and lastly, the funds invested by Equity to GCC franchises are from
GCC funds as well.
Applying the three basic areas of corporate veil piercing, GCC clearly
defeated public convenience when it established Equity to extend credit
to its investors which in turn is not allowed by the law; it justified a
wrong by fraudulently evading the Anti-Usury Law established by the
Central Bank to quasi-banking businesses, and lastly, Equity was but a
mere instrumentality of GCC for it to get away with its obligations.
 LIDDELL & CO., INC., petitioner-appellant, vs. During this time also, he issued in favor of Liddell Motors, Inc. six (6)
checks drawn against his personal account with the same bank. The
THE COLLECTOR OF INTERNAL REVENUE,
checks issued by Frank Liddell to the Liddell Motors, Inc. were
respondentappellee.
significantly for the most part issued on the same day when Liddell &
The case is an appeal from the decision of the CTA imposing a tax Co. Inc. issued the checks for Frank Liddell9 and for the same
deficiency liability of P1,317,629.61 on Liddell & Co., Inc. The amounts.
petitioner, Liddell & Co. is a domestic corporation established in the It is of course accepted that the mere fact that one or more
Philippines on February 1, 1946. From 1946 until November 22, corporations are owned and controlled by a single stockholder is not
1948 when the purpose clause of the Articles of Incorporation of of itself sufficient ground for disregarding separate corporate
Liddell & Co. Inc., was amended so as to limit its business activities entities. Authorities support the rule that it is lawful to obtain a
to importations of automobiles and trucks, Liddell & Co. was corporation charter, even with a single substantial stockholder, to
engaged in business as an importer and at the same time retailer of engage in a specific activity, and such activity may co-exist with
Oldsmobile and Chevrolet passenger cars and GMC and Chevrolet other private activities of the stockholder. If the corporation is a
trucks. substantial one, conducted lawfully and without fraud on another, its
On December 20, 1948, the Liddell Motors, Inc. was organized and separate identity is to be respected.
registered with the SEC with an authorized capital stock of P100,000 Accordingly, the mere fact that Liddell & Co. and Liddell Motors, Inc.
of which P20,000 was subscribed and paid for as follows: Irene are corporations owned and controlled by Frank Liddell directly or
Liddell wife of Frank Liddell 19,996 shares and Messrs. Marcial P. indirectly is not by itself sufficient to justify the disregard of the
Lichauco, E. K. Bromwell, V. E. del Rosario and Esmenia Silva, 1 separate corporate identity of one from the other. There is, however,
share each. in this instant case, a peculiar consequence of the organization and
Beginning January, 1949, Liddell & Co. stopped retailing cars and activities of Liddell Motors, Inc.
trucks; it conveyed them instead to Liddell Motors, Inc. which in turn Consistently with this view, the United States Supreme Court held
sold the vehicles to the public with a steep mark-up. Since then, that "a taxpayer may gain advantage of doing business thru a
Liddell & Co. paid sales taxes on the basis of its sales to Liddell corporation if he pleases, but the revenue officers in proper cases,
Motors Inc. considering said sales asits original sales. may disregard the separate corporate entity where it serves but as a
The Collector of Internal Revenue argued that the Lidell Motors, Inc. shield for tax evasion and treat the person who actually may take
was but an alter ego of Liddell & Co. and concluded that for sales the benefits of the transactions as the person accordingly taxable."
tax purposes, those sales made by Liddell Motors, Inc. to the public Thus, to allow a taxpayer to deny tax liability on the ground that the
were considered as the original sales of Liddell & Co. hence the sales were made through another and distinct corporation when it is
imposition of tax deficiency. The CTA upheld the position taken by proved that the latter is virtually owned by the former or that they are
the Collector. practically one and the same is to sanction a circumvention of our
WON Lidell Motors, Inc. is an alter ego of Lidell & Co. tax laws.
making it liable for the said tax deficiency?
YES. The Court held that Lidell Motors, Inc. is an alter ego of Lidell
& Co. hence making it liable for tax deficiency .Liddell & Co. is
wholly owned by Frank Liddell. As of the time of its organization,
98% of the capital stock belonged to Frank Liddell. The 20% paid-up
subscription with which the company began its business was paid by
him. The subsequent subscriptions to the capital stock were made
by him and paid with his own money.
As to Liddell Motors, Inc. SC is fully persuaded that Frank Liddell
also owned it. He supplied the original capital funds. It is not proven
that his wife Irene, ostensibly the sole incorporator of Liddell Motors,
Inc. had money of her own to pay for her P20,000 initial
subscription. Her income in the United States in the years 1943 and
1944 and the savings there from could not be enough to cover the
amount of subscription, much less to operate an expensive trade
like the retail of motor vehicles. The alleged sale of her property in
Oregon might have been true, but the money received there from
was never shown to have been saved or deposited so as to be still
available at the time of the organization of the Liddell Motors, Inc.
The evidence at hand also shows that Irene Liddell had scant
participation in the affairs of Liddell Motors, Inc.
There are quite a series of conspicuous circumstances that militate
against the separate and distinct personality of Liddell Motors, Inc.
from Liddell & Co.8 SC notice that the bulk of the business of Liddell
& Co. was channeled through Liddell Motors, Inc. On the other
hand, Liddell Motors, Inc. pursued no activities except to secure
cars, trucks, and spare parts from Liddell & Co. Inc. and then sell
them to the general public. These sales of vehicles by Liddell & Co.
to Liddell Motors, Inc. for the most part were shown to have taken
place on the same day that Liddell Motors, Inc. sold such vehicles to
the public. We may even say that the cars and trucks merely
touched the hands of Liddell Motors, Inc. as a matter of formality.
During the first six months of 1949, Liddell & Co. issued ten (10)
checks payable to Frank Liddell which were deposited by Frank
Liddell in his personal account with the Philippine National Bank.
 FRANCISCO MOTORS CORPORATION, petitioner, vs.
COURT OF APPEALS and SPOUSES GREGORIO and LIBRADA
MANUEL, respondents.
Petitioner filed a complaint against private respondents to recover
an amount representing the balance of the jeep body purchased by
the Manuels from petitioner; an additional sum representing the
unpaid balance on the cost of repair of the vehicle; and the cost of
suit and attorney's fees. To the original balance on the price of jeep
body were added the costs of repair.
In their answer, private respondents interposed a counterclaim for
unpaid legal services by Gregorio Manuel which was not paid by the
incorporators, directors and officers of the petitioner. Private
respondent alleged as an affirmative defense that, while he was
petitioner's Assistant Legal Officer, he represented members of the
Francisco family in the intestate estate proceedings of the late
Benita Trinidad. However, even after the termination of the
proceedings, his services were not paid. Said family members, he
said, were also incorporators, directors and officers of petitioner.
Hence, to counter petitioner’s collection suit, he filed a permissive
counterclaim for the unpaid attorney’s fees
As to the issue of attorney’s fees, the Francisco Motors argues that
being a corporation, it should not be held liable for the fees owned
by its incorporators, directors and officers in their personal capacity
as heirs of Benita Trinidad. The personality of corporation is
separate and distinct from its officers
The trial court decided the case in favor of petitioner in regard to the
petitioner's claim for money, but also allowed the counter-claim of
private respondents. Both parties appealed. The Court of Appeals
sustained the trial court's decision. Hence, the present petition for
review on certiorari under Rule 45 of the Rules of Court.
WON there is a valid ground to pierce the veil of corporate
fiction
NO. The SC held, given the facts and circumstances of this case,
that the doctrine of piercing the corporate veil has no relevant
application here. Respondent court erred in permitting the trial
court’s resort to this doctrine. The rationale behind piercing a
corporation’s identity in a given case is to remove the barrier
between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate
personality as a shield for undertaking certain proscribed activities.
However, in the case at bar, instead of holding certain individuals or
persons responsible for an alleged corporate act, the situation has
been reversed. It is the petitioner as a corporation which is being
ordered to answer for the personal liability of certain individual
directors, officers and incorporators concerned. Hence, it appears to
us that the doctrine has been turned upside down because of its
erroneous invocation.
Manuels’ move to recover unpaid legal fees through a counterclaim
against Francisco Motors Corporation, to offset the unpaid balance
of the purchase and repair of a jeep body could only result from an
obvious misapprehension that petitioners corporate assets could be
used to answer for the liabilities of its individual directors, officers,
and incorporators. Such result if permitted could easily prejudice the
corporation, its own creditors, and even other stockholders; hence,
clearly inequitous to petitioner.
Furthermore, considering the nature of the legal services involved,
whatever obligation said incorporators, directors and officers of the
corporation had incurred, it was incurred in their personal capacity.
When directors and officers of a corporation are unable to
compensate a party for a personal obligation, it is far-fetched to
allege that the corporation is perpetuating fraud or promoting
injustice, and be thereby held liable therefor by piercing its corporate
veil.
INTERNATIONAL ACADEMY OF MANAGEMENT AND
ECONOMICS (I/AME), Petitioner vs.
LITTON AND COMPANY, INC., Respondent
I/AME filed a “Motion to lift Annotations” claiming it has separate and
distinct personality from Santos. MeTC reversed its earlier decision
in favor of I/AME thus Litton elevated the case to the RTC which in
turn reversed the ruling granting I/AME’s motion for reconsideration.
I/AME filed to the CA, which was eventually denied by the appellate
court. CA noted that in August 31, 1979, Santos indicated the Deed
of Absolute Sale, he was president of the corporation when it was
only in 1985 that IAME was organized. Furthermore, that real
property was transferred to I/AME pending the Appeal for revival on
judgement. Finally, that Register of deeds issued the TCT No.
187565 only on November 17, 1993 14 years after deed of sale and
8 years after I/AME was Incorporated.
LAW: Piercing the corporate veil or lifting the corporate veil is a
legal decision in which courts put aside limited liability and hold a
corporation's shareholders or directors personally liable for the
corporation’s actions or debts.
Was the International Academy of Management and
Economics Incorporated denied of due process when it
was pierced with corporate veil by the court?
No. The court did not deny the I/AME of due process. The Supreme
Court agrees with the CA that Santos used I/AME as means to
overthrow judicial process and escape his responsibilities ought to
Litton.
The Supreme Court, in view of the forgoing, find the case as of
Arcilla vs. Court of Appeals’ case. Like Arcilla, Santos: (1) was
adjudged liable to pay on a judgment against him; (2) he became
President of a corporation; (3) he formed a corporation to conceal
assets which were supposed to pay for the judgment against his
favor; (4) the corporation which has Santos as its President, is being
asked by the court to pay on the judgment; and (5) he may not use
as a defense that he is no longer President of I/AME. Furthermore,
the Court agrees with the CA that I/AME is the alter ego of Santos
and Santos - the natural person - is the alter ego of I/AME. Santos
falsely represented himself as President of I/AME in the Deed of
Absolute Sale when he bought the Makati real property, at a time
when I/AME had not yet existed. Uncontroverted facts in this case
also reveal the findings of MeTC showing Santos and I/AME as
being one and the same person.
POLICY: The doctrine of alter ego is based upon the misuse of a
corporation by an individual for wrongful or inequitable purposes,
and in such case the court merely disregards the corporate entity
and holds the individual responsible for acts knowingly and
intentionally done in the name of the corporation. The piercing of the
corporate veil may apply to corporations as well as natural persons
involved with corporations. The Supreme Court has held that the
"corporate mask may be lifted and the corporate veil may be pierced
when a corporation is just but the alter ego of a person or of another
corporation.”
 TAN BOON BEE & CO., INC., petitioner, vs.
THE HONORABLE HILARION U. JARENCIO, PRESIDING JUDGE
OF BRANCH XVIII of the Court of First Instance of Manila,
GRAPHIC PUBLISHING, INC., and PHILIPPINE AMERICAN CAN
DRUG COMPANY, respondents.
Petitioner herein, doing business under the name and style of
Anchor Supply Co., sold on credit to herein private respondent
Graphic Publishing, Inc. (GRAPHIC for short) paper products. For
failure of GRAPHIC to pay any installment, as agagreed on the
contract of sale, petitioner filed with the then Court of First Instance
of Manila for sum of Money. The trial court ordered GRAPHIC to pay
the petitioner. On motion of petitioner, a writ of execution was issued
and the executing sheriff levied upon one (1) unit printing machine
Identified as "Original Heidelberg Cylinder Press" Type H 222, NR
78048, found in the premises of GRAPHIC but herein private
respondent, Philippine American Drug Company (PADCO for short)
had informed the sheriff that the printing machine is its property and
not that of GRAPHIC however the sheriff proceeded with the
scheduled auction sale, sold the property to the petitioner. PADCO
filed an "Affidavit of Third Party Claim" with the Office of the City
Sheriff. Thereafter, PADCO filed with the Court of First Instance of
Manila, a Motion to Nullify Sale on Execution (With Injunction) which
was opposed by the petitioner. Respondent judge ruled in favor of
PADCO hence the instant petition. Plaintiff contends that the
controlling stockholders of the Philippine American Drug Co. are
also the same controlling stockholders of the Graphic Publishing,
Inc. and, therefore, the levy upon the said machinery which was
found in the premises occupied by the Graphic Publishing, Inc.
should be upheld.
Whether or not there is need to pierce the corporate veil.
It is true that a corporation, upon coming into being, is invested by
law with a personality separate and distinct from that of the persons
composing it as well as from any other legal entity to which it may be
related. As a matter of fact, the doctrine that a corporation is a legal
entity distinct and separate from the members and stockholders who
compose it is recognized and respected in all cases which are within
reason and the law. However, this separate and distinct personality
is merely a fiction created by law for convenience and to promote
justice. Accordingly, this separate personality of the corporation may
be disregarded, or the veil of corporate fiction pierced, in cases
where it is used as a cloak or cover for fraud or illegality, or to work
an injustice, or where necessary to achieve equity or when
necessary for the protection of creditors. Likewise, this is true when
the corporation is merely an adjunct, business conduit or alter ego of
another corporation. In such case, the fiction of separate and distinct
corporation entities should be disregarded.
In the instant case, petitioner's evidence established that PADCO
was never engaged in the printing business; that the board of
directors and the officers of GRAPHIC and PADCO were the same;
and that PADCO holds 50% share of stock of GRAPHIC. Petitioner
likewise stressed that PADCO's own evidence shows that the
printing machine in question had been in the premises of GRAPHIC
since May, 1965, long before PADCO even acquired its alleged title
on July 11, 1966 from Capitol Publishing. That the said machine was
allegedly leased by PADCO to GRAPHIC on January 24, 1966,
even before PADCO purchased it from Capital Publishing on July
11, 1966, only serves to show that PADCO's claim of ownership
over the printing machine is not only farce and sham but also
unbelievable.
Considering the principles and circumstances mentioned,
respondent judge should have pierced PADCO's veil of corporate
Identity.
PREMISES CONSIDERED, Order of the then Court of First Instance
of Manila, is ANNULLED and SET ASIDE, and the Temporary
Restraining Order issued is hereby made permanent.
KUKAN INTERNATIONAL CORPORATION, Petitioner, vs.
HON. AMOR REYES, in her capacity as Presiding Judge of the
Regional Trial Court of Manila, Branch 21, and ROMEO M.
MORALES, doing business under the name and style "RM
Morales Trophies and Plaques," Respondents.
Private respondent Romeo M. Morales doing business under the
name RM Morales Trophies and Plaques was awarded a P5 million
contract for the supply and installation of signages in a building
constructed in Makati sometime in March 1998. The contract price
was later reduced to P3,388,502 because some items were deleted
from the contract. Morales complied with his contractual obligations
but he was paid only the amount of P1,976,371.07 leaving a balance
of P1,412,130.93. He filed a case against Kukan, Inc., for sum of
money with the RTC of Manila docketed as Civil Case No. 99-
93173. Kukan Inc., stopped participating in the proceedings in
November 2000, hence, it was declared in default and Morales
presented his evidence ex-parte against petitioner.
On November 28, 2002, the RTC rendered a decision in favor of
Morales and against Kunkan, Inc. ordering the latter to pay the sum
of P1,201,724.00 with legal interest of 12% per annum until fully
paid; P50,000.00 as moral damages,P20,000.00 as attorney's fees
and P7,960.06 as litigation expenses. The counterclaimfiled by
Kunkan, Inc. was dismissed. The decision became final and
executory During the execution, the sheriff levied the personal
properties found at the office of Kukan, Inc.. Claiming it owned the
properties levied, Kukan International Corporation (KIC) fied an
Affidavit of Third Party Claim. Morales filed an Omnibus Motion
praying to apply the principle of piercing the veil of corporate entity.
He alleged that Kankun, Inc. and KIC are one and the same
corporation His Motion was denied. On Motion of Morales the
presiding Judge of Branch 17 of RTC Manila inhibited himself from
hearing the case. It was raffled to Branch 21 which granted the
Motion filed by Morales on March 12, 2007 and decreed that Kukan,
Inc. and Kukan International Inc., as one and the same corporation;
that the levy made on the properties of KIC is valid; and ordering
Kunkan International Corp. and Michael Chan as jointly and
severally liable to pay the award pursuant to the Decision dated
November 28, 2002. KIC filed a Motion for Reconsideration which
was denied.KIC brought the case to the Court of Appeals which
rendered the Decision n January 23, 2008 denying KIC's petition.
The CA also denied its Motion for Reconsideration in the Resolution
dated June 7, 2007. Hence, this case.
One of the issues raised is whether or not the trial court
and the appellate court correctly applied the principle of
piercing the veil of corporate entity.
The Supreme Court ruled that the doctrine of piercing the veil of
corporate entity finds no application in this case.
According to the Supreme Court, the principle of piercing the veil of
corporate entity and the resulting treatment of two related
corporation as one and the same juridical person applies only to
established liability and not to confer jurisdiction. In this case, the
Supreme Court ruled that KIC was not made a party defendant in
Civil Case No. 99-93173. It entered a special but not a voluntary
appearance in the trial court to assert that it was a separate entity
and has a separate legal personality from Kunkan, Inc. KIC was not
impleaded nor served with summons. Hence, it could only assert its
claim through the affidavits, comments and motions filed by special
apperance before the RTC that it is a separate juridical entity.
The Supreme stated that the doctrine of piercing the veil of
corporate entity comes to play during the trial of the case after the
court has already acquired jurisdiction over the corporation.
To justify the piercing of the veil of corporate fiction, it must be
shown by clear and convincing proof that the separate and distinct
personality of the corporation was purposely employed to evade a
legitimate and binding comittment and perpetuate a fraud or like a
wrongdoing.
In those instances when the Court pierced the veil of corporate
fiction of two corporations, there was a confluence of the following
factors:
1. A first corporation is dissolved;
2. The assets of the first corporation is transferred to a second
corporation to avoid a financial liability of the first corporation; and
3. Both corporations are owned and controlled by the same persons
such that the second corporation should be considered as a
continuation and successor of the first corporation.
In this case, the second and third factors are conspicuously absent.
There is, therefore, no compelling justification for disregarding the
fiction of corporate entity separating Kukan, Inc. from KIC. In
applying the principle, both the RTC and the CA miserably failed to
identify the presence of the abovementioned factors.
The High Court stated that neither should the level of paid-up capital
of Kukan, Inc. upon its incorporation be viewed as a badge of fraud,
for it is in compliance with Sec. 13 of the Corporation Code, which
only requires a minimum paid-up capital of PhP 5,000.
The suggestion that KIC is but a continuation and successor of
Kukan, Inc., owned and controlled as they are by the same
stockholders, stands without factual basis. The fact that Michael
Chan, a.k.a. Chan Kai Kit, owns 40% of the outstanding capital
stock of both corporations standing alone, is insufficient to establish
identity. There must be at least a substantial identity of stockholders
for both corporations in order to consider this factor to be
constitutive of corporate identity. Petition granted.
April 21, 2014
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
MINING AND DEVELOPMENT, INC., and MCARTHUR MINING,
INC., Petitioners, vs.
REDMONT CONSOLIDATED MINES CORP., Respondent.
Redmont is a domestic corporation interested in the mining and
exploration of some areas in Palawan. Upon learning that those
areas were covered by MPSA applications of other three (allegedly
Filipino) corporations – Narra, Tesoro, and MacArthur, it filed a
petition before the Panel of Arbitrators of DENR seeking to deny
their permits on the ground that these corporations are in reality
foreign-owned. MBMI, a 100% Canadian corporation, owns 40% of
the shares of PLMC (which owns 5,997 shares of Narra), 40% of the
shares of MMC (which owns 5,997 shares of McArthur) and 40% of
the shares of SLMC (which, in turn, owns 5,997 shares of Tesoro).
Aside from the MPSA, the three corporations also applied for FTAA
with the Office of the President. In their answer, they countered that
(1) the liberal Control Test must be used in determining the
nationality of a corporation as based on Sec 3 of the Foreign
Investment Act – which as they claimed admits of corporate
layering schemes, and that (2) the nationality question is no longer
material because of their subsequent application for FTAA.
Is the Grandfather Rule applicable?
YES. The instant case presents a situation which exhibits a scheme
employed by stockholders to circumvent the law, creating a cloud of
doubt in the Court’s mind. To determine, therefore, the actual
participation, direct or indirect, of MBMI, the grandfather rule must
be used.
The Strict Rule or the Grandfather Rule pertains to the portion in
Paragraph 7 of the 1967 SEC Rules which states, “but if the
percentage of Filipino ownership in the corporation or partnership is
less than 60%, only the number of shares corresponding to such
percentage shall be counted as of Philippine nationality.” Under the
Strict Rule or Grandfather Rule Proper, the combined totals in the
Investing Corporation and the Investee Corporation must be traced
(i.e., “grandfathered”) to determine the total percentage of Filipino
ownership.
Whether McArthur, Tesoro and Narra are Filipino
nationals.
NO. [P]etitioners McArthur, Tesoro and Narra are not Filipino since
MBMI, a 100% Canadian corporation, owns 60% or more of their
equity interests. Such conclusion is derived from grandfathering
petitioners’ corporate owners. xxx Noticeably, the ownership of the
“layered” corporations boils down to xxx group wherein MBMI has
joint venture agreements with, practically exercising majority control
over the corporations mentioned. In effect, whether looking at the
capital structure or the underlying relationships between and among
the corporations, petitioners are NOT Filipino nationals and must be
considered foreign since 60% or more of their capital stocks or
equity interests are owned by MBMI.
January 28, 2015
NARRA NICKEL MINING AND DEVELOPMENT CORP., TESORO
MINING AND DEVELOPMENT, INC., and McARTHUR MINING,
INC., Petitioners, vs.
REDMONT CONSOLIDATED MINES CORP., Respondent
Narra and its co-petitioner corporations – Tesoro and MacArthur,
filed a motion before the SC to reconsider its April 21, 2014
Decision which upheld the denial of their MPSA applications. The
SC affirmed the CA ruling that there is a doubt to their nationality,
and that in applying the Grandfather Rule, the finding is that MBMI,
a 100% Canadian-owned corporation, effectively owns 60% of the
common stocks of petitioners by owning equity interests of the
petitioners’ other majority corporate shareholders. Narra, Tesoro
and MacArthur argued that the application of the Grandfather Rule
to determine their nationality is erroneous and allegedly without
basis in the Constitution, the FIA, the Philippine Mining Act, and the
Rules issued by the SEC. These laws and rules supposedly
espouse the application of the Control Test in verifying the Philippine
nationality of corporate entities for purposes of determining
compliance with Sec. 2, Art. XII of the Constitution that only
corporations or associations at least 60% of whose capital is owned
by such Filipino citizens may enjoy certain rights and privileges, like
the exploration and development of natural resources.
W/N the application by the SC of the grandfather resulted
to the abandonment of the ‘control test’
No. The ‘control test’ can be applied jointly with the Grandfather
Rule to determine the observance of foreign ownership restriction in
nationalized economic activities. The Control Test and the
Grandfather Rule are not incompatible ownership-determinant
methods that can only be applied alternative to each other. Rather,
these methods can, if appropriate, be used cumulatively in the
determination of the ownership and control of corporations engaged
in fully or partly nationalized activities, as the mining operation
involved in this case or the operation of public utilities.
The Grandfather Rule, standing alone, should not be used to
determine the Filipino ownership and control in a corporation, as it
could result in an otherwise foreign corporation rendered qualified to
perform nationalized or partly nationalized activities. Hence, it is only
when the Control Test is first complied with that the Grandfather
Rule may be applied. Put in another manner, if the subject
corporation’s Filipino equity falls below the threshold 60%, the
corporation is immediately considered foreign-owned, in which case,
the need to resort to the Grandfather Rule disappears.
In this case, using the ‘control test’, Narra, Tesoro and MacArthur
appear to have satisfied the 60-40 equity requirement. But the
nationality of these corporations and the foreign-owned common
investor that funds them was in doubt, hence, the need to apply the
Grandfather Rule.
 MANILA INTERNATIONAL AIRPORT AUTHORITY, petitioner, vs.
COURT OF APPEALS, CITY OF PARAÑAQUE, CITY MAYOR OF
PARAÑAQUE, SANGGUNIANG PANGLUNGSOD NG PARAÑAQUE, CITY
ASSESSOR OF PARAÑAQUE, and CITY TREASURER OF PARAÑAQUE,
respondents.
Manila International Airport Authority (MIAA) is the operator of the
Ninoy International Airport located at Paranaque City. The Officers
of Paranaque City sent notices to MIAA due to real estate tax
delinquency. MIAA then settled some of the amount. When MIAA
failed to settle the entire amount, the officers of Paranaque city
threatened to levy and subject to auction the land and buildings of
MIAA, which they did. MIAA sought for a Temporary Restraining
Order from the CA but failed to do so within the 60 days
reglementary period, so the petition was dismissed. MIAA then
sought for the TRO with the Supreme Court a day before the public
auction, MIAA was granted with the TRO but unfortunately the TRO
was received by the Paranaque City officers 3 hours after the public
auction.
MIAA claims that although the charter provides that the title of the
land and building are with MIAA still the ownership is with the
Republic of the Philippines. MIAA also contends that it is an
instrumentality of the government and as such exempted from real
estate tax. That the land and buildings of MIAA are of public
dominion therefore cannot be subjected to levy and auction sale. On
the other hand, the officers of Paranaque City claim that MIAA is a
government owned and controlled corporation therefore not
exempted to real estate tax.
Whether or not the airport lands and buildings of MIAA are
exempt from real estate tax?
The airport lands and buildings of MIAA are exempt from real estate
tax imposed by local governments. Sec. 243(a) of the LGC exempts
from real estate tax any real property owned by the Republic of the
Philippines. This exemption should be read in relation with Sec.
133(o) of the LGC, which provides that the exercise of the taxing
powers of local governments shall not extend to the levy of taxes,
fees or charges of any kind on the National Government, its
agencies and instrumentalities.
These provisions recognize the basic principle that local
governments cannot tax the national government, which historically
merely delegated to local governments the power to tax.
The rule is that a tax is never presumed and there must be clear
language in the law imposing the tax. This rule applies with greater
force when local governments seek to tax national government
instrumentalities. Moreover, a tax exemption is construed liberally in
favor of national government instrumentalities.
MIAA is not a GOCC, but an instrumentality of the government.
The Republic remains the beneficial owner of the properties. MIAA
itself is owned solely by the Republic. At any time, the President can
transfer back to the Republic title to the airport lands and buildings
without the Republic paying MIAA any consideration. As long as the
airport lands and buildings are reserved for public use, their
ownership remains with the State. Unless the President issues a
proclamation withdrawing these properties from public use, they
remain properties of public dominion. As such, they are inalienable,
hence, they are not subject to levy on execution or foreclosure sale,
and they are exempt from real estate tax.
However, portions of the airport lands and buildings that MIAA
leases to private entities are not exempt from real estate tax. In such
a case, MIAA has granted the beneficial use of such portions for a
consideration to a taxable person.
BATAAN SHIPYARD & ENGINEERING CO., INC. (BASECO),
petitioner, vs.
PRESIDENTIAL COMMISSION ON GOOD GOVERNMENT,
CHAIRMAN JOVITO SALONGA, COMMISSIONER MARY
CONCEPCION BAUTISTA, COMMISSIONER RAMON DIAZ,
COMMISSIONER RAUL R. DAZA, COMMISSIONER QUINTIN S.
DOROMAL, CAPT. JORGE B. SIACUNCO, et al., respondents.
Challenged in this special civil action of certiorari and prohibition by the
petitioner, Bataan Shipyard and Engineering Co., Inc. (BASECO) are:
(1) Executive Orders Numbered 1 and 2, promulgated by President
Corazon C. Aquino on February 28, 1986 and March 12, 1986,
respectively, and (2) the sequestration, takeover, and other orders
issued, and acts done, in accordance with said executive orders by the
Presidential Commission on Good Government and/or its
Commissioners and agents, affecting said corporation.
PCGG was tasked to sequester the BASECO thru Executive Orders 1
and 2 of President Cory Aquino.
PCGG was able to take over the BASECO and terminate its executive
employees and requested to have the following documents of the said
company. Such as Stock transfer book, Legal documents, Minutes of the
meetings, Financial statements, and the likes.
BASECO contends that he cannot produce the said documents due to it
is an infringement of its right against self-incrimination and against
unreasonable search and seizure.
W/N BASECO’s is entitled to the right against self-
incrimination, and right against unreasonable search and
seizure.
No Violation of Right against Self-Incrimination and Unreasonable
Searches and Seizures – It is elementary that the right against self-
incrimination has no application to juridical persons. While an
individual may lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not follow that a
corporation, vested with special privileges and franchises, may
refuse to show its hand when charged with an abuse of such
privileges.
BASECO contends that its right against self-incrimination and
unreasonable searches and seizures had been transgressed by the
Order of April 18,1986 which required it "to produce corporate records
from 1973 to 1986 under pain of contempt of the Commission if it fails to
do so." The order was issued upon the authority of Section 3 (e) of
Executive Order No. 1, treating of the PCGG's power to "issue
subpoenas requiring * * the production of such books, papers, contracts,
records, statements of accounts and other documents as may be
material to the investigation conducted by the Commission," and
paragraph (3), Executive Order No. 2 dealing with its power to "(r)equire
all persons in the Philippines holding * * (alleged "ill-gotten") assets or
properties, whether located in the Philippines or abroad, in their names
as nominees, agents or trustees, to make full disclosure of the same **."
The contention lacks merit. It is elementary that the right against self-
incrimination has no application to juridical persons. "While an individual
may lawfully refuse to answer incriminating questions unless protected
by an immunity statute, it does not follow that a corporation, vested with
special privileges and franchises, may refuse to show its hand when
charged with an abuse of such privileges. * *" At any rate, Executive
Order No. 14-A, amending Section 4 of Executive Order No. 14 assures
protection to individuals required to produce evidence before the PCGG
against any possible violation of his right against self-incrimination. It
gives them immunity from prosecution on the basis of testimony or
information he is compelled to present. As amended, said Section 4 now
provides that—"* * * * 'The witness may not refuse to comply with the
order on the basis of his privilege against self-incrimination; but no
testimony or other information compelled under the order (or any
information directly or indirectly derived from such testimony, or other
information) may be used against the witness in any criminal case,
except a prosecution for perjury, giving a false statement, or otherwise
failing to comply with the order." The constitutional safeguard against
unreasonable searches and seizures finds no application to the case at
bar either. There has been no search undertaken by any agent or
representative of the PCGG, and of course no seizure on the occasion
thereof.
 PEDRO R. PALTING, petitioner, vs.
SAN JOSE PETROLEUM INCORPORATED, respondent.
San Jose Petroleum filed with the Philippine Securities and
Exchange Commission a sworn registration statement, for the
registration and licensing for sale in the Philippines Voting Trust
Certificates representing 2,000,000 shares of its capital stock of a
par value of $0.35 a share, at P1.00 per share. It was alleged that
the entire proceeds of the sale of said securities will be devoted or
used exclusively to finance the operations of San Jose Oil
Company.
The San Jose Petroleum filed an amended Statement for
registration of the sale in the Philippines of its shares of capital
stock, which was increased from 2,000,000 to 5,000,000, at a
reduced offering price of from P1.00 to P0.70 per share.
Palting et.al filed with the SEC an opposition to registration and
licensing of the securities on the grounds that (1) the tie-up between
the issuer, SAN JOSE PETROLEUM, a Panamanian corporation
and SAN JOSE OIL, a domestic corporation, violates the
Constitution of the Philippines, the Corporation Law and the
Petroleum Act of 1949; (2) the issuer has not been licensed to
transact business in the Philippines; (3) the sale of the shares of the
issuer is fraudulen; and (4) the issuer as an enterprise, as well as its
business, is based upon unsound business principles.
SAN JOSE PETROLEUM claimed that it was a "business
enterprise" enjoying parity rights under the Ordinance appended to
the Constitution, which parity right, with respect to mineral resources
in the Philippines, may be exercised, pursuant to the Laurel-Langley
Agreement, only through the medium of a corporation organized
under the laws of the Philippines. Thus, registrant had to do so
through the medium of a domestic corporation, which is the SAN
JOSE OIL. It refused the contention that the Corporation Law was
being violated, by alleging that Section 13 thereof applies only to
foreign corporations doing business in the Philippines, and registrant
was not doing business here. The mere fact that it was a holding
company of SAN JOSE OIL and that registrant undertook the
financing of and giving technical assistance to said corporation did
not constitute transaction of business in the Philippines.
WON the tie-up between San Jose Petroleum, a foreign
Corporation, and San Jose Oil, a domestic mining
corporation is violative of the Constitution, the Laurel-
Langley Agreement, the Petroleum Act , and the
Corporation Law.
The privilege to utilize, exploit, and develop the natural resources of
this country was granted, by Article XIII of the Constitution, to
Filipino citizens or to corporations or associations 60% of the capital
of which is owned by such citizens. With the Parity Amendment to
the Constitution, the same right was extended to citizens of the
United States and business enterprises owned or controlled directly
or indirectly, by citizens of the United States.
A foreign corporation, which is not owned or controlled directly by
Americal citizens but is owned and controlled by a Panamanian
corporation, which in turn is owned and controlled by 2 Venezuelan
corporations, is not entitled to enjoy parity rights in the Philippines.
Granting that these individual stockholders are American citizens, it
is yet necessary to establish that the different states of which they
are citizens, allow Filipino citizens or corporations or associations
owned or controlled by Filipino citizens, to engage in the
exploitation, etc. of the natural resources of these states.
With a long chain of intervening foreign corporations, comes within
the purview of the Parity Amendment regarding business enterprises
indirectly owned or controlled by citizens of the United States, is to
unduly stretch and strain the language and intent of the law. For, to
what extent must the word "indirectly" be carried? Must we trace the
ownership or control of these various corporations ad infinitum for
the purpose of determining whether the American ownership-
control-requirement is satisfied? Add to this the admitted fact that
the shares of stock of the PANTEPEC and PANCOASTAL which are
allegedly owned or controlled directly by citizens of the United
States, are traded in the stock exchange in New York, and you have
a situation where it becomes a practical impossibility to determine at
any given time, the citizenship of the controlling stock required by
the law.
The Court held that the respondent SAN JOSE PETROLEUM is not
a business enterprise that is authorized to exercise the parity
privileges under the Parity Ordinance, the Laurel-Langley
Agreement and the Petroleum Law. Its tie-up with SAN JOSE OIL is,
consequently, illegal.
MARISSA R. UNCHUAN, Petitioner, vs.
ANTONIO J.P. LOZADA, ANITA LOZADA and THE REGISTER
OF DEEDS OF CEBU CITY, Respondents.
Sisters Anita Lozada Slaughter and Peregrina Lozada Saribay, both
based in US were the registered co-owners of 2 lots in Cebu City.
The Sisters sold the lots to their nephew Antonio J.P. Lozada under
a Deed of Sale. Armed with a Special Power of Attorney from Anita,
Peregrina went to the house of their brother, Dr. Antonio Lozada (Dr.
Lozada), Dr. Lozada agreed to advance the purchase price of
US$367,000 or P10,000,000 for Antonio, his nephew. The Deed of
Sale was later notarized and authenticated at the Philippine
Consul’s Office and new TCTs were issued in the name of Antonio
Lozada.
Pending registration of the deed, petitioner Marissa R. Unchuan
caused the annotation of an adverse claim on the lots. Marissa
claimed that Anita donated an undivided share in the lots to her
under an unregistered Deed of Donation Antonio and Anita brought
a case against Marissa for quieting of title with application for
preliminary injunction and restraining order. Marissa filed an action
to declare the Deed of Sale void and to cancel the new TCTs.
At the trial, respondents presented a notarized and duly
authenticated sworn statement, and a videotape where Anita denied
having donated land in favor of Marissa.
Dr. Lozada testified that he agreed to advance payment for Antonio
in preparation for their plan to form a corporation, wherein the lots
are to be eventually infused in the capitalization of Damasa Corp.,
where he and Antonio are to 40% and 60% stake, respectively.
In a Decision dated June 9, 1997, RTC disposed of the consolidated
cases, ruling among others that:
a. Plaintiff Antonio J.P. Lozada is declared the absolute owner
of the properties in question;
b. Defendant Marissa R. Unchuan is ordered to pay Antonio
J.P. Lozada and Anita Lozada damages.
On motion for reconsideration by petitioner, the RTC issued an
Order dated April 5, 1999. Said order declared the Deed of Sale
void, ordered the cancellation of the new TCTs in Antonio’s name,
and directed Antonio to pay Marissa damages, P100,000 attorney’s
fees and P50,000 for expenses of litigation.
Respondents moved for reconsideration. On July 6, 2000, Presiding
Judge, the RTC reinstated the Decision dated June 9, 1997, but with
the modification that the award of damages, and attorney’s were
disallowed.
Petitioner appealed to the Court of Appeals. On February 23, 2006
the appellate court affirmed with modification the July 6, 2000 Order
of the RTC.
W/N the sale between Lozada sisters and their nephew,
Antonio, violated the public policy prohibiting aliens from
owning lands in the Philippines.
No. The sale between Lozada sisters and their nephew, Antonio, did
not violated public policy. Even as Dr. Lozada advanced the money
for the payment of Antonio’s share, at no point were the lots control or management of the corporation is exercised through the
registered in Dr. Lozada’s name. Nor was it contemplated that the right to vote in the election of directors. In short, the term capital in
lots be under his control for they are actually to be included as Section 11, Article XII of the Constitution refers only to shares
capital of Damasa Corporation. According to their agreement, of stock that can vote in the election of directors.
Antonio and Dr. Lozada are to hold 60% and 40% of the shares in
said corporation, respectively. Under Republic Act No. 7042, This interpretation is consistent with the intent of the framers of the
particularly Section 3, a corporation organized under the laws of the Constitution to place in the hands of the Filipino citizens the control
Philippines of which at least 60% of the capital stock outstanding and management of public utilities. As revealed in the deliberations
and entitled to vote is owned and held by citizens of the Philippines, of the Constitutional Commission, capital refers to the voting stock
is considered a Philippine National. As such, the corporation may or controlling interest of a corporation.
acquire disposable lands in the Philippines. Neither did petitioner Mere legal title is insufficient to meet the 60 percent Filipino-owned
present proof to belie Antonio’s capacity to pay for the lots subjects “capital” required in the Constitution. Full beneficial ownership of 60
of this case. percent of the outstanding capital stock, coupled with 60 percent of
the voting rights is required. The legal and beneficial ownership of
60 percent of the outstanding capital stock must rest in the hands of
Filipino nationals in accordance with the constitutional mandate.
Otherwise, the corporation is considered as non-Philippine national.
HEIRS OF WILSON P. GAMBOA,* Petitioners,
vs. Foreigners hold 64.27 percent of the total number of PLDT’s
FINANCE SECRETARYMARGARITO B. TEVES, common share, while Filipinos hold only 35.37 percent. Since
holding a majority of the common shares equates to control, it is
The Philippine Legislature enacted Act No, 3436 which granted clear that foreigners exercise control over PLDT. Such amount of
Philippine Long Distance Telephone Company (PLDT) a franchise control unmistakably exceeds the allowable 40 percent limit on
and the right to engage in telecommunications business. The foreigner ownership of public utilities expressly mandated in Section
foreigners own 64.27% of the common shares of PLDT, which class 11, Article XII of the Constitution.
of shares exercises the sole right to vote in the election of directors.
Filipinos own only 35.73% of PLDT’s common shares, constituting a
minority of the voting stock.
The petition seeks to nullify the sale of shares of stock of Philippine
Telecommunications Investment Corporation (PTIC) by the
government to Metro Pacific Assets Holdings, Inc. (MPAH), an
affiliate of First Pacific Company Limited (First Pacific), a Hong
Kong-based investment firm and a shareholder of the PLDT.
Petitioners argued that since PTIC is a stockholder of PLDT, the
sale by the Philippine Government of 46.125 percent of PTIC shares
is actually an indirect sale of 12 million shares or about 6.3 percent
of the outstanding common shares of PLDT. With the sale, First
Pacific’s common shareholdings in PLDT increased from 30.7
percent to 37 percent, thereby increasing the common
shareholdings of foreigners in PLDT to about 81.47 percent. This
violates the Constitution which limits foreign ownership of the capital
of the public utility to not more than 40 percent.
Respondents claimed that the term capital in Section 11, Article XII
of the Constitution includes preferred shares since the Constitution
does not distinguish among classes of stock.
Petitioners countered that the 40 percent foreign equity limitation in
domestic public utilities refers only to common shares because such
shares are entitled to vote and it is through voting that control over a
corporation is exercised. Petitioners posited that the term capital in
Section 11, Article XII of the Constitution refers to the ownership of
common capital stock subscribed and outstanding, which class of
shares alone, under the corporate set-up of PLDT, can vote and
elect members of the board of directors.
Whether the term capital in Section 11, Article XII of the
Constitution refers to the total common shares only or to the
total outstanding capital stock (combined total of common and
non-voting preferred shares) of PLDT, a public utility.
The term capital in Section 11, Article XII of the Constitution refers
only to shares of stock entitled to vote in the election of directors,
and thus in the present case only to common shares, and not to the
total outstanding capital stock comprising both common and non-
voting preferred shares.
Considering that common shares have voting rights which translate
to control, as opposed to preferred shares which usually have no
voting rights, the term capital in our fundamental law refers only to
common shares. However, if the preferred shares also have the
right to vote in the election of directors, then the term capital shall
include such preferred shares because the right to participate in the
 CONCEPT BUILDERS, INC., petitioner, Information Sheet with the Securities and Exchange Commission on
vs. May 15, 1987, stating that its office address is at 355 Maysan Road,
THE NATIONAL LABOR RELATIONS COMMISSION, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet
On November, 1981, private respondents were served stating that its office address is at 355 Maysan Road, Valenzuela,
individual written notices of termination of employment by petitioner, Metro Manila.
effective on November 30, 1981. It was stated in the individual
notices that their contracts of employment had expired and the Furthermore, the NLRC stated that:
project in which they were hired had been completed. Public
respondent found it to be, the fact, however, that at the time of the Both information sheets were filed by the same Virgilio O.
termination of private respondent's employment, the project in which Casiño as the corporate secretary of both corporations. It
they were hired had not yet been finished and completed. Petitioner would also not be amiss to note that both corporations had
had to engage the services of sub-contractors whose workers the same president, the same board of directors,
performed the functions of private respondents. Aggrieved, private the same corporate officers, and substantially
respondents filed a complaint for illegal dismissal, unfair labor the same subscribers.
practice and non-payment of their legal holiday pay, overtime pay From the foregoing, it appears that, among other things, the
and thirteenth-month pay against petitioner. On December 19, 1984, respondent (herein petitioner) and the third-party claimant shared
the Labor Arbiter rendered judgment1 ordering petitioner to reinstate the same address and/or premises. Under this circumstances, (sic) it
private respondents. On November 27, 1985, the National Labor cannot be said that the property levied upon by the sheriff were not
Relations Commission (NLRC) dismissed the motion for of respondents.16
reconsideration filed by petitioner on the ground that the said
decision had already become final and executory. Clearly, petitioner ceased its business operations in order to evade
the payment to private respondents of back wages and to bar their
On November 6, 1989, a certain Dennis Cuyegkeng filed a third- reinstatement to their former positions. HPPI is obviously a business
party claim with the Labor Arbiter alleging that the properties sought conduit of petitioner corporation and its emergence was skillfully
to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. orchestrated to avoid the financial liability that already attached to
(HPPI) of which he is the Vice-President. On November 23, 1989, petitioner corporation.
private respondents filed a "Motion for Issuance of a Break-Open
Order," alleging that HPPI and petitioner corporation were owned by
the same incorporator/stockholders. They also alleged that petitioner
temporarily suspended its business operations in order to evade its
legal obligations to them and that private respondents were willing to
post an indemnity bond to answer for any damages which petitioner
and HPPI may suffer because of the issuance of the break-open
order. Petitioner further contends, that the doctrine of piercing the
corporate veil should not have been applied, in this case, in the
absence of any showing that it created HPPI in order to evade its
liability to private respondents. It also contends that HPPI is
engaged in the manufacture and sale of steel, concrete and iron
pipes, a business which is distinct and separate from petitioner's
construction business. Hence, it is of no consequence that petitioner
and HPPI shared the same premises, the same President and the
same set of officers and subscribers.
Whether or not the doctrine of piercing the corporate veil
should apply in this case.
The test in determining the applicability of the doctrine of piercing
the veil of corporate fiction is as follows:
1. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
business practice in respect to the transaction attacked so that
the corporate entity as to this transaction had at the time no
separate mind, will or existence of its own;
2. Such control must have been used by the defendant to
commit fraud or wrong, to perpetuate the violation of a
statutory or other positive legal duty or dishonest and unjust
act in contravention of plaintiff's legal rights; and
3. The aforesaid control and breach of duty must proximately
cause the injury or unjust loss complained of.
The absence of any one of these elements prevents "piercing the
corporate veil." In applying the "instrumentality" or "alter ego"
doctrine, the courts are concerned with reality and not form, with
how the corporation operated and the individual defendant's
relationship to that operation.14
Thus the question of whether a corporation is a mere alter ego, a
mere sheet or paper corporation, a sham or a subterfuge is purely
one of fact.
In this case, the NLRC noted that, while petitioner claimed that it
ceased its business operations on April 29, 1986, it filed an
MARC II MARKETING, INC. and LUCILA V. JOSON, Petitioners,
vs.
ALFREDO M. JOSON, Respondent.
Before petitioner corporation was officially incorporated, 6 respondent
has already been engaged by petitioner Lucila, in her capacity as
President of Marc Marketing, Inc., to work as the General Manager
of petitioner corporation. It was formalized through the execution of
a Management Contract7 dated 16 January 1994 under the
letterhead of Marc Marketing, Inc.8 as petitioner corporation is yet to
be incorporated at the time of its execution. It was explicitly provided
therein that respondent shall be entitled to 30% of its net income for
his work as General Manager. Respondent will also be granted 30%
of its net profit to compensate for the possible loss of opportunity to
work overseas.9 Pending incorporation of petitioner corporation,
respondent was designated as the General Manager of Marc
Marketing, Inc., which was then in the process of winding up its
business. For occupying the said position, respondent was among
its corporate officers by the express provision of Section 1, Article
IV10 of its by-laws.11 On 15 August 1994, petitioner corporation was
officially incorporated and registered with the SEC. Accordingly,
Marc Marketing, Inc. was made non-operational. Respondent
continued to discharge his duties as General Manager but this time
under petitioner corporation.
petitioner corporation cannot be considered estopped from
questioning its binding effect now that respondent was invoking the
same against it. In no way, then, can it be enforced against
petitioner corporation, much less, its provisions fixing respondent’s
compensation as General Manager to 30% of petitioner
corporation’s net profit. Consequently, such percentage cannot be
the basis for the computation of respondent’s separation pay. This
finding, however, will not affect the undisputed fact that respondent
was, indeed, the General Manager of petitioner corporation from its
incorporation up to the time of his dismissal.
As regards petitioner Lucila’s solidary liability, this Court affirms the
same.
As a rule, corporation has a personality separate and distinct from
its officers, stockholders and members such that corporate officers
are not personally liable for their official acts unless it is shown that
they have exceeded their authority. However, this corporate veil can
be pierced when the notion of the legal entity is used as a means to
perpetrate fraud, an illegal act, as a vehicle for the evasion of an
existing obligation, and to confuse legitimate issues. Under the
Labor Code, for instance, when a corporation violates a provision
declared to be penal in nature, the penalty shall be imposed upon
the guilty officer or officers of the corporation.57

Petitioners fault the Court of Appeals for having sustained the Labor Based on the prevailing circumstances in this case, petitioner Lucila,
Arbiter’s finding that respondent was not a corporate officer under being the President of petitioner corporation, acted in bad faith and
petitioner corporation’s by-laws. They insist that there is no need to with malice in effecting respondent’s dismissal from employment.
amend the corporate by-laws to specify who its corporate officers Although petitioner corporation has a valid cause for dismissing
are. Petitioners further contend that respondent’s claim for 30% of respondent due to cessation of business operations, however, the
the net profit of petitioner corporation was anchored on the latter’s dismissal therefrom was done abruptly by its President,
purported Management Contract dated 16 January 1994. It should petitioner Lucila.
be noted, however, that said Management Contract was executed at
the time petitioner corporation was still nonexistent and had no
juridical personality yet. Such being the case, respondent cannot
invoke any legal right therefrom as it has no legal and binding effect
on petitioner corporation. Moreover, it is clear from the Articles of
Incorporation of petitioner corporation that respondent was its
director and stockholder. Indubitably, respondent’s claim for his
share in the profit of petitioner corporation was based on his
capacity as such and not by virtue of any employer-employee
relationship.
Whether or not the respondent is a corporate officer of the
petitioner corporation.
This Court rules that respondent was not a corporate officer of
petitioner corporation because his position as General Manager was
not specifically mentioned in the roster of corporate officers in its
corporate by-laws. The enabling clause in petitioner corporation’s
by-laws empowering its Board of Directors to create additional
officers, i.e., General Manager, and the alleged subsequent passage
of a board resolution to that effect cannot make such position a
corporate office. The board of directors has no power to create other
corporate offices without first amending the corporate by-laws so as
to include therein the newly created corporate office. Though the
board of directors may create appointive positions other than the
positions of corporate officers, the persons occupying such positions
cannot be viewed as corporate officers under Section 25 of the
Corporation Code.
The submission, however, of the said undated Secretary’s
Certificate will not change the fact that respondent was an
employee. The certification does not amount to an amendment of
the by-laws which is needed to make the position of General
Manager a corporate office. As can be gleaned from the records, the
Management Contract dated 16 January 1994 was executed
between respondent and petitioner Lucila months before petitioner
corporation’s incorporation on 15 August 1994. Similarly, it was
done when petitioner Lucila was still the President of Marc
Marketing, Inc. Undeniably, it cannot have any binding and legal
effect on petitioner corporation. Also, there was no evidence
presented to prove that petitioner corporation adopted, ratified or
confirmed the Management Contract. It is for the same reason that
 LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
On behalf of “Ocean Quest Fishing Corporation,” Antonio Chua and
Peter Yao entered into a Contract dated February 7, 1990, for the
purchase of fishing nets of various sizes from the Philippine Fishing
Gear Industries, Inc. (herein respondent). They claimed that they
were engaged in a business venture with Petitioner Lim Tong Lim,
who however was not a signatory to the agreement. The buyers,
however, failed to pay for the fishing nets and the floats; hence,
private respondents filed a collection suit against Chua, Yao and
Petitioner Lim Tong Lim with a prayer for a writ of preliminary
attachment. The suit was brought against the three in their
capacities as general partners, on the allegation that “Ocean Quest
Fishing Corporation” was a nonexistent corporation as shown by a
Certification from the Securities and Exchange Commission. 5 On
September 20, 1990, the lower court issued a Writ of Preliminary
Attachment, which the sheriff enforced by attaching the fishing nets
on board F/B Lourdes. Instead of answering the Complaint, Chua
filed a Manifestation admitting his liability and requesting a
reasonable time within which to pay. . Lim Tong Lim, on the other
hand, filed an Answer with Counterclaim and Crossclaim and moved
for the lifting of the Writ of Attachment. 6 The trial court maintained
the Writ, and upon motion of private respondent, ordered the sale of
the fishing nets at a public auction. On November 18, 1992, the trial
court rendered its Decision, ruling that Philippine Fishing Gear
Industries was entitled to the Writ of Attachment and that Chua, Yao
and Lim, as general partners, were jointly liable to pay respondent.
The Court of Appeals stated that petitioner was a partner of Chua
and Yao in a fishing business and may thus be held liable as a such
for the fishing nets and floats purchased by and for the use of the
partnershipand that Oviously, the ultimate undertaking of the
defendants was to divide the profits among themselves which is
what a partnership essentially is . . . . By a contract of partnership,
two or more persons bind themselves to contribute money, property
or industry to a common fund with the intention of dividing the profits
among themselves.
Whether or not a partnership exists between the parties.
The facts as found by the two lower courts clearly showed that there
existed a partnership among Chua, Yao and him, pursuant to Article
1767 of the Civil Code which provides:
Art. 1767 — By the contract of partnership, two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Specifically, both lower courts ruled that a partnership among the
three existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was
engaged in commercial fishing to join him, while Antonio Chua
was already Yao’s partner;
(2) That after convening for a few times, Lim, Chua, and Yao
verbally agreed to acquire two fishing boats, the FB
Lourdes and the FB Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother
of Petitioner Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation,
which executed a Deed of Sale over these two (2) boats in
favor of Petitioner Lim Tong Lim only to serve as security for
the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-
equipping, repairing, dry docking and other expenses for the
boats would be shouldered by Chua and Yao;
(6) That because of the “unavailability of funds,” Jesus Lim
again extended a loan to the partnership in the amount of P1
million secured by a check, because of which, Yao and Chua
entrusted the ownership papers of two other boats, Chua’s FB
Lady Anne Mel and Yao’s FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao
and Antonio Chua bought nets from Respondent Philippine
Fishing Gear, in behalf of “Ocean Quest Fishing Corporation,”
their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the
Malabon RTC, Branch 72 by Antonio Chua and Peter Yao
against Lim Tong Lim for (a) declaration of nullity of
commercial documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4) injunction; and €
damages.
(9) That the case was amicably settled through a Compromise
Agreement executed between the parties-litigants the terms of
which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua,
Yao and Lim had decided to engage in a fishing business, which
they started by buying boats worth P3.35 million, financed by a loan
secured from Jesus Lim who was petitioner’s brother. In their
Compromise Agreement, they subsequently revealed their intention
to pay the loan with the proceeds of the sale of the boats, and to
divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed
money, fell under the term “common fund” under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could
be an intangible like credit or industry. That the parties agreed that
any loss or profit from the sale and operation of the boats would be
divided equally among them also shows that they had indeed
formed a partnership.
Petitioner argues that under the doctrine of corporation by estoppel,
liability can be imputed only to Chua and Yao, and not to him. Again,
we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume
to act as a corporation knowing it to be without authority to do
so shall be liable as general partners for all debts, liabilities
and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued
on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a
defense its lack of corporate personality.
One who assumes an obligation to an ostensible corporation
as such, cannot resist performance thereof on the ground that
there was in fact no corporation.
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate
existence. “The reason behind this doctrine is obvious — an
unincorporated association has no personality and would be
incompetent to act and appropriate for itself the power and attributes
of a corporation as provided by law; it cannot create agents or
confer authority on another to act in its behalf; thus, those who act or
purport to act as its representatives or agents do so without authority
and at their own risk.
 GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. same shall be held on the first Tuesday after the first Monday in
January….
THE COURT OF APPEALS, GRACE VILLAGE ASSOCIATION,
INC., ALEJANDRO G. BELTRAN, and ERNESTO L. in the case of petitioner, there is no reason at all for its
GO, respondents. representative to be given a seat in the board. Nor does petitioner
claim a right to such seat by virtue of an office held. In fact it was not
It appears, that on December 20, 1975, a committee of the board of given such seat in the beginning. It was only in 1975 that a proposed
directors prepared a draft of an amendment to the by-laws. This amendment to the by-laws sought to give it one.
draft was never presented to the general membership for approval.
Nevertheless, from 1975, after it was presumably submitted to the Since the provision in question is contrary to law, the fact that for
board, up to 1990, petitioner was given a permanent seat in the fifteen years it has not been questioned or challenged but, on the
board of directors of the association. Petitioner requested the contrary, appears to have been implemented by the members of the
chairman of the election committee to change the notice of election association cannot forestall a later challenge to its validity. Neither
by following the procedure in previous elections, claiming that the can it attain validity through acquiescence because, if it is contrary
notice issued for the 1990 elections ran "counter to the practice in to law, it is beyond the power of the members of the association to
previous years" and was "in violation of the by-laws (of 1975)" and waive its invalidity. For that matter the members of the association
"unlawfully deprive[d] Grace Christian High School of its vested right may have formally adopted the provision in question, but their action
[to] a permanent seat in the board. It appears that the opinion of the would be of no avail because no provision of the by-laws can be
Securities and Exchange Commission on the validity of this adopted if it is contrary to law.
provision was sought by the association and that in reply to the
query, the SEC rendered an opinion to the effect that the practice of
allowing unelected members in the board was contrary to the
existing by-laws of the association and to §92 of the Corporation
Code.
On June 20, 1990, the hearing officer of the HIGC rendered a
decision dismissing petitioner's action. The hearing officer held that
the amended by-laws, upon which petitioner based its claim, "[was]
merely a proposed by-laws which, although implemented in the past,
had not yet been ratified by the members of the association nor
approved by competent authority"; that, on the contrary, in the
meeting held on April 17, 1990, the directors of the association
declared "the proposed by-law dated December 20, 1975 prepared
by the committee on by-laws . . . null and void" and the by-laws of
December 17, 1968 as the "prevailing by-laws under which the
association is to operate until such time that the proposed
amendments to the by-laws are approved and ratified by a majority
of the members of the association and duly filed and approved by
the pertinent government agency." The Court of Appeals held that
there was no valid amendment of the association's by-laws because
of failure to comply with the requirement of its existing by-laws,
prescribing the affirmative vote of the majority of the members of the
association at a regular or special meeting called for the adoption of
amendment to the by-laws. The proposed amendment to the by-
laws was never approved by the majority of the members of the
association as required by these provisions of the law and by-laws.
But petitioner contends that the members of the committee which
prepared the proposed amendment were duly authorized to do so
and that because the members of the association thereafter
implemented the provision for fifteen years, the proposed
amendment for all intents and purposes should be considered to
have been ratified by them.
Whether or not giving petitioner's representative a
permanent seat in the board of the association, is contrary
to law
It is actually §§28 and 29 of the Corporation Law — not §92 of the
present law or §29 of the former one — which require members of
the boards of directors of corporations to be elected.
§28. Unless otherwise provided in this Act, the corporate powers of
all corporations formed under this Act shall be exercised, all
business conducted and all property of such corporations controlled
and held by a board of not less than five nor more than eleven
directors to be elected from among the holders of stock or, where
there is no stock, from the members of the corporation…
§29. At the meeting for the adoption of the original by-laws, or at
such subsequent meeting as may be then determined, directors
shall be elected to hold their offices for one year and until their
successors are elected and qualified. Thereafter the directors of the
corporation shall be elected annually by the stockholders if it be a
stock corporation or by the members if it be a nonstock corporation,
and if no provision is made in the by-laws for the time of election the