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G.R. No. L-60502             July 16, 1991
PEDRO LOPEZ DEE, petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, HEARING OFFICER EMMANUEL SISON, NAGA
TELEPHONE CO., INC., COMMUNICATION SERVICES, INC., LUCIANO MAGGAY, AUGUSTO
FEDERIS, NILDA RAMOS, FELIPA JAVALERA, DESIDERIO SAAVEDRA, respondents.
G.R. No. L-63922             July 16, 1991
JUSTINO DE JESUS, SR., PEDRO LOPEZ DEE, JULIO LOPEZ DEE, and VICENTE TORDILLA,
JR., petitioners,
vs.
INTERMEDIATE APPELLATE COURT, LUCIANO MAGGAY, NILDA I. RAMOS, DESIDERIO SAAVEDRA,
AUGUSTO FEDERIS, ERNESTO MIGUEL, COMMUNICATION SERVICES, INC., and NAGA TELEPHONE
COMPANY, INC., respondents.
PARAS, J.:
These are petitions for certiorari with preliminary injunction and/or restraining order which seek to annul
and set aside in: (1) G.R. No. 60502, the order* of the hearing officer dated May 4, 1982, setting the date
for the election of the directors to be held by the stockholders on May 22, 1982, in SEC Case No. 1748
entitled "Pedro Lopez Dee v. Naga Telephone Co., Inc. et al."; and (2) G.R. No. 63922, the decision** of the
Intermediate Appellate Court dated April 14, 1983 which annulled the judgment of the trial court on the
contempt charge against the private respondents in G.R. No. SP-14846-R, entitled "Luciano Maggay, et al.
v. Hon. Delfin Vir Sunga, et al."
As gathered from the records, the facts of these cases are as follows:
Naga Telephone Company, Inc. was organized in 1954, the authorized capital was P100,000.00. In 1974
Naga Telephone Co., Inc. (Natelco for short) decided to increase its authorized capital to P3,000,000.00. As
required by the Public Service Act, Natelco filed an application for the approval of the increased authorized
capital with the then Board of Communications under BOC Case No. 74-84. On January 8, 1975, a decision
was rendered in said case, approving the said application subject to certain conditions, among which was:
3. That the issuance of the shares of stocks will be for a period of one year from the date hereof,
"after which no further issues will be made without previous authority from this Board."
Pursuant to the approval given by the then Board of Communications, Natelco filed its Amended Articles of
Incorporation with the Securities and Exchange Commission (SEC for short). When the amended articles
were filed with the SEC, the original authorized capital of P100,000.00 was already paid. Of the increased
capital of P2,900,000.00 the subscribers subscribed to P580,000.00 of which P145,000 was fully paid.
The capital stock of Natelco was divided into 213,000 common shares and 87,000 preferred shares, both
at a par value of P10.00 per shares.
On April 12, 1977, Natelco entered into a contract with Communication Services, Inc. (CSI for short) for the
"manufacture, supply, delivery and installation" of telephone equipment. In accordance with this contract,
Natelco issued 24,000 shares of common stocks to CSI on the same date as part of the downpayment. On
May 5, 1979, another 12,000 shares of common stocks were issued to CSI. In both instances, no prior
authorization from the Board of Communications, now the National Telecommunications Commission, was
secured pursuant to the conditions imposed by the decision in BOC Case NO. 74-84 aforecited (Rollo, Vol.
III, Memorandum for private respondent Natelco, pp. 814-816).
On May 19, 1979, the stockholders of the Natelco held their annual stockholders' meeting to elect their
seven directors to their Board of Directors, for the year 1979-1980. In this election Pedro Lopez Dee (Dee
for short) was unseated as Chairman of the Board and President of the Corporation, but was elected as one
of the directors, together with his wife, Amelia Lopez Dee (Rollo, Vol. III, Memorandum for private
respondents, p. 985; p. 2).
In the election CSI was able to gain control of Natelco when the latter's legal counsel, Atty. Luciano
Maggay (Maggay for short) won a seat in the Board with the help of CSI. In the reorganization Atty. Maggay
became president (Ibid., Memorandum for Private Respondent Natelco, p. 811).
The following were elected in the May 19, 1979 election: Atty. Luciano Maggay, Mr. Augusto Federis, Mrs.
Nilda Ramos, Ms. Felipa Javalera, Mr. Justino de Jesus, Sr., Mr. Pedro Lopez Dee and Mrs Amelia C. Lopez
Dee. The last three named directors never attended the meetings of the Maggay Board. The members of
the Maggay Board who attended its meetings were Maggay. Federis, Ramos and Javalera. The last two
were and are CSI representatives (Ibid., p. 812).
Petitioner Dee having been unseated in the election, filed a petition in the SEC docketed as SEC Case No.
1748, questioning the validity of the elections of May 19, 1979 upon the main ground that there was no
valid list of stockholders through which the right to vote could be determined (Rollo, Vol. I, pp. 254-262-A).
As prayed for in the petition (Ibid., p. 262), a restraining order was issued by the SEC placing petitioner
and the other officers of the 1978-1979 Natelco Board in hold-over capacity (Rollo, Vol. II, Reply, p. 667).
The SEC restraining order was elevated to the Supreme Court in G.R. No. 50885 where the enforcement of
the SEC restraining order was restrained. Private respondents therefore, replaced the hold-over officers
(Rollo, Vol. 11, p. 897).
During the tenure of the Maggay Board, from June 22, 1979 to March 10, 1980, it did not reform the
contract of April 12, 1977, and entered into another contract with CSI for the supply and installation of
additional equipment but also issued to CSI 113,800 shares of common stock (Ibid., p. 812).
The shares of common stock issued to CSI are as follows:
NO. OF SHARES DATE ISSUED
24,000 shares April 12, 1977
12,000 shares May 5, 1979
28,000 shares October 2, 1979
November 5,
28,500 shares
1979
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petitioners, de Jesus, Tordilla and the Dee's all defendants therein, which was raffled to Branch I, presided
November 14,
20,000 shares over by Judge Delfin Vir Sunga (Rollo, G.R. No. 63922; pp. 25-30). Villasenor claimed that he was an
1979
assignee of an option to repurchase 36,000 shares of common stocks of Natelco under a Deed of
20,000 shares January 7, 1980 Assignment executed in his favor (Rollo, p. 31). The defendants therein (now private respondents),
principally the Maggay group, allegedly refused to allow the repurchase of said stocks when petitioner
16,500 shares January 26, 1980 Villasenor offered to defendant CSI the repurchase of said stocks by tendering payment of its price (Rollo,
p. 26 and p. 78). The complaint therefore, prayed for the allowance to repurchase the aforesaid stocks and
(Ibid., pp. 816- that the holding of the May 22, 1982 election of directors and officers of Natelco be enjoined (Rollo, pp. 28-
149,000 shares 29).
817).
Subsequently, the Supreme Court dismissed the petition in G.R. No. 50885 upon the ground that the same
was premature and the Commission should be allowed to conduct its hearing on the controversy. The A restraining order dated May 21, 1982 was issued by the lower court commanding desistance from the
dismissal of the petition resulted in the unseating of the Maggay group from the board of directors of scheduled election until further orders (Rollo, p. 32).
Natelco in a "hold-over" capacity (Rollo, Vol. II, p. 533).

Nevertheless, on May 22, 1982, as scheduled, the controlling majority of the stockholders of the Natelco
In the course of the proceedings in SEC Case No. 1748, respondent hearing officer issued an order on June defied the restraining order, and proceeded with the elections, under the supervision of the SEC
23, 1981, declaring: (1) that CSI is a stockholder of Natelco and, therefore, entitled to vote; (2) that representatives (Rollo, Vol. III, p. 985); p. 10; G.R. No. 60502).
unexplained 16,858 shares of Natelco appear to have been issued in excess to CSI which should not be
allowed to vote; (3) that 82 shareholders with their corresponding number of shares shall be allowed to
vote; and (4) consequently, ordering the holding of special stockholder' meeting to elect the new members On May 25, 1982, the SEC recognized the fact that elections were duly held, and proclaimed that the
of the Board of Directors for Natelco based on the findings made in the order as to who are entitled to vote following are the "duly elected directors" of the Natelco for the term 1982-1983:
(Rollo, Vol. 1, pp. 288-299).
1. Felipa T. Javalera
From the foregoing order dated June 23, 1981, petitioner Dee filed a petition for certiorari/appeal with the
SEC en banc. The petition/appeal was docketed as SEC-AC NO. 036. Thereafter, the Commission en
2. Nilda I. Ramos
banc rendered a decision on April 5, 1982, the dispositive part of which leads:

3. Luciano Maggay
Now therefore, the Commission en banc resolves to sustain the order of the Hearing Officer; to
dismiss the petition/appeal for lack of merit; and order new elections as the Hearing Officer shall
set after consultations with Natelco officers. For the protection of minority stockholders and in 4. Augusto Federis
the interest of fair play and justice, the Hearing Officer shall order the formation of a special
committee of three, one from the respondents (other than Natelco), one from petitioner, and the
Hearing Officer as Chairman to supervise the election. 5. Daniel J. Ilano

It remains to state that the Commission en banc cannot pass upon motions belatedly filed by 6. Nelin J. Ilano Sr.
petitioner and respondent Natelco to introduce newly discovered evidence — any such evidence
may be introduced at hearings on the merits of SEC Case No. 1748.
7. Ernesto A. Miguel

SO ORDERED. (Rollo, Vol. I, p. 24).

And, the following are the recognized officers to wit:

On April 21, 1982, petitioner filed a motion for reconsideration (Rollo, Vol. I, pp. 25-30). Likewise, private
respondent Natelco filed its motion for reconsideration dated April 21, 1982 (Ibid., pp. 32-51). 1. President Luciano Maggay

Pending resolution of the motions for reconsideration, on May 4, 1982, respondent healing officer without 2. Vice-President Nilda I. Ramos
waiting for the decision of the commission en banc to become final and executory rendered an order
stating that the election for directors would be held on May 22, 1982 (Ibid., pp. 300-301). 3. Secretary Desiderio Saavedra

On May 20, 1982, the SEC en banc denied the motions for reconsideration (Rollo, Vol. II, pp. 763-765). 4. Treasurer Felipa Javalera

Meanwhile on May 20, 1982 (G.R. No. 63922), petitioner Antonio Villasenor (as plaintiff) filed Civil Case No. 5. Auditor Daniel Ilano
1507 with the Court of First Instance of Camarines Sur, Naga City, against private respondents and co-
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(Rollo, Vol. 1, pp. 302-303)
Despite service of the order of May 25, 1982, the Lopez Dee group headed by Messrs. Justino De Jesus and
Julio Lopez Dee kept insisting no elections were held and refused to vacate their positions (Rollo, Vol. III, p.
985; p. 11).
comment on the petition, which was complied with, and at the same time temporarily refrained from
implementing and/or enforcing the questioned judgment and order of the lower court (Rollo, p. 77),
Decision of CA, p. 2).
On April 14, 1983, the then Intermediate Appellate Court, rendered a decision, the dispositive portion of
which reads:

On May 28, 1982, the SEC issued another order directing the hold-over directors and officers to turn over
their respective posts to the newly elected directors and officers and directing the Sheriff of Naga City, WHEREFORE, judgment is hereby rendered as follows:
with the assistance of PC and INP of Naga City, and other law enforcement agencies of the City or of the
Province of Camarines Sur, to enforce the aforesaid order (Rollo, Vol. 11, pp. 577-578).
1. Annuling the judgment dated September 7, 1982 rendered by respondent judge on the
contempt charge, and his order dated September 10, 1982, implementing said judgment;
On May 29, 1982, the Sheriff of Naga City, assisted by law enforcement agencies, installed the newly
elected directors and officers of the Natelco, and the hold-over officers peacefully vacated their respective
offices and turned-over their functions to the new officers (Rollo, Vol. III, p. 985; pp. 12-13). 2. Ordering the "hold-over" directors and officers of NATELCO to vacate their respective offices;

On June 2, 1982, a charge for contempt was filed by petitioner Villasenor alleging that private respondents 3. Directing respondents to restore or re-establish petitioners (private respondents in this case)
have been claiming in press conferences and over the radio airlanes that they actually held and conducted who were ejected on May 22, 1982 to their respective offices in the NATELCO, . . .;
elections on May 22, 1982 in the City of Naga and that they have a new set of officers, and that such acts
of herein private respondents constitute contempt of court (G.R. 63922; Rollo, pp. 35-37).
4. Prohibiting whoever may be the successor of respondent Judge from interfering with the
proceedings of the Securities and Exchange Commission in SE-CAC No. 036;
On September 7, 1982, the lower court rendered judgment on the contempt charge, the dispositive portion
of which reads:
x x x           x x x          x x x

WHEREFORE, judgment is hereby rendered: (Rollo, p. 88).

1. Declaring respondents, CSI Nilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto
The order of re-implementation was issued, and, finally, the Maggay group has been restored as the
Federis and Ernesto Miguel, guilty of contempt of court, and accordingly punished with officers of the Natelco (Rollo, G.R. No. 60502, p. 985; p. 37).
imprisonment of six (6) months and to pay fine of P1,000.00 each; and

Hence, these petitions involve the same parties and practically the same issues.1âwphi1 Consequently, in
2. Ordering respondents, CSI Nilda Ramos, Luciano Maggay, Desiderio Saavedra, Augusto the resolution of the Court En Banc dated August 23, 1983, G.R. No. 63922 was consolidated with G.R. No.
Federis and Ernesto Miguel, and those now occupying the positions of directors and officers of
60502.
NATELCO to vacate their respective positions therein, and ordering them to reinstate the hold-
over directors and officers of NATELCO, such as Pedro Lopez Dee as President, Justino de Jesus,
Sr., as Vice President, Julio Lopez Dee as Treasurer and Vicente Tordilla, Jr. as Secretary, and In G.R. No. 60502 — In a resolution issued by the Court En Banc dated March 22, 1983, the Court gave due
others referred to as hold-over directors and officers of NATELCO in the order dated May 28, course to the petition and required the parties to submit their respective memoranda (Rollo, Resolution, p.
1982 of SEC Hearing Officer Emmanuel Sison, in SEC Case No. 1748 (Exh. 6), by way of 638-A; Vol. II).
RESTITUTION, and consequently, ordering said respondents to turn over all records, property
and assets of NATELCO to said hold-over directors and officers. (Ibid., Rollo, p. 49).
In G.R. No. 60502

The trial judge issued an order dated September 10, 1982 directing the respondents in the contempt
charge to "comply strictly, under pain of being subjected to imprisonment until they do so" (Ibid., p. 50). The main issues in this case are:
The order also commanded the Deputy Provincial Sheriff, with the aid of the PC Provincial Commander of
Camarines Sur and the INP Station Commander of Naga City to "physically remove or oust from the offices
or positions of directors and officers of NATELCO, the aforesaid respondents (herein private (1) Whether or not the Securities and Exchange Commission has the power and jurisdiction to declare null
respondents) . . . and to reinstate and maintain, the hold-over directors and officers of NATELCO referred and void shares of stock issued by NATELCO to CSI for violation of Sec. 20 (h) of the Public Service Act;
to in the order dated May 28, 1982 of SEC Hearing Officer Emmanuel Sison." (Ibid.).
(2) Whether or not the issuance of 113,800 shares of Natelco to CSI made during the pendency of SEC
Private respondents filed on September 17, 1982, a petition for certiorari and prohibition with preliminary Case No. 1748 in the Securities and Exchange Commission was valid;
injunction or restraining order against the CFI Judge of Camarines Sur, Naga City and herein petitioners,
with the then Intermediate Appellate Court which issued a resolution ordering herein petitioners to
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(3) Whether or not Natelco stockholders have a right of preemption to the 113,800 shares in question; and
(4) Whether or not the private respondents were duly elected to the Board of Directors of Natelco at an
election held on May 22, 1982.
In G.R. No. 63922
The crucial issue to be resolved is whether or not the trial judge has jurisdiction to restrain the holding of
an election of officers and directors of a corporation. The petitions are devoid of merit.
In G.R. No. 60502
I
It is the contention of petitioner that the Securities and Exchange Commission En Banc committed grave
abuse of discretion when, in its decision dated April 5, 1982, in SEC-AC No. 036, it refused to declare void
the shares of stock issued by Natelco to CSI allegedly in violation of Sec. 20 (h) of the Public Service Act.
This section requires prior administrative approval of any transfer or sale of shares of stock of any public
service which vest in the transferee more than forty percentum of the subscribed capital of the said public
service.
Section 5 of P.D. No. 902-A, as amended, enumerates the jurisdiction of the Securities and Exchange
Commission:
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and Exchange
Commission over Corporations, partnerships and other forms of associations, registered with it
as expressly granted under the existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts, of the board of directors, business associates,
its officers or partners, amounting to fraud and misrepresentation which may be detrimental to
the interest of the public and/or of the stockholders, partners, members of associations or
organizations registered with the Commission.
(b) Controversies arising out of intra-corporate or partnership relations, between and among
stockholders, members, or associates; between any or all of them and the corporation,
partnership or association of which they are stockholders, members or associates, respectively;
and between such corporation, partnership or association and the state insofar as it concerns
their individual franchise or right to exist as such entity;
c) Controversies in the election or appointments of directors, trustees, officers or managers of
such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association possesses
sufficient property to cover all its debts but foresees the impossibility of meeting them when
they respectively fall due or in cases where the corporation, partnership or association has no
sufficient assets to cover its liabilities, but is under the management of a Rehabilitation Receiver
or Management Committee created pursuant to this Decree, (As added by PD 1758)
In other words, in order that the SEC can take cognizance of a case, the controversy must pertain to any of
the following relationships: (a) between corporation, partnership or association and the public; (b) between
the corporation, partnership, or association and its stockholders, partners, members or officers; (c)
between the corporation, partnership or association and the state insofar as its franchise, permit or license
to operate is concerned; and (d) among the stockholders, partners, or associates themselves (Union Glass
& Container Corp. vs. SEC, 126 SCRA 31 [1983]).
The jurisdiction of the SEC is limited to matters intrinsically connected with the regulation of corporations,
partnerships and associations and those dealing with internal affairs of such entities; P.D. 902-A does not
confer jurisdiction to SEC over all matters affecting corporations (Pereyra vs. IAC, 181 SCRA 244 [1990];
Sales vs. SEC, 169 SCRA 121 [1989]).
The jurisdiction of the SEC in SEC Case No. 1748 is limited to deciding the controversy in the election of
the directors and officers of Natelco. Thus, the SEC was correct when it refused to rule on whether the
issuance of the shares of Natelco stocks to CSI violated Sec. 20 (h) of the Public Service Act.
The SEC ruling as to the issue involving the Public Service Act, Section 20 (h), asserts that the
Commission En Banc is not empowered to grant much less cancel franchise for telephone and
communications, and therefore has no authority to rule that the issuance and sale of shares would in effect
constitute a violation of Natelco's secondary franchise. It would be in excess of jurisdiction on our part to
decide that a violation of our public service laws has been committed. The matter is better brought to the
attention of the appropriate body for determination. Neither can the SEC provisionally decide the issue
because it is only vested with the power to grant or revoke the primary corporate franchise. The SEC is
empowered by P.D. 902-A to decide intra-corporate controversies and that is precisely the only issue in
this case.
II
The issuance of 113,800 shares of Natelco stock to CSI made during the pendency of SEC Case No. 1748 in
the Securities and Exchange Commission was valid. The findings of the SEC En Banc as to the issuance of
the 113,800 shares of stock was stated as follows:
But the issuance of 113,800 shares were (sic) pursuant to a Board Resolution and stockholders'
approval prior to May 19, 1979 when CSI was not yet in control of the Board or of the voting
shares. There is distinction between an order to issue shares on or before May 19, 1979
and actual issuance of the shares after May 19, 1979. The actual issuance, it is true, came
during the period when CSI was in control of voting shares and the Board (if they were in fact in
control but only pursuant to the original Board and stockholders' orders, not on the initiative to
the new Board, elected May 19, 1979, which petitioners are questioning. The Commission en
banc finds it difficult to see how the one who gave the orders can turn around and impugn the
implementation of the orders lie had previously given. The reformation of the contract is
understandable for Natelco lacked the corporate funds to purchase the CSI equipment.
x x x           x x x          x x x
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Appellant had raise the issue whether the issuance of 113,800 shares of stock during the
incumbency of the Maggay Board which was allegedly CSI controlled, and while the case
was sub judice, amounted to unfair and undue advantage. This does not merit consideration in
the absence of additional evidence to support the proposition.
In effect, therefore, the stockholders of Natelco approved the issuance of stock to CSI
III
While the group of Luciano Maggay was in control of Natelco by virtue of the restraining order issued in
G.R. No. 50885, the Maggay Board issued 113,800 shares of stock to CSI Petitioner said that the Maggay
Board, in issuing said shares without notifying Natelco stockholders, violated their right of pre-emption to
the unissued shares.
This Court in Benito vs. SEC, et al., has ruled that:
Petitioner bewails the fact that in view of the lack of notice to him of such subsequent issuance,
he was not able to exercise his right of pre-emption over the unissued shares. However, the
general rule is that pre-emptive right is recognized only with respect to new issues of shares,
and not with respect to additional issues of originally authorized shares. This is on the theory
that when a corporation at its inception offers its first shares, it is presumed to have offered all
of those which it is authorized to issue. An original subscriber is deemed to have taken his
shares knowing that they form a definite proportionate part of the whole number of authorized
shares. When the shares left unsubscribed are later re-offered, he cannot therefore (sic) claim a
dilution of interest (Benito vs. SEC, et al., 123 SCRA 722).
The questioned issuance of the 113,800 stocks is not invalid even assuming that it was made without
notice to the stockholders as claimed by the petitioner. The power to issue shares of stocks in a
corporation is lodged in the board of directors and no stockholders meeting is required to consider it
because additional issuance of shares of stocks does not need approval of the stockholders. Consequently,
no pre-emptive right of Natelco stockholders was violated by the issuance of the 113,800 shares to CSI.
IV
Petitioner insists that no meeting and election were held in Naga City on May 22, 1982 as directed by
respondent Hearing Officer. This fact is shown by the Sheriffs return of a restraining order issued by the
Court of First Instance of Camarines Sur in Case No. 1505 entitled "Antonio Villasenor v. Communications
Service Inc, et al." (Rollo, Vol. 1, p. 309).
There is evidence of the fact that the Natelco special stockholders' meeting and election of members of
the Board of Directors of the corporation were held at its office in Naga City on May 22, 1982 as shown
when the Hearing Officer issued an order on May 25, 1982, declaring the stockholders named therein as
corporate officers duly elected for the term 1982-1983.
More than that, private respondents were in fact charged with contempt of court and found guilty for
holding the election on May 22, 1982, in defiance of the restraining order issued by Judge Sunga (Rollo,
Vol. II, p. 750).
It is, therefore, very clear from the records that an election was held on May 22, 1982 at the Natelco
Offices in Naga City and its officers were duly elected, thereby rendering the issue of election moot and
academic, not to mention the fact that the election of the Board of Directors/Officers has been held
annually, while this case was dragging for almost a decade.
The contempt charge against herein private respondents was predicated on their failure to comply with
the restraining order issued by the lower court on May 21, 1982, enjoining them from holding the election
of officers and directors of Natelco scheduled on May 22, 1982. The SEC en banc, in its decision of April 5,
1982, directed the holding of a new election which, through a conference attended by the hold-over
directors of Natelco accompanied by their lawyers and presided by a SEC hearing officer, was scheduled
on May 22, 1982 (Rollo, p. 59). Contrary to the claim of petitioners that the case is within the jurisdiction of
the lower court as it does not involve an intra-corporate matter but merely a claim of a private party of the
right to repurchase common shares of stock of Natelco and that the restraining order was not meant to
stop the election duly called for by the SEC, it is undisputed that the main objective of the lower court's
order of May 21, 1982 was precisely to restrain or stop the holding of said election of officers and directors
of Natelco, a matter purely within the exclusive jurisdiction of the SEC (P.D. No. 902-A, Section 5). The said
restraining order reads in part:
. . . A temporary restraining order is hereby issued, directing defendants (herein respondents),
their agents, attorneys as well as any and all persons, whether public officers or private
individuals to desist from conducting and holding, in any manner whatsoever, an election of the
directors and officers of the Naga Telephone Co. (Natelco). . . . (Rollo, P. 32).
Indubitably, the aforesaid restraining order, aimed not only to prevent the stockholders of Natelco from
conducting the election of its directors and officers, but it also amounted to an injunctive relief against the
SEC, since it is clear that even "public officers" (such as the Hearing Officer of the SEC) are commanded to
desist from conducting or holding the election "under pain of punishment of contempt of court" (Ibid.) The
fact that the SEC or any of its officers has not been cited for contempt, along with the stockholders of
Natelco, who chose to heed the lawful order of the SEC to go on with the election as scheduled by the
latter, is of no moment, since it was precisely the acts of herein private respondents done pursuant to an
order lawfully issued by an administrative body that have been considered as contemptuous by the lower
court prompting the latter to cite and punish them for contempt (Rollo, p. 48).
Noteworthy is the pertinent portion of the judgment of the lower court which states:
Certainly, this Court will not tolerate, or much less countenance, a mere Hearing Officer of the
Securities and Exchange Commission, to render a restraining order issued by it (said Court)
within its jurisdiction, nugatory and ineffectual and abet disobedience and even defiance by
individuals and entities of the same. . . . (Rollo, p. 48).
Finally, in the case of Philippine Pacific Fishing Co., Inc. vs. Luna, 12 SCRA 604, 613 [1983], this Tribunal
stated clearly the following rule:
Nowhere does the law (P.D. No. 902-A) empower any Court of First Instance to interfere with the
orders of the Commission (SEC). Not even on grounds of due process or jurisdiction. The
Commission is, conceding arguendo a possible claim of respondents, at the very least, a co-
equal body with the Courts of First Instance. Even as such co-equal, one would have no power to
control the other. But the truth of the matter is that only the Supreme Court can enjoin and
correct any actuation of the Commission.
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Accordingly, it is clear that since the trial judge in the lower court (CFI of Camarines Sur) did not have DECISION
jurisdiction in issuing the questioned restraining order, disobedience thereto did not constitute contempt,
as it is necessary that the order be a valid and legal one. It is an established rule that the court has no
authority to punish for disobedience of an order issued without authority (Chanco v. Madrilejos, 9 Phil. 356; CARPIO, J.:
Angel Jose Realty Corp. v. Galao, et al., 76 Phil. 201).
The Case
Finally, it is well-settled that the power to punish for contempt of court should be exercised on the
preservative and not on the vindictive principle. Only occasionally should the court invoke its inherent
This is a petition for review1 to set aside the Decision 2 dated 15 June 2000 and the Resolution 3 dated 27
power in order to retain that respect without which the administration of justice must falter or fail (Rivera December 2000 of the Court of Appeals in CA-G.R. SP No. 55130. The Court of Appeals affirmed with
v. Florendo, 144 SCRA 643, 662-663 [1986]; Lipata v. Tutaan, 124 SCRA 880 [1983]).
modification the 29 December 1998 Decision 4 of the National Labor Relations Commission (NLRC) in NLRC
NCR 02-00949-95.
PREMISES CONSIDERED, both petitioners are hereby DISMISSED for lack of merit.
The Facts
SO ORDERED.
The facts, as summarized by the Labor Arbiter and adopted by the NLRC and the Court of Appeals, are as
follows:

On February 2, 1995, John F. McLeod filed a complaint for retirement benefits, vacation and sick leave
benefits, non-payment of unused airline tickets, holiday pay, underpayment of salary and 13th month pay,
moral and exemplary damages, attorney’s fees plus interest against Filipinas Synthetic Corporation
(Filsyn), Far Eastern Textile Mills, Inc., Sta. Rosa Textiles, Inc., Patricio Lim and Eric Hu.

In his Position Paper, complainant alleged that he is an expert in textile manufacturing process; that as
early as 1956 he was hired as the Assistant Spinning Manager of Universal Textiles, Inc. (UTEX); that he
was promoted to Senior Manager and worked for UTEX till 1980 under its President, respondent Patricio
Lim; that in 1978 Patricio Lim formed Peggy Mills, Inc. with respondent Filsyn having controlling interest;
that complainant was absorbed by Peggy Mills as its Vice President and Plant Manager of the plant at Sta.
Rosa, Laguna; that at the time of his retirement complainant was receiving P60,000.00 monthly with
vacation and sick leave benefits; 13th month pay, holiday pay and two round trip business class tickets on
a Manila-London-Manila itinerary every three years which is convertible to cas[h] if unused; that in January
1986, respondents failed to pay vacation and leave credits and requested complainant to wait as it was
short of funds but the same remain unpaid at present; that complainant is entitled to such benefit as per
CBA provision (Annex "A"); that respondents likewise failed to pay complainant’s holiday pay up to the
present; that complainant is entitled to such benefits as per CBA provision (Annex "B"); that in 1989 the
plant union staged a strike and in 1993 was found guilty of staging an illegal strike; that from 1989 to 1992
complainant was entitled to 4 round trip business class plane tickets on a Manila-London-Manila itinerary
but this benefit not (sic) its monetary equivalent was not given; that on August 1990 the respondents
reduced complainant’s monthly salary of P60,000.00 by P9,900.00 till November 1993 or a period of 39
months; that in 1991 Filsyn sold Peggy Mills, Inc. to Far Eastern Textile Mills, Inc. as per agreement (Annex
"D") and this was renamed as Sta. Rosa Textile with Patricio Lim as Chairman and President; that
complainant worked for Sta. Rosa until November 30 that from time to time the owners of Far Eastern
consulted with complainant on technical aspects of reoperation of the plant as per correspondence
(Annexes "D-1" and "D-2"); that when complainant reached and applied retirement age at the end of 1993,
he was only given a reduced 13th month pay of P44,183.63, leaving a balance of P15,816.87; that
G.R. No. 146667             January 23, 2007 thereafter the owners of Far Eastern Textiles decided for cessation of operations of Sta. Rosa Textiles; that
on two occasions, complainant wrote letters (Annexes "E-1" to "E-2") to Patricio Lim requesting for his
retirement and other benefits; that in the last quarter of 1994 respondents offered complainant
JOHN F. McLEOD, Petitioner,
compromise settlement of only P300,000.00 which complainant rejected; that again complainant wrote a
vs.
letter (Annex "F") reiterating his demand for full payment of all benefits and to no avail, hence this
NATIONAL LABOR RELATIONS COMMISSION (First Division), FILIPINAS SYNTHETIC FIBER
complaint; and that he is entitled to all his money claims pursuant to law.
CORPORATION (FILSYN), FAR EASTERN TEXTILE MILLS, INC., STA. ROSA TEXTILES, INC., (PEGGY
MILLS, INC.), PATRICIO L. LIM, and ERIC HU, Respondents.
7

On the other hand, respondents in their Position Paper alleged that complainant was the former Vice-
President and Plant Manager of Peggy Mills, Inc.; that he was hired in June 1980 and Peggy Mills closed
operations due to irreversible losses at the end of July 1992 but the corporation still exists at present; that
its assets were acquired by Sta. Rosa Textile Corporation which was established in April 1992 but still
remains non-operational at present; that complainant was hired as consultant by Sta. Rosa Textile in
November 1992 but he resigned on November 30, 1993; that Filsyn and Far Eastern Textiles are separate
legal entities and have no employer relationship with complainant; that respondent Patricio Lim is the
President and Board Chairman of Sta. Rosa Textile Corporation; that respondent Eric Hu is a Taiwanese
and is Director of Sta. Rosa Textiles, Inc.; that complainant has no cause of action against Filsyn, Far
Eastern Textile Ltd., Sta. Rosa Textile Corporation and Eric Hu; that Sta. Rosa only acquired the assets and
not the liabilities of Peggy Mills, Inc.; that Patricio Lim was only impleaded as Board Chairman of Sta. Rosa
Textile and not as private individual; that while complainant was Vice President and Plant Manager of
Peggy Mills, the union staged a strike up to July 1992 resulting in closure of operations due to irreversible
losses as per Notice (Annex "1"); that complainant was relied upon to settle the labor problem but due to
his lack of attention and absence the strike continued resulting in closure of the company; and losses to
Sta. Rosa which acquired its assets as per their financial statements (Annexes "2" and "3"); that the
attendance records of complainant from April 1992 to November 1993 (Annexes "4" and "5") show that he
was either absent or worked at most two hours a day; that Sta. Rosa and Peggy Mills are interposing
counterclaims for damages in the total amount of P36,757.00 against complainant; that complainant’s
monthly salary at Peggy Mills was P50,495.00 and not P60,000.00; that Peggy Mills, does not have a
retirement program; that whatever amount complainant is entitled should be offset with the
counterclaims; that complainant worked only for 12 years from 1980 to 1992; that complainant was only
hired as a consultant and not an employee by Sta. Rosa Textile; that complainant’s attendance record of
absence and two hours daily work during the period of the strike wipes out any vacation/sick leave he may
have accumulated; that there is no basis for complainant’s claim of two (2) business class airline tickets;
that complainant’s pay already included the holiday pay; that he is entitled to holiday pay as consultant by
Sta. Rosa; that he has waived this benefit in his 12 years of work with Peggy Mills; that he is not entitled to
13th month pay as consultant; and that he is not entitled to moral and exemplary damages and attorney’s
fees.
and sick leave benefits of 22 days per year effective 1986; that Peggy Mills required monthly paid
employees to sign an acknowledgement that their monthly compensation includes holiday pay; that
complainant was not made to sign this undertaking precisely because he is entitled to holiday pay over
and above his monthly pay; that the company paid for complainant’s two (2) round trip tickets to London
in 1983 and 1986 as reflected in the complainant’s passport (Annex "N"); that respondents claim that
complainant is not entitled to 13th month pay but paid in 1993 and all the past 13 years; that complainant
is entitled to moral and exemplary damages and attorney’s fees; that all doubts must be resolved in favor
of complainant; and that complainant reserved the right to file perjury cases against those concerned.
In their Reply, respondents alleged that except for Peggy Mills, the other respondents are not proper
persons in interest due to the lack of employer-employee relationship between them and complainant; that
undersigned counsel does not represent Peggy Mills, Inc.
In a separate Position Paper, respondent Peggy Mills alleged that complainant was hired on February 10,
1991 as per Board Minutes (Annex "A"); that on August 19, 1987, the workers staged an illegal strike
causing cessation of operations on July 21, 1992; that respondent filed a Notice of Closure with the DOLE
(Annex "B"); that all employees were given separation pay except for complainant whose task was
extended to December 31, 1992 to wind up the affairs of the company as per vouchers (Annexes "C" and
"C-1"); that respondent offered complainant his retirement benefits under RA 7641 but complainant
refused; that the regular salaries of complainant from closure up to December 31, 1992 have offset
whatever vacation and sick leaves he accumulated; that his claim for unused plane tickets from 1989 to
1992 has no policy basis, the company’s formula of employees monthly rate x 314 days over 12 months
already included holiday pay; that complainant’s unpaid portion of the 13th month pay in 1993 has no
basis because he was only an employee up to December 31, 1992; that the 13th month pay was based on
his last salary; and that complainant is not entitled to damages. 5
On 3 April 1998, the Labor Arbiter rendered his decision with the following dispositive portion:

In his Reply, complainant alleged that all respondents being one and the same entities are solidarily liable WHEREFORE, premises considered, We hold all respondents as jointly and solidarily liable for
for all salaries and benefits and complainant is entitled to; that all respondents have the same address at complainant’s money claims as adjudicated above and computed below as follows:
12/F B.A. Lepanto Building, Makati City; that their counsel holds office in the same address; that all
respondents have the same offices and key personnel such as Patricio Lim and Eric Hu; that respondents’
Position Paper is verified by Marialen C. Corpuz who knows all the corporate officers of all respondents; Retirement Benefits (one month salary for every year of service)
that the veil of corporate fiction may be pierced if it is used as a shield to perpetuate fraud and confuse
legitimate issues; that complainant never accepted the change in his position from Vice-President and
Plant Manger to consultant and it is incumbent upon respondents to prove that he was only a consultant; 6/80 - 11/30/93 = 14 years
that the Deed of Dation in Payment with Lease (Annex "C") proves that Sta. Rosa took over the assets of
Peggy Mills as early as June 15, 1992 and not 1995 as alleged by respondents; that complainant never P60,000 x 14.0 mos. …………………… P840,000.00
resigned from his job but applied for retirement as per letters (Annexes "E-1", "E-2" and "F"); that
documents "G", "H" and "I" show that Eric Hu is a top official of Peggy Mills that the closure of Peggy Mills
cannot be the fault of complainant; that the strike was staged on the issue of CBA negotiations which is Vacation and Sick Leave (3 yrs.)
not part of the usual duties and responsibilities as Plant Manager; that complainant is a British national and
is prohibited by law in engaging in union activities; that as per Resolution (Annex "3") of the NLRC in the
proper case, complainant testified in favor of management; that the alleged attendance record of P2,000.00 x 22 days x 3 yrs. …………… 132,000.00
complainant was lifted from the logbook of a security agency and is hearsay evidence; that in the other
attendance record it shows that complainant was reporting daily and even on Saturdays; that his limited
Underpayment of Salaries (3 yrs.)
hours was due to the strike and cessation of operations; that as plant manager complainant was on call 24
hours a day; that respondents must pay complainant the unpaid portion of his salaries and his retirement
benefits that cash voucher No. 17015 (Annex "K") shows that complainant drew the monthly salary P60,000 - P50,495 = P9,505
of P60,000.00 which was reduced to P50,495.00 in August 1990 and therefore without the consent of
complainant; that complainant was assured that he will be paid the deduction as soon as the company
improved its financial standing but this assurance was never fulfilled; that Patricio Lim promised P 9,505 x 36.0 mos. …………………... 342,180.00
complainant his retirement pay as per the latter’s letters (Annexes "E-1", "E-2" and "F"); that the law itself
provides for retirement benefits; that Patricio Lim by way of Memorandum (Annex "M") approved vacation
Holiday Pay (3 yrs.)
8

P2,000 x 30 days ………………………. 60,000.00 1. retirement pay equivalent to 22.5 days for every year of service for his twelve (12) years of
service from 1980 to 1992 based on a salary rate of P50,495, a month;
Underpayment of 13th month pay (1993) ……... 15,816.87
2. moral damages in the amount of one hundred thousand (P100,000.00) Pesos;

Moral Damages ……………………………….. 3,000,000.00

3. exemplary damages in the amount of fifty thousand (P50,000.00) Pesos; and

Exemplary Damages ………………………….. 1,000,000.00

4. attorney’s fees equivalent to 10% of the total award.

10% Attorney’s Fees …………………………. 138,999.68

No costs is awarded.

TOTAL P5,528,996.55
SO ORDERED.10

Unused Airline Tickets (3 yrs.)

The Court of Appeals rejected McLeod’s theory that all respondent corporations are the same corporate
entity which should be held solidarily liable for the payment of his monetary claims.
(To be converted in Peso upon payment)

The Court of Appeals ruled that the fact that (1) all respondent corporations have the same address; (2) all
$2,450.00 x 3.0 [yrs.]..……………… $7,350.00 were represented by the same counsel, Atty. Isidro S. Escano; (3) Atty. Escano holds office at respondent
corporations’ address; and (4) all respondent corporations have common officers and key personnel, would
not justify the application of the doctrine of piercing the veil of corporate fiction.
SO ORDERED.6

The Court of Appeals held that there should be clear and convincing evidence that SRTI, FETMI, and Filsyn
Filipinas Synthetic Fiber Corporation (Filsyn), Far Eastern Textile Mills, Inc. (FETMI), Sta. Rosa Textiles, Inc.
were being used as alter ego, adjunct or business conduit for the sole benefit of Peggy Mills, Inc. (PMI),
(SRTI), Patricio L. Lim (Patricio), and Eric Hu appealed to the NLRC. The NLRC rendered its decision on 29
otherwise, said corporations should be treated as distinct and separate from each other.
December 1998, thus:

The Court of Appeals pointed out that the Articles of Incorporation of PMI show that it has six incorporators,
WHEREFORE, the Decision dated 3 April 1998 is hereby REVERSED and SET ASIDE and a new one is
namely, Patricio, Jose Yulo, Jr., Carlos Palanca, Jr., Cesar R. Concio, Jr., E. A. Picasso, and Walter Euyang. On
entered ORDERING respondent Peggy Mills, Inc. to pay complainant his retirement pay equivalent to 22.5
the other hand, the Articles of Incorporation of Filsyn show that it has 10 incorporators, namely, Jesus Y.
days for every year of service for his twelve (12) years of service from 1980 to 1992 based on a salary rate
Yujuico, Carlos Palanca, Jr., Patricio, Ang Beng Uh, Ramon A. Yulo, Honorio Poblador, Jr., Cipriano Azada,
of P50,495.00 a month.
Manuel Tomacruz, Ismael Maningas, and Benigno Zialcita, Jr.

All other claims are DISMISSED for lack of merit.

The Court of Appeals pointed out that PMI and Filsyn have only two interlocking incorporators and
directors, namely, Patricio and Carlos Palanca, Jr.
SO ORDERED.7
Reiterating the ruling of this Court in Laguio v. NLRC,11 the Court of Appeals held that mere substantial
John F. McLeod (McLeod) filed a motion for reconsideration which the NLRC denied in its Resolution of 30 identity of the incorporators of two corporations does not necessarily imply fraud, nor warrant the piercing
June 1999.8 McLeod thus filed a petition for certiorari before the Court of Appeals assailing the decision and of the veil of corporate fiction.
resolution of the NLRC.9
The Court of Appeals also pointed out that when SRTI and PMI executed the Dation in Payment with Lease,
The Ruling of the Court of Appeals it was clear that SRTI did not assume the liabilities PMI incurred before the execution of the contract.

On 15 June 2000, the Court of Appeals rendered judgment as follows: The Court of Appeals held that McLeod failed to substantiate his claim that all respondent corporations
should be treated as one corporate

WHEREFORE, the decision dated December 29, 1998 of the NLRC is hereby AFFIRMED with the
MODIFICATION that respondent Patricio Lim is jointly and solidarily liable with Peggy Mills, Inc., to pay the entity. The Court of Appeals thus upheld the NLRC’s finding that no employer-employee relationship
following amounts to petitioner John F. McLeod: existed between McLeod and respondent corporations except PMI.
9
The Court of Appeals ruled that Eric Hu, as an officer of PMI, should be exonerated from any liability, there
being no proof of malice or bad faith on his part. The Court of Appeals, however, ruled that McLeod was
entitled to recover from PMI and Patricio, the company’s Chairman and President.
The Court of Appeals pointed out that Patricio deliberately and maliciously evaded PMI’s financial
obligation to McLeod. The Court of Appeals stated that, on several occasions, despite his approval, Patricio
refused and ignored to pay McLeod’s retirement benefits. The Court of Appeals stated that the delay lasted
for one year prompting McLeod to initiate legal action. The Court of Appeals stated that although PMI
offered to pay McLeod his retirement benefits, this offer for P300,000 was still below the "floor limits"
provided by law. The Court of Appeals held that an employee could demand payment of retirement
benefits as a matter of right.
The Court of Appeals stated that considering that PMI was no longer in operation, its "officer should be held
liable for acting on behalf of the corporation."
The Court of Appeals also ruled that since PMI did not have a retirement program providing for retirement
benefits of its employees, Article 287 of the Labor Code must be followed. The Court of Appeals thus
upheld the NLRC’s finding that McLeod was entitled to retirement pay equivalent to 22.5 days for every
year of service from 1980 to 1992 based on a salary rate of P50,495 a month.
The Court of Appeals held that McLeod was not entitled to payment of vacation, sick leave and holiday pay
because as Vice President and Plant Manager, McLeod is a managerial employee who, under Article 82 of
the Labor Code, is not entitled to these benefits.
The Court of Appeals stated that for McLeod to be entitled to payment of service incentive leave and
holidays, there must be an agreement to that effect between him and his employer.
Moreover, the Court of Appeals rejected McLeod’s argument that since PMI paid for his two round-trip
tickets Manila-London in 1983 and 1986, he was also "entitled to unused airline tickets." The Court of
Appeals stated that the fact that PMI granted McLeod "free transport to and from Manila and London for
the year 1983 and 1986 does not ipso facto characterize it as regular that would establish a prevailing
company policy."
The Court of Appeals also denied McLeod’s claims for underpayment of salaries and his 13th month pay for
the year 1994. The Court of Appeals upheld the NLRC’s ruling that it could be deduced from McLeod’s own
narration of facts that he agreed to the reduction of his compensation from P60,000 to P50,495 in August
1990 to November 1993.
The Court of Appeals found the award of moral damages for P50,000 in order because of the "stubborn
refusal" of PMI and Patricio to respect McLeod’s valid claims.
The Court of Appeals also ruled that attorney’s fees equivalent to 10% of the total award should be given
to McLeod under Article 2208, paragraph 2 of the Civil Code. 12
Hence, this petition.
The Issues
McLeod submits the following issues for our consideration:
1. Whether the challenged Decision and Resolution of the 14th Division of the Court of Appeals
promulgated on 15 June 2000 and 27 December 2000, respectively, in CA-G.R. SP No. 55130 are
in accord with law and jurisprudence;
2. Whether an employer-employee relationship exists between the private respondents and the
petitioner for purposes of determining employer liability to the petitioner;
3. Whether the private respondents may avoid their financial obligations to the petitioner by
invoking the veil of corporate fiction;
4. Whether petitioner is entitled to the relief he seeks against the private respondents;
5. Whether the ruling of [this] Court in Special Police and Watchman Association (PLUM)
Federation v. National Labor Relations Commission cited by the Office of the Solicitor General is
applicable to the case of petitioner; and
6. Whether the appeal taken by the private respondents from the Decision of the labor arbiter
meets the mandatory requirements recited in the Labor Code of the Philippines, as amended. 13
The Court’s Ruling
The petition must fail.
McLeod asserts that the Court of Appeals should not have upheld the NLRC’s findings that he was a
managerial employee of PMI from 20 June 1980 to 31 December 1992, and then a consultant of SRTI up to
30 November 1993. McLeod asserts that if only for this "brazen assumption," the Court of Appeals should
not have sustained the NLRC’s ruling that his cause of action was only against PMI.
These assertions do not deserve serious consideration.
Records disclose that McLeod was an employee only of PMI. 14 PMI hired McLeod as its acting Vice President
and General Manager on 20 June 1980.15 PMI confirmed McLeod’s appointment as Vice President/Plant
Manager in the Special Meeting of its Board of Directors on 10 February 1981. 16 McLeod himself testified
during the hearing before the Labor Arbiter that his "regular employment" was with PMI. 17
When PMI’s rank-and-file employees staged a strike on 19 August 1989 to July 1992, PMI incurred serious
business losses. 18 This prompted PMI to stop permanently plant operations and to send a notice of closure
to the Department of Labor and Employment on 21 July 1992.19
PMI informed its employees, including McLeod, of the closure. 20 PMI paid its employees, including
managerial employees, except McLeod, their unpaid wages, sick leave, vacation leave, prorated 13th
month pay, and separation pay. Under the compromise agreement between PMI and its employees, the
employer-employee relationship between them ended on 25 November 1992.21
10
Records also disclose that PMI extended McLeod’s service up to 31 December 1992 "to wind up some
affairs" of the company.22 McLeod testified on cross-examination that he received his last salary from PMI
in December 1992.23
It is thus clear that McLeod was a managerial employee of PMI from 20 June 1980 to 31 December 1992.
However, McLeod claims that after FETMI purchased PMI in January 1993, he "continued to work at the
same plant with the same responsibilities" until 30 November 1993. McLeod claims that FETMI merely
renamed PMI as SRTI. McLeod asserts that it was for this reason that when he reached the retirement age
in 1993, he asked all the respondents for the payment of his benefits. 24
These assertions deserve scant consideration.
What took place between PMI and SRTI was dation in payment with lease. Pertinent portions of the
contract that PMI and SRTI executed on 15 June 1992 read:
WHEREAS, PMI is indebted to the Development Bank of the Philippines ("DBP") and as security for such
debts (the "Obligations") has mortgaged its real properties covered by TCT Nos. T-38647, T-37136, and T-
37135, together with all machineries and improvements found thereat, a complete listing of which is
hereto attached as Annex "A" (the "Assets");
WHEREAS, by virtue of an inter-governmental agency arrangement, DBP transferred the Obligations,
including the Assets, to the Asset Privatization Trust ("APT") and the latter has received payment for the
Obligations from PMI, under APT’s Direct Debt Buy-Out ("DDBO") program thereby causing APT to
completely discharge and cancel the mortgage in the Assets and to release the titles of the Assets back to
PMI;
WHEREAS, PMI obtained cash advances from SRTC in the total amount of TWO HUNDRED TEN MILLION
PESOS (P210,000,000.00) (the "Advances") to enable PMI to consummate the DDBO with APT, with SRTC
subrogating APT as PMI’s creditor thereby;
WHEREAS, in payment to SRTC for PMI’s liability, PMI has agreed to transfer all its rights, title and interests
in the Assets by way of a dation in payment to SRTC, provided that simultaneous with the dation in
payment, SRTC shall grant unto PMI the right to lease the Assets under terms and conditions stated
hereunder;
xxxx
NOW THEREFORE, for and in consideration of the foregoing premises, and of the terms and conditions
hereinafter set forth, the parties hereby agree as follows:
1. CESSION. In consideration of the amount of TWO HUNDRED TEN MILLION PESOS (P210,000,000.00), PMI
hereby cedes, conveys and transfers to SRTC all of its rights, title and interest in and to the Assets by way
of a dation in payment. 25 (Emphasis supplied)
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly
agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and
(4) where the selling corporation fraudulently enters into the transaction to escape liability for those
debts.26
None of the foregoing exceptions is present in this case.
Here, PMI transferred its assets to SRTI to settle its obligation to SRTI in the sum of P210,000,000. We are
not convinced that PMI fraudulently transferred these assets to escape its liability for any of its debts. PMI
had already paid its employees, except McLeod, their money claims.
There was also no merger or consolidation of PMI and SRTI.
Consolidation is the union of two or more existing corporations to form a new corporation called the
consolidated corporation. It is a combination by agreement between two or more corporations by which
their rights, franchises, and property are united and become those of a single, new corporation, composed
generally, although not necessarily, of the stockholders of the original corporations.
Merger, on the other hand, is a union whereby one corporation absorbs one or more existing corporations,
and the absorbing corporation survives and continues the combined business.
The parties to a merger or consolidation are called constituent corporations. In consolidation, all the
constituents are dissolved and absorbed by the new consolidated enterprise. In merger, all constituents,
except the surviving corporation, are dissolved. In both cases, however, there is no liquidation of the
assets of the dissolved corporations, and the surviving or consolidated corporation acquires all their
properties, rights and franchises and their stockholders usually become its stockholders.
The surviving or consolidated corporation assumes automatically the liabilities of the dissolved
corporations, regardless of whether the creditors have consented or not to such merger or consolidation. 27
In the present case, there is no showing that the subject dation in payment involved any corporate merger
or consolidation. Neither is there any showing of those indicative factors that SRTI is a mere
instrumentality of PMI.
Moreover, SRTI did not expressly or impliedly agree to assume any of PMI’s debts. Pertinent portions of the
subject Deed of Dation in Payment with Lease provide, thus:
2. WARRANTIES AND REPRESENTATIONS. PMI hereby warrants and represents the following:
xxxx
(e) PMI shall warrant that it will hold SRTC or its assigns, free and harmless from any liability for claims of
PMI’s creditors, laborers, and workers and for physical injury or injury to property arising from PMI’s
custody, possession, care, repairs, maintenance, use or operation of the Assets except ordinary wear and
tear;28 (Emphasis supplied)
Also, McLeod did not present any evidence to show the alleged renaming of "Peggy Mills, Inc." to "Sta.
Rosa Textiles, Inc."
11

Hence, it is not correct for McLeod to treat PMI and SRTI as the same entity. So, there is proof that you were in fact really employed by Peggy Mills?

Respondent corporations assert that SRTI hired McLeod as consultant after PMI stopped operations. 29 On WITNESS:
the other hand, McLeod asserts that he was respondent corporations’ employee from 1980 to 30
November 1993.30 However, McLeod failed to present any proof of employer-employee relationship
between him and Filsyn, SRTI, or FETMI. McLeod testified, thus: Yes, sir.

ATTY. ESCANO: ATTY. ESCANO:

Do you have any employment contract with Far Eastern Textile? Of course, my interest now is to whether or not there is a similar document to present that you were
employed by the other respondents like Filsyn Corporation?

WITNESS:
WITNESS:

It is my belief up the present time.

I have no document, sir.

ATTY. AVECILLA:
ATTY. ESCANO:

May I request that the witness be allowed to go through his Annexes, Your Honor.
What about Far Eastern Textile Mills?

ATTY. ESCANO:
WITNESS:

Yes, but I want a precise answer to that question. If he has an employment contract with Far Eastern
Textile? I have no document, sir.

WITNESS: ATTY. ESCANO:

Can I answer it this way, sir? There is not a valid contract but I was under the impression taking into And Sta. Rosa Textile Mills?
consideration that the closeness that I had at Far Eastern Textile is enough during that period of time of
the development of Peggy Mills to reorganize a staff. I was under the basic impression that they might still WITNESS:
retain my status as Vice President and Plant Manager of the company.

There is no document, sir.31

ATTY. ESCANO:

xxxx
But the answer is still, there is no employment contract in your possession appointing you in any capacity
by Far Eastern?
ATTY. ESCANO:
WITNESS:
Q Yes. Let me be more specific, Mr. McLeod. Do you have a contract of employment from Far Eastern
Textiles, Inc.?
There was no written contract, sir.

A No, sir.
xxxx

Q What about Sta. Rosa Textile Mills, do you have an employment contract from this company?
ATTY. ESCANO:

A No, sir.
12
xxxx
Q And what about respondent Eric Hu. Have you had any contract of employment from Mr. Eric Hu?
A Not a direct contract but I was taken in and I told to take over this from Mr. Eric Hu. Automatically, it
confirms that Mr. Eric Hu, in other words, was under the control of Mr. Patricio Lim at that period of time.
Q No documents to show, Mr. McLeod?
A No. No documents, sir.32
McLeod could have presented evidence to support his allegation of employer-employee relationship
between him and any of Filsyn, SRTI, and FETMI, but he did not. Appointment letters or employment
contracts, payrolls, organization charts, SSS registration, personnel list, as well as testimony of co-
employees, may serve as evidence of employee status. 33
It is a basic rule in evidence that parties must prove their affirmative allegations. While technical rules are
not strictly followed in the NLRC, this does not mean that the rules on proving allegations are entirely
ignored. Bare allegations are not enough. They must be supported by substantial evidence at the very
least.34
However, McLeod claims that "for purposes of determining employer liability, all private respondents are
one and the same employer" because: (1) they have the same address; (2) they are all engaged in the
same business; and (3) they have interlocking directors and officers. 35
This assertion is untenable.
A corporation is an artificial being invested by law with a personality separate and distinct from that of its
stockholders and from that of other corporations to which it may be connected. 36
While a corporation may exist for any lawful purpose, the law will regard it as an association of persons or,
in case of two corporations, merge them into one, when its corporate legal entity is used as a cloak for
fraud or illegality. This is the doctrine of piercing the veil of corporate fiction. The doctrine applies only
when such corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or defend
crime,37 or when it is made as a shield to confuse the legitimate issues, or where a corporation is the mere
alter ego or business conduit of a person, or where the corporation is so organized and controlled and its
affairs are so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another
corporation. 38
To disregard the separate juridical personality of a corporation, the wrongdoing must be established
clearly and convincingly. It cannot be presumed.39
Here, we do not find any of the evils sought to be prevented by the doctrine of piercing the corporate veil.
Respondent corporations may be engaged in the same business as that of PMI, but this fact alone is not
enough reason to pierce the veil of corporate fiction. 40
In Indophil Textile Mill Workers Union v. Calica, 41 the Court ruled, thus:
In the case at bar, petitioner seeks to pierce the veil of corporate entity of Acrylic, alleging that the
creation of the corporation is a devise to evade the application of the CBA between petitioner Union and
private respondent Company. While we do not discount the possibility of the similarities of the businesses
of private respondent and Acrylic, neither are we inclined to apply the doctrine invoked by petitioner in
granting the relief sought. The fact that the businesses of private respondent and Acrylic are related, that
some of the employees of the private respondent are the same persons manning and providing for
auxiliary services to the units of Acrylic, and that the physical plants, offices and facilities are situated in
the same compound, it is our considered opinion that these facts are not sufficient to justify the piercing of
the corporate veil of Acrylic. 42 (Emphasis supplied)
Also, the fact that SRTI and PMI shared the same address, i.e., 11/F BA-Lepanto Bldg., Paseo de Roxas,
Makati City, 43 can be explained by the two companies’ stipulation in their Deed of Dation in Payment with
Lease that "simultaneous with the dation in payment, SRTC shall grant unto PMI the right to lease the
Assets under terms and conditions stated hereunder." 44
As for the addresses of Filsyn and FETMI, Filsyn held office at 12th Floor, BA-Lepanto Bldg., Paseo de
Roxas, Makati City,45 while FETMI held office at 18F, Tun Nan Commercial Building, 333 Tun Hwa South
Road, Sec. 2, Taipei, Taiwan, R.O.C.46 Hence, they did not have the same address as that of PMI.
That respondent corporations have interlocking incorporators, directors, and officers is of no moment.
The only interlocking incorporators of PMI and Filsyn were Patricio and Carlos Palanca, Jr. 47 While Patricio
was Director and Board Chairman of Filsyn, SRTI, and PMI,48 he was never an officer of FETMI.
Eric Hu, on the other hand, was Director of Filsyn and SRTI.49 He was never an officer of PMI.
Marialen C. Corpuz, Filsyn’s Finance Officer,50 testified on cross-examination that (1) among all of Filsyn’s
officers, only she was the one involved in the management of PMI; (2) only she and Patricio were the
common officers between Filsyn and PMI; and (3) Filsyn and PMI are "two separate companies." 51
Apolinario L. Posio, PMI’s Chief Accountant, testified that "SRTI is a different corporation from PMI." 52
At any rate, the existence of interlocking incorporators, directors, and officers is not enough justification to
pierce the veil of corporate fiction, in the absence of fraud or other public policy considerations. 53
In Del Rosario v. NLRC,54 the Court ruled that substantial identity of the incorporators of corporations does
not necessarily imply fraud.
In light of the foregoing, and there being no proof of employer-employee relationship between McLeod and
respondent corporations and Eric Hu, McLeod’s cause of action is only against his former employer, PMI.
On Patricio’s personal liability, it is settled that in the absence of malice, bad faith, or specific provision of
law, a stockholder or an officer of a corporation cannot be made personally liable for corporate liabilities. 55
13
To reiterate, a corporation is a juridical entity with legal personality separate and distinct from those acting
for and in its behalf and, in general, from the people comprising it. The rule is that obligations incurred by
the corporation, acting through its directors, officers, and employees, are its sole liabilities. 56
Personal liability of corporate directors, trustees or officers attaches only when (1) they assent to a
patently unlawful act of the corporation, or when they are guilty of bad faith or gross negligence in
directing its affairs, or when there is a conflict of interest resulting in damages to the corporation, its
stockholders or other persons; (2) they consent to the issuance of watered down stocks or when, having
knowledge of such issuance, do not forthwith file with the corporate secretary their written objection; (3)
they agree to hold themselves personally and solidarily liable with the corporation; or (4) they are made by
specific provision of law personally answerable for their corporate action. 57
Considering that McLeod failed to prove any of the foregoing exceptions in the present case, McLeod
cannot hold Patricio solidarily liable with PMI.
The records are bereft of any evidence that Patricio acted with malice or bad faith. Bad faith is a question
of fact and is evidentiary. Bad faith does not connote bad judgment or negligence. It imports a dishonest
purpose or some moral obliquity and conscious wrongdoing. It means breach of a known duty through
some ill motive or interest. It partakes of the nature of fraud. 58
In the present case, there is nothing substantial on record to show that Patricio acted in bad faith in
terminating McLeod’s services to warrant Patricio’s personal liability. PMI had no other choice but to stop
plant operations. The work stoppage therefore was by necessity. The company could no longer continue
with its plant operations because of the serious business losses that it had suffered. The mere fact that
Patricio was president and director of PMI is not a ground to conclude that he should be held solidarily
liable with PMI for McLeod’s money claims.
The ruling in A.C. Ransom Labor Union-CCLU v. NLRC,59 which the Court of Appeals cited, does not apply to
this case. We quote pertinent portions of the ruling, thus:
(a) Article 265 of the Labor Code, in part, expressly provides:
"Any worker whose employment has been terminated as a consequence of an unlawful lockout shall be
entitled to reinstatement with full backwages."
Article 273 of the Code provides that:
"Any person violating any of the provisions of Article 265 of this Code shall be punished by a fine of not
exceeding five hundred pesos and/or imprisonment for not less than one (1) day nor more than six (6)
months."
(b) How can the foregoing provisions be implemented when the employer is a corporation? The answer is
found in Article 212 (c) of the Labor Code which provides:
"(c) ‘Employer’ includes any person acting in the interest of an employer, directly or indirectly. The term
shall not include any labor organization or any of its officers or agents except when acting as employer.".
The foregoing was culled from Section 2 of RA 602, the Minimum Wage Law. Since RANSOM is an artificial
person, it must have an officer who can be presumed to be the employer, being the "person acting in the
interest of (the) employer" RANSOM. The corporation, only in the technical sense, is the employer.
The responsible officer of an employer corporation can be held personally, not to say even criminally, liable
for non-payment of back wages. That is the policy of the law.
xxxx
(c) If the policy of the law were otherwise, the corporation employer can have devious ways for evading
payment of back wages. In the instant case, it would appear that RANSOM, in 1969, foreseeing
the possibility or probability of payment of back wages to the 22 strikers, organized ROSARIO
to replace RANSOM, with the latter to be eventually phased out if the 22 strikers win their
case. RANSOM actually ceased operations on May 1, 1973, after the December 19, 1972 Decision of the
Court of Industrial Relations was promulgated against RANSOM. 60 (Emphasis supplied)
Clearly, in A.C. Ransom, RANSOM, through its President, organized ROSARIO to evade payment of
backwages to the 22 strikers. This situation, or anything similar showing malice or bad faith on the part of
Patricio, does not obtain in the present case. In Santos v. NLRC,61 the Court held, thus:
It is true, there were various cases when corporate officers were themselves held by the Court to be
personally accountable for the payment of wages and money claims to its employees. In A.C. Ransom
Labor Union-CCLU vs. NLRC, for instance, the Court ruled that under the Minimum Wage Law, the
responsible officer of an employer corporation could be held personally liable for nonpayment of
backwages for "(i)f the policy of the law were otherwise, the corporation employer (would) have devious
ways for evading payment of backwages." In the absence of a clear identification of the officer directly
responsible for failure to pay the backwages, the Court considered the President of the corporation as such
officer. The case was cited in Chua vs. NLRC in holding personally liable the vice-president of the
company, being the highest and most ranking official of the corporation next to the President who was
dismissed for the latter’s claim for unpaid wages.
A review of the above exceptional cases would readily disclose the attendance of facts and circumstances
that could rightly sanction personal liability on the part of the company officer. In A.C. Ransom, the
corporate entity was a family corporation and execution against it could not be implemented because of
the disposition posthaste of its leviable assets evidently in order to evade its just and due obligations. The
doctrine of "piercing the veil of corporate fiction" was thus clearly appropriate. Chua likewise involved
another family corporation, and this time the conflict was between two brothers occupying the highest
ranking positions in the company. There were incontrovertible facts which pointed to extreme personal
animosity that resulted, evidently in bad faith, in the easing out from the company of one of the brothers
by the other.
The basic rule is still that which can be deduced from the Court’s pronouncement in Sunio vs. National
Labor Relations Commission; thus:
We come now to the personal liability of petitioner, Sunio, who was made jointly and severally responsible
with petitioner company and CIPI for the payment of the backwages of private respondents. This is
reversible error. The Assistant Regional Director’s Decision failed to disclose the reason why he was made
personally liable. Respondents, however, alleged as grounds thereof, his being the owner of one-half (½)
interest of said corporation, and his alleged arbitrary dismissal of private respondents.
14
Petitioner Sunio was impleaded in the Complaint in his capacity as General Manager of petitioner
corporation. There appears to be no evidence on record that he acted maliciously or in bad faith in
terminating the services of private respondents. His act, therefore, was within the scope of his authority
and was a corporate act.
It is basic that a corporation is invested by law with a personality separate and distinct from those of the
persons composing it as well as from that of any other legal entity to which it may be related. Mere
ownership by a single stockholder or by another corporation of all or nearly all of the capital stock of a
corporation is not of itself sufficient ground for disregarding the separate corporate personality. Petitioner
Sunio, therefore, should not have been made personally answerable for the payment of private
respondents’ back salaries. 62 (Emphasis supplied)
Thus, the rule is still that the doctrine of piercing the corporate veil applies only when the corporate fiction
is used to defeat public convenience, justify wrong, protect fraud, or defend crime. In the absence of
malice, bad faith, or a specific provision of law making a corporate officer liable, such corporate officer
cannot be made personally liable for corporate liabilities. Neither Article 212(c) nor Article 273 (now 272)
of the Labor Code expressly makes any corporate officer personally liable for the debts of the corporation.
As this Court ruled in H.L. Carlos Construction, Inc. v. Marina Properties Corporation:63
We concur with the CA that these two respondents are not liable. Section 31 of the Corporation Code
(Batas Pambansa Blg. 68) provides:
"Section 31. Liability of directors, trustees or officers. - Directors or trustees who willfully and knowingly
vote for or assent to patently unlawful acts of the corporation or who are guilty of gross negligence or bad
faith ... shall be liable jointly and severally for all damages resulting therefrom suffered by the corporation,
its stockholders and other persons."
The personal liability of corporate officers validly attaches only when (a) they assent to a patently unlawful
act of the corporation; or (b) they are guilty of bad faith or gross negligence in directing its affairs; or (c)
they incur conflict of interest, resulting in damages to the corporation, its stockholders or other persons.
The records are bereft of any evidence that Typoco acted in bad faith with gross or inexcusable
negligence, or that he acted outside the scope of his authority as company president. The unilateral
termination of the Contract during the existence of the TRO was indeed contemptible – for which MPC
should have merely been cited for contempt of court at the most – and a preliminary injunction would have
then stopped work by the second contractor. Besides, there is no showing that the unilateral termination of
the Contract was null and void. 64
McLeod is not entitled to payment of vacation leave and sick leave as well as to holiday pay. Article 82,
Title I, Book Three of the Labor Code, on Working Conditions and Rest Periods, provides:
Coverage. ─ The provisions of this title shall apply to employees in all establishments and undertakings
whether for profit or not, but not to government employees, managerial employees, field personnel,
members of the family of the employer who are dependent on him for support, domestic helpers, persons
in the personal service of another, and workers who are paid by results as determined by the Secretary of
Labor in appropriate regulations.
As used herein, "managerial employees" refer to those whose primary duty consists of the management of
the establishment in which they are employed or of a department or subdivision thereof, and to other
officers or members of the managerial staff. (Emphasis supplied)
As Vice President/Plant Manager, McLeod is a managerial employee who is excluded from the coverage of
Title I, Book Three of the Labor Code. McLeod is entitled to payment of vacation leave and sick leave only if
he and PMI had agreed on it. The payment of vacation leave and sick leave depends on the policy of the
employer or the agreement between the employer and employee.65 In the present case, there is no
showing that McLeod and PMI had an agreement concerning payment of these benefits.
McLeod’s assertion of underpayment of his 13th month pay in December 1993 is unavailing. 66 As already
stated, PMI stopped plant operations in 1992. McLeod himself testified that he received his last salary from
PMI in December 1992. After the termination of the employer-employee relationship between McLeod and
PMI, SRTI hired McLeod as consultant and not as employee. Since McLeod was no longer an employee, he
was not entitled to the 13th month pay.67 Besides, there is no evidence on record that McLeod indeed
received his alleged "reduced 13th month pay of P44,183.63" in December 1993.68
Also unavailing is McLeod’s claim that he was entitled to the "unpaid monetary equivalent of unused plane
tickets for the period covering 1989 to 1992 in the amount of P279,300.00."69 PMI has no company policy
granting its officers and employees expenses for trips abroad.70 That at one time PMI reimbursed McLeod
for his and his wife’s plane tickets in a vacation to London 71 could not be deemed as an established
practice considering that it happened only once. To be considered a "regular practice," the giving of the
benefits should have been done over a long period, and must be shown to have been consistent and
deliberate.72
In American Wire and Cable Daily Rated Employees Union v. American Wire and Cable Co., Inc., 73 the Court
held that for a bonus to be enforceable, the employer must have promised it, and the parties must have
expressly agreed upon it, or it must have had a fixed amount and had been a long and regular practice on
the part of the employer.
In the present case, there is no showing that PMI ever promised McLeod that it would continue to grant
him the benefit in question. Neither is there any proof that PMI and McLeod had expressly agreed upon the
giving of that benefit.
McLeod’s reliance on Annex M74 can hardly carry the day for him. Annex M, which is McLeod’s letter
addressed to "Philip Lim, VP Administration," merely contains McLeod’s proposals for the grant of some
benefits to supervisory and confidential employees. Contrary to McLeod’s allegation, Patricio did not sign
the letter. Hence, the letter does not embody any agreement between McLeod and the management that
would entitle McLeod to his money claims.
Neither can McLeod’s assertions find support in Annex U.75 Annex U is the Agreement which McLeod and
Universal Textile Mills, Inc. executed in 1959. The Agreement merely contains the renewal of the service
agreement which the parties signed in 1956.
McLeod cannot successfully pretend that his monthly salary of P60,000 was reduced without his consent.
McLeod testified that in 1990, Philip Lim explained to him why his salary would have to be reduced.
McLeod said that Philip told him that "they were short in finances; that it would be repaid." 76 Were McLeod
not amenable to that reduction in salary, he could have immediately resigned from his work in PMI.
15
McLeod knew that PMI was then suffering from serious business losses. In fact, McLeod testified that PMI
was not able to operate from August 1989 to 1992 because of the strike. Even before 1989, as Vice
President of PMI, McLeod was aware that the company had incurred "huge loans from DBP." 77 As it
happened, McLeod continued to work with PMI. We find it pertinent to quote some portions of Apolinario
Posio’s testimony, to wit:
Q You also stated that before the period of the strike as shown by annex "K" of the reply filed by the
complainant which was I think a voucher, the salary of Mr. McLeod was roughly P60,000.00 a month?
A Yes, sir.
Q And as shown by their annex "L" to their reply, that this was reduced to roughly P50,000.00 a month?
A Yes, sir.
Q You stated that this was indeed upon the instruction by the Vice-President of Peggy Mills at that time
and that was Mr. Philip Lim, would you not?
A Yes, sir.
Q Of your own personal knowledge, can you say if this was, in fact, by agreement between Mr. Philip Lim
or any other officers of Peggy Mills and Mr. McLeod?
A If I recall it correctly, I assume it was an agreement, verbal agreement with, between Mr. Philip Lim and
Mr. McLeod, because the voucher that we prepared was actually acknowledged by Mr. McLeod, the
reduced amount was acknowledged by Mr. McLeod thru the voucher that we prepared.
Q In other words, Mr. Witness, you mean to tell us that Mr. McLeod continuously received the reduced
amount of P50,000.00 by signing the voucher and receiving the amount in question?
A Yes, sir.
Q As far as you remember, Mr. Posio, was there any complaint by Mr. McLeod because of this reduced
amount of his salary at that time?
A I don’t have any personal knowledge of any complaint, sir.
Q At least, that is in so far as you were concerned, he said nothing when he signed the voucher in
question?
A Yes, sir.
Q Now, you also stated that the reason for what appears to be an agreement between Peggy Mills and Mr.
McLeod in so far as the reduction of his salary from P60,000.00 to P50,000.00 a month was because he
would have a reduced number of working days in view of the strike at Peggy Mills, is that right?
A Yes, sir.
Q And that this was so because on account of the strike, there was no work to be done in the company?
A Yes, sir.78
xxxx
Q Now, you also stated if you remember during the first time that you testified that in the beginning, the
monthly salary of the complainant was P60,000.00, is that correct?
A Yes, sir.
Q And because of the long period of the strike, when there was no work to be done, by agreement with the
complainant, his monthly salary was adjusted to only P50,495 because he would not have to report for
work on Saturday. Do you remember having made that explanation?
A Yes, sir.
Q You also stated that the complainant continuously received his monthly salary in the adjusted amount
of P50,495.00 monthly signing the necessary vouchers or pay slips for that without complaining, is that not
right, Mr. Posio?
A Yes, sir.79
Since the last salary that McLeod received from PMI was P50,495, that amount should be the basis in
computing his retirement benefits. McLeod must be credited only with his service to PMI as it had a
juridical personality separate and distinct from that of the other respondent corporations.
Since PMI has no retirement plan,80 we apply Section 5, Rule II of the Rules Implementing the New
Retirement Law which provides:
5.1 In the absence of an applicable agreement or retirement plan, an employee who retires pursuant to
the Act shall be entitled to retirement pay equivalent to at least one-half (1/2) month salary for every year
of service, a fraction of at least six (6) months being considered as one whole year.
5.2 Components of One-half (1/2) Month Salary. ─ For the purpose of determining the minimum retirement
pay due an employee under this Rule, the term "one-half month salary" shall include all of the following:
(a) Fifteen (15) days salary of the employee based on his latest salary rate. x x x
With McLeod having worked with PMI for 12 years, from 1980 to 1992, he is entitled to a retirement pay
equivalent to ½ month salary for every year of service based on his latest salary rate of P50,495 a month.
There is no basis for the award of moral damages.
16

Moral damages are recoverable only if the defendant has acted fraudulently or in bad faith, or is guilty of ATTY. ESCANO:
gross negligence amounting to bad faith, or in wanton disregard of his contractual obligations. The breach
must be wanton, reckless, malicious, or in bad faith, oppressive or abusive. 81 From the records of the case,
the Court finds no ultimate facts to support a conclusion of bad faith on the part of PMI. And , of course, the reason, if I may assume, that you declined this offer was that, according to you, there
are other claims which you would like to raise against the Respondents which, by your impression, they
were not willing to pay in addition to this particular amount?
Records disclose that PMI had long offered to pay McLeod his money claims. In their Comment,
respondents assert that they offered to pay McLeod the sum of P840,000, as "separation benefits, and
not P300,000, if only to buy peace and to forestall any complaint" that McLeod may initiate before the WITNESS:
NLRC. McLeod admitted at the hearing before the Labor Arbiter that PMI has made this offer ─
Yes, sir.
ATTY. ESCANO:
ATTY. ESCANO:
x x x According to your own statement in your Position Paper and I am referring to page 8, your unpaid
retirement benefit for fourteen (14) years of service at P60,000.00 per year is P840,000.00, is that correct?
The question now is, if the same amount is offered to you by way of retirement which is exactly what you
stated in your own Position Paper, would you accept it or not?
WITNESS:
WITNESS:
That is correct, sir.
Not on the concept without all the basic benefits due me, I will refuse. 82
ATTY. ESCANO:
xxxx
And this amount is correct P840,000.00, according to your Position Paper?
ATTY. ROXAS:
WITNESS:
Q You mentioned in the cross-examination of Atty. Escano that you were offered the separation pay in
That is correct, sir. 1994, is that correct, Mr. Witness?

ATTY. ESCANO: WITNESS:

The question I want to ask is, are you aware that this amount was offered to you sometime last year A I was offered a settlement of P300,000.00 for complete settlement and that was I think in January or
through your own lawyer, my good friend, Atty. Avecilla, who is right here with us? February 1994, sir.

WITNESS: ATTY. ESCANO:

I was aware, sir. No. What was mentioned was the amount of P840,000.00.

ATTY. ESCANO: WITNESS:

So this was offered to you, is that correct? What did you say, Atty. Escano?

WITNESS: ATTY. ESCANO:

I was told that a fixed sum of P840,000.00 was offered. The amount that I mentioned was P840,000.00 corresponding to the . . . . . . .
17

WITNESS:

May I ask that the question be clarified, your Honor?

ATTY. ROXAS:

Q You mentioned that you were offered for the settlement of your claims in 1994 for P840,000.00, is that
right, Mr. Witness?

A During that period in time, while the petition in this case was ongoing, we already filed a case at that
period of time, sir. There was a discussion. To the best of my knowledge, they are willing to settle
for P840,000.00 and based on what the Attorney told me, I refused to accept because I believe that my
position was not in anyway due to a compromise situation to the benefits I am entitled to. 83

Hence, the awards for exemplary damages and attorney’s fees are not proper in the present case. 84

That respondent corporations, in their appeal to the NLRC, did not serve a copy of their memorandum of
appeal upon PMI is of no moment. Section 3(a), Rule VI of the NLRC New Rules of Procedure provides:

Requisites for Perfection of Appeal. ─ (a) The appeal shall be filed within the reglementary period as
provided in Section 1 of this Rule; shall be under oath with proof of payment of the required appeal fee and
the posting of a cash or surety bond as provided in Section 5 of this Rule; shall be accompanied by a
memorandum of appeal x x x and proof of service on the other party of such appeal. (Emphasis supplied)

The "other party" mentioned in the Rule obviously refers to the adverse party, in this case, McLeod.
Besides, Section 3, Rule VI of the Rules which requires, among others, proof of service of the memorandum
of appeal on the other party, is merely a rundown of the contents of the required memorandum of appeal
to be submitted by the appellant. These are not jurisdictional requirements. 85

WHEREFORE, we DENY the petition and AFFIRM the Decision of the Court of Appeals in CA-G.R. SP No.
55130, with the following MODIFICATIONS: (a) the retirement pay of John F. McLeod should be computed at
½ month salary for every year of service for 12 years based on his salary rate of P50,495 a month; (b)
Patricio L. Lim is absolved from personal liability; and (c) the awards for moral and exemplary damages
and attorney’s fees are deleted. No pronouncement as to costs.

SO ORDERED.
18
ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES & EXCHANGE
COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.
HERMOSISIMA, JR., J.:
The subject of this petition for review is the Decision of the public respondent Court of Appeals, 1 dated
October 28, 1994, setting aside the portion of the Decision of the Securities and Exchange Commission
(SEC, for short) in SEC Case No. 4012 which declared null and void the sale of two (2) parcels of land in
Quezon City covered by the Deed of Absolute Sale entered into by and between private respondent Iglesia
Ni Cristo (INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for short).
The following facts appear of record.
Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim major tribal
groups in the Philippines headed by Dean Cesar Adib Majul organized and incorporated the ISLAMIC
DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of which is to establish an Islamic Center in
Quezon City for the construction of a "Mosque (prayer place), Madrasah (Arabic School), and other
religious infrastructures" so as to facilitate the effective practice of Islamic faith in the area. 2
Towards this end, that is, in the same year, the Libyan government donated money to the IDP to purchase
land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the Islamic populace. The land, with
an area of 49,652 square meters, was covered by two titles: Transfer Certificate of Title Nos. RT-26520
(176616) 3 and RT-26521 (170567), 4 both registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following per Article 6 of its
Articles of Incorporation:
Senator Mamintal Tamano 5
Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar 6
According to the petitioner, in 1972, after the purchase of the land by the Libyan government in the name
of IDP, Martial Law was declared by the late President Ferdinand Marcos. Most of the members of the 1971
Board of Trustees like Senators Mamintal Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman
Al-Rashid Lucman flew to the Middle East to escape political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk Carpizo, and the
Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas. Both groups claimed to be the
legitimate IDP. Significantly, on October 3, 1986, the SEC, in a suit between these two contending groups,
came out with a Decision in SEC Case No. 2687 declaring the election of both the Carpizo Group and the
Abbas Group as IDP board members to be null and void. The dispositive portion of the SEC Decision reads:
WHEREFORE, judgment is hereby rendered declaring the elections of both the
petitioners  7 and respondents  8 as null and void for being violative of the Articles of
Incorporation of petitioner corporation. With the nullification of the election of the
respondents, the approved by-laws which they certified to this Commission as
members of the Board of Trustees must necessarily be likewise declared null and void.
However, before any election of the members of the Board of Trustees could be
conducted, there must be an approved by-laws to govern the internal government of
the association including the conduct of election. And since the election of both
petitioners and respondents have been declared null and void, a vacuum is created as
to who should adopt the by-laws and certify its adoption. To remedy this unfortunate
situation that the association has found itself in, the members of the petitioning
corporation are hereby authorized to prepare and adopt their by-laws for submission
to the Commission. Once approved, an election of the members of the Board of
Trustees shall immediately be called pursuant to the approved by-laws.
SO ORDERED. 9
Neither group, however, took the necessary steps prescribed by the SEC in its October 3, 1986 Decision,
and, thus, no valid election of the members of the Board of Trustees of IDP was ever called. Although the
Carpizo Group 10 attempted to submit a set of by-laws, the SEC found that, aside from Engineer Farouk
Carpizo and Atty. Musib Buat, those who prepared and adopted the by-laws were not bona fide members
of the IDP, thus rendering the adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of the Board of Trustee of IDP,
the Carpizo Group caused to be signed an alleged Board Resolution 11 of the IDP, authorizing the sale of
the subject two parcels of land to the private respondent INC for a consideration of P22,343,400.00, which
sale was evidenced by a Deed of Absolute Sale 12 dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator Mamintal Tamano,
or the Tamano Group, filed a petition before the SEC, docketed as SEC Case No. 4012, seeking to declare
null and void the Deed of Absolute Sale signed by the Carpizo Group and the INC since the group of
Engineer Carpizo was not the legitimate Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its favor, filed an
action for Specific Performance with Damages against the vendor, Carpizo Group, before Branch 81 of the
Regional Trial Court of Quezon City, docketed as Civil Case No. Q-90-6937, to compel said group to clear
the property of squatters and deliver complete and full physical possession thereof to INC. Likewise, INC
filed a motion in the same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the
Register of Deeds of Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and RT-26520 covering
the aforementioned two parcels of land, so that the sale in INC's favor may be registered and new titles
issued in the name of INC. Mrs. Ligon was alleged to be the mortgagee of the two parcels of land executed
in her favor by certain Abdulrahman R.T. Linzag and Rowaida Busran-Sampaco claimed to be in behalf of
the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937 averring, inter
alia:
xxx xxx xxx
2. That the Intervenor has filed a case before the Securities and Exchange
Commission (SEC) against Mr. Farouk Carpizo, et. al., who, through false schemes and
19
machinations, succeeded in executing the Deed of Sale between the IDP and the
Iglesia Ni Kristo (plaintiff in the instant case) and which Deed of Sale is the subject of
the case at bar;
3. That the said case before the SEC is docketed as Case No. 04012, the main issue of
which is whether or not the aforesaid Deed of Sale between IDP and the Iglesia ni
Kristo is null and void, hence, Intervenor's legal interest in the instant case. A copy of
the said case is hereto attached as Annex "A";
4. That, furthermore, Intervenor herein is the duly constituted body which can lawfully
and legally represent the Islamic Directorate of the Philippines;
xxx xxx xxx 13
Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be litigated by way
of intervention is an intra-corporate dispute which falls under the jurisdiction of the SEC. 14
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied petitioner's motion to
intervene on the ground of lack of juridical personality of the IDP-Tamano Group and that the issues being
raised by way of intervention are intra-corporate in nature, jurisdiction thereto properly pertaining to the
SEC. 15
Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the IDP-Carpizo Group
but without waiting for the outcome of said case, Judge Reyes, on September 12, 1991, rendered Partial
Judgment in Civil Case No. Q-90-6937 ordering the IDP-Carpizo Group to comply with its obligation under
the Deed of Sale of clearing the subject lots of squatters and of delivering the actual possession thereof to
INC. 16
Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil Case No. Q-90-
6937, treated INC as the rightful owner of the real properties and disposed as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or surrender to
plaintiff 17 the owner's copy of RT-26521 (170567) and RT-26520 (176616) in open
court for the registration of the Deed of Absolute Sale in the latter's name and the
annotation of the mortgage executed in her favor by herein defendant Islamic
Directorate of the Philippines on the new transfer certificate of title to be issued to
plaintiff.
SO ORDERED. 18
On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver the owner's
duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of
Quezon City for the purposes stated in the Order of March 2, 1992." 19
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as CA-G.R No. SP-
27973, assailing the foregoing Orders of Judge Reyes. The appellate court dismissed her petition on
October 28, 1992. 20
Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed as G.R. No.
107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case No. 4012 in this
wise:
1. Declaring the by-laws submitted by the respondents 21 as unauthorized, and hence,
null and void.
2. Declaring the sale of the two (2) parcels of land in Quezon City covered by the Deed
of Absolute Sale entered into by Iglesia ni Kristo and the Islamic Directorate of the
Philippines, Inc. 22 null and void;
3. Declaring the election of the Board of Directors, 23 of the corporation from 1986 to
1991 as null and void;
4. Declaring the acceptance of the respondents, except Farouk Carpizo and Musnib
Buat, as members of the IDP null and void.
No pronouncement as to cost.
SO ORDERED. 24
Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC Case No. 4012,
but the same was denied on account of the fact that the decision of the case had become final and
executory, no appeal having been taken therefrom. 25
INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a special civil action
for certiorari, docketed as CA-G.R SP No. 33295. On October 28, 1994, the court a quo promulgated a
Decision in CA-G.R. SP No. 33295 granting INC's petition. The portion of the SEC Decision in SEC Case No.
4012 which declared the sale of the two (2) lots in question to INC as void was ordered set aside by the
Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21, 1994, submitting
that the Court of Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches. 26
While the above petition was pending, however, the Supreme Court rendered judgment in G.R. No. 107751
on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1, 1995, denied the Ligon petition
and affirmed the October 28, 1992 Decision of the Court of Appeals in CA-G.R. No. SP-27973 which
sustained the Order of Judge Reyes compelling mortgagee Ligon to surrender the owner's duplicate copies
20
of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to the Register of Deeds of Quezon City so that
the Deed of Absolute Sale in INC's favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would like to point out that our disposition
in G.R. No. 107751 entitled, "Ligon v. Court of Appeals," promulgated on June 1, 1995, in no wise
constitutes res judicata such that the petition under consideration would be barred if it were the ease.
Quite the contrary, the requisites or res judicata do not obtain in the case at bench.
Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res judicata in actions in
personam, to wit:
Effect of judgment. — The effect of a judgment or final order rendered by a court or
judge of the Philippines, having jurisdiction to pronounce the judgment or order, may
be as follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with respect to the matter directly
adjudged or as to any other matter that could have been raised in relation thereto,
conclusive between the parties and their successors in interest by title subsequent to
the commencement of the action or special proceeding, litigating for the same thing
and under the same title and in the same capacity;
(c) In any other litigation between the same parties or their successors in interest, that
only is deemed to have been adjudged in a former judgment which appears upon its
face to have been so adjudged, or which was actually and necessarily included therein
or necessary thereto.
Section 49(b) enunciates the first concept of res judicata known as "bar by prior judgment," whereas,
Section 49(c) is referred to as "conclusiveness of judgment."
There is "bar by former judgment" when, between the first case where the judgment was rendered, and
the second case where such judgment is invoked, there is identity of parties, subject matter and cause of
action. When the three identities are present, the judgment on the merits rendered in the first constitutes
an absolute bar to the subsequent action. But where between the first case wherein judgment is rendered
and the second case wherein such judgment is invoked, there is only identity of parties but there is no
identity of cause of action, the judgment is conclusive in the second case, only as to those matters actually
and directly controverted and determined, and not as to matters merely involved therein. This is what is
termed "conclusiveness of judgment." 27
Neither of these concepts of res judicata find relevant application in the case at bench. While there may be
identity of subject matter (IDP property) in both cases, there is no identity of parties. The principal parties
in G.R. No. 107751 were mortgagee Leticia P. Ligon, as petitioner, and the Iglesia Ni Cristo, as private
respondent. The IDP, as represented by the 1971 Board of Trustees or the Tamano Group, was only made
an ancillary party in G.R. No. 107751 as intervenor. 28 It was never originally a principal party thereto. It
must be noted that intervention is not an independent action, but is merely collateral, accessory, or
ancillary to the principal action. It is just an interlocutory proceeding dependent on or subsidiary to the
case between the original
parties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R. No. 107751 for
purposes of applying the principle of res judicata since the contrary goes against the true import of the
action of intervention as a mere subsidiary proceeding without an independent life apart from the principal
action as well as the intrinsic character of the intervenor as a mere subordinate party in the main case
whose right may be said to be only in aid of the right of the original party. 30 It is only in the present case,
actually, where the IDP-Tamano Group became a principal party, as petitioner, with the Iglesia Ni Cristo, as
private respondent. Clearly, there is no identity of parties in both cases.
In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to G.R. No. 107751,
was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the Philippines, Defendant," 31 the IDP can
not be considered essentially a formal party thereto for the simple reason that it was not duly represented
by a legitimate Board of Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a
case for Specific Performance with Damages, a mere action in personam, did not become final and
executory insofar as the true IDP is concerned since petitioner corporation, for want of legitimate
representation, was effectively deprived of its day in court in said case. Res inter alios judicatae nullum
allis praejudicium faciunt. Matters adjudged in a cause do not prejudice those who were not parties to
it. 32 Elsewise put, no person (natural or juridical) shall be affected by a proceeding to which he is a
stranger. 33
Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as a "bar by former
judgment" will still not set in on the ground that the cause of action in the two cases are different. The
cause of action in G.R. No. 107751 is the surrender of the owner's duplicate copy of the transfer
certificates of title to the rightful possessor thereof, whereas the cause of action in the present case is the
validity of the Carpizo Group-INC Deed of Absolute Sale.
Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the reason that any
mention at all in Ligon as to the validity of the disputed Carpizo Board-INC sale may only be deemed
incidental to the resolution of the primary issue posed in said case which is: Who between Ligon and INC
has the better right of possession over the owner's duplicate copy of the TCTs covering the IDP property?
G.R. No. 107751 cannot be considered determinative and conclusive on the matter of the validity of the
sale for this particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause
grave and irreparable injustice to IDP which never gave its consent to the sale, thru a legitimate Board of
Trustees.
In any case, while it is true that the principle of res judicata is a fundamental component of our judicial
system, it should be disregarded if its rigid application would involve the sacrifice of justice to
technicality. 34
The main question though in this petition is: Did the Court of Appeals commit reversible error in setting
aside that portion of the SEC's Decision in SEC Case No. 4012 which declared the sale of two (2) parcels of
land in Quezon City between the IDP-Carpizo Group and private respondent INC null and void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to pass upon the issue as to who among the
different contending groups is the legitimate Board of Trustees of the IDP since this is a matter properly
falling within the original and exclusive jurisdiction of the SEC by virtue of Sections 3 and 5(c) of
Presidential Decree No. 902-A:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over
all corporations, partnership or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to operate in the
Philippines . . . .
21
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
xxx xxx xxx
c) Controversies in the selection or appointment of directors, trustees, officers, or
managers of such corporations, partnerships or associations. . . . .
If the SEC can declare who is the legitimate IDP Board, then by parity of reasoning, it can also
declare who is not the legitimate IDP Board. This is precisely what the SEC did in SEC Case No.
4012 when it adjudged the election of the Carpizo Group to the IDP Board of Trustees to be null
and
void. 35 By this ruling, the SEC in effect made the unequivocal finding that the IDP-Carpizo Group
is a bogus Board of Trustees. Consequently, the Carpizo Group is bereft of any authority
whatsoever to bind IDP in any kind of transaction including the sale or disposition of ID property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the opportunity to pass
upon the status of the Carpizo Group. As far back as October 3, 1986, the SEC, in Case No. 2687, 36 in a
suit between the Carpizo Group and the Abbas Group, already declared the election of the Carpizo Group
(as well as the Abbas Group) to the IDP Board as null and void for being violative of the Articles of
Incorporation. 37 Nothing thus becomes more settled than that the IDP-Carpizo Group with whom private
respondent INC contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the Tandang Sora
property, allegedly in the name of the IDP, have to be struck down for having been done without the
consent of the IDP thru a legitimate Board of Trustees. Article 1318 of the New Civil Code lays down the
essential requisites of contracts:
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For, where even one is absent,
the contract is void. As succinctly put by Tolentino, consent is essential for the existence of a
contract, and where it is wanting, the contract is non-existent. 38 In this case, the IDP, owner of
the subject parcels of land, never gave its consent, thru a legitimate Board of Trustees, to the
disputed Deed of Absolute Sale executed in favor of INC. This is, therefore, a case not only of
vitiated consent, but one where consent on the part of one of the supposed contracting parties is
totally wanting. Ineluctably, the subject sale is void and produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the Carpizo Group's failure
to comply with Section 40 of the Corporation Code pertaining to the disposition of all or substantially all
assets of the corporation:
Sec. 40. Sale or other disposition of assets. — Subject to the provisions of existing
laws on illegal combinations and monopolies, a corporation may, by a majority vote of
its board of directors or trustees, sell, lease, exchange, mortgage, pledge or otherwise
dispose of all or substantially all of its property and assets, including its goodwill, upon
terms and conditions and for such consideration, which may be money, stocks, bonds
or other instruments for the payment of money or other property or consideration, as
its board of directors or trustees may deem expedient, when authorized by the vote of
the stockholders representing at least two-thirds (2/3) of the outstanding capital
stock; or in case of non-stock corporation, by the vote of at least two-thirds (2/3) of
the members, in a stockholders' or members' meeting duly called for the purpose.
Written notice of the proposed action and of the time and place of the meeting shall
be addressed to each stockholder or member at his place of residence as shown on
the books of the corporation and deposited to the addressee in the post office with
postage prepaid, or served personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the corporate
property and assets if thereby the corporation would be rendered incapable of
continuing the business or accomplishing the purpose for which it was incorporated.
x x x           x x x          x x x
The Tandang Sora property, it appears from the records, constitutes the only property of the IDP. Hence,
its sale to a third-party is a sale or disposition of all the corporate property and assets of IDP falling
squarely within the contemplation of the foregoing section. For the sale to be valid, the majority vote of
the legitimate Board of Trustees, concurred in by the vote of at least 2/3 of the bona fide members of the
corporation should have been obtained. These twin requirements were not met as the Carpizo Group which
voted to sell the Tandang Sora property was a fake Board of Trustees, and those whose names and
signatures were affixed by the Carpizo Group together with the sham Board Resolution authorizing the
negotiation for the sale were, from all indications, not bona fide members of the IDP as they were made to
appear to be. Apparently, there are only fifteen (15) official members of the petitioner corporation
including the eight (8) members of the Board of Trustees. 39
All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and private respondent
INC was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to nullify the sale for being made
outside of its jurisdiction, the same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had jurisdiction to declare the subject sale null
and void is rendered moot and academic by the inherent nullity of the highly dubious sale due to lack of
consent of the IDP, owner of the subject property. No end of substantial justice will be served if we reverse
the SEC's conclusion on the matter, and remand the case to the regular courts for further litigation over an
issue which is already determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for intervention filed by the 1971 Board
of Trustees in Civil Case. No. Q-90-6937, a case for Specific Performance with Damages between INC and
22
the Carpizo Group on the subject Deed of Absolute Sale. The legitimate IDP Board could have been granted
ample opportunity before the regional trial court to shed light on the true status of the Carpizo Board and
settled the matter as to the validity of the sale then and there. But INC, wanting to acquire the property at
all costs and threatened by the participation of the legitimate IDP Board in the civil suit, argued for the
denial of the motion averring, inter alia, that the issue sought to be litigated by the movant is intra-
corporate in nature and outside the jurisdiction of the regional trial court. 40 As a result, the motion for
intervention was denied. When the Decision in SEC Case No. 4012 came out nullifying the sale, INC came
forward, this time, quibbling over the issue that it is the regional trial court, and not the SEC, which has
jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot put a premium
on this clever legal maneuverings of private respondent which, if countenanced, would result in a failure of
justice.
Furthermore, the Court observes that the INC bought the questioned property from the Carpizo Group
without even seeing the owner's duplicate copy of the titles covering the property. This is very strange
considering that the subject lot is a large piece of real property in Quezon City worth millions, and that
under the Torrens System of Registration, the minimum requirement for one to be a good faith buyer for
value is that the vendee at least sees the owner's duplicate copy of the title and relies upon the
same. 41 The private respondent, presumably knowledgeable on the aforesaid workings of the Torrens
System, did not take heed of this and nevertheless went through with the sale with undue haste. The
unexplained eagerness of INC to buy this valuable piece of land in Quezon City without even being
presented with the owner's copy of the titles casts very serious doubt on the rightfulness of its position as
vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of Appeals dated
October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of the Securities and Exchange
Commission dated July 5, 1993 in SEC Case No. 4012 is REINSTATED. The Register of Deeds of Quezon City
is hereby ordered to cancel the registration of the Deed of Absolute Sale in the name of respondent Iglesia
Ni Cristo, if one has already been made. If new titles have been issued in the name of Iglesia Ni Cristo, the
Register of Deeds is hereby ordered to cancel the same, and issue new ones in the name of petitioner
Islamic Directorate of the Philippines. Petitioner corporation is ordered to return to private respondent
whatever amount has been initially paid by INC as consideration for the property with legal interest, if the
same was actually received by IDP. Otherwise, INC may run after Engineer Farouk Carpizo and his group
for the amount of money paid.
SO ORDERED.
G.R. No. 142936            April 17, 2002
PHILIPPINE NATIONAL BANK & NATIONAL SUGAR DEVELOPMENT CORPORATION, petitioners,
vs.
ANDRADA ELECTRIC & ENGINEERING COMPANY, respondent.
PANGANIBAN, J.:
Basic is the rule that a corporation has a legal personality distinct and separate from the persons and
entities owning it. The corporate veil may be lifted only if it has been used to shield fraud, defend crime,
justify a wrong, defeat public convenience, insulate bad faith or perpetuate injustice. Thus, the mere fact
that the Philippine National Bank (PNB) acquired ownership or management of some assets of the
Pampanga Sugar Mill (PASUMIL), which had earlier been foreclosed and purchased at the resulting public
auction by the Development Bank of the Philippines (DBP), will not make PNB liable for the PASUMIL’s
contractual debts to respondent.
Statement of the Case
Before us is a Petition for Review assailing the April 17, 2000 Decision 1 of the Court of Appeals (CA) in CA-
GR CV No. 57610. The decretal portion of the challenged Decision reads as follows:
"WHEREFORE, the judgment appealed from is hereby AFFIRMED." 2
The Facts
The factual antecedents of the case are summarized by the Court of Appeals as follows:
"In its complaint, the plaintiff [herein respondent] alleged that it is a partnership duly organized,
existing, and operating under the laws of the Philippines, with office and principal place of
business at Nos. 794-812 Del Monte [A]venue, Quezon City, while the defendant [herein
petitioner] Philippine National Bank (herein referred to as PNB), is a semi-government
corporation duly organized, existing and operating under the laws of the Philippines, with office
and principal place of business at Escolta Street, Sta. Cruz, Manila; whereas, the other
defendant, the National Sugar Development Corporation (NASUDECO in brief), is also a semi-
government corporation and the sugar arm of the PNB, with office and principal place of
business at the 2nd Floor, Sampaguita Building, Cubao, Quezon City; and the defendant
Pampanga Sugar Mills (PASUMIL in short), is a corporation organized, existing and operating
under the 1975 laws of the Philippines, and had its business office before 1975 at Del Carmen,
Floridablanca, Pampanga; that the plaintiff is engaged in the business of general construction for
the repairs and/or construction of different kinds of machineries and buildings; that on August
26, 1975, the defendant PNB acquired the assets of the defendant PASUMIL that were earlier
foreclosed by the Development Bank of the Philippines (DBP) under LOI No. 311; that the
defendant PNB organized the defendant NASUDECO in September, 1975, to take ownership and
possession of the assets and ultimately to nationalize and consolidate its interest in other PNB
controlled sugar mills; that prior to October 29, 1971, the defendant PASUMIL engaged the
services of plaintiff for electrical rewinding and repair, most of which were partially paid by the
defendant PASUMIL, leaving several unpaid accounts with the plaintiff; that finally, on October
29, 1971, the plaintiff and the defendant PASUMIL entered into a contract for the plaintiff to
perform the following, to wit –
‘(a) Construction of one (1) power house building;
‘(b) Construction of three (3) reinforced concrete foundation for three (3) units 350 KW
diesel engine generating set[s];
‘(c) Construction of three (3) reinforced concrete foundation for the 5,000 KW and
1,250 KW turbo generator sets;
‘(d) Complete overhauling and reconditioning tests sum for three (3) 350 KW diesel
engine generating set[s];
‘(e) Installation of turbine and diesel generating sets including transformer,
switchboard, electrical wirings and pipe provided those stated units are completely
supplied with their accessories;
23
‘(f) Relocating of 2,400 V transmission line, demolition of all existing concrete
foundation and drainage canals, excavation, and earth fillings – all for the total
amount of P543,500.00 as evidenced by a contract, [a] xerox copy of which is hereto
attached as Annex ‘A’ and made an integral part of this complaint;’
that aside from the work contract mentioned-above, the defendant PASUMIL required the
plaintiff to perform extra work, and provide electrical equipment and spare parts, such as:
‘(a) Supply of electrical devices;
‘(b) Extra mechanical works;
‘(c) Extra fabrication works;
‘(d) Supply of materials and consumable items;
‘(e) Electrical shop repair;
‘(f) Supply of parts and related works for turbine generator;
‘(g) Supply of electrical equipment for machinery;
‘(h) Supply of diesel engine parts and other related works including fabrication of
parts.’
that out of the total obligation of P777,263.80, the defendant PASUMIL had paid only
P250,000.00, leaving an unpaid balance, as of June 27, 1973, amounting to P527,263.80, as
shown in the Certification of the chief accountant of the PNB, a machine copy of which is
appended as Annex ‘C’ of the complaint; that out of said unpaid balance of P527,263.80, the
defendant PASUMIL made a partial payment to the plaintiff of P14,000.00, in broken amounts,
covering the period from January 5, 1974 up to May 23, 1974, leaving an unpaid balance of
P513,263.80; that the defendant PASUMIL and the defendant PNB, and now the defendant
NASUDECO, failed and refused to pay the plaintiff their just, valid and demandable obligation;
that the President of the NASUDECO is also the Vice-President of the PNB, and this official holds
office at the 10th Floor of the PNB, Escolta, Manila, and plaintiff besought this official to pay the
outstanding obligation of the defendant PASUMIL, inasmuch as the defendant PNB and
NASUDECO now owned and possessed the assets of the defendant PASUMIL, and these
defendants all benefited from the works, and the electrical, as well as the engineering and
repairs, performed by the plaintiff; that because of the failure and refusal of the defendants to
pay their just, valid, and demandable obligations, plaintiff suffered actual damages in the total
amount of P513,263.80; and that in order to recover these sums, the plaintiff was compelled to
engage the professional services of counsel, to whom the plaintiff agreed to pay a sum
equivalent to 25% of the amount of the obligation due by way of attorney’s fees. Accordingly,
the plaintiff prayed that judgment be rendered against the defendants PNB, NASUDECO, and
PASUMIL, jointly and severally to wit:
‘(1) Sentencing the defendants to pay the plaintiffs the sum of P513,263.80, with
annual interest of 14% from the time the obligation falls due and demandable;
‘(2) Condemning the defendants to pay attorney’s fees amounting to 25% of the
amount claim;
‘(3) Ordering the defendants to pay the costs of the suit.’
"The defendants PNB and NASUDECO filed a joint motion to dismiss the complaint chiefly on the
ground that the complaint failed to state sufficient allegations to establish a cause of action
against both defendants, inasmuch as there is lack or want of privity of contract between the
plaintiff and the two defendants, the PNB and NASUDECO, said defendants citing Article 1311 of
the New Civil Code, and the case law ruling in Salonga v. Warner Barnes & Co., 88 Phil. 125; and
Manila Port Service, et al. v. Court of Appeals, et al., 20 SCRA 1214.
"The motion to dismiss was by the court a quo denied in its Order of November 27, 1980; in the
same order, that court directed the defendants to file their answer to the complaint within 15
days.
"In their answer, the defendant NASUDECO reiterated the grounds of its motion to dismiss, to
wit:
‘That the complaint does not state a sufficient cause of action against the defendant
NASUDECO because: (a) NASUDECO is not x x x privy to the various electrical
construction jobs being sued upon by the plaintiff under the present complaint; (b) the
taking over by NASUDECO of the assets of defendant PASUMIL was solely for the
purpose of reconditioning the sugar central of defendant PASUMIL pursuant to martial
law powers of the President under the Constitution; (c) nothing in the LOI No. 189-A
(as well as in LOI No. 311) authorized or commanded the PNB or its subsidiary
corporation, the NASUDECO, to assume the corporate obligations of PASUMIL as that
being involved in the present case; and, (d) all that was mentioned by the said letter
of instruction insofar as the PASUMIL liabilities [were] concerned [was] for the PNB, or
its subsidiary corporation the NASUDECO, to make a study of, and submit [a]
recommendation on the problems concerning the same.’
"By way of counterclaim, the NASUDECO averred that by reason of the filing by the plaintiff of
the present suit, which it [labeled] as unfounded or baseless, the defendant NASUDECO was
constrained to litigate and incur litigation expenses in the amount of P50,000.00, which plaintiff
should be sentenced to pay. Accordingly, NASUDECO prayed that the complaint be dismissed
and on its counterclaim, that the plaintiff be condemned to pay P50,000.00 in concept of
attorney’s fees as well as exemplary damages.
"In its answer, the defendant PNB likewise reiterated the grounds of its motion to dismiss,
namely: (1) the complaint states no cause of action against the defendant PNB; (2) that PNB is
not a party to the contract alleged in par. 6 of the complaint and that the alleged services
rendered by the plaintiff to the defendant PASUMIL upon which plaintiff’s suit is erected, was
rendered long before PNB took possession of the assets of the defendant PASUMIL under LOI No.
189-A; (3) that the PNB take-over of the assets of the defendant PASUMIL under LOI 189-A was
solely for the purpose of reconditioning the sugar central so that PASUMIL may resume its
operations in time for the 1974-75 milling season, and that nothing in the said LOI No. 189-A, as
well as in LOI No. 311, authorized or directed PNB to assume the corporate obligation/s of
PASUMIL, let alone that for which the present action is brought; (4) that PNB’s management and
operation under LOI No. 311 did not refer to any asset of PASUMIL which the PNB had to acquire
and thereafter [manage], but only to those which were foreclosed by the DBP and were in turn
redeemed by the PNB from the DBP; (5) that conformably to LOI No. 311, on August 15, 1975,
24

the PNB and the Development Bank of the Philippines (DBP) entered into a ‘Redemption
Agreement’ whereby DBP sold, transferred and conveyed in favor of the PNB, by way of ‘Judge’"3
redemption, all its (DBP) rights and interest in and over the foreclosed real and/or personal Ruling of the Court of Appeals
properties of PASUMIL, as shown in Annex ‘C’ which is made an integral part of the answer; (6)
that again, conformably with LOI No. 311, PNB pursuant to a Deed of Assignment dated October
21, 1975, conveyed, transferred, and assigned for valuable consideration, in favor of Affirming the trial court, the CA held that it was offensive to the basic tenets of justice and equity for a
NASUDECO, a distinct and independent corporation, all its (PNB) rights and interest in and under corporation to take over and operate the business of another corporation, while disavowing or repudiating
the above ‘Redemption Agreement.’ This is shown in Annex ‘D’ which is also made an integral any responsibility, obligation or liability arising therefrom.4
part of the answer; [7] that as a consequence of the said Deed of Assignment, PNB on October
21, 1975 ceased to managed and operate the above-mentioned assets of PASUMIL, which
function was now actually transferred to NASUDECO. In other words, so asserted PNB, the Hence, this Petition. 5
complaint as to PNB, had become moot and academic because of the execution of the said Deed
of Assignment; [8] that moreover, LOI No. 311 did not authorize or direct PNB to assume the
Issues
corporate obligations of PASUMIL, including the alleged obligation upon which this present suit
was brought; and [9] that, at most, what was granted to PNB in this respect was the authority to
‘make a study of and submit recommendation on the problems concerning the claims of In their Memorandum, petitioners raise the following errors for the Court’s consideration:
PASUMIL creditors,’ under sub-par. 5 LOI No. 311.

"In its counterclaim, the PNB averred that it was unnecessarily constrained to litigate and to
incur expenses in this case, hence it is entitled to claim attorney’s fees in the amount of at least
P50,000.00. Accordingly, PNB prayed that the complaint be dismissed; and that on its
counterclaim, that the plaintiff be sentenced to pay defendant PNB the sum of P50,000.00 as
attorney’s fees, aside from exemplary damages in such amount that the court may seem just
and equitable in the premises.
"I
The Court of Appeals gravely erred in law in holding the herein petitioners liable for the unpaid
corporate debts of PASUMIL, a corporation whose corporate existence has not been legally
extinguished or terminated, simply because of petitioners[’] take-over of the management and
operation of PASUMIL pursuant to the mandates of LOI No. 189-A, as amended by LOI No. 311.

"Summons by publication was made via the Philippines Daily Express, a newspaper with editorial "II
office at 371 Bonifacio Drive, Port Area, Manila, against the defendant PASUMIL, which was
thereafter declared in default as shown in the August 7, 1981 Order issued by the Trial Court.
The Court of Appeals gravely erred in law in not applying [to] the case at bench the ruling
enunciated in Edward J. Nell Co. v. Pacific Farms, 15 SCRA 415."6
"After due proceedings, the Trial Court rendered judgment, the decretal portion of which reads:
Succinctly put, the aforesaid errors boil down to the principal issue of whether PNB is liable for the unpaid
‘WHEREFORE, judgment is hereby rendered in favor of plaintiff and against the debts of PASUMIL to respondent.
defendant Corporation, Philippine National Bank (PNB) NATIONAL SUGAR
DEVELOPMENT CORPORATION (NASUDECO) and PAMPANGA SUGAR MILLS (PASUMIL),
ordering the latter to pay jointly and severally the former the following: This Court’s Ruling

‘1. The sum of P513,623.80 plus interest thereon at the rate of 14% per
annum as claimed from September 25, 1980 until fully paid;
‘2. The sum of P102,724.76 as attorney’s fees; and,
‘3. Costs.
‘SO ORDERED.
‘Manila, Philippines, September 4, 1986.
The Petition is meritorious.
Main Issue:
Liability for Corporate Debts
As a general rule, questions of fact may not be raised in a petition for review under Rule 45 of the Rules of
Court.7 To this rule, however, there are some exceptions enumerated in Fuentes v. Court of Appeals.8 After
a careful scrutiny of the records and the pleadings submitted by the parties, we find that the lower courts
misappreciated the evidence presented. 9 Overlooked by the CA were certain relevant facts that would
justify a conclusion different from that reached in the assailed Decision. 10

Petitioners posit that they should not be held liable for the corporate debts of PASUMIL, because their
'(SGD) ERNESTO S. TENGCO takeover of the latter’s foreclosed assets did not make them assignees. On the other hand, respondent
25
asserts that petitioners and PASUMIL should be treated as one entity and, as such, jointly and severally
held liable for PASUMIL’s unpaid obligation.1âwphi1.nêt
As a rule, a corporation that purchases the assets of another will not be liable for the debts of the selling
corporation, provided the former acted in good faith and paid adequate consideration for such assets,
except when any of the following circumstances is present: (1) where the purchaser expressly or impliedly
agrees to assume the debts, (2) where the transaction amounts to a consolidation or merger of the
corporations, (3) where the purchasing corporation is merely a continuation of the selling corporation, and
(4) where the transaction is fraudulently entered into in order to escape liability for those debts. 11
Piercing the Corporate
Veil Not Warranted
A corporation is an artificial being created by operation of law. It possesses the right of succession and
such powers, attributes, and properties expressly authorized by law or incident to its existence. 12 It has a
personality separate and distinct from the persons composing it, as well as from any other legal entity to
which it may be related.13 This is basic.
Equally well-settled is the principle that the corporate mask may be removed or the corporate veil pierced
when the corporation is just an alter ego of a person or of another corporation. 14 For reasons of public
policy and in the interest of justice, the corporate veil will justifiably be impaled 15 only when it becomes a
shield for fraud, illegality or inequity committed against third persons. 16
Hence, any application of the doctrine of piercing the corporate veil should be done with caution. 17 A court
should be mindful of the milieu where it is to be applied. 18 It must be certain that the corporate fiction was
misused to such an extent that injustice, fraud, or crime was committed against another, in disregard of its
rights.19 The wrongdoing must be clearly and convincingly established; it cannot be presumed. 20 Otherwise,
an injustice that was never unintended may result from an erroneous application. 21
This Court has pierced the corporate veil to ward off a judgment credit, 22 to avoid inclusion of corporate
assets as part of the estate of the decedent, 23 to escape liability arising from a debt,24 or to perpetuate
fraud and/or confuse legitimate issues 25 either to promote or to shield unfair objectives26 or to cover up an
otherwise blatant violation of the prohibition against forum-shopping. 27 Only in these and similar instances
may the veil be pierced and disregarded. 28
The question of whether a corporation is a mere alter ego is one of fact. 29 Piercing the veil of corporate
fiction may be allowed only if the following elements concur: (1) control -- not mere stock control, but
complete domination -- not only of finances, but of policy and business practice in respect to the
transaction attacked, must have been such 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 a fraud or a wrong to perpetuate the violation of a statutory or other positive legal duty, or a
dishonest and an unjust act in contravention of plaintiff’s legal right; and (3) the said control and breach of
duty must have proximately caused the injury or unjust loss complained of. 30
We believe that the absence of the foregoing elements in the present case precludes the piercing of the
corporate veil. First, other than the fact that petitioners acquired the assets of PASUMIL, there is no
showing that their control over it warrants the disregard of corporate personalities. 31 Second, there is no
evidence that their juridical personality was used to commit a fraud or to do a wrong; or that the separate
corporate entity was farcically used as a mere alter ego, business conduit or instrumentality of another
entity or person. 32 Third, respondent was not defrauded or injured when petitioners acquired the assets of
PASUMIL.33
Being the party that asked for the piercing of the corporate veil, respondent had the burden of presenting
clear and convincing evidence to justify the setting aside of the separate corporate personality
rule.34 However, it utterly failed to discharge this burden; 35 it failed to establish by competent evidence that
petitioner’s separate corporate veil had been used to conceal fraud, illegality or inequity. 36
While we agree with respondent’s claim that the assets of the National Sugar Development Corporation
(NASUDECO) can be easily traced to PASUMIL,37 we are not convinced that the transfer of the latter’s
assets to petitioners was fraudulently entered into in order to escape liability for its debt to respondent. 38
A careful review of the records reveals that DBP foreclosed the mortgage executed by PASUMIL and
acquired the assets as the highest bidder at the public auction conducted. 39 The bank was justified in
foreclosing the mortgage, because the PASUMIL account had incurred arrearages of more than 20 percent
of the total outstanding obligation. 40 Thus, DBP had not only a right, but also a duty under the law to
foreclose the subject properties.41
Pursuant to LOI No. 189-A42 as amended by LOI No. 311,43 PNB acquired PASUMIL’s assets that DBP had
foreclosed and purchased in the normal course. Petitioner bank was likewise tasked to manage temporarily
the operation of such assets either by itself or through a subsidiary corporation. 44
PNB, as the second mortgagee, redeemed from DBP the foreclosed PASUMIL assets pursuant to Section 6
of Act No. 3135.45 These assets were later conveyed to PNB for a consideration, the terms of which were
embodied in the Redemption Agreement.46 PNB, as successor-in-interest, stepped into the shoes of DBP as
PASUMIL’s creditor. 47 By way of a Deed of Assignment, 48 PNB then transferred to NASUDECO all its rights
under the Redemption Agreement.
In Development Bank of the Philippines v. Court of Appeals,49 we had the occasion to resolve a similar
issue. We ruled that PNB, DBP and their transferees were not liable for Marinduque Mining’s unpaid
obligations to Remington Industrial Sales Corporation (Remington) after the two banks had foreclosed the
assets of Marinduque Mining. We likewise held that Remington failed to discharge its burden of proving
bad faith on the part of Marinduque Mining to justify the piercing of the corporate veil.
In the instant case, the CA erred in affirming the trial court’s lifting of the corporate mask. 50 The CA did not
point to any fact evidencing bad faith on the part of PNB and its transferee. 51 The corporate fiction was not
used to defeat public convenience, justify a wrong, protect fraud or defend crime. 52 None of the foregoing
exceptions was shown to exist in the present case. 53 On the contrary, the lifting of the corporate veil would
result in manifest injustice. This we cannot allow.
No Merger or Consolidation
Respondent further claims that petitioners should be held liable for the unpaid obligations of PASUMIL by
virtue of LOI Nos. 189-A and 311, which expressly authorized PASUMIL and PNB to merge or consolidate.
On the other hand, petitioners contend that their takeover of the operations of PASUMIL did not involve
any corporate merger or consolidation, because the latter had never lost its separate identity as a
corporation.
26

A consolidation is the union of two or more existing entities to form a new entity called the consolidated
corporation. A merger, on the other hand, is a union whereby one or more existing corporations are
absorbed by another corporation that survives and continues the combined business. 54

The merger, however, does not become effective upon the mere agreement of the constituent
corporations.55 Since a merger or consolidation involves fundamental changes in the corporation, as well as
in the rights of stockholders and creditors, there must be an express provision of law authorizing
them.56 For a valid merger or consolidation, the approval by the Securities and Exchange Commission
(SEC) of the articles of merger or consolidation is required. 57 These articles must likewise be duly approved
by a majority of the respective stockholders of the constituent corporations. 58

In the case at bar, we hold that there is no merger or consolidation with respect to PASUMIL and PNB. The
procedure prescribed under Title IX of the Corporation Code59 was not followed.

In fact, PASUMIL’s corporate existence, as correctly found by the CA, had not been legally extinguished or
terminated.60 Further, prior to PNB’s acquisition of the foreclosed assets, PASUMIL had previously made
partial payments to respondent for the former’s obligation in the amount of P777,263.80. As of June 27,
1973, PASUMIL had paid P250,000 to respondent and, from January 5, 1974 to May 23, 1974, another
P14,000.
G.R. No. L-21601      December 28, 1968
Neither did petitioner expressly or impliedly agree to assume the debt of PASUMIL to respondent. 61 LOI No.
11 explicitly provides that PNB shall study and submit recommendations on the claims of PASUMIL’s
creditors.62 Clearly, the corporate separateness between PASUMIL and PNB remains, despite respondent’s NIELSON & COMPANY, INC., plaintiff-appellant,
insistence to the contrary.63 vs.
LEPANTO CONSOLIDATED MINING COMPANY, defendant-appellee.

WHEREFORE, the Petition is hereby GRANTED and the assailed Decision SET ASIDE. No pronouncement

as to costs. RESOLUTION

SO ORDERED. ZALDIVAR, J.:

Lepanto seeks the reconsideration of the decision rendered on December 17, 1966. The motion for
reconsideration is based on two sets of grounds — the first set consisting of four principal grounds, and the
second set consisting of five alternative grounds, as follows:

Principal Grounds:

1. The court erred in overlooking and failing to apply the proper law applicable to the agency or
management contract in question, namely, Article 1733 of the Old Civil Code (Article 1920 of the
new), by virtue of which said agency was effectively revoked and terminated in 1945 when, as
stated in paragraph 20 of the complaint, "defendant voluntarily ... prevented plaintiff from
resuming management and operation of said mining properties."

2. The court erred in holding that paragraph II of the management contract (Exhibit C)
suspended the period of said contract.

3. The court erred in reversing the ruling of the trial judge, based on well-settled jurisprudence
of this Supreme Court, that the management agreement was only suspended but not extended
on account of the war.
27
4. The court erred in reversing the finding of the trial judge that Nielson's action had prescribed,
but considering only the first claim and ignoring the prescriptibility of the other claims.
Alternative Grounds:
5. The court erred in holding that the period of suspension of the contract on account of the war
lasted from February 1942 to June 26, 1948.
6. Assuming arguendo that Nielson is entitled to any relief, the court erred in awarding as
damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January, 1942; and (c) the full contract price for
the extended period of sixty months, since these damages were neither demanded nor proved
and, in any case, not allowable under the general law of damages.
7. Assuming arguendo that appellant is entitled to any relief, the court erred in ordering appellee
to issue and deliver to appellant shares of stock together with fruits thereof.
8. The court erred in awarding to appellant an undetermined amount of shares of stock and/or
cash, which award cannot be ascertained and executed without further litigation.
9. The court erred in rendering judgment for attorney's fees.
We are going to dwell on these grounds in the order they are presented.
1. In its first principal ground Lepanto claims that its own counsel and this Court had overlooked the real
nature of the management contract entered into by and between Lepanto and Nielson, and the law that is
applicable on said contract. Lepanto now asserts for the first time and this is done in a motion for
reconsideration - that the management contract in question is a contract of agency such that it has the
right to revoke and terminate the said contract, as it did terminate the same, under the law of agency, and
particularly pursuant to Article 1733 of the Old Civil Code (Article 1920 of the New Civil Code).
We have taken note that Lepanto is advancing a new theory. We have carefully examined the pleadings
filed by Lepanto in the lower court, its memorandum and its brief on appeal, and never did it assert the
theory that it has the right to terminate the management contract because that contract is one of agency
which it could terminate at will. While it is true that in its ninth and tenth special affirmative defenses, in its
answer in the court below, Lepanto pleaded that it had the right to terminate the management contract in
question, that plea of its right to terminate was not based upon the ground that the relation between
Lepanto and Nielson was that of principal and agent but upon the ground that Nielson had allegedly not
complied with certain terms of the management contract. If Lepanto had thought of considering the
management contract as one of agency it could have amended its answer by stating exactly its position. It
could have asserted its theory of agency in its memorandum for the lower court and in its brief on appeal.
This, Lepanto did not do. It is the rule, and the settled doctrine of this Court, that a party cannot change his
theory on appeal — that is, that a party cannot raise in the appellate court any question of law or of fact
that was not raised in the court below or which was not within the issue made by the parties in their
pleadings (Section 19, Rule 49 of the old Rules of Court, and also Section 18 of the new Rules of Court;
Hautea vs. Magallon, L-20345, November 28, 1964; Northern Motors, Inc. vs. Prince Line, L-13884,
February 29, 1960; American Express Co. vs. Natividad, 46 Phil. 207; Agoncillo vs. Javier, 38 Phil. 424 and
Molina vs. Somes, 24 Phil 49).
At any rate, even if we allow Lepanto to assert its new theory at this very late stage of the proceedings,
this Court cannot sustain the same.
Lepanto contends that the management contract in question (Exhibit C) is one of agency because: (1)
Nielson was to manage and operate the mining properties and mill on behalf, and for the account, of
Lepanto; and (2) Nielson was authorized to represent Lepanto in entering, on Lepanto's behalf, into
contracts for the hiring of laborers, purchase of supplies, and the sale and marketing of the ores mined. All
these, Lepanto claims, show that Nielson was, by the terms of the contract, destined to execute juridical
acts not on its own behalf but on behalf of Lepanto under the control of the Board of Directors of Lepanto
"at all times". Hence Lepanto claims that the contract is one of agency. Lepanto then maintains that an
agency is revocable at the will of the principal (Article 1733 of the Old Civil Code), regardless of any term
or period stipulated in the contract, and it was in pursuance of that right that Lepanto terminated the
contract in 1945 when it took over and assumed exclusive management of the work previously entrusted
to Nielson under the contract. Lepanto finally maintains that Nielson as an agent is not entitled to
damages since the law gives to the principal the right to terminate the agency at will.
Because of Lepanto's new theory We consider it necessary to determine the nature of the management
contract — whether it is a contract of agency or a contract of lease of services. Incidentally, we have noted
that the lower court, in the decision appealed from, considered the management contract as a contract of
lease of services.
Article 1709 of the Old Civil Code, defining contract of agency, provides:
By the contract of agency, one person binds himself to render some service or do something for
the account or at the request of another.
Article 1544, defining contract of lease of service, provides:
In a lease of work or services, one of the parties binds himself to make or construct something or
to render a service to the other for a price certain.
In both agency and lease of services one of the parties binds himself to render some service to the other
party. Agency, however, is distinguished from lease of work or services in that the basis of agency is
representation, while in the lease of work or services the basis is employment. The lessor of services does
not represent his employer, while the agent represents his principal. Manresa, in his "Commentarios al
Codigo Civil Español" (1931, Tomo IX, pp. 372-373), points out that the element of representation
distinguishes agency from lease of services, as follows:
Nuestro art. 1.709 como el art. 1.984 del Codigo de Napoleon y cuantos textos legales citamos
en las concordancias, expresan claramente esta idea de la representacion, "hacer alguna cosa
por cuenta o encargo de otra" dice nuestro Codigo; "poder de hacer alguna cosa para el
mandante o en su nombre" dice el Codigo de Napoleon, y en tales palabras aparece vivo y
luminoso el concepto y la teoria de la representacion, tan fecunda en ensenanzas, que a su sola
luz es como se explican las diferencias que separan el mandato del arrendamiento de servicios,
de los contratos inominados, del consejo y de la gestion de negocios.
En efecto, en el arrendamiento de servicios al obligarse para su ejecucion, se trabaja, en verdad,
para el dueno que remunera la labor, pero ni se le representa ni se obra en su nombre....
28
On the basis of the interpretation of Article 1709 of the old Civil Code, Article 1868 of the new Civil Code
has defined the contract of agency in more explicit terms, as follows:
By the contract of agency a person binds himself to render some service or to do something in
representation or on behalf of another, with the consent or authority of the latter.
There is another obvious distinction between agency and lease of services. Agency is a preparatory
contract, as agency "does not stop with the agency because the purpose is to enter into other contracts."
The most characteristic feature of an agency relationship is the agent's power to bring about business
relations between his principal and third persons. "The agent is destined to execute juridical acts (creation,
modification or extinction of relations with third parties). Lease of services contemplate only material (non-
juridical) acts." (Reyes and Puno, "An Outline of Philippine Civil Law," Vol. V, p. 277).
In the light of the interpretations we have mentioned in the foregoing paragraphs let us now determine the
nature of the management contract in question. Under the contract, Nielson had agreed, for a period of
five years, with the right to renew for a like period, to explore, develop and operate the mining claims of
Lepanto, and to mine, or mine and mill, such pay ore as may be found therein and to market the metallic
products recovered therefrom which may prove to be marketable, as well as to render for Lepanto other
services specified in the contract. We gather from the contract that the work undertaken by Nielson was to
take complete charge subject at all times to the general control of the Board of Directors of Lepanto, of the
exploration and development of the mining claims, of the hiring of a sufficient and competent staff and of
sufficient and capable laborers, of the prospecting and development of the mine, of the erection and
operation of the mill, and of the benefication and marketing of the minerals found on the mining
properties; and in carrying out said obligation Nielson should proceed diligently and in accordance with the
best mining practice. In connection with its work Nielson was to submit reports, maps, plans and
recommendations with respect to the operation and development of the mining properties, make
recommendations and plans on the erection or enlargement of any existing mill, dispatch mining
engineers and technicians to the mining properties as from time to time may reasonably be required to
investigate and make recommendations without cost or expense to Lepanto. Nielson was also to "act as
purchasing agent of supplies, equipment and other necessary purchases by Lepanto, provided, however,
that no purchase shall be made without the prior approval of Lepanto; and provided further, that no
commission shall be claimed or retained by Nielson on such purchase"; and "to submit all requisition for
supplies, all constricts and arrangement with engineers, and staff and all matters requiring the
expenditures of money, present or future, for prior approval by Lepanto; and also to make contracts
subject to the prior approve of Lepanto for the sale and marketing of the minerals mined from said
properties, when said products are in a suitable condition for marketing." 1
It thus appears that the principal and paramount undertaking of Nielson under the management contract
was the operation and development of the mine and the operation of the mill. All the other undertakings
mentioned in the contract are necessary or incidental to the principal undertaking — these other
undertakings being dependent upon the work on the development of the mine and the operation of the
mill. In the performance of this principal undertaking Nielson was not in any way executing juridical acts
for Lepanto, destined to create, modify or extinguish business relations between Lepanto and third
persons. In other words, in performing its principal undertaking Nielson was not acting as an agent of
Lepanto, in the sense that the term agent is interpreted under the law of agency, but as one who was
performing material acts for an employer, for a compensation.
It is true that the management contract provides that Nielson would also act as purchasing agent of
supplies and enter into contracts regarding the sale of mineral, but the contract also provides that Nielson
could not make any purchase, or sell the minerals, without the prior approval of Lepanto. It is clear,
therefore, that even in these cases Nielson could not execute juridical acts which would bind Lepanto
without first securing the approval of Lepanto. Nielson, then, was to act only as an intermediary, not as an
agent.
Lepanto contends that the management contract in question being one of agency it had the right to
terminate the contract at will pursuant to the provision of Article 1733 of the old Civil Code. We find,
however, a proviso in the management contract which militates against this stand of Lepanto. Paragraph
XI of the contract provides:
Both parties to this agreement fully recognize that the terms of this Agreement are made
possible only because of the faith or confidence that the Officials of each company have in the
other; therefore, in order to assure that such confidence and faith shall abide and continue,
NIELSON agrees that LEPANTO may cancel this Agreement at any time upon ninety (90) days
written notice, in the event that NIELSON for any reason whatsoever, except acts of God, strike
and other causes beyond its control, shall cease to prosecute the operation and development of
the properties herein described, in good faith and in accordance with approved mining practice.
It is thus seen, from the above-quoted provision of paragraph XI of the management contract, that Lepanto
could not terminate the agreement at will. Lepanto could terminate or cancel the agreement by giving
notice of termination ninety days in advance only in the event that Nielson should prosecute in bad faith
and not in accordance with approved mining practice the operation and development of the mining
properties of Lepanto. Lepanto could not terminate the agreement if Nielson should cease to prosecute the
operation and development of the mining properties by reason of acts of God, strike and other causes
beyond the control of Nielson.
The phrase "Both parties to this agreement fully recognize that the terms of this agreement are made
possible only because of the faith and confidence of the officials of each company have in the other" in
paragraph XI of the management contract does not qualify the relation between Lepanto and Nielson as
that of principal and agent based on trust and confidence, such that the contractual relation may be
terminated by the principal at any time that the principal loses trust and confidence in the agent. Rather,
that phrase simply implies the circumstance that brought about the execution of the management
contract. Thus, in the annual report for 19362, submitted by Mr. C. A. Dewit, President of Lepanto, to its
stockholders, under date of March 15, 1937, we read the following:
To the stockholders
xxx      xxx      xxx
The incorporation of our Company was effected as a result of negotiations with Messrs. Nielson
& Co., Inc., and an offer by these gentlemen to Messrs. C. I. Cookes and V. L. Lednicky, dated
August 11, 1936, reading as follows:
Messrs. Cookes and Lednicky,
Present
Re: Mankayan Copper Mines
GENTLEMEN:
29
After an examination of your property by our engineers, we have decided to offer as
we hereby offer to underwrite the entire issue of stock of a corporation to be formed
for the purpose of taking over said properties, said corporation to have an authorized
capital of P1,750,000.00, of which P700,000.00 will be issued in escrow to the claim-
owners in exchange for their claims, and the balance of P1,050,000.00 we will sell to
the public at par or take ourselves.
The arrangement will be under the following conditions:
1. The subscriptions for cash shall be payable 50% at time of subscription and the
balance subject to the call of the Board of Directors of the proposed corporation.
2. We shall have an underwriting and brokerage commission of 10% of the
P1,050,000.00 to be sold for cash to the public, said commission to be payable from
the first payment of 50% on each subscription.
3. We will bear the cost of preparing and mailing any prospectus that may be
required, but no such prospectus will be sent out until the text thereof has been first
approved by the Board of Directors of the proposed corporation.
4. That after the organization of the corporation, all operating contract be entered into
between ourselves and said corporation, under the terms which the property will be
developed and mined and a mill erected, under our supervision, our compensation to
be P2,000.00 per month until the property is put on a profitable basis and P2,500.00
per month plus 10% of the net profits for a period of five years thereafter.
5. That we shall have the option to renew said operating contract for an additional
period of five years, on the same basis as the original contract, upon the expiration
thereof.
It is understood that the development and mining operations on said property, and the
erection of the mill thereon, and the expenditures therefor shall be subject to the
general control of the Board of Directors of the proposed corporation, and, in case you
accept this proposition, that a detailed operating contract will be entered into,
covering the relationships between the parties.
Yours very truly,
(Sgd.) L. R. Nielson
Pursuant to the provisions of paragraph 2 of this offer, Messrs. Nielson & Co., took subscriptions
for One Million Fifty Thousand Pesos (P1,050,000.00) in shares of our Company and their
underwriting and brokerage commission has been paid. More than fifty per cent of these
subscriptions have been paid to the Company in cash. The claim owners have transferred their
claims to the Corporation, but the P700,000.00 in stock which they are to receive therefor, is as
yet held in escrow.
Immediately upon the formation of the Corporation Messrs. Nielson & Co., assumed the
Management of the property under the control of the Board of Directors. A modification in the
Management Contract was made with the consent of all the then stockholders, in virtue of which
the compensation of Messrs. Nielson & Co., was increased to P2,500.00 per month when mill
construction began. The formal Management Contract was not entered into until January 30,
1937.
xxx      xxx      xxx
Manila, March 15, 1937
(Sgd.) C. A. DeWitt President
We can gather from the foregoing statements in the annual report for 1936, and from the provision of
paragraph XI of the Management contract, that the employment by Lepanto of Nielson to operate and
manage its mines was principally in consideration of the know-how and technical services that Nielson
offered Lepanto. The contract thus entered into pursuant to the offer made by Nielson and accepted by
Lepanto was a "detailed operating contract". It was not a contract of agency. Nowhere in the record is it
shown that Lepanto considered Nielson as its agent and that Lepanto terminated the management
contract because it had lost its trust and confidence in Nielson.
The contention of Lepanto that it had terminated the management contract in 1945, following the
liberation of the mines from Japanese control, because the relation between it and Nielson was one of
agency and as such it could terminate the agency at will, is, therefore, untenable. On the other hand, it
can be said that, in asserting that it had terminated or cancelled the management contract in 1945,
Lepanto had thereby violated the express terms of the management contract. The management contract
was renewed to last until January 31, 1947, so that the contract had yet almost two years to go — upon
the liberation of the mines in 1945. There is no showing that Nielson had ceased to prosecute the
operation and development of the mines in good faith and in accordance with approved mining practice
which would warrant the termination of the contract upon ninety days written notice. In fact there was no
such written notice of termination. It is an admitted fact that Nielson ceased to operate and develop the
mines because of the war — a cause beyond the control of Nielson. Indeed, if the management contract in
question was intended to create a relationship of principal and agent between Lepanto and Nielson,
paragraph XI of the contract should not have been inserted because, as provided in Article 1733 of the old
Civil Code, agency is essentially revocable at the will of the principal — that means, with or without cause.
But precisely said paragraph XI was inserted in the management contract to provide for the cause for its
revocation. The provision of paragraph XI must be given effect.
In the construction of an instrument where there are several provisions or particulars, such a construction
is, if possible, to be adopted as will give effect to all, 3 and if some stipulation of any contract should admit
of several meanings, it shall be understood as bearing that import which is most adequate to render it
effectual.4
It is Our considered view that by express stipulation of the parties, the management contract in question is
not revocable at the will of Lepanto. We rule that this management contract is not a contract of agency as
defined in Article 1709 of the old Civil Code, but a contract of lease of services as defined in Article 1544 of
the same Code. This contract can not be unilaterally revoked by Lepanto.
The first ground of the motion for reconsideration should, therefore, be brushed aside.
30
2. In the second, third and fifth grounds of its motion for reconsideration, Lepanto maintains that this Court
erred, in holding that paragraph 11 of the management contract suspended the period of said contract, in
holding that the agreement was not only suspended but was extended on account of the war, and in
holding that the period of suspension on account of the war lasted from February, 1942 to June 26, 1948.
We are going to discuss these three grounds together because they are interrelated.
In our decision we have dwelt lengthily on the points that the management contract was suspended
because of the war, and that the period of the contract was extended for a period equivalent to the time
when Nielson was unable to perform the work of mining and milling because of the adverse effects of the
war on the work of mining and milling.
It is the contention of Lepanto that the happening of those events, and the effects of those events, simply
suspended the performance of the obligations by either party in the contract, but did not suspend the
period of the contract, much less extended the period of the contract.
We have conscientiously considered the arguments of Lepanto in support of these three grounds, but We
are not persuaded to reconsider the rulings that We made in Our decision.
We want to say a little more on these points, however. Paragraph II of the management contract provides
as follows:
In the event of inundation, flooding of the mine, typhoon, earthquake or any other force
majeure, war, insurrection, civil commotion, organized strike, riot, fire, injury to the machinery or
other event or cause reasonably beyond the control of NIELSON and which adversely affects the
work of mining and milling; NIELSON shall report such fact to LEPANTO and without liability or
breach of the terms of this Agreement, the same shall remain in suspense, wholly or partially
during the terms of such inability. (Emphasis supplied)
A reading of the above-quoted paragraph II cannot but convey the idea that upon the happening of any of
the events enumerated therein, which adversely affects the work of mining and milling, the agreement is
deemed suspended for as long as Nielson is unable to perform its work of mining and milling because of
the adverse effects of the happening of the event on the work of mining and milling. During the period
when the adverse effects on the work of mining and milling exist, neither party in the contract would be
held liable for non-compliance of its obligation under the contract. In other words, the operation of the
contract is suspended for as long as the adverse effects of the happening of any of those events had
impeded or obstructed the work of mining and milling. An analysis of the phraseology of the above-quoted
paragraph II of the management contract readily supports the conclusion that it is the agreement, or the
contract, that is suspended. The phrase "the same" can refer to no other than the term "Agreement" which
immediately precedes it. The "Agreement" may be wholly or partially suspended, and this situation will
depend on whether the event wholly or partially affected adversely the work of mining and milling. In the
instant case, the war had adversely affected — and wholly at that — the work of mining and milling. We
have clearly stated in Our decision the circumstances brought about by the war which caused the whole or
total suspension of the agreement or of the management contract.
LEPANTO itself admits that the management contract was suspended. We quote from the brief of
LEPANTO:
Probably, what Nielson meant was, it was prevented by Lepanto to assume again the
management of the mine in 1945, at the precise time when defendant was at the feverish phase
of rehabilitation and although the contract had already been suspended. (Lepanto's Brief, p. 9).
... it was impossible, as a result of the destruction of the mine, for the plaintiff to manage and
operate the same and because, as provided in the agreement, the contract was suspended by
reason of the war (Lepanto's Brief, pp. 9-10).
Clause II, by its terms, is clear that the contract is suspended in case fortuitous event or force
majeure, such as war, adversely affects the work of mining and milling. (Lepanto's Brief, p. 49).
Lepanto is correct when it said that the obligations under the contract were suspended upon the
happening of any of the events enumerated in paragraph II of the management contract. Indeed, those
obligations were suspended because the contract itself was suspended. When we talk of a contract that
has been suspended we certainly mean that the contract temporarily ceased to be operative, and the
contract becomes operative again upon the happening of a condition — or when a situation obtains —
which warrants the termination of the suspension of the contract.
In Our decision We pointed out that the agreement in the management contract would be suspended when
two conditions concur, namely: (1) the happening of the event constituting a force majeure that was
reasonably beyond the control of Nielson, and (2) that the event constituting the force majeure adversely
affected the work of mining and milling. The suspension, therefore, would last not only while the event
constituting the force majeure continued to occur but also for as long as the adverse effects of the force
majeure on the work of mining and milling had not been eliminated. Under the management contract the
happening alone of the event constituting the force majeure which did not affect adversely the work of
mining and milling would not suspend the period of the contract. It is only when the two conditions concur
that the period of the agreement is suspended.
It is not denied that because of the war, in February 1942, the mine, the original mill, the original power
plant, the supplies and equipment, and all installations at the Mankayan mines of Lepanto, were destroyed
upon order of the United States Army, to prevent their utilization by the enemy. It is not denied that for the
duration of the war Nielson could not undertake the work of mining and milling. When the mines were
liberated from the enemy in August, 1945, the condition of the mines, the mill, the power plant and other
installations, was not the same as in February 1942 when they were ordered destroyed by the US army.
Certainly, upon the liberation of the mines from the enemy, the work of mining and milling could not be
undertaken by Nielson under the same favorable circumstances that obtained before February 1942. The
work of mining and milling, as undertaken by Nielson in January, 1942, could not be resumed by Nielson
soon after liberation because of the adverse effects of the war, and this situation continued until June of
1948. Hence, the suspension of the management contract did not end upon the liberation of the mines in
August, 1945. The mines and the mill and the installations, laid waste by the ravages of war, had to be
reconstructed and rehabilitated, and it can be said that it was only on June 26, 1948 that the adverse
effects of the war on the work of mining and milling had ended, because it was on that date that the
operation of the mines and the mill was resumed. The period of suspension should, therefore, be reckoned
from February 1942 until June 26, 1948, because it was during this period that the war and the adverse
effects of the war on the work of mining and milling had lasted. The mines and the installations had to be
rehabilitated because of the adverse effects of the war. The work of rehabilitation started soon after the
liberation of the mines in August, 1945 and lasted until June 26, 1948 when, as stated in Lepanto's annual
report to its stockholders for the year 1948, "June 28, 1948 marked the official return to operation of this
company at its properties at Mankayan, Mountain Province, Philippines" (Exh. F-1).
Lepanto would argue that if the management contract was suspended at all the suspension should cease
in August of 1945, contending that the effects of the war should cease upon the liberation of the mines
from the enemy. This contention cannot be sustained, because the period of rehabilitation was still a
period when the physical effects of the war — the destruction of the mines and of all the mining
installations — adversely affected, and made impossible, the work of mining and milling. Hence, the period
of the reconstruction and rehabilitation of the mines and the installations must be counted as part of the
period of suspension of the contract.
31
Lepanto claims that it would not be unfair to end the period of suspension upon the liberation of the mines
because soon after the liberation of the mines Nielson insisted to resume the management work, and that
Nielson was under obligation to reconstruct the mill in the same way that it was under obligation to
construct the mill in 1937. This contention is untenable. It is true that Nielson insisted to resume its
management work after liberation, but this was only for the purpose of restoring the mines, the mill, and
other installations to their operating and producing condition as of February 1942 when they were ordered
destroyed. It is not shown by any evidence in the record, that Nielson had agreed, or would have agreed,
that the period of suspension of the contract would end upon the liberation of the mines. This is so
because, as found by this Court, the intention of the parties in the management contract, and as
understood by them, the management contract was suspended for as long as the adverse effects of the
force majeure on the work of mining and milling had not been removed, and the contract would be
extended for as long as it was suspended. Under the management contract Nielson had the obligation to
erect and operate the mill, but not to erect or reconstruct the mill in case of its destruction by force
majeure.
It is the considered view of this court that it would not be fair to Nielson to consider the suspension of the
contract as terminated upon the liberation of the mines because then Nielson would be placed in a
situation whereby it would have to suffer the adverse effects of the war on the work of mining and milling.
The evidence shows that as of January 1942 the operation of the mines under the management of Nielson
was already under beneficial conditions, so much so that dividends were already declared by Lepanto for
the years 1939, 1940 and 1941. To make the management contract immediately operative after the
liberation of the mines from the Japanese, at the time when the mines and all its installations were laid
waste as a result of the war, would be to place Nielson in a situation whereby it would lose all the benefits
of what it had accomplished in placing the Lepanto mines in profitable operation before the outbreak of
the war in December, 1941. The record shows that Nielson started its management operation way back in
1936, even before the management contract was entered into. As early as August 1936 Nielson negotiated
with Messrs. C. I. Cookes and V. L. Lednicky for the operation of the Mankayan mines and it was the result
of those negotiations that Lepanto was incorporated; that it was Nielson that helped to capitalize Lepanto,
and that after the formation of the corporation (Lepanto) Nielson immediately assumed the management
of the mining properties of Lepanto. It was not until January 30, 1937 when the management contract in
question was entered into between Lepanto and Nielson (Exhibit A).
A contract for the management and operation of mines calls for a speculative and risky venture on the part
of the manager-operator. The manager-operator invests its technical know-how, undertakes back-breaking
efforts and tremendous spade-work, so to say, in the first years of its management and operation of the
mines, in the expectation that the investment and the efforts employed might be rewarded later with
success. This expected success may never come. This had happened in the very case of the Mankayan
mines where, as recounted by Mr. Lednicky of Lepanto, various persons and entities of different
nationalities, including Lednicky himself, invested all their money and failed. The manager-operator may
not strike sufficient ore in the first, second, third, or fourth year of the management contract, or he may
not strike ore even until the end of the fifth year. Unless the manager-operator strikes sufficient quantity of
ore he cannot expect profits or reward for his investment and efforts. In the case of Nielson, its corps of
competent engineers, geologists, and technicians begun working on the Mankayan mines of Lepanto since
the latter part of 1936, and continued their work without success and profit through 1937, 1938, and the
earlier part of 1939. It was only in December of 1939 when the efforts of Nielson started to be rewarded
when Lepanto realized profits and the first dividends were declared. From that time on Nielson could
expect profit to come to it — as in fact Lepanto declared dividends for 1940 and 1941 — if the
development and operation of the mines and the mill would continue unhampered. The operation, and the
expected profits, however, would still be subject to hazards due to the occurrence of fortuitous events,
fires, earthquakes, strikes, war, etc., constituting force majeure, which would result in the destruction of
the mines and the mill. One of these diverse causes, or one after the other, may consume the whole period
of the contract, and if it should happen that way the manager-operator would reap no profit to compensate
for the first years of spade-work and investment of efforts and know-how. Hence, in fairness to the
manager-operator, so that he may not be deprived of the benefits of the work he had accomplished, the
force majeure clause is incorporated as a standard clause in contracts for the management and operation
of mines.
The nature of the contract for the management and operation of mines justifies the interpretation of the
force majeure clause, that a period equal to the period of suspension due to force majeure should be
added to the original term of the contract by way of an extension. We, therefore, reiterate the ruling in Our
decision that the management contract in the instant case was suspended from February, 1942 to June 26,
1948, and that from the latter date the contract had yet five years to go.
3. In the fourth ground of its motion for reconsideration, Lepanto maintains that this Court erred in
reversing the finding of the trial court that Nielson's action has prescribed, by considering only the first
claim and ignoring the prescriptibility of the other claims.
This ground of the motion for reconsideration has no merit.
In Our decision We stated that the claims of Nielson are based on a written document, and, as such, the
cause of action prescribes in ten years.5 Inasmuch as there are different claims which accrued on different
dates the prescriptive periods for all the claims are not the same. The claims of Nielson that have been
awarded by this Court are itemized in the dispositive part of the decision.
The first item of the awards in Our decision refers to Nielson's compensation in the sum of P17,500.00,
which is equivalent to 10% of the cash dividends declared by Lepanto in December, 1941. As we have
stated in Our decision, this claim accrued on December 31, 1941, and the right to commence an action
thereon started on January 1, 1942. We declared that the action on this claim did not prescribe although
the complaint was filed on February 6, 1958 — or after a lapse of 16 years, 1 month and 5 days — because
of the operation of the moratorium law.
We declared that under the applicable decisions of this Court6 the moratorium period of 8 years, 2 months
and 8 days should be deducted from the period that had elapsed since the accrual of the cause of action to
the date of the filing of the complaint, so that there is a period of less than 8 years to be reckoned for the
purpose of prescription.
This claim of Nielson is covered by Executive Order No. 32, issued on March 10, 1945, which provides as
follows:
Enforcement of payments of all debts and other monetary obligations payable in the Philippines,
except debts and other monetary obligations entered into in any area after declaration by
Presidential Proclamation that such area has been freed from enemy occupation and control, is
temporarily suspended pending action by the Commonwealth Government. (41 O.G. 56-57;
Emphasis supplied)
Executive Order No. 32 covered all debts and monetary obligation contracted before the war (or before
December 8, 1941) and those contracted subsequent to December 8, 1941 and during the Japanese
occupation. Republic Act No. 342, approved on July 26, 1948, lifted the moratorium provided for in
Executive Order No. 32 on pre-war (or pre-December 8, 1941) debts of debtors who had not filed war
damage claims with the United States War Damage Commission. In other words, after the effectivity of
Republic Act No. 342, the debt moratorium was limited: (1) to debts and other monetary obligations which
were contracted after December 8, 1941 and during the Japanese occupation, and (2) to those pre-war (or
pre-December 8, 1941) debts and other monetary obligations where the debtors filed war damage claims.
That was the situation up to May 18, 1953 when this Court declared Republic Act No. 342
32
unconstitutional.7 It has been held by this Court, however, that from March 10, 1945 when Executive Order
No. 32 was issued, to May 18, 1953 when Republic Act No. 342 was declared unconstitutional — or a
period of 8 years, 2 months and 8 days — the debt moratorium was in force, and had the effect of
suspending the period of prescription.8
Lepanto is wrong when in its motion for reconsideration it claims that the moratorium provided for in
Executive Order No. 32 was continued by Republic Act No. 342 "only with respect to debtors of pre-war
obligations or those incurred prior to December 8, 1941," and that "the moratorium
was lifted and terminated with respect to obligations incurred after December 8, 1941."9
This Court has held that Republic Act No. 342 does not apply to debts contracted during the war and did
not lift the moratorium in relations thereto. 10 In the case of Abraham, et al. vs. Intestate Estate of Juan C.
Ysmael, et al., L-16741, Jan. 31, 1962, this Court said:
Respondents, however, contend that Republic Act No. 342, which took effect on July 26, 1948,
lifted the moratorium on debts contracted during the Japanese occupation. The court has
already held that Republic Act No. 342 did not lift the moratorium on debts contracted during
the war (Uy vs. Kalaw Katigbak, G.R. No. L-1830, Dec. 31, 1949) but modified Executive Order
No. 32 as to pre-war debts, making the protection available only to debtors who had war
damage claims (Sison v. Mirasol, G.R. No. L-4711, Oct. 3, 1952).
We therefore reiterate the ruling in Our decision that the claim involved in the first item awarded to
Nielson had not prescribed.
What we have stated herein regarding the non-prescription of the cause of action of the claim involved in
the first item in the award also holds true with respect to the second item in the award, which refers to
Nielson's claim for management fee of P2,500.00 for January, 1942. Lepanto admits that this second item,
like the first, is a monetary obligation. The right of action of Nielson regarding this claim accrued on
January 31, 1942.
As regards items 3, 4, 5, 6 and 7 in the awards in the decision, the moratorium law is not applicable. That
is the reason why in Our decision We did not discuss the question of prescription regarding these items.
The claims of Nielson involved in these items are based on the management contract, and Nielson's cause
of action regarding these claims prescribes in ten years. Corollary to Our ruling that the management
contract was suspended from February, 1942 until June 26, 1948, and that the contract was extended for
five years from June 26, 1948, the right of action of Nielson to claim for what is due to it during that period
of extension accrued during the period from June 26, 1948 till the end of the five-year extension period or
until June 26, 1953. And so, even if We reckon June 26, 1948 as the starting date of the ten-year period in
connection with the prescriptibility of the claims involved in items 3, 4, 5, 6 and 7 of the awards in the
decision, it is obvious that when the complaint was filed on February 6, 1958 the ten-year prescriptive
period had not yet lapsed.
In Our decision We have also ruled that the right of action of Nielson against Lepanto had not prescribed
because of the arbitration clause in the Management contract. We are satisfied that there is evidence that
Nielson had asked for arbitration, and an arbitration committee had been constituted. The arbitration
committee, however, failed to bring about any settlement of the differences between Nielson and Lepanto.
On June 25, 1957 counsel for Lepanto definitely advised Nielson that they were not entertaining any claim
of Nielson. The complaint in this case was filed on February 6, 1958.
4. In the sixth ground of its motion for reconsideration, Lepanto maintains that this Court "erred in
awarding as damages (a) 10% of the cash dividends declared and paid in December, 1941; (b) the
management fee of P2,500.00 for the month of January 1942; and (c) the full contract price for the
extended period of 60 months, since the damages were never demanded nor proved and, in any case, not
allowable under the general law on damages."
We have stated in Our decision that the original agreement in the management contract regarding the
compensation of Nielson was modified, such that instead of receiving a monthly compensation of
P2,500.00 plus 10% of the net profits from the operation of the properties for the preceding
month,11 Nielson would receive a compensation of P2,500.00 a month, plus (1) 10% of the dividends
declared and paid, when and as paid, during the period of the contract, and at the end of each year, (2)
10% of any depletion reserve that may be set up, and (3) 10% of any amount expended during the year
out of surplus earnings for capital account.
It is shown that in December, 1941, cash dividends amounting to P175,000.00 was declared by
Lepanto.12 Nielson, therefore, should receive the equivalent of 10% of this amount, or the sum of
P17,500.00. We have found that this amount was not paid to Nielson.
In its motion for reconsideration, Lepanto inserted a photographic copy of page 127 of its cash
disbursement book, allegedly for 1941, in an effort to show that this amount of P17,500.00 had been paid
to Nielson. It appears, however, in this photographic copy of page 127 of the cash disbursement book that
the sum of P17,500.00 was entered on October 29 as "surplus a/c Nielson & Co. Inc." The entry does not
make any reference to dividends or participation of Nielson in the profits. On the other hand, in the
photographic copy of page 89 of the 1941 cash disbursement book, also attached to the motion for
reconsideration, there is an entry for P17,500.00 on April 23, 1941 which states "Accts. Pay. Particip.
Nielson & Co. Inc." This entry for April 23, 1941 may really be the participation of Nielson in the profits
based on dividends declared in April 1941 as shown in Exhibit L. But in the same Exhibit L it is not stated
that any dividend was declared in October 1941. On the contrary it is stated in Exhibit L that dividends
were declared in December 1941. We cannot entertain this piece of evidence for several reasons: (1)
because this evidence was not presented during the trial in the court below; (2) there is no showing that
this piece of evidence is newly discovered and that Lepanto was not in possession of said evidence when
this case was being tried in the court below; and (3) according to Exhibit L cash dividends of P175,000.00
were declared in December, 1941, and so the sum of P17,500.00 which appears to have been paid to
Nielson in October 1941 could not be payment of the equivalent of 10% of the cash dividends that were
later declared in December, 1941.
As regards the management fee of Nielson corresponding to January, 1942, in the sum of P2,500.00, We
have also found that Nielson is entitled to be paid this amount, and that this amount was not paid by
Lepanto to Nielson. Whereas, Lepanto was able to prove that it had paid the management fees of Nielson
for November and December, 1941,13 it was not able to present any evidence to show that the
management fee of P2,500.00 for January, 1942 had been paid.
It having been declared in Our decision, as well as in this resolution, that the management contract had
been extended for 5 years, or sixty months, from June 27, 1948 to June 26, 1953, and that the cause of
action of Nielson to claim for its compensation during that period of extension had not prescribed, it
follows that Nielson should be awarded the management fees during the whole period of extension, plus
the 10% of the value of the dividends declared during the said period of extension, the 10% of the
depletion reserve that was set up, and the 10% of any amount expended out of surplus earnings for capital
account.
5. In the seventh ground of its motion for reconsideration, Lepanto maintains that this Court erred in
ordering Lepanto to issue and deliver to Nielson shares of stock together with fruits thereof.
33
In Our decision, We declared that pursuant to the modified agreement regarding the compensation of
Nielson which provides, among others, that Nielson would receive 10% of any dividends declared and paid,
when and as paid, Nielson should be paid 10% of the stock dividends declared by Lepanto during the
period of extension of the contract.
It is not denied that on November 28, 1949, Lepanto declared stock dividends worth P1,000,000.00; and
on August 22, 1950, it declared stock dividends worth P2,000,000.00). In other words, during the period of
extension Lepanto had declared stock dividends worth P3,000,000.00. We held in Our decision that Nielson
is entitled to receive l0% of the stock dividends declared, or shares of stock worth P300,000.00 at the par
value of P0.10 per share. We ordered Lepanto to issue and deliver to Nielson those shares of stocks as well
as all the fruits or dividends that accrued to said shares.
In its motion for reconsideration, Lepanto contends that the payment to Nielson of stock dividends as
compensation for its services under the management contract is a violation of the Corporation Law, and
that it was not, and it could not be, the intention of Lepanto and Nielson — as contracting parties — that
the services of Nielson should be paid in shares of stock taken out of stock dividends declared by Lepanto.
We have assiduously considered the arguments adduced by Lepanto in support of its contention, as well as
the answer of Nielson in this connection, and We have arrived at the conclusion that there is merit in the
contention of Lepanto.
Section 16 of the Corporation Law, in part, provides as follows:
No corporation organized under this Act shall create or issue bills, notes or other evidence of
debt, for circulation as money, and no corporation shall issue stock or bonds except in exchange
for actual cash paid to the corporation or for: (1) property actually received by it at a fair
valuation equal to the par or issued value of the stock or bonds so issued; and in case of
disagreement as to their value, the same shall be presumed to be the assessed value or the
value appearing in invoices or other commercial documents, as the case may be; and the
burden or proof that the real present value of the property is greater than the assessed value or
value appearing in invoices or other commercial documents, as the case may be, shall be upon
the corporation, or for (2) profits earned by it but not distributed among its stockholders or
members; Provided, however, That no stock or bond dividend shall be issued without the
approval of stockholders representing not less than two-thirds of all stock then outstanding and
entitled to vote at a general meeting of the corporation or at a special meeting duly called for
the purpose.
xxx      xxx      xxx
No corporation shall make or declare any dividend except from the surplus profits arising from
its business, or divide or distribute its capital stock or property other than actual profits among
its members or stockholders until after the payment of its debts and the termination of its
existence by limitation or lawful dissolution: Provided, That banking, savings and loan, and trust
corporations may receive deposits and issue certificates of deposit, checks, drafts, and bills of
exchange, and the like in the transaction of the ordinary business of banking, savings and loan,
and trust corporations. (As amended by Act No. 2792, and Act No. 3518; Emphasis supplied.)
From the above-quoted provision of Section 16 of the Corporation Law, the consideration for which shares
of stock may be issued are: (1) cash; (2) property; and (3) undistributed profits. Shares of stock are given
the special name "stock dividends" only if they are issued in lieu of undistributed profits. If shares of stocks
are issued in exchange of cash or property then those shares do not fall under the category of "stock
dividends". A corporation may legally issue shares of stock in consideration of services rendered to it by a
person not a stockholder, or in payment of its indebtedness. A share of stock issued to pay for services
rendered is equivalent to a stock issued in exchange of property, because services is equivalent to
property.14 Likewise a share of stock issued in payment of indebtedness is equivalent to issuing a stock in
exchange for cash. But a share of stock thus issued should be part of the original capital stock of the
corporation upon its organization, or part of the stocks issued when the increase of the capitalization of a
corporation is properly authorized. In other words, it is the shares of stock that are originally issued by the
corporation and forming part of the capital that can be exchanged for cash or services rendered, or
property; that is, if the corporation has original shares of stock unsold or unsubscribed, either coming from
the original capitalization or from the increased capitalization. Those shares of stock may be issued to a
person who is not a stockholder, or to a person already a stockholder in exchange for services rendered or
for cash or property. But a share of stock coming from stock dividends declared cannot be issued to one
who is not a stockholder of a corporation.
A "stock dividend" is any dividend payable in shares of stock of the corporation declaring or authorizing
such dividend. It is, what the term itself implies, a distribution of the shares of stock of the corporation
among the stockholders as dividends. A stock dividend of a corporation is a dividend paid in shares of
stock instead of cash, and is properly payable only out of surplus profits. 15 So, a stock dividend is actually
two things: (1) a dividend, and (2) the enforced use of the dividend money to purchase additional shares of
stock at par.16 When a corporation issues stock dividends, it shows that the corporation's accumulated
profits have been capitalized instead of distributed to the stockholders or retained as surplus available for
distribution, in money or kind, should opportunity offer. Far from being a realization of profits for the
stockholder, it tends rather to postpone said realization, in that the fund represented by the new stock has
been transferred from surplus to assets and no longer available for actual distribution. 17 Thus, it is
apparent that stock dividends are issued only to stockholders. This is so because only stockholders are
entitled to dividends. They are the only ones who have a right to a proportional share in that part of the
surplus which is declared as dividends. A stock dividend really adds nothing to the interest of the
stockholder; the proportional interest of each stockholder remains the same. 18If a stockholder is deprived
of his stock dividends - and this happens if the shares of stock forming part of the stock dividends are
issued to a non-stockholder — then the proportion of the stockholder's interest changes radically. Stock
dividends are civil fruits of the original investment, and to the owners of the shares belong the civil fruits. 19
The term "dividend" both in the technical sense and its ordinary acceptation, is that part or portion of the
profits of the enterprise which the corporation, by its governing agents, sets apart for ratable division
among the holders of the capital stock. It means the fund actually set aside, and declared by the directors
of the corporation as dividends and duly ordered by the director, or by the stockholders at a corporate
meeting, to be divided or distributed among the stockholders according to their respective interests. 20
It is Our considered view, therefore, that under Section 16 of the Corporation Law stock dividends can not
be issued to a person who is not a stockholder in payment of services rendered. And so, in the case at bar
Nielson can not be paid in shares of stock which form part of the stock dividends of Lepanto for services it
rendered under the management contract. We sustain the contention of Lepanto that the understanding
between Lepanto and Nielson was simply to make the cash value of the stock dividends declared as the
basis for determining the amount of compensation that should be paid to Nielson, in the proportion of 10%
of the cash value of the stock dividends declared. And this conclusion of Ours finds support in the record.
We had adverted to in Our decision that in 1940 there was some dispute between Lepanto and Nielson
regarding the application and interpretation of certain provisions of the original contract particularly with
regard to the 10% participation of Nielson in the net profits, so that some adjustments had to be made. In
the minutes of the meeting of the Board of Directors of Lepanto on August 21, 1940, We read the
following:
The Chairman stated that he believed that it would be better to tie the computation of the 10%
participation of Nielson & Company, Inc. to the dividend, because Nielson will then be able to
definitely compute its net participation by the amount of the dividends declared. In addition to
34
the dividend, we have been setting up a depletion reserve and it does not seem fair to burden
the 10% participation of Nielson with the depletion reserve, as the depletion reserve should not
be considered as an operating expense. After a prolonged discussion, upon motion duly made
and seconded, it was —
RESOLVED, That the President, be, and he hereby is, authorized to enter into an agreement with
Nielson & Company, Inc., modifying Paragraph V of management contract of January 30, 1937,
effective January 1, 1940, in such a way that Nielson & Company, Inc. shall receive 10% of any
dividends declared and paid, when and as paid during the period of the contract and at the end
of each year, 10% of any depletion reserve that may be set up and 10% of any amount
expended during the year out of surplus earnings for capital account. (Emphasis supplied.)
From the sentence, "The Chairman stated that he believed that it would be better to tie the computation of
the 10% participation of Nielson & Company, Inc., to the dividend, because Nielson will then be able to
definitely compute its net participation by the amount of the dividends declared" the idea is conveyed that
the intention of Lepanto, as expressed by its Chairman C. A. DeWitt, was to make the value of the
dividends declared — whether the dividends were in cash or in stock — as the basis for determining the
amount of compensation that should be paid to Nielson, in the proportion of 10% of the cash value of the
dividends so declared. It does not mean, however, that the compensation of Nielson would be taken from
the amount actually declared as cash dividend to be distributed to the stockholder, nor from the shares of
stocks to be issued to the stockholders as stock dividends, but from the other assets or funds of the
corporation which are not burdened by the dividends thus declared. In other words, if, for example, cash
dividends of P300,000.00 are declared, Nielson would be entitled to a compensation of P30,000.00, but
this P30,000.00 should not be taken from the P300,000.00 to be distributed as cash dividends to the
stockholders but from some other funds or assets of the corporation which are not included in the amount
to answer for the cash dividends thus declared. This is so because if the P30,000.00 would be taken out
from the P300,000.00 declared as cash dividends, then the stockholders would not be getting P300,000.00
as dividends but only P270,000.00. There would be a dilution of the dividend that corresponds to each
share of stock held by the stockholders. Similarly, if there were stock dividends worth one million pesos
that were declared, which means an issuance of ten million shares at the par value of ten centavos per
share, it does not mean that Nielson would be given 100,000 shares. It only means that Nielson should be
given the equivalent of 10% of the aggregate cash value of those shares issued as stock dividends. That
this was the understanding of Nielson itself is borne out by the fact that in its appeal brief Nielson urged
that it should be paid "P300,000.00 being 10% of the P3,000,000.00 stock dividends declared on
November 28, 1949 and August 20, 1950...."21
We, therefore, reconsider that part of Our decision which declares that Nielson is entitled to shares of
stock worth P300,000.00 based on the stock dividends declared on November 28, 1949 and on August 20,
1950, together with all the fruits accruing thereto. Instead, We declare that Nielson is entitled to payment
by Lepanto of P300,000.00 in cash, which is equivalent to 10% of the money value of the stock dividends
worth P3,000,000.00 which were declared on November 28, 1949 and on August 20, 1950, with interest
thereon at the rate of 6% from February 6, 1958.
6. In the eighth ground of its motion for reconsideration Lepanto maintains that this Court erred in
awarding to Nielson an undetermined amount of shares of stock and/or cash, which award can not be
ascertained and executed without further litigation.
In view of Our ruling in this resolution that Nielson is not entitled to receive shares of stock as stock
dividends in payment of its compensation under the management contract, We do not consider it
necessary to discuss this ground of the motion for reconsideration. The awards in the present case are all
reduced to specific sums of money.
7. In the ninth ground of its motion for reconsideration Lepanto maintains that this Court erred in rendering
judgment or attorney's fees.
The matter of the award of attorney's fees is within the sound discretion of this Court. In Our decision We
have stated the reason why the award of P50,000.00 for attorney's fees is considered by this Court as
reasonable.
Accordingly, We resolve to modify the decision that We rendered on December 17, 1966, in the sense that
instead of awarding Nielson shares of stock worth P300,000.00 at the par value of ten centavos (P0.10) per
share based on the stock dividends declared by Lepanto on November 28, 1949 and August 20, 1950,
together with their fruits, Nielson should be awarded the sum of P300,000.00 which is an amount
equivalent to 10% of the cash value of the stock dividends thus declared, as part of the compensation due
Nielson under the management contract. The dispositive portion of the decision should, therefore, be
amended, to read as follows:
IN VIEW OF THE FOREGOING CONSIDERATIONS, We hereby reverse the decision of the court a quo and
enter in lieu thereof another, ordering the appellee Lepanto to pay the appellant Nielson the different
amounts as specified hereinbelow:
(1) Seventeen thousand five hundred pesos (P17,500.00), equivalent to 10% of the cash dividends of
December, 1941, with legal interest thereon from the date of the filing of the complaint;
(2) Two thousand five hundred pesos (P2,500.00) as management fee for January 1942, with legal interest
thereon from the date of the filing of the complaint;
(3) One hundred fifty thousand pesos (P150,000.00), representing management fees for the sixty-month
period of extension of the management contract, with legal interest thereon from the date of the filing of
the complaint;
(4) One million four hundred thousand pesos (P1,400,000.00), equivalent to 10% of the cash dividends
declared during the period of extension of the management contract, with legal interest thereon from the
date of the filing of the complaint;
(5) Three hundred thousand pesos (P300,000.00), equivalent to 10% of the cash value of the stock
dividends declared on November 28, 1949 and August 20, 1950, with legal interest thereon from the date
of the filing of the complaint;
(6) Fifty three thousand nine hundred twenty eight pesos and eighty eight centavos (P53,928.88),
equivalent to 10% of the depletion reserve set up during the period of extension, with legal interest
thereon from the date of the filing of the complaint;
(7) Six hundred ninety four thousand three hundred sixty four pesos and seventy six centavos
(P694,364.76), equivalent to 10% of the expenses for capital account during the period of extension, with
legal interest thereon from the date of the filing of the complaint;
(8) Fifty thousand pesos (P50,000.00) as attorney's fees; and
(9) The costs.
35

It is so ordered.

G.R. No. 160215             November 10, 2004

HYDRO RESOURCES CONTRACTORS CORPORATION, petitioner,

vs.
NATIONAL IRRIGATION ADMINISTRATION, respondent.

DECISION

YNARES-SANTIAGO, J.:

Challenged in this petition for review on certiorari under Rule 45 is the Decision of the Court of
Appeals1 dated October 29, 2002 and its Resolution dated September 24, 20032 in CA-G.R. SP No.
44527,3 reversing the judgment of the Construction Industry Arbitration Commission (CIAC) dated June 10,
19974 in CIAC Case No. 14-98 in favor of petitioner Hydro Resources Contractors Corporation.

The facts are undisputed and are matters of record.

In a competitive bidding conducted by the National Irrigation Administration (NIA) sometime in August
1978, Hydro Resources Contractors Corporation (Hydro) was awarded Contract MPI-C-2 5 involving the main
civil work of the Magat River Multi-Purpose Project. The contract price for the work was pegged at
P1,489,146,473.72 with the peso component thereof amounting to P1,041,884,766.99 and the US$
component valued at $60,657,992.37 at the exchange rate of P7.3735 to the dollar or P447,361,706.73.

On November 6, 1978, the parties signed Amendment No. 16 of the contract whereby NIA agreed to
increase the foreign currency allocation for equipment financing from US$28,000,000.00 for the first and
second years of the contract to US$38,000,000.00, to be made available in full during the first year of the
contract to enable the contractor to purchase the needed equipment and spare parts, as approved by NIA,
for the construction of the project. On April 9, 1980, the parties entered into a Memorandum of
Agreement7 (MOA) whereby they agreed that Hydro may directly avail of the foreign currency component
of the contract for the sole purpose of purchasing necessary spare parts and equipment for the project.
This was made in order for the contractor to avoid further delays in the procurement of the said spare
parts and equipment.

A few months after the MOA was signed, NIA and Hydro entered into a Supplemental Memorandum of
Agreement (Supplemental MOA) to include among the items to be financed out of the foreign currency
portion of the Contract "construction materials, supplies and services as well as equipment and materials
for incorporation in the permanent works of the Project." 8

Work on the project progressed steadily until Hydro substantially completed the project in 1982 and the
final acceptance was made by NIA on February 14, 1984.9
36
During the period of the execution of the contract, the foreign exchange value of the peso against the US
dollar declined and steadily deteriorated. Whenever Hydro's availment of the foreign currency component
exceeded the amount of the foreign currency payable to Hydro for a particular period, NIA charged interest
in dollars based on the prevailing exchange rate instead of the fixed exchange rate of P7.3735 to the
dollar. Yet when Hydro received payments from NIA in Philippine Pesos, NIA made deductions from Hydro's
foreign currency component at the fixed exchange rate of P7.3735 to US$1.00 instead of the prevailing
exchange rate.
Upon completion of the project, a final reconciliation of the total entitlement of Hydro to the foreign
currency component of the contract was made. The result of this final reconciliation showed that the total
entitlement of Hydro to the foreign currency component of the contract exceeded the amount of US dollars
required by Hydro to repay the advances made by NIA for its account in the importation of new equipment,
spare parts and tools. Hydro then requested a full and final payment due to the underpayment of the
foreign exchange portion caused by price escalations and extra work orders. In 1983, NIA and Hydro
prepared a joint computation denominated as the "MPI-C-2 Dollar Rate Differential on Foreign Component
of Escalation." 10 Based on said joint computation, Hydro was still entitled to a foreign exchange differential
of US$1,353,771.79 equivalent to P10,898,391.17.
Hydro then presented its claim for said foreign exchange differential to NIA on August 12, 198311 but the
latter refused to honor the same. Hydro made several 12 demands to recover its claim until the same was
turned down with finality by then NIA Administrator Federico N. Alday, Jr. on January 6, 1987. 13
On December 7, 1994, Hydro filed a request for arbitration with the Construction Industry Arbitration
Commission (CIAC).14 In the said request, Hydro nominated six (6) arbitrators. The case was docketed as
CIAC Case No. 18-94.
NIA filed its Answer with Compulsory Counterclaim 15 raising laches, estoppel and lack of jurisdiction by
CIAC as its special defenses. NIA also submitted its six (6) nominees to the panel of arbitrators. After
appointment of the arbitrators, both parties agreed on the Terms of Reference 16 as well as the issues
submitted for arbitration.
On March 13, 1995, NIA filed a Motion to Dismiss17 questioning CIAC's jurisdiction to take cognizance of the
case. The latter, however, deferred resolution of the motion and set the case for hearing for the reception
of evidence.18 NIA moved19 for reconsideration but the same was denied by CIAC in an Order dated April 25,
1995.20
Dissatisfied, NIA filed a petition for certiorari and prohibition with the Court of Appeals where the same was
docketed as CA-G.R. SP No. 37180,21 which dismissed the petition in a Resolution dated June 28, 1996.22
NIA challenged the resolution of the Court of Appeals before this Court in a special civil action for certiorari,
docketed as G.R. No. 129169.23
Meanwhile, on June 10, 1997, the CIAC promulgated a decision in favor of Hydro. 24 NIA filed a Petition for
Review on Appeal before the Court of Appeals, which was docketed as CA-G.R. SP No. 44527. 25
During the pendency of CA-G.R. SP No. 44527 before the Court of Appeals, this Court dismissed special
civil action for certiorari docketed as G.R. No. 129169 on the ground that CIAC had jurisdiction over the
dispute and directed the Court of Appeals to proceed with reasonable dispatch in the disposition of CA-G.R.
SP No. 44527. NIA did not move for reconsideration of the said decision, hence, the same became final and
executory on December 15, 1999.26
Thereafter, the Court of Appeals rendered the challenged decision in CA-G.R. SP No. 44527, reversing the
judgment of the CIAC on the grounds that: (1) Hydro's claim has prescribed; (2) assuming that Hydro was
entitled to its claim, the rate of exchange should be based on a fixed rate; (3) Hydro's claim is contrary to
R.A. No. 529;27 (4) NIA's Certification of Non-Forum-Shopping was proper even if the same was signed only
by counsel and not by NIA's authorized representative; and (5) NIA did not engage in forum-shopping.
Hydro's Motion for Reconsideration was denied in Resolution of September 24, 2003.
Hence, this petition.
Addressing first the issue of prescription, the Court of Appeals, in ruling that Hydro's claim had prescribed,
reasoned thus:
Nevertheless, We find good reason to apply the principle of prescription against HRCC. It is well
to note that Section 25 of the General Conditions of the subject contract provides (CIAC
Decision, p. 15, Rollo, p. 57):
Any controversy or dispute arising out of or relating to this Contract which cannot be resolved by
mutual agreement shall be decided by the Administrator within thirty (30) calendar days from
receipt of a written notice from Contractor and who shall furnish Contractor a written copy of this
decision. Such decision shall be final and conclusive unless within thirty (30) calendar days from
the date of receipt thereof, Contractor shall deliver to NIA a written notice addressed to the
Administrator that he desires that the dispute be submitted to arbitration. Pending decision from
arbitration, Contractor shall proceed diligently with the performance of the Contract and in
accordance with the decision of the Administrator. (Emphasis and Underscoring Ours)
Both parties admit the existence of this provision in the Contract (Petition, p. 4; Comment, p. 16;
Rollo, pp. 12 and 131). Apropos, the following matters are clear: (1) any controversy or dispute
between the parties arising from the subject contract shall be governed by the provisions of the
contract; (2) upon the failure to arrive at a mutual agreement, the contractor shall submit the
dispute to the Administrator of NIA for determination; and (3) the decision of the Administrator
shall become final and conclusive, unless within thirty (30) calendar days from the date of
receipt thereof, the Contractor shall deliver to NIA a written notice addressed to the
Administrator that he desires that the dispute be submitted for arbitration.
Prescinding from the foregoing matters, We find that the CIAC erred in granting HRCC's claim
considering that the latter's right to make such demand had clearly prescribed. To begin with, on
January 7, 1986, Cesar L. Tech (NIA's Administrator at the time) informed HRCC in writing that
after a review of the additional points raised by the latter, NIA confirms its original
recommendation not to allow the said claim (Annex "F"; Rollo, p. 81; CIAC Decision, p. 11; Rollo,
p. 53). This should have propelled private respondent to notify and signify to NIA of intention to
submit the dispute to arbitration pursuant to the provision of the contract. Yet, it did not. Instead
it persisted to send several letters to NIA reiterating the reason for its rejected claim (CIAC
Decision, p. 11; Rollo, p. 53).28
We disagree for the following reasons:
First, the appellate court clearly overlooked the fact that NIA, through then Administrator Fedrico N. Alday,
Jr., denied "with finality" Hydro's claim only on January 6, 1987 in a letter bearing the same date 29 which
reads:
37
This refers to your letter dated November 7, 1986 requesting reconsideration on your claim for
payment of the Dollar Rate Differential of Price Escalation in Contract No. MPI-C-2.
We have reviewed the relevant facts and issues as presented and the additional points raised in
the abovementioned letter in the context of the Contract Documents and we find no strong and
valid reason to reverse the earlier decision of NIA's previous management denying your claim.
Therefore, we regret that we have to reiterate the earlier official stand of NIA under its letter
dated January 7, 1986, that confirms the original recommendation which had earlier been
presented in our 4th Indorsement dated February 5, 1985 to your office.
In view hereof, we regret to say with finality that the claim cannot be given favorable
consideration. (Emphasis and italics supplied)
Hydro received the above-mentioned letter on January 27, 1987.30 Pursuant to Section 25 of the Contract's
General Conditions (GC-25), Hydro had thirty (30) days from receipt of said denial, or until February 26,
1987, within which to notify NIA of its desire to submit the dispute to arbitration.
On February 18, 1987, Hydro sent a letter 31 to NIA, addressed to then NIA Administrator Federico N. Alday,
Jr., manifesting its desire to submit the dispute to arbitration. The letter was received by NIA on February
19, 1987, which was within the thirty-day prescriptive period.
Moreover, a circumspect scrutiny of the wording of GC-25 with regard to the thirty-day prescriptive period
shows that said proviso is intended to apply to disputes which arose during the actual construction of the
project and not for controversies which occured after the project is completed. The rationale for such a
stipulation was aptly explained thus by the CIAC in its Decision in CIAC Case No. 18-94:
In construction contracts, there is invariably a provision for interim settlement of disputes. The
right to settle disputes is given to the owner or his representative, either an architect or
engineer, designated as "owner's representative," only for the purpose of avoiding delay in the
completion of the project. In this particular contract, that right was reserved to the NIA
Administrator. The types of disputes contemplated were those which may have otherwise
affected the progress of the work. It is very clear that this is the purpose of the limiting periods
in this clause that the dispute shall be resolved by the Administrator within 30 days from receipt
of a written notice from the Contractor and that the Contractor may submit to arbitration this
dispute if it does not agree with the decision of the Administrator, and "Pending decision from
arbitration, Contractor shall proceed diligently with the performance of the Contract and in
accordance with the decision of the Administrator."
In this case, the dispute had arisen after completion of the Project. The reason for the 30-day
limitation no longer applies, and we find no legal basis for applying it. Moreover, in Exhibit "B,"
NIA Administrator Cesar L. Tech had, instead of rendering an adverse decision, by signing the
document with HRCC's Onofre B. Banson, implicitly approved the payment of the foreign
exchange differential, but this payment could not be made because of the opinion of Auditor
Saldua and later of the Commission on Audit.32
Second, as early as April 1983, Hydro and NIA, through its Administrator Cesar L. Tech, prepared the Joint
Computation which shows that Hydro is entitled to the foreign currency differential. 33 As correctly found by
the CIAC, this computation constitutes a written acknowledgment of the debt by the debtor under Article
1155 of the Civil Code, which states:
ART. 1155. The prescription of actions is interrupted when they are filed before the court, when
there is a written extrajudicial demand by the creditors, and when there is any written
acknowledgment of the debt by the debtor. (Emphasis and italics supplied)
Instead of upholding the CIAC's findings on this point, the Court of Appeals ruled that Cesar L. Tech's act of
signing the Joint Computation was an ultra vires act. This again is patent error. It must be noted that the
Administrator is the highest officer of the NIA. Furthermore, Hydro has been dealing with NIA through its
Administrator in all of its transactions with respect to the contract and subsequently the foreign currency
differential claim. The NIA Administrator is empowered by the Contract to grant or deny foreign currency
differential claims. It would be preposterous for the NIA Administrator to have the power of granting claims
without the authority to verify the computation of such claims. Finally, the records of the case will show
that NIA itself never disputed its Administrator's capacity to sign the Joint Computation because it knew
that the Administrator, in fact, had such capacity.
Even assuming for the sake of argument that the Administrator had no authority to bind NIA, the latter is
already estopped after repeatedly representing to Hydro that the Administrator had such authority. A
corporation may be held in estoppel from denying as against third persons the authority of its officers or
agents who have been clothed by it with ostensible or apparent authority. 34 Indeed –
. . . The rule is of course settled that "[a]lthough an officer or agent acts without, or in excess of,
his actual authority if he acts within the scope of an apparent authority with which the
corporation has clothed him by holding him out or permitting him to appear as having such
authority, the corporation is bound thereby in favor of a person who deals with him in good faith
in reliance on such apparent authority, as where an officer is allowed to exercise a particular
authority with respect to the business, or a particular branch of it, continuously and publicly, for
a considerable time.". . .35
Third, NIA has clearly waived the prescriptive period when it continued to entertain Hydro's claim
regarding new matters raised by the latter in its letters to NIA and then issuing rulings thereon. In this
regard, Article 1112 of the Civil Code provides that:
ART. 1112. Persons with capacity to alienate property may renounce prescription already
obtained, but not the right to prescribe in the future.
Prescription is deemed to have been tacitly renounced when the renunciation results from acts
which imply the abandonment of the right acquired. (Emphasis and italics supplied)
Certainly, when a party has renounced a right acquired by prescription through its actions, it can no longer
claim prescription as a defense.36
Fourth, even assuming that NIA did not waive the thirty-day prescriptive period, it clearly waived the
effects of such period when it actively participated in arbitration proceedings through the following acts:
a) On January 6, 1995, NIA voluntarily filed its written appearance, readily submitted its Answer
and asserted its own Counterclaims;
b) In the Compliance which accompanied the Answer, NIA also submitted its six nominees to the
Arbitral Tribunal to be constituted, among of which one was eventually appointed to the tribunal;
38
c) NIA also actively participated in the deliberations for and the formulation of the Terms of
Reference during the preliminary conference set by CIAC; and
d) For the purpose of obviating the introduction of testimonial evidence on the authenticity and
due execution of its documentary evidence, NIA even had examined, upon prior request to
Hydro, all of the documents which the latter intended to present as evidentiary exhibits for the
said arbitration case.
We now come to the issue of whether or not the provisions of R.A. No. 529, otherwise known as an Act To
Assure Uniform Value to Philippine Coin And Currency, is applicable to Hydro's claim.
The Contract between NIA and Hydro is an internationally tendered contract considering that it was funded
by the International Bank for Reconstruction and Development (IBRD). As a contract funded by an
international organization, particularly one recognized by the Philippines, 37 the contract is exempt from the
provisions of R.A. No. 529. R.A. No. 4100 amended the provisions of R.A. 529 thus:
SECTION 1. Section one of Republic Act Numbered Five hundred and twenty-nine, entitled "An
Act to Assure Uniform Value of Philippine Coin and Currency," is hereby amended to read as
follows:
Sec. 1. Every provision contained in, or made with respect to, any domestic obligation
to wit, any obligation contracted in the Philippines which provisions purports to give
the obligee the right to require payment in gold or in a particular kind of coin or
currency other than Philippine currency or in an amount of money of the Philippines
measured thereby, be as it is hereby declared against public policy, and null, void, and
of no effect, and no such provision shall be contained in, or made with respect to, any
obligation hereafter incurred. The above prohibition shall not apply to (a) transactions
where the funds involved are the proceeds of loans or investments made directly or
indirectly, through bona fide intermediaries or agents, by foreign governments, their
agencies and instrumentalities, and international financial and banking institutions so
long as the funds are identifiable, as having emanated from the sources enumerated
above; (b) transactions affecting high-priority economic projects for agricultural,
industrial and power development as may be determined by the National Economic
Council which are financed by or through foreign funds; (c) forward exchange
transaction entered into between banks or between banks and individuals or juridical
persons; (d) import-export and other international banking, financial investment and
industrial transactions. With the exception of the cases enumerated in items (a), (b),
(c) and (d) in the foregoing provisions, in which bases the terms of the parties'
agreement shall apply, every other domestic obligation heretofore or hereafter
incurred, whether or not any such provision as to payment is contained therein or
made with respect thereto, shall be discharged upon payment in any coin or currency
which at the time of payment is legal tender for public and private debts: Provided,
That if the obligation was incurred prior to the enactment of this Act and required
payment in a particular kind of coin or currency other than Philippine currency, it shall
be discharged in Philippine currency measured at the prevailing rates of exchange at
the time the obligation was incurred, except in case of a loan made in a foreign
currency stipulated to be payable in the same currency in which case the rate of
exchange prevailing at the time of the stipulated date of payment shall prevail. All
coin and currency, including Central Bank notes, heretofore and hereafter issued and
declared by the Government of the Philippines shall be legal tender for all debts,
public and private.
SECTION 2. This Act shall take effect upon its approval. (Emphasis and italics supplied)
Even assuming ex gratia argumenti that R.A. No. 529 is applicable, it is still erroneous for the Court of
Appeals to deny Hydro's claim because Section 1 of R.A. No. 529 states that only the stipulation requiring
payment in foreign currency is void, but not the obligation to make payment. This can be gleaned from the
provision that "every other domestic obligation heretofore or hereafter incurred" shall be "discharged upon
payment in any coin and currency which at the time is legal tender for public and private debts." In
Republic Resources and Development Corporation v. Court of Appeals, 38 it was held:
. . . it is clear from Section 1 of R.A. No. 529 that what is declared null and void is the "provision
contained in, or made with respect to, any domestic obligation to wit, any obligation contracted
in the Philippines which provision purports to give the obligee the right to require payment in
gold or in a particular kind of coin or currency other than Philippine currency or in an amount of
money of the Philippines measured thereby" and not the contract or agreement which contains
such proscribed provision. (Emphasis supplied)
More succinctly, we held in San Buenaventura v. Court of Appeals 39 that –
It is to be noted under the foregoing provision that while an agreement to pay an obligation in a
currency other than Philippine currency is null and void as contrary to public policy, what the law
specifically prohibits is payment in currency other than legal tender but does not defeat a
creditor's claim for payment. A contrary rule would allow a person to profit or enrich himself
inequitably at another's expense. (Emphasis supplied)
It is thus erroneous for the Court of Appeals to disallow petitioner's claim for foreign currency differential
because NIA's obligation should be converted to Philippine Pesos which was legal tender at the time. 40
The next issue to be resolved is whether or not Hydro's claim should be computed at the fixed rate of
exchange.
When the MOA41 and the Supplemental MOA42 were in effect, there were instances when the foreign
currency availed of by Hydro exceeded the foreign currency payable to it for that particular Progress
Payment. In instances like these, NIA actually charged Hydro interest in foreign currency computed at the
prevailing exchange rate and not at the fixed rate. NIA now insists that the exchange rate should be
computed according to the fixed rate and not the escalating rate it actually charged Hydro.
Suffice it to state that this flip-flopping stance of NIA of adopting and discarding positions to suit its
convenience cannot be countenanced. A person who, by his deed or conduct has induced another to act in
a particular manner, is barred from adopting an inconsistent position, attitude or course of conduct that
thereby causes loss or injury to another.43 Indeed, the application of the principle of estoppel is proper and
timely in heading off NIA's efforts at renouncing its previous acts to the prejudice of Hydro which had dealt
with it honestly and in good faith.
. . . A principle of equity and natural justice, this is expressly adopted under Article 1431 of the
Civil Code, and pronounced as one of the conclusive presumptions under Rule 131, Section 3(a)
of the Rules of Court, as follows:
Whenever a party has, by his own declaration, act or omission, intentionally and deliberately led
another to believe a particular thing to be true, and to act upon such a belief he cannot, in any
litigation arising out of such declaration, act or omission, be permitted to falsify it.
39

Petitioner, having performed affirmative acts upon which the respondents based their
subsequent actions, cannot thereafter refute his acts or renege on the effects of the same, to
the prejudice of the latter. To allow him to do so would be tantamount to conferring upon him
the liberty to limit his liability at his whim and caprice, which is against the very principles of
equity and natural justice… 44
However, in the case of the corporations, the physical act of signing may be performed, on
behalf of the corporate entity, only by specifically authorized individuals for the simple reason
that corporations, as artificial persons, cannot personally do the task themselves. . . It cannot be
gainsaid that obedience to the requirements of procedural rule[s] is needed if we are to expect
fair results therefrom. Utter disregard of the rules cannot justly be rationalized by harking on the
policy of liberal construction. (Emphasis and italics supplied)

NIA is, therefore, estopped from invoking the contractual stipulation providing for the fixed rate to justify a
lower computation than that claimed by Hydro. It cannot be allowed to hide behind the very provision In this connection, the lawyer must be "specifically authorized" in order to validly sign the certification. 53
which it itself continuously violated.45 An admission or representation is rendered conclusive upon the
person making it and cannot be denied or disproved as against the person relying thereon. 46 A party may
not go back on his own acts and representations to the prejudice of the other party who relied upon In closing, we restate the rule that the courts will not interfere in matters which are addressed to the
them.47 sound discretion of government agencies entrusted with the regulation of activities coming under the
special technical knowledge and training of such agencies. 54

NIA was guilty of forum-shopping. Forum-shopping refers to the act of availing oneself of several judicial
remedies in different courts, either simultaneously or successively, substantially founded on the same
transaction and identical material facts and circumstances, raising basically the like issues either pending
in, or already resolved by, some other court. 48
It has been characterized as an act of malpractice that is prohibited and condemned as trifling with the
courts and abusing their processes. It constitutes improper conduct which tends to degrade the
administration of justice. It has also been described as deplorable because it adds to the congestion of the
heavily burdened dockets of the courts. 49 The test in determining the presence of this pernicious practice is
whether in the two or more cases pending, there is identity of: (a) parties; (b) rights or causes of action;
and (c) reliefs sought. 50
An action by an administrative agency may be set aside by the judicial department only if there is an error
of law, abuse of power, lack of jurisdiction or grave abuse of discretion clearly conflicting with the letter
and spirit of the law.55 In the case at bar, there is no cogent reason to depart from the general rule because
the action of the CIAC conforms rather than conflicts with the governing statutes and controlling case law
on the matter.
WHEREFORE, the petition is GRANTED. The Decision of the Court of Appeals in CA-G.R. SP No. 44527 dated
October 29, 2002 and the Resolution dated September 24, 2003 are REVERSED and SET ASIDE. The
Decision of the Construction Industry Arbitration Commission dated June 10, 1997 in CIAC Case No. 18-94
is REINSTATED.

Applying the foregoing yardstick to the instant case, it is clear that NIA violated the prohibition against SO ORDERED.
forum-shopping. Besides filing CA-G.R. SP No. 44527 wherein the Court of Appeals' decision is the subject
of appeal in this proceeding, NIA previously filed CA-G.R. SP No. 37180 and G.R. No. 129169 which is a
special civil action for certiorari. In all three cases, the parties are invariably Hydro and NIA. In all three
petitions, NIA raised practically the same issues 51 and in all of them, NIA's prayer was the same: to nullify
the proceedings commenced at the CIAC.

It must be pointed out in this regard that the first two petitions namely, CA-G.R. SP No. 37180 and G.R. No.
129169 are both original actions. Since NIA failed to file a petition for review on certiorari under Rule 45 of
the Rules of Court challenging the decision of the appellate court in CA-G.R. SP No. 37180 dismissing its
petition, it opted to file an original action for certiorari under Rule 65 with this Court where the same was
docketed as G.R. No. 129169. For its failure to appeal the judgments in CA-G.R. SP No. 37180 and G.R. No.
129169, NIA is necessarily bound by the effects of those decisions. The filing of CA-G.R. SP No. 44527,
which raises the issues already passed upon in both cases is a clear case of forum-shopping which merits
outright dismissal.

The issue of whether or not the Certification of Non-Forum Shopping is valid despite that it was signed by
NIA's counsel must be answered in the negative. Applicable is the ruling in Mariveles Shipyard Corp. v. G.R. No. 117188 August 7, 1997
Court of Appeals, et al.:52

LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC., petitioner,

It is settled that the requirement in the Rules that the certification of non-forum shopping should vs.
be executed and signed by the plaintiff or the principal means that counsel cannot sign said HON. COURT OF APPEALS, HOME INSURANCE AND GUARANTY CORPORATION, EMDEN
certification unless clothed with special authority to do so. The reason for this is that the plaintiff ENCARNACION and HORATIO AYCARDO, respondents.
or principal knows better than anyone else whether a petition has previously been filed involving
the same case or substantially the same issues. Hence, a certification signed by counsel alone is
defective and constitutes a valid cause for dismissal of the petition. In the case of natural
persons, the Rule requires the parties themselves to sign the certificate of non-forum shopping. ROMERO, J.:
40
May the failure of a corporation to file its by-laws within one month from the date of its incorporation, as
mandated by Section 46 of the Corporation Code, result in its automatic dissolution?
This is the issue raised in this petition for review on certiorari of the Decision1 of the Court of Appeals
affirming the decision of the Home Insurance and Guaranty Corporation (HIGC). This quasi-judicial body
recognized Loyola Grand Villas Homeowners Association (LGVHA) as the sole homeowners' association in
Loyola Grand Villas, a duly registered subdivision in Quezon City and Marikina City that was owned and
developed by Solid Homes, Inc. It revoked the certificates of registration issued to Loyola Grand Villas
homeowners (North) Association Incorporated (the North Association for brevity) and Loyola Grand Villas
Homeowners (South) Association Incorporated (the South Association).
LGVHAI was organized on February 8, 1983 as the association of homeowners and residents of the Loyola
Grand Villas. It was registered with the Home Financing Corporation, the predecessor of herein respondent
HIGC, as the sole homeowners' organization in the said subdivision under Certificate of Registration No.
04-197. It was organized by the developer of the subdivision and its first president was Victorio V. Soliven,
himself the owner of the developer. For unknown reasons, however, LGVHAI did not file its corporate by-
laws.
Sometime in 1988, the officers of the LGVHAI tried to register its by-laws. They failed to do so. 2 To the
officers' consternation, they discovered that there were two other organizations within the subdivision —
the North Association and the South Association. According to private respondents, a non-resident and
Soliven himself, respectively headed these associations. They also discovered that these associations had
five (5) registered homeowners each who were also the incorporators, directors and officers thereof. None
of the members of the LGVHAI was listed as member of the North Association while three (3) members of
LGVHAI were listed as members of the South Association. 3 The North Association was registered with the
HIGC on February 13, 1989 under Certificate of Registration No. 04-1160 covering Phases West II, East III,
West III and East IV. It submitted its by-laws on December 20, 1988.
In July, 1989, when Soliven inquired about the status of LGVHAI, Atty. Joaquin A. Bautista, the head of the
legal department of the HIGC, informed him that LGVHAI had been automatically dissolved for two
reasons. First, it did not submit its by-laws within the period required by the Corporation Code and, second,
there was non-user of corporate charter because HIGC had not received any report on the association's
activities. Apparently, this information resulted in the registration of the South Association with the HIGC
on July 27, 1989 covering Phases West I, East I and East II. It filed its by-laws on July 26, 1989.
These developments prompted the officers of the LGVHAI to lodge a complaint with the HIGC. They
questioned the revocation of LGVHAI's certificate of registration without due notice and hearing and
concomitantly prayed for the cancellation of the certificates of registration of the North and South
Associations by reason of the earlier issuance of a certificate of registration in favor of LGVHAI.
On January 26, 1993, after due notice and hearing, private respondents obtained a favorable ruling from
HIGC Hearing Officer Danilo C. Javier who disposed of HIGC Case No. RRM-5-89 as follows:
WHEREFORE, judgment is hereby rendered recognizing the Loyola Grand Villas Homeowners
Association, Inc., under Certificate of Registration No. 04-197 as the duly registered and existing
homeowners association for Loyola Grand Villas homeowners, and declaring the Certificates of
Registration of Loyola Grand Villas Homeowners (North) Association, Inc. and Loyola Grand Villas
Homeowners (South) Association, Inc. as hereby revoked or cancelled; that the receivership be
terminated and the Receiver is hereby ordered to render an accounting and turn-over to Loyola
Grand Villas Homeowners Association, Inc., all assets and records of the Association now under
his custody and possession.
The South Association appealed to the Appeals Board of the HIGC. In its Resolution of September 8, 1993,
the Board 4 dismissed the appeal for lack of merit.
Rebuffed, the South Association in turn appealed to the Court of Appeals, raising two issues. First, whether
or not LGVHAI's failure to file its by-laws within the period prescribed by Section 46 of the Corporation
Code resulted in the automatic dissolution of LGVHAI. Second, whether or not two homeowners'
associations may be authorized by the HIGC in one "sprawling subdivision." However, in the Decision of
August 23, 1994 being assailed here, the Court of Appeals affirmed the Resolution of the HIGC Appeals
Board.
In resolving the first issue, the Court of Appeals held that under the Corporation Code, a private
corporation commences to have corporate existence and juridical personality from the date the Securities
and Exchange Commission (SEC) issues a certificate of incorporation under its official seal. The
requirement for the filing of by-laws under Section 46 of the Corporation Code within one month from
official notice of the issuance of the certificate of incorporation presupposes that it is already incorporated,
although it may file its by-laws with its articles of incorporation. Elucidating on the effect of a delayed filing
of by-laws, the Court of Appeals said:
We also find nothing in the provisions cited by the petitioner, i.e., Section 46 and 22, Corporation
Code, or in any other provision of the Code and other laws which provide or at least imply that
failure to file the by-laws results in an automatic dissolution of the corporation. While Section 46,
in prescribing that by-laws must be adopted within the period prescribed therein, may be
interpreted as a mandatory provision, particularly because of the use of the word "must," its
meaning cannot be stretched to support the argument that automatic dissolution results from
non-compliance.
We realize that Section 46 or other provisions of the Corporation Code are silent on the result of
the failure to adopt and file the by-laws within the required period. Thus, Section 46 and other
related provisions of the Corporation Code are to be construed with Section 6 (1) of P.D. 902-A.
This section empowers the SEC to suspend or revoke certificates of registration on the grounds
listed therein. Among the grounds stated is the failure to file by-laws (see also II Campos: The
Corporation Code, 1990 ed., pp. 124-125). Such suspension or revocation, the same section
provides, should be made upon proper notice and hearing. Although P.D. 902-A refers to the
SEC, the same principles and procedures apply to the public respondent HIGC as it exercises its
power to revoke or suspend the certificates of registration or homeowners association. (Section
2 [a], E.O. 535, series 1979, transferred the powers and authorities of the SEC over homeowners
associations to the HIGC.)
We also do not agree with the petitioner's interpretation that Section 46, Corporation Code
prevails over Section 6, P.D. 902-A and that the latter is invalid because it contravenes the
former. There is no basis for such interpretation considering that these two provisions are not
inconsistent with each other. They are, in fact, complementary to each other so that one cannot
be considered as invalidating the other.
The Court of Appeals added that, as there was no showing that the registration of LGVHAI had been validly
revoked, it continued to be the duly registered homeowners' association in the Loyola Grand Villas. More
importantly, the South Association did not dispute the fact that LGVHAI had been organized and that,
thereafter, it transacted business within the period prescribed by law.
On the second issue, the Court of Appeals reiterated its previous ruling 5 that the HIGC has the authority to
order the holding of a referendum to determine which of two contending associations should represent the
entire community, village or subdivision.
41
Undaunted, the South Association filed the instant petition for review on certiorari. It elevates as sole issue
for resolution the first issue it had raised before the Court of Appeals, i.e., whether or not the LGVHAI's
failure to file its by-laws within the period prescribed by Section 46 of the Corporation Code had the effect
of automatically dissolving the said corporation.
Petitioner contends that, since Section 46 uses the word "must" with respect to the filing of by-laws,
noncompliance therewith would result in "self-extinction" either due to non-occurrence of a suspensive
condition or the occurrence of a resolutory condition "under the hypothesis that (by) the issuance of the
certificate of registration alone the corporate personality is deemed already formed." It asserts that the
Corporation Code provides for a "gradation of violations of requirements." Hence, Section 22 mandates
that the corporation must be formally organized and should commence transaction within two years from
date of incorporation. Otherwise, the corporation would be deemed dissolved. On the other hand, if the
corporation commences operations but becomes continuously inoperative for five years, then it may be
suspended or its corporate franchise revoked.
Petitioner concedes that Section 46 and the other provisions of the Corporation Code do not provide for
sanctions for non-filing of the by-laws. However, it insists that no sanction need be provided "because the
mandatory nature of the provision is so clear that there can be no doubt about its being an essential
attribute of corporate birth." To petitioner, its submission is buttressed by the facts that the period for
compliance is "spelled out distinctly;" that the certification of the SEC/HIGC must show that the by-laws are
not inconsistent with the Code, and that a copy of the by-laws "has to be attached to the articles of
incorporation." Moreover, no sanction is provided for because "in the first place, no corporate identity has
been completed." Petitioner asserts that "non-provision for remedy or sanction is itself the tacit
proclamation that non-compliance is fatal and no corporate existence had yet evolved," and therefore,
there was "no need to proclaim its demise." 6 In a bid to convince the Court of its arguments, petitioner
stresses that:
. . . the word MUST is used in Sec. 46 in its universal literal meaning and corollary human
implication — its compulsion is integrated in its very essence — MUST is always enforceable by
the inevitable consequence — that is, "OR ELSE". The use of the word MUST in Sec. 46 is no
exception — it means file the by-laws within one month after notice of issuance of certificate of
registration OR ELSE. The OR ELSE, though not specified, is inextricably a part of MUST . Do this
or if you do not you are "Kaput". The importance of the by-laws to corporate existence compels
such meaning for as decreed the by-laws is "the government" of the corporation. Indeed, how
can the corporation do any lawful act as such without by-laws. Surely, no law is indeed to create
chaos. 7
Petitioner asserts that P.D. No. 902-A cannot exceed the scope and power of the Corporation Code which
itself does not provide sanctions for non-filing of by-laws. For the petitioner, it is "not proper to assess the
true meaning of Sec. 46 . . . on an unauthorized provision on such matter contained in the said decree."
In their comment on the petition, private respondents counter that the requirement of adoption of by-laws
is not mandatory. They point to P.D. No. 902-A as having resolved the issue of whether said requirement is
mandatory or merely directory. Citing Chung Ka Bio v. Intermediate Appellate Court, 8 private respondents
contend that Section 6(I) of that decree provides that non-filing of by-laws is only a ground for suspension
or revocation of the certificate of registration of corporations and, therefore, it may not result in automatic
dissolution of the corporation. Moreover, the adoption and filing of by-laws is a condition subsequent which
does not affect the corporate personality of a corporation like the LGVHAI. This is so because Section 9 of
the Corporation Code provides that the corporate existence and juridical personality of a corporation
begins from the date the SEC issues a certificate of incorporation under its official seal. Consequently,
even if the by-laws have not yet been filed, a corporation may be considered a de facto corporation. To
emphasize the fact the LGVHAI was registered as the sole homeowners' association in the Loyola Grand
Villas, private respondents point out that membership in the LGVHAI was an "unconditional restriction in
the deeds of sale signed by lot buyers."
In its reply to private respondents' comment on the petition, petitioner reiterates its argument that the
word " must" in Section 46 of the Corporation Code is mandatory. It adds that, before the ruling in Chung
Ka Bio v. Intermediate Appellate Court could be applied to this case, this Court must first resolve the issue
of whether or not the provisions of P.D. No. 902-A prescribing the rules and regulations to implement the
Corporation Code can "rise above and change" the substantive provisions of the Code.
The pertinent provision of the Corporation Code that is the focal point of controversy in this case states:
Sec. 46. Adoption of by-laws. — Every corporation formed under this Code, must within one (1)
month after receipt of official notice of the issuance of its certificate of incorporation by the
Securities and Exchange Commission, adopt a code of by-laws for its government not
inconsistent with this Code. For the adoption of by-laws by the corporation, the affirmative vote
of the stockholders representing at least a majority of the outstanding capital stock, or of at
least a majority of the members, in the case of non-stock corporations, shall be necessary. The
by-laws shall be signed by the stockholders or members voting for them and shall be kept in the
principal office of the corporation, subject to the stockholders or members voting for them and
shall be kept in the principal office of the corporation, subject to inspection of the stockholders
or members during office hours; and a copy thereof, shall be filed with the Securities and
Exchange Commission which shall be attached to the original articles of incorporation.
Notwithstanding the provisions of the preceding paragraph, by-laws may be adopted and filed
prior to incorporation; in such case, such by-laws shall be approved and signed by all the
incorporators and submitted to the Securities and Exchange Commission, together with the
articles of incorporation.
In all cases, by-laws shall be effective only upon the issuance by the Securities and Exchange
Commission of a certification that the by-laws are not inconsistent with this Code.
The Securities and Exchange Commission shall not accept for filing the by-laws or any
amendment thereto of any bank, banking institution, building and loan association, trust
company, insurance company, public utility, educational institution or other special corporations
governed by special laws, unless accompanied by a certificate of the appropriate government
agency to the effect that such by-laws or amendments are in accordance with law.
As correctly postulated by the petitioner, interpretation of this provision of law begins with the
determination of the meaning and import of the word "must" in this section Ordinarily, the word "must"
connotes an imperative act or operates to impose a duty which may be enforced. 9 It is synonymous with
"ought" which connotes compulsion or mandatoriness. 10 However, the word "must" in a statute, like
"shall," is not always imperative. It may be consistent with an exercise of discretion. In this jurisdiction, the
tendency has been to interpret "shall" as the context or a reasonable construction of the statute in which it
is used demands or requires. 11 This is equally true as regards the word "must." Thus, if the languages of a
statute considered as a whole and with due regard to its nature and object reveals that the legislature
intended to use the words "shall" and "must" to be directory, they should be given that meaning. 12
In this respect, the following portions of the deliberations of the Batasang Pambansa No. 68 are
illuminating:
42
MR. FUENTEBELLA. Thank you, Mr. Speaker.
On page 34, referring to the adoption of by-laws, are we made to understand here, Mr. Speaker,
that by-laws must immediately be filed within one month after the issuance? In other words,
would this be mandatory or directory in character?
MR. MENDOZA. This is mandatory.
MR. FUENTEBELLA. It being mandatory, Mr. Speaker, what would be the effect of the failure of
the corporation to file these by-laws within one month?
MR. MENDOZA. There is a provision in the latter part of the Code which identifies and describes
the consequences of violations of any provision of this Code. One such consequences is the
dissolution of the corporation for its inability, or perhaps, incurring certain penalties.
MR. FUENTEBELLA. But it will not automatically amount to a dissolution of the corporation by
merely failing to file the by-laws within one month. Supposing the corporation was late, say, five
days, what would be the mandatory penalty?
MR. MENDOZA. I do not think it will necessarily result in the automatic or ipso facto dissolution of
the corporation. Perhaps, as in the case, as you suggested, in the case of El Hogar Filipino where
a quo warranto action is brought, one takes into account the gravity of the violation committed.
If the by-laws were late — the filing of the by-laws were late by, perhaps, a day or two, I would
suppose that might be a tolerable delay, but if they are delayed over a period of months — as is
happening now — because of the absence of a clear requirement that by-laws must be
completed within a specified period of time, the corporation must suffer certain consequences. 13
This exchange of views demonstrates clearly that automatic corporate dissolution for failure to file the by-
laws on time was never the intention of the legislature. Moreover, even without resorting to the records of
deliberations of the Batasang Pambansa, the law itself provides the answer to the issue propounded by
petitioner.
Taken as a whole and under the principle that the best interpreter of a statute is the statute itself (optima
statuli interpretatix est ipsum statutum), 14 Section 46 aforequoted reveals the legislative intent to attach a
directory, and not mandatory, meaning for the word "must" in the first sentence thereof. Note should be
taken of the second paragraph of the law which allows the filing of the by-laws even prior to incorporation.
This provision in the same section of the Code rules out mandatory compliance with the requirement of
filing the by-laws "within one (1) month after receipt of official notice of the issuance of its certificate of
incorporation by the Securities and Exchange Commission." It necessarily follows that failure to file the by-
laws within that period does not imply the "demise" of the corporation. By-laws may be necessary for the
"government" of the corporation but these are subordinate to the articles of incorporation as well as to the
Corporation Code and related statutes. 15 There are in fact cases where by-laws are unnecessary to
corporate existence or to the valid exercise of corporate powers, thus:
In the absence of charter or statutory provisions to the contrary, by-laws are not necessary
either to the existence of a corporation or to the valid exercise of the powers conferred upon it,
certainly in all cases where the charter sufficiently provides for the government of the body; and
even where the governing statute in express terms confers upon the corporation the power to
adopt by-laws, the failure to exercise the power will be ascribed to mere nonaction which will
not render void any acts of the corporation which would otherwise be valid.  16 (Emphasis
supplied.)
As Fletcher aptly puts it:
It has been said that the by-laws of a corporation are the rule of its life, and that until by-laws
have been adopted the corporation may not be able to act for the purposes of its creation, and
that the first and most important duty of the members is to adopt them. This would seem to
follow as a matter of principle from the office and functions of by-laws. Viewed in this light, the
adoption of by-laws is a matter of practical, if not one of legal, necessity. Moreover, the peculiar
circumstances attending the formation of a corporation may impose the obligation to adopt
certain by-laws, as in the case of a close corporation organized for specific purposes. And the
statute or general laws from which the corporation derives its corporate existence may
expressly require it to make and adopt by-laws and specify to some extent what they shall
contain and the manner of their adoption. The mere fact, however, of the existence of power in
the corporation to adopt by-laws does not ordinarily and of necessity make the exercise of such
power essential to its corporate life, or to the validity of any of its acts.  17
Although the Corporation Code requires the filing of by-laws, it does not expressly provide for the
consequences of the non-filing of the same within the period provided for in Section 46. However, such
omission has been rectified by Presidential Decree No. 902-A, the pertinent provisions on the jurisdiction of
the SEC of which state:
Sec. 6. In order to effectively exercise such jurisdiction, the Commission shall possess the
following powers:
xxx xxx xxx
(1) To suspend, or revoke, after proper notice and hearing, the franchise or certificate of
registration of corporations, partnerships or associations, upon any of the grounds provided by
law, including the following:
xxx xxx xxx
5. Failure to file by-laws within the required period;
xxx xxx xxx
In the exercise of the foregoing authority and jurisdiction of the Commission or by a
Commissioner or by such other bodies, boards, committees and/or any officer as may be created
or designated by the Commission for the purpose. The decision, ruling or order of any such
Commissioner, bodies, boards, committees and/or officer may be appealed to the Commission
sitting en banc within thirty (30) days after receipt by the appellant of notice of such decision,
ruling or order. The Commission shall promulgate rules of procedures to govern the proceedings,
hearings and appeals of cases falling with its jurisdiction.
The aggrieved party may appeal the order, decision or ruling of the Commission sitting en
banc to the Supreme Court by petition for review in accordance with the pertinent provisions of
the Rules of Court.
43

Even under the foregoing express grant of power and authority, there can be no automatic corporate
dissolution simply because the incorporators failed to abide by the required filing of by-laws embodied in
Section 46 of the Corporation Code. There is no outright "demise" of corporate existence. Proper notice
and hearing are cardinal components of due process in any democratic institution, agency or society. In
other words, the incorporators must be given the chance to explain their neglect or omission and remedy
the same.
corporate personality. The adoption and filing of by-laws is also a condition subsequent. Under
Section 19 of the Corporation Code, a Corporation commences its corporate existence and
juridical personality and is deemed incorporated from the date the Securities and Exchange
Commission issues certificate of incorporation under its official seal. This may be done even
before the filing of the by-laws, which under Section 46 of the Corporation Code, must be
adopted "within one month after receipt of official notice of the issuance of its certificate of
incorporation." 21

That the failure to file by-laws is not provided for by the Corporation Code but in another law is of no
moment. P.D. No. 902-A, which took effect immediately after its promulgation on March 11, 1976, is very
much apposite to the Code. Accordingly, the provisions abovequoted supply the law governing the
situation in the case at bar, inasmuch as the Corporation Code and P.D. No. 902-A are statutes in pari
materia. Interpretare et concordare legibus est optimus interpretandi. Every statute must be so construed
and harmonized with other statutes as to form a uniform system of jurisprudence. 18
That the corporation involved herein is under the supervision of the HIGC does not alter the result of this
case. The HIGC has taken over the specialized functions of the former Home Financing Corporation by
virtue of Executive Order No. 90 dated December 17, 1989. 22 With respect to homeowners associations,
the HIGC shall "exercise all the powers, authorities and responsibilities that are vested on the Securities
and Exchange Commission . . . , the provision of Act 1459, as amended by P.D. 902-A, to the contrary
notwithstanding." 23

As the "rules and regulations or private laws enacted by the corporation to regulate, govern and control its
own actions, affairs and concerns and its stockholders or members and directors and officers with relation WHEREFORE, the instant petition for review on certiorari is hereby DENIED and the questioned Decision of
thereto and among themselves in their relation to it," 19 by-laws are indispensable to corporations in this the Court of Appeals AFFIRMED. This Decision is immediately executory. Costs against petitioner.
jurisdiction. These may not be essential to corporate birth but certainly, these are required by law for an
orderly governance and management of corporations. Nonetheless, failure to file them within the period
required by law by no means tolls the automatic dissolution of a corporation. SO ORDERED.

In this regard, private respondents are correct in relying on the pronouncements of this Court in Chung Ka
Bio v. Intermediate Appellate Court, 20 as follows:

. . . . Moreover, failure to file the by-laws does not automatically operate to dissolve a
corporation but is now considered only a ground for such dissolution.

Section 19 of the Corporation Law, part of which is now Section 22 of the Corporation Code,
provided that the powers of the corporation would cease if it did not formally organize and
commence the transaction of its business or the continuation of its works within two years from
date of its incorporation. Section 20, which has been reproduced with some modifications in
Section 46 of the Corporation Code, expressly declared that "every corporation formed under
this Act, must within one month after the filing of the articles of incorporation with the Securities
and Exchange Commission, adopt a code of by-laws." Whether this provision should be given
mandatory or only directory effect remained a controversial question until it became academic
with the adoption of PD 902-A. Under this decree, it is now clear that the failure to file by-laws
within the required period is only a ground for suspension or revocation of the certificate of
registration of corporations.

Non-filing of the by-laws will not result in automatic dissolution of the corporation. Under Section
6(I) of PD 902-A, the SEC is empowered to "suspend or revoke, after proper notice and hearing,
the franchise or certificate of registration of a corporation" on the ground inter alia of "failure to
file by-laws within the required period." It is clear from this provision that there must first of all
be a hearing to determine the existence of the ground, and secondly, assuming such finding, the
penalty is not necessarily revocation but may be only suspension of the charter. In fact, under
the rules and regulations of the SEC, failure to file the by-laws on time may be penalized merely
with the imposition of an administrative fine without affecting the corporate existence of the
erring firm.

It should be stressed in this connection that substantial compliance with conditions subsequent
will suffice to perfect corporate personality. Organization and commencement of transaction of
corporate business are but conditions subsequent and not prerequisites for acquisition of
44

In a letter dated 27 September 1974, VGCCI replied that the deed of pledge executed by Calapatia in
petitioner's favor was duly noted in its corporate books. 3

On 3 August 1983, Calapatia obtained a loan of P20,000.00 from petitioner, payment of which was secured
by the aforestated pledge agreement still existing between Calapatia and petitioner. 4

Due to Calapatia's failure to pay his obligation, petitioner, on 12 April 1985, filed a petition for extrajudicial
foreclosure before Notary Public Antonio T. de Vera of Manila, requesting the latter to conduct a public
auction sale of the pledged stock.5

On 14 May 1985, petitioner informed VGCCI of the above-mentioned foreclosure proceedings and
requested that the pledged stock be transferred to its (petitioner's) name and the same be recorded in the
corporate books. However, on 15 July 1985, VGCCI wrote petitioner expressing its inability to accede to
petitioner's request in view of Calapatia's unsettled accounts with the club. 6

Despite the foregoing, Notary Public de Vera held a public auction on 17 September 1985 and petitioner
emerged as the highest bidder at P20,000.00 for the pledged stock. Consequently, petitioner was issued
the corresponding certificate of sale. 7

On 21 November 1985, VGCCI sent Calapatia a notice demanding full payment of his overdue account in
the amount of P18,783.24. 8 Said notice was followed by a demand letter dated 12 December 1985 for the
same amount9 and another notice dated 22 November 1986 for P23,483.24. 10

On 4 December 1986, VGCCI caused to be published in the newspaper Daily Express a notice of auction
sale of a number of its stock certificates, to be held on 10 December 1986 at 10:00 a.m. Included therein
was Calapatia's own share of stock (Stock Certificate No. 1219).
G.R. No. 117604 March 26, 1997

Through a letter dated 15 December 1986, VGCCI informed Calapatia of the termination of his membership
CHINA BANKING CORPORATION, petitioner, due to the sale of his share of stock in the 10 December 1986 auction. 11
vs.
COURT OF APPEALS, and VALLEY GOLF and COUNTRY CLUB, INC., respondents.
On 5 May 1989, petitioner advised VGCCI that it is the new owner of Calapatia's Stock Certificate No. 1219
by virtue of being the highest bidder in the 17 September 1985 auction and requested that a new
certificate of stock be issued in its name. 12
KAPUNAN, J.:

On 2 March 1990, VGCCI replied that "for reason of delinquency" Calapatia's stock was sold at the public
Through a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner China auction held on 10 December 1986 for P25,000.00. 13
Banking Corporation seeks the reversal of the decision of the Court of Appeals dated 15 August 1994
nullifying the Securities and Exchange Commission's order and resolution dated 4 June 1993 and 7
December 1993, respectively, for lack of jurisdiction. Similarly impugned is the Court of Appeals' resolution On 9 March 1990, petitioner protested the sale by VGCCI of the subject share of stock and thereafter filed
dated 4 September 1994 which denied petitioner's motion for reconsideration. a case with the Regional Trial Court of Makati for the nullification of the 10 December 1986 auction and for
the issuance of a new stock certificate in its name. 14
The case unfolds thus:
On 18 June 1990, the Regional Trial Court of Makati dismissed the complaint for lack of jurisdiction over the
subject matter on the theory that it involves an intra-corporate dispute and on 27 August 1990 denied
On 21 August 1974, Galicano Calapatia, Jr. (Calapatia, for brevity) a stockholder of private respondent petitioner's motion for reconsideration.
Valley Golf & Country Club, Inc. (VGCCI, for brevity), pledged his Stock Certificate No. 1219 to petitioner
China Banking Corporation (CBC, for brevity). 1
On 20 September 1990, petitioner filed a complaint with the Securities and Exchange Commission (SEC)
for the nullification of the sale of Calapatia's stock by VGCCI; the cancellation of any new stock certificate
On 16 September 1974, petitioner wrote VGCCI requesting that the aforementioned pledge agreement be
recorded in its books.2
45
issued pursuant thereto; for the issuance of a new certificate in petitioner's name; and for damages,
attorney's fees and costs of litigation.
On 3 January 1992, SEC Hearing Officer Manuel P. Perea rendered a decision in favor of VGCCI, stating in
the main that "(c)onsidering that the said share is delinquent, (VGCCI) had valid reason not to transfer the
share in the name of the petitioner in the books of (VGCCI) until liquidation of
delinquency." 15 Consequently, the case was dismissed. 16
On 14 April 1992, Hearing Officer Perea denied petitioner's motion for reconsideration. 17
Petitioner appealed to the SEC en banc and on 4 June 1993, the Commission issued an order reversing the
decision of its hearing officer. It declared thus:
The Commission en banc believes that appellant-petitioner has a prior right over the
pledged share and because of pledgor's failure to pay the principal debt upon
maturity, appellant-petitioner can proceed with the foreclosure of the pledged share.
WHEREFORE, premises considered, the Orders of January 3, 1992 and April 14, 1992
are hereby SET ASIDE. The auction sale conducted by appellee-respondent Club on
December 10, 1986 is declared NULL and VOID. Finally, appellee-respondent Club is
ordered to issue another membership certificate in the name of appellant-petitioner
bank.
SO ORDERED.  18
VGCCI sought reconsideration of the abovecited order. However, the SEC denied the same in its resolution
dated 7 December 1993. 19
The sudden turn of events sent VGCCI to seek redress from the Court of Appeals. On 15 August 1994, the
Court of Appeals rendered its decision nullifying and setting aside the orders of the SEC and its hearing
officer on ground of lack of jurisdiction over the subject matter and, consequently, dismissed petitioner's
original complaint. The Court of Appeals declared that the controversy between CBC and VGCCI is not
intra-corporate. It ruled as follows:
In order that the respondent Commission can take cognizance of a case, the
controversy must pertain to any of the following relationships: (a) between the
corporation, partnership or association and the public; (b) between the corporation,
partnership or association and its stockholders, partners, members, or officers; (c)
between the corporation, partnership or association and the state in so far as its
franchise, permit or license to operate is concerned, and (d) among the stockholders,
partners or associates themselves (Union Glass and Container Corporation vs. SEC,
November 28, 1983, 126 SCRA 31). The establishment of any of the relationship
mentioned will not necessarily always confer jurisdiction over the dispute on the
Securities and Exchange Commission to the exclusion of the regular courts. The
statement made in Philex Mining Corp. vs. Reyes, 118 SCRA 602, that the rule admits
of no exceptions or distinctions is not that absolute. The better policy in determining
which body has jurisdiction over a case would be to consider not only the status or
relationship of the parties but also the nature of the question that is the subject of
their controversy (Viray vs. Court of Appeals, November 9, 1990, 191 SCRA 308, 322-
323).
Indeed, the controversy between petitioner and respondent bank which involves
ownership of the stock that used to belong to Calapatia, Jr. is not within the
competence of respondent Commission to decide. It is not any of those mentioned in
the aforecited case.
WHEREFORE, the decision dated June 4, 1993, and order dated December 7, 1993 of
respondent Securities and Exchange Commission (Annexes Y and BB, petition) and of
its hearing officer dated January 3, 1992 and April 14, 1992 (Annexes S and W,
petition) are all nullified and set aside for lack of jurisdiction over the subject matter of
the case. Accordingly, the complaint of respondent China Banking Corporation (Annex
Q, petition) is DISMISSED. No pronouncement as to costs in this instance.
SO ORDERED. 20
Petitioner moved for reconsideration but the same was denied by the Court of Appeals in its resolution
dated 5 October 1994. 21
Hence, this petition wherein the following issues were raised:
II
ISSUES
WHETHER OR NOT RESPONDENT COURT OF APPEALS (Former Eighth Division)
GRAVELY ERRED WHEN:
1. IT NULLIFIED AND SET ASIDE THE DECISION DATED JUNE 04, 1993 AND ORDER
DATED DECEMBER 07, 1993 OF THE SECURITIES AND EXCHANGE COMMISSION EN
BANC, AND WHEN IT DISMISSED THE COMPLAINT OF PETITIONER AGAINST
RESPONDENT VALLEY GOLF ALL FOR LACK OF JURISDICTION OVER THE SUBJECT
MATTER OF THE CASE;
2. IT FAILED TO AFFIRM THE DECISION OF THE SECURITIES AND EXCHANGE
COMMISSION EN BANC DATED JUNE 04, 1993 DESPITE PREPONDERANT EVIDENCE
SHOWING THAT PETITIONER IS THE LAWFUL OWNER OF MEMBERSHIP CERTIFICATE
NO. 1219 FOR ONE SHARE OF RESPONDENT VALLEY GOLF.
The petition is granted.
The basic issue we must first hurdle is which body has jurisdiction over the controversy, the regular courts
or the SEC.
P. D. No. 902-A conferred upon the SEC the following pertinent powers:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and control over
all corporations, partnerships or associations, who are the grantees of primary
franchises and/or a license or permit issued by the government to operate in the
Philippines, and in the exercise of its authority, it shall have the power to enlist the aid
46
and support of and to deputize any and all enforcement agencies of the government,
civil or military as well as any private institution, corporation, firm, association or
person.
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of
directors, business associates, its officers or partners, amounting
to fraud and misrepresentation which may be detrimental to the
interest of the public and/or of the stockholders, partners,
members of associations or organizations registered with the
Commission.
b) Controversies arising out of intra-corporate or partnership
relations, between and among stockholders, members, or
associates; between any or all of them and the corporation,
partnership or association of which they are stockholders,
members or associates, respectively; and between such
corporation, partnership or association and the State insofar as it
concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors,
trustees, officers, or managers of such corporations, partnerships
or associations.
d) Petitions of corporations, partnerships or associations to be
declared in the state of suspension of payments in cases where
the corporation, partnership or association possesses property to
cover all of its debts but foresees the impossibility of meeting
them when they respectively fall due or in cases where the
corporation, partnership or association has no sufficient assets to
cover its liabilities, but is under the Management Committee
created pursuant to this Decree.
The aforecited law was expounded upon in Viray v. CA 22 and in the recent cases of Mainland Construction
Co., Inc. v. Movilla 23 and Bernardo v. CA, 24 thus:
. . . .The better policy in determining which body has jurisdiction over a case would be
to consider not only the status or relationship of the parties but also the nature of the
question that is the subject of their controversy.
Applying the foregoing principles in the case at bar, to ascertain which tribunal has jurisdiction we have to
determine therefore whether or not petitioner is a stockholder of VGCCI and whether or not the nature of
the controversy between petitioner and private respondent corporation is intra-corporate.
As to the first query, there is no question that the purchase of the subject share or membership certificate
at public auction by petitioner (and the issuance to it of the corresponding Certificate of Sale) transferred
ownership of the same to the latter and thus entitled petitioner to have the said share registered in its
name as a member of VGCCI. It is readily observed that VGCCI did not assail the transfer directly and has
in fact, in its letter of 27 September 1974, expressly recognized the pledge agreement executed by the
original owner, Calapatia, in favor of petitioner and has even noted said agreement in its corporate
books. 25 In addition, Calapatia, the original owner of the subject share, has not contested the said transfer.
By virtue of the afore-mentioned sale, petitioner became a bona fide stockholder of VGCCI and, therefore,
the conflict that arose between petitioner and VGCCI aptly exemplies an intra-corporate controversy
between a corporation and its stockholder under Sec. 5(b) of P.D. 902-A.
An important consideration, moreover, is the nature of the controversy between petitioner and private
respondent corporation. VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art
VIII of its by-laws which provides that "after a member shall have been posted as delinquent, the Board
may order his/her/its share sold to satisfy the claims of the Club. . ." 26 It is pursuant to this provision that
VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its
argument by asserting that its corporate by-laws should prevail. The bone of contention, thus, is the
proper interpretation and application of VGCCI's aforequoted by-laws, a subject which irrefutably calls for
the special competence of the SEC.
We reiterate herein the sound policy enunciated by the Court in Abejo v. De la Cruz 27:
6. In the fifties, the Court taking cognizance of the move to vest jurisdiction in
administrative commissions and boards the power to resolve specialized disputes in
the field of labor (as in corporations, public transportation and public utilities) ruled
that Congress in requiring the Industrial Court's intervention in the resolution of labor-
management controversies likely to cause strikes or lockouts meant such jurisdiction
to be exclusive, although it did not so expressly state in the law. The Court held that
under the "sense-making and expeditious doctrine of primary jurisdiction . . . the
courts cannot or will not determine a controversy involving a question which is within
the jurisdiction of an administrative tribunal, where the question demands the
exercise of sound administrative discretion requiring the special knowledge,
experience, and services of the administrative tribunal to determine technical and
intricate matters of fact, and a uniformity of ruling is essential to comply with the
purposes of the regulatory statute administered.
In this era of clogged court dockets, the need for specialized administrative boards or
commissions with the special knowledge, experience and capability to hear and
determine promptly disputes on technical matters or essentially factual matters,
subject to judicial review in case of grave abuse of discretion, has become well nigh
indispensable. Thus, in 1984, the Court noted that "between the power lodged in an
administrative body and a court, the unmistakable trend has been to refer it to the
former. 'Increasingly, this Court has been committed to the view that unless the law
speaks clearly and unequivocably, the choice should fall on [an administrative
agency.]'" The Court in the earlier case of Ebon v. De Guzman, noted that the
lawmaking authority, in restoring to the labor arbiters and the NLRC their jurisdiction
to award all kinds of damages in labor cases, as against the previous P.D. amendment
splitting their jurisdiction with the regular courts, "evidently, . . . had second thoughts
about depriving the Labor Arbiters and the NLRC of the jurisdiction to award damages
in labor cases because that setup would mean duplicity of suits, splitting the cause of
action and possible conflicting findings and conclusions by two tribunals on one and
the same claim."
47
In this case, the need for the SEC's technical expertise cannot be over-emphasized involving as it does the
meticulous analysis and correct interpretation of a corporation's by-laws as well as the applicable
provisions of the Corporation Code in order to determine the validity of VGCCI's claims. The SEC, therefore,
took proper cognizance of the instant case.
VGCCI further contends that petitioner is estopped from denying its earlier position, in the first complaint it
filed with the RTC of Makati (Civil Case No. 90-1112) that there is no intra-corporate relations between
itself and VGCCI.
VGCCI's contention lacks merit.
In Zamora v. Court of Appeals, 28 this Court, through Mr. Justice Isagani A. Cruz, declared that:
It follows that as a rule the filing of a complaint with one court which has no
jurisdiction over it does not prevent the plaintiff from filing the same complaint later
with the competent court. The plaintiff is not estopped from doing so simply because it
made a mistake before in the choice of the proper forum. . . .
We remind VGCCI that in the same proceedings before the RTC of Makati, it categorically stated (in its
motion to dismiss) that the case between itself and petitioner is intra-corporate and insisted that it is the
SEC and not the regular courts which has jurisdiction. This is precisely the reason why the said court
dismissed petitioner's complaint and led to petitioner's recourse to the SEC.
Having resolved the issue on jurisdiction, instead of remanding the whole case to the Court of Appeals, this
Court likewise deems it procedurally sound to proceed and rule on its merits in the same proceedings.
It must be underscored that petitioner did not confine the instant petition for review on certiorari on the
issue of jurisdiction. In its assignment of errors, petitioner specifically raised questions on the merits of the
case. In turn, in its responsive pleadings, private respondent duly answered and countered all the issues
raised by petitioner.
Applicable to this case is the principle succinctly enunciated in the case of Heirs of Crisanta Y. Gabriel-
Almoradie v. Court of Appeals, 29 citing Escudero v. Dulay 30 and The Roman Catholic Archbishop of Manila
v. Court of Appeals. 31
In the interest of the public and for the expeditious administration of justice the issue
on infringement shall be resolved by the court considering that this case has dragged
on for years and has gone from one forum to another.
It is a rule of procedure for the Supreme Court to strive to settle the entire controversy
in a single proceeding leaving no root or branch to bear the seeds of future litigation.
No useful purpose will be served if a case or the determination of an issue in a case is
remanded to the trial court only to have its decision raised again to the Court of
Appeals and from there to the Supreme Court.
We have laid down the rule that the remand of the case or of an issue to the lower
court for further reception of evidence is not necessary where the Court is in position
to resolve the dispute based on the records before it and particularly where the ends
of justice would not be subserved by the remand thereof. Moreover, the Supreme
Court is clothed with ample authority to review matters, even those not raised on
appeal if it finds that their consideration is necessary in arriving at a just disposition of
the case.
In the recent case of China Banking Corp., et al. v. Court of Appeals, et al., 32 this Court, through Mr. Justice
Ricardo J. Francisco, ruled in this wise:
At the outset, the Court's attention is drawn to the fact that since the filing of this suit
before the trial court, none of the substantial issues have been resolved. To avoid and
gloss over the issues raised by the parties, as what the trial court and respondent
Court of Appeals did, would unduly prolong this litigation involving a rather simple
case of foreclosure of mortgage. Undoubtedly, this will run counter to the avowed
purpose of the rules, i.e., to assist the parties in obtaining just, speedy and
inexpensive determination of every action or proceeding. The Court, therefore, feels
that the central issues of the case, albeit unresolved by the courts below, should now
be settled specially as they involved pure questions of law. Furthermore, the pleadings
of the respective parties on file have amply ventilated their various positions and
arguments on the matter necessitating prompt adjudication.
In the case at bar, since we already have the records of the case (from the proceedings before the SEC)
sufficient to enable us to render a sound judgment and since only questions of law were raised (the proper
jurisdiction for Supreme Court review), we can, therefore, unerringly take cognizance of and rule on the
merits of the case.
The procedural niceties settled, we proceed to the merits.
VGCCI assails the validity of the pledge agreement executed by Calapatia in petitioner's favor. It contends
that the same was null and void for lack of consideration because the pledge agreement was entered into
on 21 August
1974 33 but the loan or promissory note which it secured was obtained by Calapatia much later or only on 3
August 1983. 34
VGCCI's contention is unmeritorious.
A careful perusal of the pledge agreement will readily reveal that the contracting parties explicitly
stipulated therein that the said pledge will also stand as security for any future advancements (or renewals
thereof) that Calapatia (the pledgor) may procure from petitioner:
xxx xxx xxx
This pledge is given as security for the prompt payment when due of all loans,
overdrafts, promissory notes, drafts, bills or exchange, discounts, and all other
obligations of every kind which have heretofore been contracted, or which may
hereafter be contracted, by the PLEDGOR(S) and/or DEBTOR(S) or any one of them, in
favor of the PLEDGEE, including discounts of Chinese drafts, bills of exchange,
promissory notes, etc., without any further endorsement by the PLEDGOR(S) and/or
Debtor(s) up to the sum of TWENTY THOUSAND (P20,000.00) PESOS, together with the
accrued interest thereon, as hereinafter provided, plus the costs, losses, damages and
expenses (including attorney's fees) which PLEDGEE may incur in connection with the
collection thereof. 35 (Emphasis ours.)
48
The validity of the pledge agreement between petitioner and Calapatia cannot thus be held suspect by
VGCCI. As candidly explained by petitioner, the promissory note of 3 August 1983 in the amount of
P20,000.00 was but a renewal of the first promissory note covered by the same pledge agreement.
VGCCI likewise insists that due to Calapatia's failure to settle his delinquent accounts, it had the right to
sell the share in question in accordance with the express provision found in its by-laws.
Private respondent's insistence comes to naught. It is significant to note that VGCCI began sending notices
of delinquency to Calapatia after it was informed by petitioner (through its letter dated 14 May 1985) of
the foreclosure proceedings initiated against Calapatia's pledged share, although Calapatia has been
delinquent in paying his monthly dues to the club since 1975. Stranger still, petitioner, whom VGCCI had
officially recognized as the pledgee of Calapatia's share, was neither informed nor furnished copies of
these letters of overdue accounts until VGCCI itself sold the pledged share at another public auction. By
doing so, VGCCI completely disregarded petitioner's rights as pledgee. It even failed to give petitioner
notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith.
In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues in this
wise:
The general rule really is that third persons are not bound by the by-laws of a
corporation since they are not privy thereto (Fleischer v. Botica Nolasco, 47 Phil. 584).
The exception to this is when third persons have actual or constructive knowledge of
the same. In the case at bar, petitioner had actual knowledge of the by-laws of private
respondent when petitioner foreclosed the pledge made by Calapatia and when
petitioner purchased the share foreclosed on September 17, 1985. This is proven by
the fact that prior thereto, i.e., on May 14, 1985 petitioner even quoted a portion of
private respondent's by-laws which is material to the issue herein in a letter it wrote to
private respondent. Because of this actual knowledge of such by-laws then the same
bound the petitioner as of the time when petitioner purchased the share. Since the by-
laws was already binding upon petitioner when the latter purchased the share of
Calapatia on September 17, 1985 then the petitioner purchased the said share subject
to the right of the private respondent to sell the said share for reasons of delinquency
and the right of private respondent to have a first lien on said shares as these rights
are provided for in the by-laws very very clearly. 36
VGCCI misunderstood the import of our ruling in Fleischer v. Botica Nolasco Co.: 37
And moreover, the by-law now in question cannot have any effect on the appellee. He
had no knowledge of such by-law when the shares were assigned to him. He obtained
them in good faith and for a valuable consideration. He was not a privy to the contract
created by said by-law between the shareholder Manuel Gonzales and the Botica
Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.
An unauthorized by-law forbidding a shareholder to sell his shares without first
offering them to the corporation for a period of thirty days is not binding upon an
assignee of the stock as a personal contract, although his assignor knew of the by-law
and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)
When no restriction is placed by public law on the transfer of corporate stock, a
purchaser is not affected by any contractual restriction of which he had no notice.
(Brinkerhoff-Farris Trust & Savings Co. vs. Home Lumber Co., 118 Mo., 447.)
The assignment of shares of stock in a corporation by one who has assented to an
unauthorized by-law has only the effect of a contract by, and enforceable against, the
assignor; the assignee is not bound by such by-law by virtue of the assignment alone.
(Ireland vs. Globe Milling Co., 21 R.I., 9.)
A by-law of a corporation which provides that transfers of stock shall not be valid
unless approved by the board of directors, while it may be enforced as a reasonable
regulation for the protection of the corporation against worthless stockholders, cannot
be made available to defeat the rights of third persons. (Farmers' and Merchants'
Bank of Lineville vs. Wasson, 48 Iowa, 336.) (Emphasis ours.)
In order to be bound, the third party must have acquired knowledge of the pertinent by-laws at the time
the transaction or agreement between said third party and the shareholder was entered into, in this case,
at the time the pledge agreement was executed. VGCCI could have easily informed petitioner of its by-
laws when it sent notice formally recognizing petitioner as pledgee of one of its shares registered in
Calapatia's name. Petitioner's belated notice of said by-laws at the time of foreclosure will not suffice. The
ruling of the SEC en banc is particularly instructive:
By-laws signifies the rules and regulations or private laws enacted by the corporation
to regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto and among
themselves in their relation to it. In other words, by-laws are the relatively permanent
and continuing rules of action adopted by the corporation for its own government and
that of the individuals composing it and having the direction, management and control
of its affairs, in whole or in part, in the management and control of its affairs and
activities. (9 Fletcher 4166, 1982 Ed.)
The purpose of a by-law is to regulate the conduct and define the duties of the
members towards the corporation and among themselves. They are self-imposed and,
although adopted pursuant to statutory authority, have no status as public law. (Ibid.)
Therefore, it is the generally accepted rule that third persons are not bound by by-
laws, except when they have knowledge of the provisions either actually or
constructively. In the case of Fleisher v. Botica Nolasco, 47 Phil. 584, the Supreme
Court held that the by-law restricting the transfer of shares cannot have any effect on
the transferee of the shares in question as he "had no knowledge of such by-law when
the shares were assigned to him. He obtained them in good faith and for a valuable
consideration. He was not a privy to the contract created by the by-law between the
shareholder . . . and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his
right as a purchaser. (Emphasis supplied.)
By analogy of the above-cited case, the Commission en banc is of the opinion that
said case is applicable to the present controversy. Appellant-petitioner bank as a third
party can not be bound by appellee-respondent's by-laws. It must be recalled that
when appellee-respondent communicated to appellant-petitioner bank that the pledge
agreement was duly noted in the club's books there was no mention of the
shareholder-pledgor's unpaid accounts. The transcript of stenographic notes of the
June 25, 1991 Hearing reveals that the pledgor became delinquent only in 1975. Thus,
appellant-petitioner was in good faith when the pledge agreement was contracted.
The Commission en banc also believes that for the exception to the general accepted
rule that third persons are not bound by by-laws to be applicable and binding upon the
49
pledgee, knowledge of the provisions of the VGCI By-laws must be acquired at the
time the pledge agreement was contracted. Knowledge of said provisions, either
actual or constructive, at the time of foreclosure will not affect pledgee's right over the
pledged share. Art. 2087 of the Civil Code provides that it is also of the essence of
these contracts that when the principal obligation becomes due, the things in which
the pledge or mortgage consists maybe alienated for the payment to the creditor.
In a letter dated March 10, 1976 addressed to Valley Golf Club, Inc., the Commission
issued an opinion to the effect that:
According to the weight of authority, the pledgee's right is
entitled to full protection without surrender of the certificate, their
cancellation, and the issuance to him of new ones, and when
done, the pledgee will be fully protected against a subsequent
purchaser who would be charged with constructive notice that the
certificate is covered by the pledge. (12-A Fletcher 502)
The pledgee is entitled to retain possession of the stock until the
pledgor pays or tenders to him the amount due on the debt
secured. In other words, the pledgee has the right to resort to its
collateral for the payment of the debts. (Ibid, 502)
To cancel the pledged certificate outright and the issuance of new
certificate to a third person who purchased the same certificate
covered by the pledge, will certainly defeat the right of the
pledgee to resort to its collateral for the payment of the debt. The
pledgor or his representative or registered stockholders has no
right to require a return of the pledged stock until the debt for
which it was given as security is paid and satisfied, regardless of
the length of time which have elapsed since debt was created.
(12-A Fletcher 409)
A bona fide pledgee takes free from any latent or secret equities or liens in favor
either of the corporation or of third persons, if he has no notice thereof, but not
otherwise. He also takes it free of liens or claims that may subsequently arise in favor
of the corporation if it has notice of the pledge, although no demand for a transfer of
the stock to the pledgee on the corporate books has been made. (12-A Fletcher 5634,
1982 ed., citing Snyder v. Eagle Fruit Co., 75 F2d739) 38
Similarly, VGCCI's contention that petitioner is duty-bound to know its by-laws because of Art. 2099 of the
Civil Code which stipulates that the creditor must take care of the thing pledged with the diligence of a
good father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H. Lee, 39 is clearly not
applicable:
In applying this provision to the situation before us it must be borne in mind that the
ordinary pawn ticket is a document by virtue of which the property in the thing
pledged passes from hand to hand by mere delivery of the ticket; and the contract of
the pledge is, therefore, absolvable to bearer. It results that one who takes a pawn
ticket in pledge acquires domination over the pledge; and it is the holder who must
renew the pledge, if it is to be kept alive.
It is quite obvious from the aforequoted case that a membership share is quite different in
character from a pawn ticket and to reiterate, petitioner was never informed of Calapatia's
unpaid accounts and the restrictive provisions in VGCCI's by-laws.
Finally, Sec. 63 of the Corporation Code which provides that "no shares of stock against which the
corporation holds any unpaid claim shall be transferable in the books of the corporation" cannot be utilized
by VGCCI. The term "unpaid claim" refers to "any unpaid claim arising from unpaid subscription, and not to
any indebtedness which a subscriber or stockholder may owe the corporation arising from any other
transaction." 40 In the case at bar, the subscription for the share in question has been fully paid as
evidenced by the issuance of Membership Certificate No. 1219. 41 What Calapatia owed the corporation
were merely the monthly dues. Hence, the aforequoted provision does not apply.
WHEREFORE, premises considered, the assailed decision of the Court of Appeals is REVERSED and the
order of the SEC en banc dated 4 June 1993 is hereby AFFIRMED.
SO ORDERED.
G.R. No. 121791 December 23, 1998
ENRIQUE SALAFRANCA, petitioner,
vs.
PHILAMLIFE (PAMPLONA) VILLAGE HOMEOWNERS ASSOCIATION, INC., BONIFACIO DAZO and
THE SECOND DIVISION, NATIONAL LABOR RELATIONS COMMISSION (NLRC), respondents.
ROMERO, J.:
Petitioner Enrique Salafranca started working with the private respondent Philamlife Village Homeowners
Association on May 1, 1981 as administrative officer for a period of six months. From this date until
December 31, 1983, petitioner was reappointed to his position three more times. 1 As administrative
officer, petitioner was generally responsible for the management of the village's day to day
activities.2 After petitioner's term of employment expired on December 31, 1983, he still continued to work
in the same capacity, albeit, without the benefit of a renewed contract.
Sometime in 1987, private respondent decided to amend its by-laws. Included therein was a provision
regarding officers, specifically, the position of administrative officer under which said officer shall hold
office at the pleasure of the Board of Directors. In view of this development, private respondent, on July 3,
1987, informed the petitioner that his term of office shall be coterminus with the Board of Directors which
appointed him to his position. Furthermore, until he submits a medical certificate showing his state of
health, his employment shall be on a month-to-month basis. 3 Oddly, notwithstanding the failure of herein
petitioner to submit his medical certificate, he continued working until his termination in December
1992.4 Claiming that his services had been unlawfully and unceremoniously dispensed with, petitioner filed
a complaint for illegal dismissal with money claims and for damages. 5
After the submission by the parties of their respective position papers and other pleadings, the Labor
Arbiter rendered a decision6 ordering private respondent to pay the petitioner the amount of P257,833.33
representing his backwages, separation pay and 13th month pay. In justifying the award, the Labor Arbiter
elucidated:
50
Respondents' contention that complainant's term of employment was co-terminus
with the term of Office of the Board of Directors, is wanting in merit. Records show
that complainant had been hired in 1981 while the Amendment of the respondents'
By-Laws making the position of an Administrative Officer co-terminus with the term of
the Board of Directors was made in 1987. Evidently, the said Amendment would not
be applicable to the case of complainant who had become a regular employee long
time before the Amendment took place. Moreover, the Amendment should be applied
prospectively and not retroactively.
On appeal by the private respondent, the NLRC reversed the decision of the Labor Arbiter and rendered a
new one7 reducing petitioner's monetary award to only one-half (1/2) month pay for every year of service
representing his retirement pay. In other words, the NLRC viewed the dismissal of the petitioner as a valid
act by the private respondent.
The fact that he continued to perform the function of the office of administrative
officer without extension or re-appointment thereafter, to our mind, did not in any way
make his employment permanent as in fact, he was even reminded of the nature of
his position by then president of the association Jaime Y. Ladao in a letter of 3 July
1987. His reply to the aforesaid letter, claiming his employment regular, and viz a viz,
referring to submit his medical certificate, notwithstanding, to our mind, merely
underscored the need to define his position as, in fact, the Association's Rules and
Regulations were amended if but to put to rest the tenural (sic) limit of the office of
the Administrative Officer in accordance with its earlier intention, that it is co-terminus
with that of the members of the Board of Directors.
WHEREFORE, the decision appealed from is hereby set aside. Respondents are hereby
ordered to pay herein appellee one half (1/2) month pay for every year of service
representing his retirement pay.
In view of the sudden turn of events, petitioner has elevated the case to this Court assigning the following
errors:8
1. The NLRC gravely abused its discretion when it ruled that the employment of the
Petitioner is not purely based on considerations of Employer-Employee relationship.
2. Petitioner was illegally dismissed by private respondents.
As to the first assigned error by the petitioner, we need not dwell on this at length. We agree with the
Solicitor General's observation that an employer-employee relationship exists between the petitioner and
the private respondent. 9
x x x           x x x          x x x
The first element is present in this case. Petitioner was hired as Administrative Officer
by respondents. In fact, he was extended successive appointments by respondents.
The second element is also present since it is not denied that respondent PVHA paid
petitioner a fixed salary for his services.
As to the third element, it can be seen from the Records that respondents had the
power of dismissal over petitioner. In their letter dated December 7, 1992,
respondents informed petitioner that they had decided to discontinue his services. In
their Position Paper submitted to the Labor Arbiter, respondents stated that petitioner
"was dismissed for cause." (p. 17, Record).
With respect to the fourth and most important element, respondents controlled the
work of petitioner not only with respect to the ends to be achieved but also the means
used in reaching such ends.
Relative to the second assigned error of the petitioner, both the Solicitor General and the private
respondent take the stance that petitioner was not illegally dismissed. 10 On this aspect, we disagree with
their contentions.
On the outset, there is no dispute that petitioner had already attained the status of a regular employee, as
evidenced by his eleven years of service with the private respondent. Accordingly, petitioner enjoys the
right to security of tenure 11 and his services may be terminated only for causes provided by law. 12
Viewed in this light, while private respondent has the right to terminate the services of petitioner, this is
subject to both substantive and procedural grounds. 13 The substantive causes for dismissal are those
provided in Articles 282 and 283 of the, Labor Code, 14 while the procedural grounds refer to the
observance of the requirement of due process. 15 In all these instances, it is the private respondent, being
the employer, who must prove the validity of the dismissal. 16
Having reviewed the records of this case carefully, we conclude that private respondent utterly failed to
substantiate petitioner's dismissal, rendering the latter's termination illegal. At the risk of being redundant,
it must be stressed that these requirements are mandatory and non-compliance therewith renders any
judgment reached by the management void and inexistent. 17
While private respondent imputes "gross negligence," and "serious misconduct" as the causes of
petitioner's dismissal, 18 not a shred of evidence was offered in support thereof, other than bare and
uncorroborated allegations. The facts and circumstances regarding such alleged infractions were never
explained, While it is true that private respondent, through its president Bonifacio Dazo, executed an
affidavit narrating the alleged violations of the petitioner, 19 these were never corroborated by concrete or
competent evidence. It is settled that no undue importance should be given to a sworn statement or
affidavit as a piece of evidence because, being taken ex-parte, an affidavit is almost always incomplete
and inaccurate. 20 Furthermore, it must be noted that when petitioner was terminated in 1992, these
alleged infractions were never raised nor communicated to him. In fact, these were only revealed after the
complaint was filed by the petitioner in 1993. Why there was a delay was never adequately explained by
private respondent.
Likewise, we note that Dazo himself was not presented as a witness to give the petitioner an opportunity
to cross-examine him and propound clarificatory questions regarding matters averred in his affidavit. All
told, the foregoing lapses and the belated submission of the affidavit, cast doubt as to the credibility of the
allegations. In sum, the dismissal of the petitioner had no factual basis whatsoever. The rule is that
unsubstantiated accusations without more, are not tantamount to guilt. 21
As regards the issue of procedural due process, private respondent justifies its non-compliance therewith
in this wise:
51
The Association Officers, being his peers and friends had a problem however in
terminating his services. He had been found to have committed infractions as
previously enumerated. PVHA could have proceeded with a full-blown investigation to
hear these charges, but the ordeal might break the old man's heart as this will surely
affect his standing in the community. So they decided to make their move as
discreetly (but legally) as possible to save the petitioner's reputation. Terminating him
in accordance with the provision of the by-laws of the Association without pointing out
his numerous faults and malfeasance in office and with one-half month pay for every
year of service in accordance with the Retirement Law was the best and only
alternative.
We are not impressed. The reasoning advanced by the private respondent is as puerile as it is
preposterous.
The essence of due process is to afford the party an opportunity to be heard and defend himself, to
cleanse his name and reputation from any taint. It includes the twin requirements of notice and
hearing. 22 This concept evolved from the basic tenet that one's employment or profession is a property
right protected by the constitutional guaranty of due process of law. 23 Hence, an individual's separation
from work must be founded on clearly-established facts, not on mere conjectures and suspicions. 24
In light of the foregoing, private respondent's arguments are clearly baseless and without merit. In truth,
instead of protecting petitioner's reputation, private respondent succeeded in doing exactly the opposite
— it condemned the petitioner without even hearing his side. It is stating the obvious that dismissal, being
the ultimate penalty that can be meted out to an employee, should be based on a clear or convincing
ground. 25 As such, a decision to terminate an employee without fully apprising him of the facts, on the
pretext that the twin requirements of notice and hearing are unnecessary or useless, is an invalid and
obnoxious exercise of management prerogative.
Furthermore, private respondent, in an effort to validate the dismissal of the petitioner, posits the theory
that the latter's position is coterminus with that of the Village's Board of Directors, as provided for in its
amended by-laws. 26
Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in the
exercise of management prerogative or business judgment. However this right, extensive as it may be,
cannot impair the obligation of existing contracts or rights.
Prescinding from these premises, private respondent's insistence that it can legally dismiss petitioner on
the ground that his tenure has expired is untenable. To reiterate, petitioner, being a regular employee, is
entitled to security of tenure, hence, his services may only be terminated for causes provided by law. 27 A
contrary interpretation would not find justification in the laws or the Constitution. If we were to rule
otherwise, it would enable an employer to remove any employee from his employment by the simple
expediency of amending its by-laws and providing that his/her position shall cease to exist upon the
occurrence of a specified event.
If private respondent wanted to make the petitioner's position co-terminus with that of the Board of
Directors, then the amendment must be effective after petitioner's stay with the private respondent, not
during his term. Obviously, the measure taken by the private respondent in amending its by-laws is
nothing but a devious, but crude, attempt to circumvent petitioner's right to security of tenure as a regular
employee guaranteed under the Labor Code. 28
Interestingly, the Solicitor General is of the view that what actually transpired was that petitioner was
retired from his employment, considering the fact that in 1992 he was already 70 years old and not
terminated. 29
While there seems to be a semblance of plausibility in this contention for the matter of extension of service
of such employee or official is addressed to the sound discretion of the employer, still we have no doubt
that this was just a mere after-thought — a dismissal disguised as retirement.
In the proceedings before the Labor Arbiter, it is noteworthy that private respondent never raised the issue
of compulsory retirement, 30 as a cause for terminating petitioner's service. In its appeal before the NLRC,
this ground was never discussed. In fact, private respondent, in justifying the termination of the petitioner,
still anchored its claim on the applicability of the amended by-laws. This omission is fatal to private
respondent's cause, for the rule is well-settled that matters, theories or arguments not brought out in the
proceedings below will ordinarily not be considered by a reviewing court, as they cannot be raised for the
first time on appeal. 31
Undaunted, private respondent now asserts that the instant petition was filed out of time, 32 considering
that the assailed NLRC decision was received on June 28, 1995 while this petition was filed on September
20, 1995. At this juncture, we take this opportunity to state that under the 1997 Rules of Civil Procedure, a
petition for certiorari must now be instituted within sixty days of receipt of the assailed judgment, order or
resolution. 33 However, since this case arose in 1995 and the aforementioned rule only took effect on July
1, 1997 then the old rule is applicable. Since prior to the effectivity of the new rule, a special civil action
of certiorari should be instituted within a period of three months, 34 the instant petition which was filed on
September 20, 1995 or two months and twenty-two days thereafter, was still within the reglementary
period.
With respect to the issue of the monetary award to be given to the petitioner, private respondent argues
that he deserves only retirement pay and nothing more. This position would have been tenable had
petitioner not been illegally dismissed. However, since we have already ruled petitioner's dismissal as
without just cause and lacking due process, the award of backwages and reinstatement is proper. 35
In this particular case, reinstatement is no longer feasible since petitioner was already 70 years old at the
time he was removed from his employment. As a substitute thereof, separation pay is generally
awarded, 36 the amount of which must be equivalent to one-month salary for every year of service. 37
With respect to the amount of backwages which, incidentally is different from separation pay, 38 it now
settled that an illegally dismissed employee is entitled to its full payment as long as the cause of action
accrued after March 21, 1989. 39 Considering that petitioner was terminated from the service on December
9, 1992, which is after March 21, 1989, he is entitled to full backwages from the time of the illegal
dismissal without any, qualification or deduction. 40
As regards the issue of retirement pay, private respondent asserts that the correct amount should be one-
half (1/2) month salary for every year of service. This time we agree with private respondent's contention.
The pertinent law is Article 287 of the Labor Code, as amended by Republic Act No. 7641, which reads:
Art. 287. Retirement. — Any employee may be retired upon reaching the retirement
age established in the collective bargaining agreement or other applicable
employment contract.
52

In case of retirement, the employee shall he entitled to receive such retirement

benefits as he may have earned under existing laws and any collective bargaining
agreement and other agreements: Provided, however, That an employee's retirement
benefits under any collective bargaining and other agreements shall not be less than
those provided herein.

In the absence of a retirement plan or agreement providing for retirement benefits of

employees in the establishment, an employee upon reaching the age of sixty (60)
years or more, but not beyond sixty-five (65) years which is hereby declared the
compulsory retirement age, who has served at least five (5) years in the said
establishment, may retire and shall be entitled to retirement pay equivalent to at least
one-half (1/2) month salary for every year of service, a fraction of al least six (6)
months being considered as one whole year.

x x x           x x x          x x x

With respect to the issue that petitioner, being a managerial employee, is not entitled to thirteenth month
pay, Memorandum Order No. 28, as implemented by the Revised Guidelines on the Implementation of the
13th Month Pay Law dated November 16, 1987, provides:

Sec. 1 of Presidential Decree No. 851 is hereby modified to the extent that all
employers are hereby required to pay all their rank and file employees a 13th month
pay not later than December 24 of every year.

Clearly, therefore, the foregoing exempts managerial employees from this benefit. Of course, this does not
preclude an employer from granting other bonuses, in lieu of the 13th month pay, to managerial
employees in its discretion.

Finally, we cannot simply ignore private respondent's malicious scheme to remove petitioner from his
position which is contrary to good customs and effected in an oppressive manner, thus warranting an
award of moral and exemplary damages to the petitioner. 41 Moreover, since petitioner was forced to
litigate and incur expenses to protect his right and interests, he is entitled to attorney's fees. 42

WHEREFORE, in view of the foregoing, the instant petition is GRANTED. The NLRC decision dated June 15,
1995 is hereby REVERSED and SET ASIDE. Private respondent Philamlife Village Homeowners Association is
ORDERED: (1) to pay petitioner Enrique Salafranca separation pay equivalent to one month salary for
every year of service; (2) to pay his full backwages in accordance with our ruling in Bustamante v.
NLRC; 43 (3) to pay his retirement pay in accordance with Article 287 of the Labor Code, as amended by
Republic Act No. 7641, (4) to pay moral and exemplary damages in the amount of twenty thousand
(P20,000.00) pesos and ten thousand (P10,000.00) pesos, respectively; 44 and (5) to pay ten (10%) percent
of the total amount due to petitioner, as attorney's fees. Consequently, the respondent NLRC is ORDERED
to COMPUTE the total monetary benefits awarded in accordance with this decision and to submit its
compliance thereon within thirty (30) days from notice of this decision.

SO ORDERED.