SECTION II that the seller had already gained from the riding public and his adeptness and
01 VILLA REY TRANSIT, INC vs FERRER (MEL) proficiency in the trade.
October 29, 1968 | Angeles. J. | Business Enterprise
PLAINTIFF-APPELLANT: Villa Rey Transit, Inc.
DEFENDANTS: Eusebio E. Ferrer, Pangasinan Transportation Co., Inc. and Public
Service Commission
DEFENDANT-APPELLANTS: Eusebio E. Ferrer and Pangasinan Transportation Co.,
Inc.
THIRD-PARTY PLAINTIFF-APPELLANT: Pangasinan Transportation Co., Inc
THIRD-PARTY DEFENDANT-APPELLEE: Jose M. Villarama
FACTS:
SUMMARY: Jose Villarama entered into a Contract of Sale with PANTRANCO
for two certificates of public convenience (first set) which authorizes the owner
to operate 32 units of buses along the Pangasinan to Manila route. Among others,
the contract contains a restriction clause that prohibits the seller (Villarama) from
applying for new TPUs( transportation public utilities) for 10 years identical or
competing with the buyer’s. Three months later a corporation called Villa Rey
Transit Inc. was organized with a capital stock of P500,000. The incorporators
are Natividad Villarama (respondent Villarama’s wife) and other relatives. After
registering with the SEC, Villa Rey bought five certificates of public convenience
(second set) from Fernando along with 49 buses, tools and other equipment. After
the execution of the contract, Villa Rey then prayed for the Public Service
Commission (PSC) to grant it provisional authority to operate. Before the PSC
could take action on the application, pursuant to a civil case in favor of Ferrer,
the Sherrif levied on 2 of the 5 certificates of public convenience were levied in
favor of respondent Ferrer in cases against Fernando. Ferrer then sold these two
TPUs to PANTRANCO. Subsequently, the PSC ordered that PANTRANCO
would have the authority to operate on the two TPUs acquired from Ferrer. 
Villa
Rey now questioned this order and initiated an action in the CFI of Manila to
annul these two TPUs. PANTRANCO on the other hand initiated a third-party
complaint alleging that alleging that Villarama and the Corporation, are one and
the same; that Villarama/Villa Rey Inc. was disqualified from operating on the
two TPUs by virtue of their original contract of Sale. The issue is WON the
restriction clause in the original contract between PANTRANCO and Villarama
binds Villa Rey Inc. as well? – YES. The SC said that there was strong persuasive
evidence (please look at ratio for the evidence) showing that Villarama has been
too much involved in the affairs of the Corporation to altogether negative the
claim that he was only a part-time general manager. They show beyond doubt that
the Corporation is his alter ego and so the restrictive clause in the contract entered
into by Jose Villarama and Pantranco is also enforceable and binding against the
said Corporation. 2) WON the restriction clause applies both to existing and new
lines? – YES. The evident intention behind the restriction was to eliminate the
sellers as a competitor, and this must be, considering such factors as the good will
DOCTRINE: The Corporation law, precisely, seeks to separate personal
responsibilities from corporate undertakings. It is the very essence of
incorporation that the acts and conduct of the corporation be carried out in its own
corporate name because it has its own personality.
(doctrine in syllabus) Business enterprise constitutes the goodwill, the customer’s
lists and all factors that make a business profitable.
1. Prior to 1959, Jose M. Villarama was an operator of a bus transportation,
under the business name of Villa Rey Transit, pursuant to certificates of
public convenience granted him by the Public Service Commission (PSC)
which authorized him to operate a total of 32 units on various routes or lines
from Pangasinan to Manila, and vice- versa.
2. He sold the two certificates of public convenience to the Pangasinan
Transportation Company, Inc. (PANTRANCO) for P350,000.00 with the
condition, among others, that the seller (Villarama) "shall not for a period
of 10 years from the date of this sale, apply for any TPU (transportation
public utilities) service identical or competing with the buyer.
3. Barely three months thereafter, a corporation called Villa Rey Transit, Inc.
(Corporation) was organized with a capital stock of P500,000 divided into
5,000 shares worth P100 each.
Division:
- P200,000 subscribed stock
- P1,000 from Natividad R. Villarama, one of the incorporators and wife of
Jose M. Villarama
- P199,000 subscribed by the brother and sister-in-law of Jose M Villarama.
4. Of the subscribed capital stock, P105,000.00 was paid to Natividad, the
treasurer of the corporation,
5. In less than a month after its registration with the Securities and Exchange
Commission, the Corporation bought 5 certificates of public convenience, 49
buses, tools and equipment from one Valentin Fernando
6. The very same day that the contract of sale was executed, the parties
immediately applied with the PSC for its approval, with a prayer for the
issuance of a provisional authority in favor of the vendee Corporation to
operate the service therein involved
7. The PSC granted the provisional permit prayed for, upon the condition that
"it may be modified or revoked by the Commission at any time, shall be
subject to whatever action that may be taken on the basic application and shall
be valid only during the pendency of said application."
8. Before the PSC could take final action on said application for approval of
sale, however, the Sheriff levied on 2 of the 5 certificates of public
convenience involved, those issued under PSC cases, pursuant to a writ of
 execution issued by the CFI of Pangasinan in a Civil Case in favor of Eusebio
Ferrer, plaintiff, judgment creditor, against Valentin Fernando, defendant,
judgment debtor.
9. The Sheriff made and entered the levy in the records of the PSC.
10. A public sale was conducted by the Sheriff of the said two certificates of
public convenience. Ferrer was the highest bidder, and a certificate of sale
was issued in his name.
11. Thereafter, Ferrer sold the two certificates of public convenience to
Pantranco, and jointly submitted for approval their corresponding contract of
sale to the PSC. Pantranco therein prayed that it be authorized provisionally
to operate the service involved in the said two certificates.
12. The applications for approval of sale, filed before the PSC, by Fernando and
that of Ferrer were scheduled for a joint hearing.
13. In the meantime, the PSC issued an order disposing that during the pendency
of the cases and before a final resolution on the applications, the Pantranco
shall be the one to operate provisionally the service under the two certificates
embraced in the contract between Ferrer and Pantranco.
14. The Corporation filed in the Court of First Instance of Manila, a complaint
for the annulment of the sheriff's sale of the aforesaid two certificates of
public convenience in favor of the defendant Ferrer, and the subsequent sale
thereof by the latter to Pantranco, against Ferrer, Pantranco and the PSC. The
plaintiff Corporation prayed therein that all the orders of the PSC relative to
the parties' dispute over the said certificates be annulled.
15. The defendants Ferrer and Pantranco averred that the plaintiff Corporation
had no valid title to the certificates in question because the contract pursuant
to which it acquired them from Fernando was subject to a suspensive
condition — the approval of the PSC — which has not yet been fulfilled, and,
therefore, the Sheriff's levy and the consequent sale at public auction of the
certificates referred to, as well as the sale of the same by Ferrer to Pantranco,
were valid and regular, and vested unto Pantranco, a superior right thereto.
16. Pantranco, on its part, filed a third-party complaint against Jose M.
Villarama alleging that Villarama and the Corporation, are one and the
same; that Villarama and/or the Corporation was disqualified from
operating the two certificates in question by by virtue of the
aforementioned agreement between said Villarama and Pantranco,
which stipulated that Villarama "shall not for a period of 10 years from the
date of this sale, apply for any TPU service identical or competing with the
buyer."
17. The CFI declared null and void the sheriff’s sale of 2 certificate of public
convenience in favor of Ferrer and also declared void the subsequent sale
thereof by Ferrer to Pantranco. It declared Villa Rey Transit, to be the lawful
owner of the said certificas and order the Ferrer and Pantranco to pay the
plaintif P5,000 for atty’s fees.
18. Both appealed.
ISSUE/s:
RELEVANT ISSUES
1. WON the restriction clause in the original contract between PANTRANCO
and Villarama binds Villa Rey Inc. as well? – YES.
2. (based on the syllabus) WON the restriction clause applies both to existing
lines and new lines ? – YES.
OTHER ISSUE:
3. WON the restriction clause was valid? – YES.
Note the restriction clause “The SELLER shall not, for a period of ten (10) years
from the date of this sale apply for any TPU service identical or competing with the
BUYER.”
RULING:
PREMISES CONSIDERED, the judgement appeald from is hereby modified as follows:
1. The sale of the 2 certificates of public convenicne in question by Valentin Fernando
to Villa Rey Transit, Inc. is declared preferred over that made by the Sheriff at public
auction of the aforesaid certificate of public convenience in favor of Eusebio Ferrer;
2. Reversed insofar as it dismisses the third-party complainted filed by Pantranco against
Jose Villarama, holding that Villa Rey Transit Inc is an entity distince and separate
from the personality of Jose M. Villarama, and insofar as it awards the sum of P5,000
as attorney’s fees in faver of Villa Rey Transit Inc.
3. The case is remanded to the trial court for the reception of evidence in consonance
with the above findings as regards the amount of damages suffered by Pantrance; and
4. On equitable considerations, without costs. So ordered.
RATIO:
The stipulation in the original contract between Pantranco and Villarama binds Villa
Rey Inc. as well.
1. Evidence discloses that for someone claiming he is only a part-time manager,
the evidence on record shows Villarama practically controlled the
corporation because he used the corporation funds to pay for his own
obligations, and that he also bought money into the corporation’s coffers.
2. The finances of the Corporation which are supposed to be under the control
and administration of the treasurer keeping them as trust fund for the
Corporation, were, nonetheless, manipulated and disbursed as if they were
the private funds of Villarama, in such a way and extent that Villarama
appeared to be the actual owner-treasurer of the business without regard
to the rights of the stockholders.
3. The evidence further shows that the initial cash capitalization of the
corporation of P105,000 was mostly financed by Villarama. Further, the
evidence shows that when the Corporation was in its initial months of
operation, Villarama purchased and paid with his personal checks Ford trucks
for the Corporation. Villarama had co-mingled his personal funds and
transactions with those made in the name of the Corporation. 

4. Villarama himself admitted that he mingled the corporate funds with his
own money. He also admitted that gasoline purchases of the Corporation
 were made in his namebecause "he had existing account with Stanvac which
was properly secured and he wanted the Corporation to benefit from the
rebates that he received."
5. The foregoing circumstances are strong persuasive evidence showing that
Villarama has been too much involved in the affairs of the Corporation
to altogether negative the claim that he was only a part-time general
manager. They show beyond doubt that the Corporation is his alter ego.
6. Indeed, while Villarama was not the Treasurer of the Corporation but was,
allegedly, only a part-time manager, he admitted not only having held the
corporate money but that he advanced and lent funds for the Corporation, and
yet there was no Board Resolution allowing it.
7. The interference of Villarama in the complex affairs of the corporation,
and particularly its finances, are much too inconsistent with the ends and
purposes of the Corporation law, which, precisely, seeks to separate
personal responsibilities from corporate undertakings. It is the very
essence of incorporation that the acts and conduct of the corporation be
carried out in its own corporate name because it has its own personality.
8. The doctrine that a corporation is a legal entity distinct and separate from
the members and stockholders who compose it is recognized and
respected in all cases which are within reason and the law. When the
fiction is urged as a means of perpetrating a fraud or an illegal act or as a
vehicle for the evasion of an existing obligation, the circumvention of
statutes, the achievement or perfection of a monopoly or generally the
perpetration of knavery or crime, the veil with which the law covers and
isolates the corporation from the members or stockholders who compose it
will be lifted to allow for its consideration merely as an aggregation of
individuals.
9. Upon the foregoing considerations, the preponderance of evidence have
shown that the Villa Rey Transit, Inc. is an alter ego of Jose M.
Villarama, and that the restrictive clause in the contract entered into by
the latter and Pantranco is also enforceable and binding against the said
Corporation.
10. For the rule is that a seller or promisor may not make use of a corporate entity
as a means of evading the obligation of his covenant. Where the
Corporation is substantially the alter ego of the covenantor to the
restrictive agreement, it can be enjoined from competing with the
covenantee.
The restriction clause applies both to existing lines and new lines
1. It is evident from the context of the disputed clause that the intention of the
parties was to eliminate the seller as a competitor of the buyer for ten years
along the lines of operation covered by the certificates of public convenience
subject of their transaction.
2. The clear intention of the parties was to prevent the seller from conducting
any competitive line for 10 years since, anyway, he has bound himself not to
apply for authorization to operate along such lines for the duration of such
period.
3. If the prohibition is to be applied only to the acquisition of new certificates
of public convenience thru an application with the Public Service
Commission, this would, in effect, allow the seller just the same to compete
with the buyer as long as his authority to operate is only acquired thru transfer
or sale from a previous operator, thus defeating the intention of the parties.
4. The evident intention behind the restriction was to eliminate the sellers
as a competitor, and this must be, considering such factors as the good
will that the seller had already gained from the riding public and his
adeptness and proficiency in the trade.
5. On this matter, Corbin, an authority on Contracts has this to say When one
buys the business of another as a going concern, he usually wishes to keep it
going; he wishes to get the location, the building, the stock in trade, and the
customers. He wishes to step into the seller's shoes and to enjoy the same
business relations with other men. He is willing to pay much more if he can
get the "good will" of the business, meaning by this the good will of the
customers, that they may continue to tread the old footpath to his door
and maintain with him the business relations enjoyed by the seller. ... In
order to be well assured of this, he obtains and pays for the seller's
promise not to reopen business in competition with the business sold.
The restriction clause was valid.
1. Analyzing the characteristics of the questioned stipulation, We find that
although it is in the nature of an agreement suppressing competition, it is,
however, merely ancillary or incidental to the main agreement which is that
of sale
2. It does not appear that the ultimate result of the clause or stipulation would
be to leave solely to Pantranco the right to operate along the lines in question,
thereby establishing monopoly or predominance approximating thereto. We
believe the main purpose of the restraint was to protect for a limited time the
business of the buyer.
3. To avoid any misunderstanding, it is here to be emphasized that the 10-year
prohibition upon Villarama is not against his application for, or purchase of,
certificates of public convenience, but merely the operation of TPU along the
lines covered by the certificates sold by him to Pantranco.
 02 TAYAG v. BENGUET CONSOLIDATED (Hanna)
Month, date, year | Ponencia, J. | Topic
PETITIONER: TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased.
RENATO D. TAYAG
RESPONDENTS: BENGUET CONSOLIDATED, INC.,
SUMMARY: Idonah Perkins left 2 cwetificates covering shares of Benguet
Cconsolidated Inc (a Philippine corp). The certificates are in the possessin of
County Trust Company CTC (domicillary administrator of the estate of the
deceased).
In the Philippines, Sanidad instituted ancillary administration peoceedings. Tayag
was appointed ancillary administrator. A dispute arose between the domicillary
administrator CTC in NY and the ancillary administrator in the PH as to which of
them was entitled to the possessin of the stock certificates in question. CFI of
Manila ordered the domicillary administrator CTC to surrender to ancillary
administrator Tayag the stock certificates. CTC refused. Tayag filed with the court
a petition to have rge said certificates be declated or considered lost, and to compel
Benguet Consolidated to issue new stock certificates in rwpkacement thereof. The
lower court granted the petition. Benguet Consolidated assailed said order as it
averred that it cannot possibly issue new stock certificates beause such were not
actually lost, and that according to its by-laws, it can only issue new stock
certificates in lieu of lost, stolen, or destroyed certificates of stocks following the
procedure provided.
Issue: WoN the court’s order of the issuance of new stock certificates can be
disregarded by Benguet because of its by-laws – No
Ratio: Benguet consolidated cannot refuse to comply with the order of the court to
issue replacement certificatws of stocks. For Benguet Consolidated is a Philippine
corporation owing full allegiance and subject to the unrestricted jurisdiction of
local courts. Its shares of stock cannot therefore be considered in any wise as
immune from lawful court orders. If there is a conflict between the above by-law
and the command of a court decree, the latter is to be followed. It would be most
highly unorthodox, however, if a corporate by-law would be accorded such a high
estate in the jural order that a court must not only take note of it but yield to its
alleged controlling force.
A corporation as known to Philippine jurisprudence is a creature without any
existence until it has received the imprimatur of the state according to law. It is
logically inconceivable therefore that it will have rights and privileges of a higher
priority than that of its creator. More than that, it cannot legitimately refuse to yield
obedience to acts of its state organs, certainly not excluding the judiciary, whenever
called upon to do so. As a matter of fact, a corporation once it comes into being
comes more often within the ken of the judiciary than the other two coordinate
branches. It institutes the appropriate court action to enforce its right. Correlatively,
it is not immune from judicial control in those instances, where a duty under the
law as ascertained in an appropriate legal proceeding is cast upon it.
DOCTRINE: There is thus a rejection of Gierke's genossenchaft theory, the basic
theme of which to quote from Friedmann, "is the reality of the group as a social and
legal entity, independent of state recognition and concession." A corporation as
known to Philippine jurisprudence is a creature without any existence until it has
received the imprimatur of the state according to law. It is logically inconceivable
therefore that it will have rights and privileges of a higher priority than that of its
creator. More than that, it cannot legitimately refuse to yield obedience to acts of its
state organs, certainly not excluding the judiciary, whenever called upon to do so.
FACTS:
1. Idonah Perkins left 2 stock certificates covering 33,002 shares of appellant
(Benguet Consolidated). These stock certificates are in the possession of the
County Trust Company of New York (the domiciliary administrator of the
estate of the deceased).
2. Meanwhile in the Phulippines, Prospero Sanidad instituted ancillary
administration proceedings in the CFI of Manila. Marquez was appointed
ancillary administrator, and was then substituted by Tayag.
3. CFI of Manila ordered County Trust (domiciliary) to “produce and deposit”
33,002 shares of stock certificates with Tayag (ancillary) or with the clerk
of court.
4. Domiciliary did not comply with the order. Ancillary petitioned the court to
"issue an order declaring the certificate or certificates of stocks covering the
33,002 shares issued in the name of Idonah Slade Perkins by Benguet
Consolidated, Inc., be declared [or] considered as lost."
5. The lower court, then presided by the Honorable Arsenio Santos, now
retired, an order: "After considering the motion of the ancillary
administrator, as well as the opposition filed by the Benguet the Court
hereby
a. considers as lost for all purposes in connection with the
administration and liquidation of the Philippine estate of Idonah
Slade Perkins the stock certificates covering the 33,002 shares of
stock standing in her name in the books of the Benguet
Consolidated, Inc.,
b. orders said certificates cancelled, and
c. directs said corporation to issue new certificates in lieu thereof, the
same to be delivered by said corporation to either the incumbent
ancillary administrator or to the Probate Division of this Court."
6. Benguet opposed the petition of the ancillary administrator because the said
stock certificates are in existence, they are today in the possession of the
domiciliary administrator in New York.
7. According to Benguet, the stock certificates cannot be declared or
considered as lost and that it alleged that there was a failure to observe
certain requirements of its by-laws before new stock certificates could be
issued. Hence this appeal.
ISSUE/s:
 1. WoN the court’s order of the issuance of new stock certificates can be state organs, certainly not excluding the judiciary, whenever called upon
disregarded by Benguet because of its by-laws - No to do so.
10. As a matter of fact, a corporation once it comes into being comes more often
RULING: WHEREFORE, the appealed order of the Honorable Arsenio Santos, the within the ken of the judiciary than the other two coordinate branches. It
Judge of the Court of First Instance, is affirmed institutes the appropriate court action to enforce its right. Correlatively, it is
not immune from judicial control in those instances, where a duty under
RATIO: the law as ascertained in an appropriate legal proceeding is cast upon it.
1. The court affirmed the authority of the probate court to require that ancillary 11. To assert that it can choose which court order to follow and which to
administrator's right to "the stock certificates covering the 33,002 shares ... disregard is to confer upon it not autonomy which may be conceded but
standing in her name in the books of Benguet Consolidated, Inc...." be license which cannot be tolerated. It is to argue that it may, when so minded,
respected is equally beyond question. For Benguet Consolidated is a overrule the state, the source of its very existence
Philippine corporation owing full allegiance and subject to the unrestricted
jurisdiction of local courts. Its shares of stock cannot therefore be
considered in any wise as immune from lawful court orders.
2. "In the instant case, the actual situs of the shares of stock is in the Philippines,
the corporation being domiciled [here]." To the force of the above undeniable
proposition, not even appellant is insensible.
3. On appellant Benguet Consolidated’s invocation that one of the provisions of
its by-laws be followed in case of a lost, stolen or destroyed stock certificate,
the SC held that such reliance is misplaced. There is no such occasion to apply
such by-law.
4. Assuming that a contrariety exists between the above by-law and the
command of a court decree, the latter is to be followed.
5. It is understandable that the Constitution overrides a statute, to which,
however, the judiciary must yield deference, when appropriately invoked and
deemed applicable. It would be most highly unorthodox, however, if a
corporate by-law would be accorded such a high estate in the jural order
that a court must not only take note of it but yield to its alleged
controlling force.
6. "A corporation is an artificial being created by operation of law...." It owes
its life to the state, its birth being purely dependent on its will.
7. "A corporation is not in fact and in reality a person, but the law treats it as
though it were a person by process of fiction, or by regarding it as an artificial
person distinct and separate from its individual stockholders.... It owes its
existence to law. It is an artificial person created by law for certain specific
purposes, the extent of whose existence, powers and liberties is fixed by its
charter."
8. There is thus a rejection of Gierke's genossenchaft theory, the basic theme of
which to quote from Friedmann, "is the reality of the group as a social and
legal entity, independent of state recognition and concession."
9. A corporation as known to Philippine jurisprudence is a creature
without any existence until it has received the imprimatur of the state
according to law. It is logically inconceivable therefore that it will have
rights and privileges of a higher priority than that of its creator. More
than that, it cannot legitimately refuse to yield obedience to acts of its
03 INTERNATIONAL EXPRESS TRAVEL & TOUR SERVICES, INC. been correct if he was able to adduce evidence proving the corporate
v. CA (Frances) existence of PFF. That a voluntary unincorporated association, like defendant
October 19, 2000 | Kapunan, J. | State Consent Federation has no power to enter into, or to ratify, a contract.
6. The contract entered into by its officers or agents on behalf of such
association is not binding on, or enforceable against it. The officers or agents
PETITIONERS: International Express Travel & Tour Services, Inc.
are themselves personally liable.
RESPONDENTS: Hon. Court of Appeals, Henri Kahn, Philippine Football
7. CA reversed, recognizing the PFF’s juridical existence saying that since Int’l
Federation
Express wasn’t able to prove that Kahn guaranteed the PFF obligation, he
shouldn’t be held liable. CA held that the PFF was a corporation because of
SUMMARY: Int’l Express secured airline tickets for the PFF athletes and
RA 3135 and PD 604 recognizing the juridical existence of national sports
officials but PFF was unable to pay Int’l Express. After Int’l Express demanded
associations
payment, Henri Kahn (PFF President) issued a personal check. Kahn was sought
to be made personally liable but he opposed saying that he didn’t guarantee the
ISSUE: WoN the PFF is a juridical person? No, the PFF is not a separate juridical
obligation, but merely acted as agent of the PFF which had a separate and
person. Henri Kahn is liable for the deficiency
distinct juridical personality. RTC ruled in favor of Int’l Express. CA reversed
and ruled that Kahn is not personally liable. Issue is WoN the PFF is a juridical
HELD: WHEREFORE, the decision appealed from is REVERSED and SET
person? No, the PFF is not a separate juridical person because before a
ASIDE. The decision of the Regional Trial Court of Manila, Branch 35, in Civil
corporation may acquire juridical personality, the State must give its consent
Case No. 90-53595 is hereby REINSTATED.
either in the form of a special law or a general enabling act and nowhere can it
be found in R.A. 3135 or P.D. 604 any provision creating the Philippine Football
RATIO:
Federation came into existence by the passage of such laws. Therefore, Henri
Kahn is liable for the deficiency. 1. The powers and functions (Annex A PD 604) granted to national sports
associations indicate that they may acquire a juridical personality but such
DOCTRINE: “It is a basic postulate that before a corporation may acquire does not automatically take place by the mere passage of the laws.
juridical personality, the State must give its consent either in the form of a 2. “It is a basic postulate that before a corporation may acquire juridical
special law or a general enabling act,” and the procedure and conditions personality, the State must give its consent either in the form of a special
provided under the law for the acquisition of such juridical personality must be law or a general enabling act,” and the procedure and conditions provided
complied with. under the law for the acquisition of such juridical personality must be
complied with.
FACTS: 3. Nowhere can it be found in R.A. 3135 or P.D. 604 any provision creating the
1. Int’l Express offered its travel agency services to the Philippine Football Philippine Football Federation came into existence by the passage of such
Federation (PFF), which the PFF accepted. Int’l Express was then able to laws. These laws merely recognized the existence of national sports
secure airline tickets for the PFF athletes and officials for the SEA Games in associations and provided the manner by which these entities may acquire
KL, as well as for trips to China and Brisbane. The total costs amounted to juridical personality.
P449,654.83. 4. Although the statutory grant to an association of the powers to purchase, sell,
2. The Federation made 2 partial payments amounting to P176,467.50 then lease and encumber property can only be construed the grant of a juridical
didn’t pay anymore until Int’l Express wrote a demand letter. PFF made personality to such an association… nevertheless, the failure to comply with
another partial payment, which was followed by Henri Kahn (PFF President) the statutory procedure and conditions does not warrant a finding that such
issuing a personal check. association acquired a juridical personality, even when it adopts constitution
3. No more payments were made despite repeated demands so Int’l Express and by-laws.
brought suit against the PFF and Kahn in his personal capacity and as 5. The laws require that before an entity may be considered as a national sports
President of the PFF. Kahn was sought to be made personally liable since he association, such entity must be recognized by the accrediting organization,
allegedly guaranteed the obligation the Philippine Amateur Athletic Federation under R.A. 3135, and the
4. Kahn opposed saying that he didn’t guarantee the obligation, but merely acted Department of Youth and Sports Development under P.D. 604. Kahn was not
as agent of the PFF which had a separate and distinct juridical personality able to substantiate this recognition. The constitution and by-laws of the PFF
5. RTC ruled in favor of Int’l Express, holding Kahn personally liable, adding do not prove that the PFF has indeed been recognized and accredited by either
that Kahn’s contention that the PFF had a separate personality would have the Philippine Amateur Athletic Federation or the Department of Youth and
 Sports Development. xxx
6. Henri Kahn should be held liable for the unpaid obligations of the 13. Perform such other functions as may be provided by law.
unincorporated Philippine Football Federation. It is a settled principle in
corporation law that any person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and
becomes personally liable for contract entered into or for other acts
performed as such agent.
7. As president of the Federation, Henri Kahn is presumed to have known about
the corporate existence or non-existence of the Federation. The SC does not
subscribe to the position taken by the appellate court that even assuming that
the Federation was defectively incorporated, the petitioner cannot deny the
corporate existence of the Federation because it had contracted and dealt with
the Federation in such a manner as to recognize and in effect admit its
existence.
8. The doctrine of corporation by estoppel is mistakenly applied by the
respondent court to the petitioner. The application of the doctrine applies
to a third party only when he tries to escape liability on a contract from
which he has benefited on the irrelevant ground of defective incorporation.
In the case at bar, the petitioner is not trying to escape liability from the
contract but rather is the one claiming from the contract.

ANNEX A
SEC. 14. Functions, powers and duties of Associations. - The National Sports' Association shall
have the following functions, powers and duties:
1. To adopt a constitution and by-laws for their internal organization and government;
2. To raise funds by donations, benefits, and other means for their purposes.
3. To purchase, sell, lease or otherwise encumber property both real and personal, for the
accomplishment of their purpose;
4. To affiliate with international or regional sports' Associations after due consultation with the
executive committee;
xxx
13. To perform such other acts as may be necessary for the proper accomplishment of their
purposes and not inconsistent with this Act.
Section 8 of P.D. 604, grants similar functions to these sports associations:
SEC. 8. Functions, Powers, and Duties of National Sports Association. - The National sports
associations shall have the following functions, powers, and duties:
1. Adopt a Constitution and By-Laws for their internal organization and government which shall
be submitted to the Department and any amendment thereto shall take effect upon approval by
the Department: Provided, however, That no team, school, club, organization, or entity shall be
admitted as a voting member of an association unless 60 per cent of the athletes composing said
team, school, club, organization, or entity are Filipino citizens;
2. Raise funds by donations, benefits, and other means for their purpose subject to the approval
of the Department;
3. Purchase, sell, lease, or otherwise encumber property, both real and personal, for the
accomplishment of their purpose;
4. Conduct local, interport, and international competitions, other than the Olympic and Asian
Games, for the promotion of their sport;
5. Affiliate with international or regional sports associations after due consultation with the
Department;

SECTION III
001 WEST COAST LIFE INSURANCE CO. vs. HURD (SEE)
January 13, 2015 | Leonen, J. | No criminal suit can lie against a corporation
PLAINTIFF: West Coast Life Insurance Corp.
DEFENDANT: Geo N. Hurd, Judge of CFI
SUMMARY: The assistant prosecuting attorney of the city of Manila filed an
information for libel for its publication of malicious statements against Insular Life
Insurance against the West Coast Insurance and againt John Northcott and Manuel
Grey. The CFI denied the motion to quash and issued its own process (i.e. it made
its own civil procedure for cases against corporations). The company and the 2 others
question such information as they claim that no criminal suit can lie against a
corporation given that no process has been provided for by law for it. The issue in
this case is WoN the court may, of itself and on its own motion, create not only a
process but a procedure by which the process (Criminal case against a corporation)
may be made effective.-NO. The SC ruled that to bring a corporation into court
criminally requires many additions to the present criminal procedure. While it may
be said to be the duty of courts to see to it that criminals are punished, it is no less
their duty to follow prescribed forms of procedure and to go out upon unauthorized
ways or act in an unauthorized manner. since there is no law and procedure providing
that a corporation can be sued, it cannot be sued as an entity.
DOCTRINE: Corporations cannot be held criminally liable within Philippine
jurisdiction since there is no law relating to the practice and procedure in criminal
actions whereby a corporation may be brought to court to be proceeded against
criminally.
FACTS:
1. West Coast Life Insurance is a foreign life-insurance company organized in
California doing business in the Philippines.
2. The assistant prosecuting attorney of the city of Manila filed an information
for libel against the corporation and againt John Northcott and Manuel Grey.
3. Judge Geo Hurd issued a process directed to the corporation summoning it to
appear before the CFI for the charge of libel for its publication of malicious
statements against Insular Life Insurance.1
4. The Corporation and the 2 others filed a motion to quash the summons and
the service thereof on the ground that the court had no jurisdiction over the
company. The court denied the motion and ordered them to appear.
5. The basis of the action is that the Court of First Instance has no power or
authority, under the laws of the Philippine Islands, to proceed against a
1
“First. For some time past various rumors are current to the effect that the Insular Life Insurance Company is not in as
good a condition as i should be at the present time, and that really it is in bad shape. Nevertheless, the investigations made
by the representative of the "Bulletin" have failed fully to confirm these rumors. It is known that the Insular Auditor has
corporation, as such, criminally, to bring it into court for the purpose of
making it amenable to the criminal laws. It is contended that the court had no
jurisdiction to issue the process in evidence against the plaintiff corporation;
that the issuance and service thereof upon the plaintiff corporation were
outside of the authority and jurisdiction of the court, were authorized by no
law, conferred no jurisdiction over said corporation, and that they were
absolutely void and without force or effect.
ISSUE/s:
1. WoN the court may, of itself and on its own motion, create not only a process
but a procedure by which the process (Criminal case against a corporation)
may be made effective.-NO
RULING: It is adjudged that the Court of First Instance of the city of Manila be and
it is hereby enjoined and prohibited from proceeding further in the criminal cause
which is before us in this proceeding, entitled United States vs. West Coast Life
Insurance Company, a corporation, John Northcott and Manuel C. Grey, so far as said
proceedings relate to the said West Coast Life Insurance Company, a corporation, the
plaintiff in the case.
RATIO:
12. The CFI has no authority to create new procedure and processes in criminal
law, this exercise of power is practically legislation.
13. Even if there are various laws which penalize corporations, the court is still
not authorized to go to the extent of creating special procedure and special
processes for the purpose of carrying out those penal statues, when the
legislature itself has neglected to do so.
14. To bring a corporation into court criminally requires many additions to the
present criminal procedure. While it may be said to be the duty of courts to
see to it that criminals are punished, it is no less their duty to follow
prescribed forms of procedure and to go out upon unauthorized ways or act
in an unauthorized manner.
15. The CFI cites many cases where corporations are punished as maelfactors but
No case has been cited to where a corporation has been proceeded against
under a criminal statute where the court did not exercise its common law
powers or where there was not in force a special procedure applicable to
corporations.
16. It is undoubted that, under the Spanish criminal law and procedure, a
corporation could not have been proceeded against criminally, as such, if
such an entity as a corporation in fact existed under the Spanish law, and as
such it could not have committed a crime in which a willful purpose or a
malicious intent was required. Criminal actions would have been restricted
examined the books of the company and has found that its capital has diminished, and that by direction of said official the
company has decided to double the amount of its capital, and also to pay its reserve fund. All this is true."
 or limited, under that system, to the officials of such corporations and never
would have been directed against the corporation itself.
002 People v. Tan Boon Kong (sarmiento)
March 15, 1930 | Ostrand J. | Criminal Liabiliy
PETITIONER: People of the Philippines
RESPONDENTS: Tan Boon Kong
SUMMARY: There was a corporation engaged in the sale of sugar and other
products. Internal revenue taxes had to be paid, but the corporation falsified in its
tax declaration the true amount of their sales, to achieve a lower tax computation.
The manager of the corporation is now facing criminal charges for the violation of
the Act. 2711. Court ruled that the managers or agents of the corporation are the
ones liable for any criminal liabilities imputed to the corporation A corporation can
act only through its officers and agents, and where the business itself involves a
violation of the law, the correct rule is that all who participate in it are liable
DOCTRINE: A corporation can act only through its officers and agents, and where
the business itself involves a violation of the law, the correct rule is that all who
participate in it are liable
FACTS:
1. This is an appeal from an order of the Judge sustaining to demurrer to an
information charging the defendant Tan Boon Kong with the violation of
section 1458 of Act No. 2711 as amended.
2. In the municipality of Iloilo, Province of Iloilo, Philippine Islands, the said
accused, as corporation organized under the laws of the Philippine Islands
and engaged in the purchase and the sale of sugar, and other native products
and as such object to the payment of internal-revenue taxes upon its sales
criminally declare in 1924 for the purpose of taxation only the sum of
P2,352,761.94, when in truth and in fact, and the accused well knew that the
total gross sales of said corporation during that year amounted to
P2543,303.44, thereby failing to declare for the purpose of taxation the
amount of P190,541.50, and voluntarily and illegally not paying the
Government as internal-revenue percentage taxes the sum of P2,960.12,
corresponding to 1½ per cent of said undeclared sales.
ISSUE/s:
2. Whether or not the agent of the corporation are criminally liable-YES
RULING:
The ruling of the court below sustaining the demurrer to the complaint
is therefore reversed, and the case will be returned to said court for further
proceedings not inconsistent with our view as hereinafter stated. Without costs.
So ordered.
RATIO:
1. Section 1458 and 2723 of Act No. 2711 read as follows:
a. SEC. 1458. Payment of percentage taxes — Quarterly reports of
earnings. — The percentage taxes on business shall be payable at
the end of each calendar quarter in the amount lawfully due on the
business transacted during each quarter; and it shall be on the duty
of every person conducting a business subject to such tax, within the
same period as is allowed for the payment of the quarterly
installments of the fixed taxes without penalty, to make a true and
complete return of the amount of the receipts or earnings of his
business during the preceeding quarter and pay the tax due thereon.
. . . (Act No. 2711.)
b. SEC. 2723. Failure to make true return of receipts and sales. —
Any person who, being required by law to make a return of the
amount of his receipts, sales, or business, shall fail or neglect to
make such return within the time required, shall be punished by a
fine not exceeding two thousand pesos or by imprisonment for a
term not exceeding one year, or both. And any such person who shall
make a false or fraudulent return shall be punished by a fine not
exceeding ten thousand pesos or by imprisonment for a term not
exceeding two years, or both. (Act No. 2711.)
2. Apparently, the court below based the appealed ruling on the ground that the
offense charged must be regarded as committed by the corporation and not
by its officials or agents.
a. This view is in direct conflict with the great weight of authority.
b. A corporation can act only through its officers and agents, and
where the business itself involves a violation of the law, the
correct rule is that all who participate in it are liable
3. In the present case the information or complaint alleges that the defendant
was the manager of a corporation which was engaged in business as a
merchant, and as such manager, he made a false return, for purposes of
taxation, of the total amount of sale made by said false return constitutes a
violation of law, the defendant, as the author of the illegal act, must
necessarily answer for its consequences, provided that the allegation are
proven.
 003 PEOPLE v. CHOWDURY (EMAR) 3. The prosecutor dismissed the estafa charges against Chowdury and filed an
15 Feb 2000 | Puno | Criminal Liability in a Corporate Act amended complaint indicting only Ong for estafa.
PLAINTIFF-APPELLEE: PEOPLE OF THE PHILIPPINES
4. Chowdury pleaded not guilty while Ong remained at large.
ACCUSED-APPELLANT: BULU CHOWDURY
SUMMARY: Sasis, Calleja, Miranda went to craft trade to apply for a job in South
5. Prosecution presented the 3 & Labor Employment officer Caguitla.
Korea. They were interviewed by Chowdury, and required to (1) submit documents
such as NBI clearance, medical certificate, passport and pictures, and pay (2)
6. The Calleja, Miranda and Sasis testified that they were required to (1) submit
Around 16-25k each for placement and processing fee, which were received by the
requirements such as medical certificates, NBI clearance, passport and pictures, (2)
agency’s cashier, Ong. The applicants’ deployment didn’t push through. They filed
attend a seminar and (3) pay around 16-25k for processing/placement fees which are
a complaint for illegal recruitment before the POEA wherein they found out that
received by Ong. However, their deployment didn’t push through so they filed
Craftrade’s recruitment license has already expired. POEA Officer Caguitla
complaints for illegal recruitment before the POEA, where they found out that that
testified that (1) Craftrade was PREVIOUSLY licensed to recruit which expired on
Craftrade’s recruitment licence was already expired.
Dec1993 (2) Craftrade was granted a temporary license effective Dec1993-
Sept1994 and (3) Chowdury & Ong, were not, in their personal capacities, licensed
7. According to Officer Caguitla of the POEA’s Licensing Branch, (1) she prepared a
recruiters. Chowdury, on the other hand, testified that as a mere employee, he only
certification on Jun 1996 that Chowdury & Ong, were not, in their personal
followed the instructions given by his superiors and never received money from
capacities, licensed recruiters (2) Craftrade was PREVIOUSLY licensed to recruit
applicants and that under the Migrant Workers Act, the ones criminally liable in
workers for abroad which expired on Dec1993. It applied for renewal of its license
illegal recruitment cases, in case of juridical persons are the officers having
but was only granted a temporary license effective Dec1993-Sept1994. From
control, management or direction of their business. The trial court found Chowdury
September 11, 1994, the POEA granted Craftrade another temporary authority to
guilty of the crime of illegal recruitment in large scale. The issue in this case is
process the expiring visas of overseas workers who have already been deployed. The
WON Chowdury knowingly and intentionally participated in the commission of
POEA suspended Craftrade's temporary license on Dec1994.
the crime charged. SC acquitted Chowdury since the prosecution failed to prove
that Chowdury was aware of Craftrade's failure to register his name with the POEA
8. Chowdury’s defense: He worked as interviewer at Craftrade. As a mere employee,
and that he actively engaged in recruitment despite this knowledge. The obligation
he only followed the instructions given by his superiors, President & General
to register its personnel with the POEA belongs to the officers of the agency. Mere
Manager Geslani & Managing Director Utkal Chowdury. Chowdury admitted that he
employee of the agency cannot be expected to know the legal requirements for its
interviewed private complainants on different dates. He had a form containing the
operation.
qualifications for the job and he filled out this form based on the applicant's
DOCTRINE: Existence of the corporate entity doesn’t shield from prosecution the
responses to his questions. He then submitted them to Managing Director Utkal
corporate agent who knowingly and intentionally causes the corporation to commit
Chowdury who evaluates Chowdury’s findings. He never received money from the
a crime. The corporation can act only by and through its human agents, and it is
applicants. He resigned from Craftrade Nov 1994.
their conduct which the law must deter. The employee/agent of a corporation
engaged in unlawful business naturally aids & abets in the carrying on of such
9. Chowdury further contends that under the Migrant Workers Act, (In case of
business & will be prosecuted as principal if, with knowledge of the business, its
juridical persons, the officers having control, management or direction of their
purpose and effect, he consciously contributes his efforts to its conduct and
business shall be liable), he may not be held liable for the crime of illegal
promotion, however slight his contribution may be. Where it is shown that the
recruitment as he’s merely an employee & he only performed the tasks assigned to
employee was merely acting under the direction of his superiors and was
unaware that his acts constituted a crime, he may not be held criminally liable him by his superiors. He argues that the ones who should be held liable for the
for an act done for and in behalf of his employer. (Outline) offense are the officers having control, management and direction of the agency.

FACTS:
1. Chowdury and Josephine Ong allegedly represented themselves to have the
capacity to contract, enlist & transport workers for employment abroad & recruited:
Calleja, Miranda and Sasis for employment in Korea without license/authorization
from the Philippine Overseas Employment Administration (POEA)
2. Nov. 1995: Chowdury & Josephine Ong were charged with the crime of illegal
recruitment and 3 counts of estafa.
ISSUE: WON Chowdury knowingly & intentionally participated in the commission
of the crime– NO
RULING:
RTC decision is REVERSED. Chowdury is ACQUITTED. The Director of the
Bureau of Corrections is ordered to RELEASE Chowdury unless he is being held for
some other cause, and to REPORT to this Court compliance with this order within
10d from receipt of this decision. Let a copy of this Decision be furnished the
Secretary of Justice for his information and appropriate action.
RATIO:
1. The elements of illegal recruitment in large scale are:
(1) The accused undertook any recruitment activity defined under Article 13
(b) or any prohibited practice enumerated under Art.34, Labor Code;
(2) He didn’t have the license or authority to lawfully engage in the
recruitment and placement of workers; &
(3) He committed the same against three or more persons, individually or as
a group.
2. Sec6, RA 8042/Migrant Workers Act: Persons criminally liable for the above
offenses: principals, accomplices & accessories. In case of juridical persons, the
officers having control, management/direction of their business shall be liable.
9. Chowdury confined his actions to his job description, merely interviewing
applicants & informed them of the requirements for deployment but NEVER
received money from them. Their payments were received by agency's cashier, Ong.
10. Chowdury performed his tasks under the supervision of its president & managing
director. Hence, we hold that the prosecution failed to prove beyond reasonable
doubt accused-appellant's conscious and active participation in the commission of
the crime of illegal recruitment. His conviction, therefore, is without basis.
11. Department of Justice may still file a complaint against the officers having
control, management or direction of the business of Craftrade Overseas Developers
(Craftrade), so long as the offense has not yet prescribed. Illegal recruitment is a
crime of economic sabotage which need to be curbed by the strong arm of the law. It
is important, however, to stress that the government's action must be directed to the
real offenders, those who perpetrate the crime and benefit from it.

3. Evidence shows that Chowdury interviewed private complainants in the months of

Jun, Aug & Sept 1994 at Craftrade's office. At that time, he’s employed as
interviewer of Craftrade which was then operating under a temporary authority given
by the POEA pending renewal of its license.

4. The temporary license included the authority to recruit workers. He was convicted
based on the fact that he’s not registered with the POEA as employee of Craftrade.
Neither was he, in his personal capacity, licensed to recruit overseas workers.

5. Sec10, Rule II, Book II, Rules & Regulation Governing Overseas Employment
requires that every change, termination or appointment of officers, representatives
and personnel of licensed agencies be registered with the POEA. Agents/reps
appointed by a licensed recruitment agency whose appointments are not previously
approved by the POEA are considered "non-licensee " or "non-holder of authority"
and therefore not authorized to engage in recruitment activity.

6. Prosecution failed to prove that Chowdury was aware of Craftrade's failure

to register his name with the POEA and that he actively engaged in recruitment
despite this knowledge.

7. The obligation to register its personnel with the POEA belongs to the officers
of the agency. Mere employee of the agency cannot be expected to know the legal
requirements for its operation.

8. Evidence shows that Chowdury carried out his duties as interviewer of Craftrade
believing that the agency was duly licensed by the POEA and he, in turn, was duly
authorized by his agency to deal with the applicants in its behalf.
 004 CHING v. SECRETARY OF JUSTICE (Loyola)
February 6, 2006 | Callejo, Sr., J. | Agents of corporations
PETITIONER: Alfredo Ching
RESPONDENTS: The Secretary of Justice, Asst. City Prosecutor Ecilyn
Burgos-Villavert, Judge Edgardo Sudiam of the Regional Trial Court, Manila,
Branch 52; Rizal Commercial Banking Corp. and the People of the Philippines
SUMMARY: Ching, the Senior VP of PBMI, signed 13 trust receipts as surety.
When the trust receipts matured, Ching failed to return the goods to RCBC.
Thus, RCBC filed a criminal complaint for estafa, which was dismissed. RCBC
re-filed the complaint, which was originally dimissed but was reversed by the
DOJ saying that the execution of the said receipts is enough to indict Ching as
the official responsible for the violation of the Trust Receipts Law. The issue is
WoN Ching can be held criminally liable. The SC held yes, saying that Ching is
the one who had signed the trust receipts. He is the agent of the corporation
responsible for its actions.
DOCTRINE: If the crime is committed by a corporation or other juridical entity,
the directors, officers, employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime, precisely because of the
nature of the crime and the penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime punishable by imprisonment.
However, a corporation may be charged and prosecuted for a crime if the
imposable penalty is fine. Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be prosecuted and, if found guilty,
may be fined.
FACTS:
1. Ching was the Senior VP of Philippine Blooming Mills Inc (PBMI). Sometime
in Sept-Oct 1980, PBMI through petitioner, applied with RCBC for the issuance
of commercial letters of credit to finance its importation of assorted goods, which
RCBC approved and irrevocable letters of credit were issued in favor of Ching.
Afterwards, the goods were purchased and delivered in trust to PBMI.
2. Ching signed 13 trust receipts as surety, acknowledging receipt of the goods.
Under the receipts, petitioner agreed to hold the goods in trust for the said bank,
with authority to sell but not by way of conditional sale, pledge or otherwise; and
in case such goods were sold, to turn over the proceeds thereof as soon as received,
to apply against the relative acceptances and payment of other indebtedness to
respondent bank. In case the goods remained unsold within the specified period,
the goods were to be returned to RCBC without any need of demand. Thus, said
goods were RCBC’s property.
3. When the trust receipts matured, petitioner failed to return the goods to
respondent bank, or to return their value despite demands. Thus, RCBC filed a
criminal complaint for estafa in the Office of the City Prosecutor of Manila.
4. The Prosecutor found probable cause for estafa in relation to the Trust Receipts
Law. 13 informations were filed against Ching at the RTC of Manila. He then
appealed to the DOJ but was dismissed. Moved for reconsideration and the DOJ
eventually reversed its previous decision. City Prosecutor was ordered to
withdraw the 13 informations. RCBC filed an MR which was denied.
5. On February 27, 1995, RCBC re-filed the criminal complaint for estafa against
petitioner before the Office of the City Prosecutor of Manila. The prosecutor
found no probable cause as petitioner’s liability was only civil, not criminal,
having only signed as surety.
6. RCBC appealed to the DOJ. The DOJ reversed the City Prosecutor again and said
that the execution of said receipts is enough to indict Ching as the official
responsible for violating the Trust Receipts Law.
7. Petitioner then filed a petition for certiorari, prohibition and mandamus with the
CA, assailing the resolutions of the DOJ but it was dismissed. Thus, this petition.
ISSUES:
WoN the Ching should be held criminally liable – YES, cannot hide behind the cloak
of separate corporate personality of PBMI
RULING: IN LIGHT OF ALL THE FOREGOING, petition is DENIED for lack of
merit. Costs against the petitioner.
RATIO:
1. There is no dispute that Ching, as Senior VP, executed the 13 trust receipts and
this proves that he is the official responsible for the offense. Since a corporation
cannot be proceeded against criminally because it cannot commit crime in which
personal violence or malicious intent is required, criminal action is limited to
the corporate agents guilty of an act amounting to a crime and never against
the corporation itself. Thus, the execution by respondent of said receipts is
enough to indict him as the official responsible for violation of the Trust Receipts
Law.
2. The respondent bound himself under the terms of the trust receipts not only as a
corporate official of PBM but also as its surety. It is evident that these are two (2)
capacities which do not exclude the other. Logically, he can be proceeded against
in two (2) ways: first, as surety as determined by the Supreme Court; and,
secondly, as the corporate official responsible for the offense under the Trust
Receipts Law (PD 115), the present case is an appropriate remedy under our
penal law.
3. Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense,
without prejudice to the civil liabilities of such corporation and/or board of
directors, officers, or other officials or employees responsible for the offense. The
rationale is that such officers or employees are vested with the authority and
responsibility to devise means necessary to ensure compliance with the law and,
if they fail to do so, are held criminally accountable; thus, they have a responsible
share in the violations of the law.
4. The principle applies whether or not the crime requires the consciousness of
wrongdoing. It applies to those corporate agents who themselves commit the
crime and to those, who, by virtue of their managerial positions or other similar
relation to the corporation, could be deemed responsible for its commission, if by
virtue of their relationship to the corporation, they had the power to prevent the
act. Moreover, all parties active in promoting a crime, whether agents or not, are
principals. Whether such officers or employees are benefited by their delictual
acts is not a touchstone of their criminal liability. Benefit is not an operative fact.
5. In this case, petitioner signed the trust receipts in question. He cannot, thus, hide
behind the cloak of the separate corporate personality of PBMI. In the words
of Chief Justice Earl Warren, a corporate officer cannot protect himself behind a
corporation where he is the actual, present and efficient actor.
 005 GAMBOA v. TEVES (Sabaupan)
June 28, 2011 | Carpio, J. | Meaning of “capital” in the Constitutional provision
PETITIONER: Wilson P. Gamboa
RESPONDENTS: Finance Secretary, Margarito Teves, Finance Undersecretary
John P. Sevilla, and Commissioner Ricardo Abcede of the Presidential Commission
on Good Government (PCGG) in their capacities as chair members, respectively, of
the privatization council, Chairman Anthoni Salim of First Pacific Cp., Ltd. in his
apacity as Director of Metro Pacific Asset Holdings Inc., Chairman Manuel
Pangilinan of Philippine Long Distance Telephone Company (PLDT) in his
capacity as managing director of First Pacific Co., Ltd., President Napoleon L.
Nazareno of PLDT Company Chair Fe Barin of Securities Exchange Commission,
President Francis Lim of the Philippine Stock Exchange
SUMMARY: The subject of the dispute of this case is the foreign-Filipino
ownership of PLDT, a public utility. Below is a summary of the distribution of
shares (taken from Kat Gaw’s annotated outline):
PLDT Common shares Preferred shares
Filipino Foreigner Filipino Foreigner
Percentage 35.73% 64.27% 99.4% 0.56%
Par value P5 P5 P10 P10
Dividend
P70 P1
declaration
Preferred shares constitute 77.85% of the authorized capital stock of PLDT.
Moreover, the 99.4% preferred shares owned by Filipinos, have no voting rights.
The contention of the respondents is that the term capital in the Constitution that
regulates the ownership of public utilities refer to the total outstanding capital
stock. If this interpretation is adhered to, then clearly, there would be no violation
of the Constitution as seen on the summarized statistics. Petitioner on the other
hand contends that the capital should refer only to common shares for these are the
shares entitled to vote. The issue in this case is whether the term capital refers to
the total common shares only or to the total outstanding capital stock. In the 2011
Decision, the SC ruled that capital refers to shares of stock entitled to vote. The
reason is that capital pertains to control and control is exercised by the
stockholder’s right to vote in the election of directors for it is the board that
controls or manages the corporation. This interpretation ensures that it is the
Filipinos who have effective control over the corporation. The SC further ruled that
mere legal title is insufficient to meet the 60% Filipino capital requirement under
the Constitution. Full beneficial ownership of 60% of the outstanding capital
stock, coupled with 60% of the voting rights, is required.
In the MR, the SC reaffirmed its original decision and emphasized that the 60-40
ownership requirement in favor of Filipino citizens in the Constitution to
engage in certain activities applies not only to voting control of the
corporation, but also to the beneficial ownership of the corporation. Both the
Voting Control Test and the Beneficial Ownership Test must be applied to
determine whether a corporation is a “Philippine national.” The right to elect
directors, coupled with beneficial ownership translates to effective control. Full
beneficial ownership of the stocks, coupled with appropriate voting rights, is
essential. Furthermore, the Court ruled that even preferred shares must be 60%
owned by Filipinos. This is because preferred shares, denied the right to vote in the
election of directors, are anyway still entitled to vote on the eight specific corporate
matters mentioned in the Corporation Code. In short, the 60-40 requirement in
favor of Filipino citizens must apply separately to each class of shares, whether
common, preferred non-voting, preferred non-voting, preferred voting, or any
other class of shares.
DOCTRINE: The provision on Filipinization is an express recognition of the
sensitive and vital position of public utilities both in the national economy and for
national security. The purpose of the citizenship requirement is to prevent aliens
from assuming control of public utilities, which may be inimical to the national
interest.
The term capital in the Constitution applies to the capital stock of the corporation
entitled to vote (Voting Control Test). Moreover the 60-40 ownership requirement
also applies to each class of shares, common, preferred non-voting, preferred
voting, or any other class of shares (Beneficial Interest Test).
FACTS:
1. Act No. 3436 was enacted by the Legislature which granted PLDT a franchise
and the right to engage in telecommunications business.
2. General Telephone and Electronics Corporation (GTE), an American
company and a major PLDT stockholder, sold 26% of the outstanding
commons shares of PLDT to Philippine Telecommunications Investment
Corporation (PTIC). Subsequently, Prime Holdings Inc. (PHI) became the
owner of 111,415 shares of stock of PTIC by virtue of 3 Deeds of Assignment
executed by PTIC stockholders.
3. In 1986, the 111,415 shares of stock of PTIC held by PHI were sequestered
by the PCGG. These sequestered shares (46.125% of the outstanding capital
stock of PTIC), were later declared by the SC to be owned by the Republic
of the Philippines.
4. First Pacific, a Bermuda-registered, Hong Kong-based investment firm,
acquired the remaining 54% of the outstanding capital stock of PTIC.
5. In 2006, the Inter-Agency Privatization Council (IPC) of the Philippine
Government announced that it would sell the 111,415 shares (the 46.125%)
through a public bidding.
6. First Pacific then announced that it would exercise its right of first refusal as
a PTIC stockholder and buy the 111,415 shares by matching the bid price of
the winning bidder (Parallax). Then, First Pacific, through its subsidiary,
MPAH, entered into a Conditional Sale and Purchase Agreement of the said
shares. The sale was completed in 2007.
 7. Since PTIC is a stockholder of PDT, the sale by the Philippine Government
of 46.125% of PTIC shares is actually an indirect sale of 12 million shares or
about 6.3% of the outstanding common shares of PLDT.
8. With the sale, First Pacific’s common shareholdings in PLDT increased from
30.7 to 37%, thereby increasing the common shareholdings of foreigners in
PLDT to about 81.47% which is a violation of Section 11, Article 12 of the
Constitution which limits foreign ownership of the capital of a public utility
to not more than 40%.
9. Gamboa then filed the instant petition for the declaration of nullity of sale of
the 111,415 shares. He claims that the sale of said shares would result in an
increase in First Pacific’s common shareholdings in PLDT from 30.7 to 37%.
Combining this with the common shareholdings of Japanese NTT DoCoMo’s
in PLDT would result to a total foreign common shareholdings in PLDT of
51.56% which is over the 40% constitutional limit.
ISSUE/s:
3. Whether the term “capital” in Section 11, Article 12 of the Constitution refers
to the total common shares only or to the total outstanding capital stock
(combined total of common and non-voting preferred shares) of PLDT, a
public utility. Capital refers to the voting shares.
RULING: SC PARTLY GRANTED the petition and ruled that the term “capital” in
Section 11, Article 12 of the Constitution refers only to shares of stock entitled to
vote in the election of directors, and thus in the present case only to common shares,
and not to the total outstanding capital stock (common and non-voting preferred
shares). SC directed the Chairperson of SEC to apply this definition of “capital” in
determining the extent of allowable foreign ownership in PLDT, and if there is a
violation of Section 11, Article 12 of the Constitution, to impose the appropriate
sanctions under the law.
RATIO:
17. Section 11, Article 12 of the 1987 Constitution mandates the Filipinization
of public utilities:
Section 11. No franchise, certificate, or any other form of authorization
for the operation of a public utility shall be granted except to citizens of
the Philippines or to corporations or associations organized under the
laws of the Philippines, at least sixty per centum of whose capital is
owned by such citizens; nor shall such franchise, certificate, or authorization
be exclusive in character or for a longer period than fifty years. Neither shall
any such franchise or right be granted except under the condition that it shall
be subject to amendment, alteration, or repeal by the Congress when the
common good so requires. The State shall encourage equity participation in
public utilities by the general public. The participation of foreign investors in
the governing body of any public utility enterprise shall be limited to their
proportionate share in its capital, and all the executive and managing officers
of such corporation or association must be citizens of the Philippines.
18. The above-mentioned provision is an express recognition of the sensitive and
vital position of public utilities both in the national economy and for national
security. The evident purpose of the citizenship requirement is to prevent
aliens from assuming control of public utilities, which may be inimical to the
national interest.
19. This specific provision explicitly reserves to Filipino citizens control of
public utilities, pursuant to an overriding economic goal of the 1987
Constitution” to “conserve and develop our patrimony” and ensure a “self-
reliant and independent national economy effectively-controlled by Filipinos.
20. Any citizen or juridical entity desiring to operate a public utility must
therefore meet the minimum nationality requirement prescribed in Section
11, Article XII of the Constitution. Hence, for a corporation to be granted
authority to operate a public utility, at least 60 percent of its "capital" must
be owned by Filipino citizens. The term “capital” then needs to be defined.
21. Gamboa’s contention: 40% foreign equity limitation in domestic public
utilities refers only to commons shares because such shares are entitled to
vote and it is through voting that control over a corporation is exercised. He
posits that the term “capital” in Section 11, Article 12 of the Constitution
refers to “the ownership of common capital stock subscribed and outstanding,
which class of shares alone, under the corporate set-up of PLDT, can vote
and elect members of the board of directors.
22. Respondents, on the other hand, do not offer a definition of the term “capital”
but merely focused in the procedural infirmities of the petition. For
Pangilinan’s part, he asserts that Section 11, Article 12 of the Constitution
imposes no nationality requirement on the shareholders of the utility
company as a condition for keeping their shares in the utility company.
23. The Supreme Court ruled in favor of Gamboa. The Court ruled that the term
“capital” refers only to shares entitled to vote in the election of directors, and
this in the present case only common shares, and not to the total outstanding
capital stock comprising both common and non-voting preferred shares.
24. The Corporation Code of the Philippines classifies shares as common or
preferred. The said code provides that no share may be deprived of voting
rights except those classified and issued as “preferred” or “redeemable”
shares, unless otherwise provided in the Corporation Code. It also provides
that preferred shares of stock issued by any corporation may be given
preference in the distribution of the assets of the corporation in case of
liquidation and in the distribution of dividends, or such other preferences as
may be stated in the articles of incorporation which are not violative of the
provisions of this Code (See Section 6 of Corp Code for the entire section on
classification of shares).
25. One of the rights of a stockholder is the right to participate in the control or
management of the corporation which is exercised through his vote in the
election of directors because it is the board of directors that controls or
manages the corporation. By default, preferred shares have the same voting
rights as common shares. However, preferred shareholders are often excluded
from any control, that is, deprived of the right to vote in the election of
 directors and on other matters, on the theory that the preferred shareholders
are merely investors in the corporation for income.
26. Under the Corporation Code, only preferred or redeemable shares can be
deprived of the right to vote. Common shares cannot be deprived of the right
to vote in any corporate meeting, and any provision in the articles of
incorporation restricting the right of common shareholders to vote is invalid.
27. Considering that common shares have voting rights which translate to
control, as opposed to preferred shares which usually have no voting rights,
the term "capital" in Section 11, Article 12 of the Constitution refers only to
common shares. However, if the preferred shares also have the right to vote
in the election of directors, then the term "capital" shall include such preferred
shares because the right to participate in the control or management of the
corporation is exercised through the right to vote in the election of directors.
In short, the term "capital" in Section 11, Article XII of the Constitution refers
only to shares of stock that can vote in the election of directors.
28. This interpretation is consistent with the intent of the framers of the
Constitution to place in the Filipino citizens the control and management of
public utilities. As revealed in the deliberations of the Constitutional
Commission, “capital” refers to the voting stock or controlling interest of a
corporation.
29. This interpretation of “capital” is reinforced by the definition of “Philippine
national” in the Foreign Investments Act of 1991, to wit: The term
"Philippine national" shall mean a citizen of the Philippines; or a domestic
partnership or association wholly owned by citizens of the Philippines; or a
corporation organized under the laws of the Philippines of which at least sixty
percent (60%) of the capital stock outstanding and entitled to vote is owned
and held by citizens of the Philippines; x x x Compliance with the required
Filipino ownership of a corporation shall be determined on the basis of
outstanding capital stock whether fully paid or not, but only such stocks
which are generally entitled to vote are considered. For stocks to be
deemed owned and held by Philippine citizens or Philippine nationals,
mere legal title is not enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with appropriate voting
rights is essential. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.
30. To construe broadly the term “capital” as the total outstanding capital stock,
including both common and non-voting preferred shares, grossly contravenes
the intent and letter of the Constitution. A broad definition unjustifiably
disregards who owns the all-important voting stock, which necessarily
equates to control of the public utility.
31. For instance, a corporation has 100 common shares owned by foreigners and
1,000,000 non-voting preferred shares owned by Filipinos. Under the broad
definition of “capital”, such corporation would be considered compliant with
the 40% limit on foreign equity since the overwhelming majority, or more
than 99.999%, of the total outstanding capital stock is Filipino-owned. This
would be absurd because only the foreigners holding the common shares have
voting rights in the election of directors, even if they hold only 100 shares.
The foreigners’ equity of less than 0.001% exercise control over the public
utility. This interpretation would render illusory the State policy of an
independent national economy effectively controlled by Filipinos. This
situation exists in the present case.
32. Holders of PLDT preferred shares are explicitly denied of the right to vote in
the election of directors. PLDT's Articles of Incorporation expressly state that
"the holders of Serial Preferred Stock shall not be entitled to vote at any
meeting of the stockholders for the election of directors or for any other
purpose or otherwise participate in any action taken by the corporation or its
stockholders, or to receive notice of any meeting of stockholders."
33. On the other hand, holders of common shares are granted the exclusive right
to vote in the election of directors. PLDT's Articles of Incorporation state that
"each holder of Common Capital Stock shall have one vote in respect of each
share of such stock held by him on all matters voted upon by the stockholders,
and the holders of Common Capital Stock shall have the exclusive right to
vote for the election of directors and for all other purposes."
34. Hence, only holders of common shares can vote in the election of directors,
meaning, only common shareholders exercise control over PLDT.
Conversely, holders of preferred shares, who have no voting rights in the
election of directors, do not have any control over PLDT.
35. It must be stressed, and respondents do not dispute, that foreigners hold a
majority of the common shares of PLDT. Based on PLDT’s 2010 General
Information Sheet (GIS), foreigners hold 64.27% of the total number of
PLDT’s common shares, while Filipinos hold only 35.73%.
36. Since holding a majority of the common shares equates to control, it is clear
that foreigners exercise control over PLDT. Such amount of control
unmistakably exceeds the allowable 40 percent limit on foreign ownership of
public utilities expressly mandated in Section 11, Article 12 of the
Constitution.
37. Moreover, the Dividend Declaration of PLDT for 2009 shows that PLDT
declared dividends for the common shares at P70.00 per share, while the
declared dividends for the preferred shares amounted to a measly P1.00 per
share. So the preferred shares not only cannot vote in the election of directors,
they also have very little and obviously negligible dividend earning capacity
compared to common shares.
38. Worse, preferred shares constitute 77.85% of the authorized capital stock of
PLDT while common shares constitute only 22.15%. These numbers show
that beneficial interest in PLDT is not with the non-voting preferred shares
but with the common shares, which is a blatant violation of the constitutional
requirement of 60% Filipino control and Filipino beneficial ownership in a
public utility.
39. The legal and beneficial ownership of 60% of the outstanding capital
stock must rest in the hands of Filipinos in accordance with the
constitutional mandate. Full beneficial ownership of 60% of the
 outstanding capital stock, coupled with 60% of the voting rights, is
constitutionally required for the State's grant of authority to operate a
public utility.
40. In conclusion, Filipinos hold less than 60% of the voting stock, and earn less
than 60% of dividends, of PLDT. This is a violation of the Constitutional
provision.
41. In summary:
1. Foreigners own 64.27% of the common shares of PLDT (shares
having control over PLDT).
2. Filipinos own 35.73% of PLDT’s common shares (minority of
voting stock – do not exercise control over PLDT).
3. Preferred shares (99.44%) owned by Filipinos, have no voting
rights.
4. Preferred shares earn only 1/70 of the dividends that the
common shares earn.
5. Preferred shares have twice the value of common shares
6. Preferred shares constitute 77.85% of the authorized capital
stock of PLDT and common shares of only 22.15%.
42. Under Section 17(4) of the Corporation Code, the SEC has the regulatory
function to reject or disapprove the Articles of Incorporation of any
corporation where "the required percentage of ownership of the capital stock
to be owned by citizens of the Philippines has not been complied with as
required by existing laws or the Constitution." Thus, the SEC is the
government agency tasked with the duty to enforce the nationality
requirement prescribed in Section11, Article 12 on the ownership of public
utilities.
43. Under Section 5(m) of the Securities Regulation Code, the SEC is vested with
the "power and function" 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."
44. The Court compelled SEC to hear and decide a possible violation of the
Constitution in view of the ownership structure of PLDT’s voting shares
pursuant to SEC’s power to regulate and adjudicate.
Motion for Reconsideration (2012)
1. MR was denied with finality.
2. In its Resolution, the Court noted the SEC en banc rulings conforms to the
2011 Decision that the 60-40 ownership requirement in favor of Filipino
citizens in the Constitution to engage in certain activities applies not only to
voting control of the corporation, but also to the beneficial ownership of the
corporation. Both the Voting Control Test and the Beneficial Ownership Test
must be applied to determine whether a corporation is a “Philippine national.”
3. The 1987 Constitution reserves the ownership and operation of public utilities
exclusively to (1) Filipino citizens, or (2) corporations or associations at least
60% of whose “capital” is owned by Filipino citizens. Hence, in the case of
individuals, only Filipino citizens can validly own and operate a public
utility. In the case of corporations or associations, at least 60% of their
“capital” must be owned by Filipino citizens. In other words, under
Section 11, Article 12 of the 1987 Constitution, to own and operate a
public utility a corporation’s capital must at least be 60% owned by
Philippine nationals.
4. The SC reiterated and emphasized that the right to elect directors, coupled
with beneficial ownership translates to effective control. Full beneficial
ownership of the stocks, coupled with appropriate voting rights, is essential.
5. Since the constitutional requirement of at least 60% Filipino ownership
applies not only to voting control of the corporation but also to the beneficial
ownership of the corporation, it is therefore imperative that such requirement
apply uniformly and across the board to all classes of shares, regardless of
nomenclature and category, comprising the capital of a corporation.
6. Under the Corporation Code, preferred shares may be denied the right to vote.
Nonetheless, preferred shares, even if denied the right to vote in the election
of directors, are entitled to vote on the corporate matters:
1. Amendment to articles of incorporation
2. Increase and decrease of capital stock
3. Incurring, creating, or increasing bonded indebtedness
4. Sale, lease, mortgage, or other disposition of substantially
all corporate assets
5. Investment of funds in another business or corporation or
for a purpose other than the primary purpose for which the
corporation was organized
6. Adoption, amendment and repeal of by-laws
7. Merger and consolidation
8. Dissolution of a corporation
7. Since a specific class of shares may have rights and privileges or restrictions
different from the rest of the shares in a corporation, the 60-40 ownership
requirement in favor of Filipino citizens in Section 11, Article 12 of the
Constitution must apply not only to shares with voting rights but also to
shares without voting rights. Preferred shares, denied the right to vote in the
election of directors, are anyway still entitled to vote on the eight specific
corporate matters mentioned above.
8. Thus, if a corporation, engaged in a partially nationalized industry, issues a
mixture of common and preferred non-voting shares, at least 60% of the
common shares and at least 60% of the preferred non-voting shares must be
owned by Filipinos.
9. In short, the 60-40 requirement in favor of Filipino citizens must apply
separately to each class of shares, whether common, preferred non-
voting, preferred non-voting, preferred voting, or any other class of
shares. Applying uniformly the 60-40 ownership requirement in favor of
Filipino citizens to each class of shares, regardless of differences of voting
rights, privileges, and restrictions, guarantees effective Filipino control of
public utilities, as mandated by the Constitution.
10. The Court also said that even if foreigners who own more than 40% of the
voting shares elect an all-Filipino board of directors, this situation does not
guarantee Filipino control and does not in any way cure thee violation of the
Constitution. The independence of the Filipino board members so elected by
such foreign shareholders is highly doubtful.
11. Allowing foreign shareholders to elect a controlling majority of the board,
even if all the directors are Filipinos, grossly circumvents the letter and intent
of the Constitution and defeats the very purpose of our nationalization laws.
 006 ROY III v HERBOSA (Clark)
November 22, 2016 | Caguioa, J. | SEC-MC No. 8
PETITIONER: Jose M. Roy III
RESPONDENTS: Chairperson Teresita Herbosa, SEC, and PLDT
SUMMARY: On June 28, 2011, the Court issued the Gamboa Decision ruling the term
“capital” in Section 11, Article XII of the 1987 Constitution refers only to shares of stock
entitled to vote in the election of directors, and thus in the present case only to common
shares, and not to the total outstanding capital stock (common and non-voting preferred
shares). The SEC posted a Notice in its website inviting the public to attend a public
dialogue and to submit comments on the draft memorandum circular (attached thereto) on
the guidelines to be followed. petitioner Atty. Jose M. Roy III ("Roy") submitted his written
comments on the draft guidelines. The SEC, through respondent Chairperson Teresita J.
Herbosa, issued SEC-MC No. 8 which required percentage of Filipino ownership shall be
applied to BOTH (a) the total number of outstanding shares of stock entitled to vote in the
election of directors; AND (b) the total number of outstanding shares of stock, whether or
not entitled to vote in the election of directors. Roy, as well as the intervenors, filed a
petition assailing the validity of SEC-MC No. 8 for not conforming with the Gamboa
Decision and Resolution. He seeks to apply the 60-40 requirement separately to each class
of shares of a public utility corporation. Issue is WoN SEC gravely abused its discretion in
issuing SEC-MC No. 8 in light of the Gamboa decision and Gamboa Resolution? SC held
that it did not. A domestic corporation is a "Philippine national" only if at least 60% of
its voting stock is owned by Filipino citizens. From the deliberations of the Constitutional
Commission, it is evident that the term "capital" refers to controlling interest of a
corporation, and the framers of the Constitution intended public utilities to
be majority Filipino-owned and controlled. In this regard, since Filipinos own at least 60%
of the outstanding shares of stock entitled to vote directors, which is what the Constitution
precisely requires, then the Filipino stockholders control the corporation. Mere legal title
is insufficient to meet the 60 percent Filipino-owned "capital" required in the Constitution.
Full beneficial ownership of 60 percent of the outstanding capital stock, coupled with 60
percent of the voting rights, is required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of Filipino nationals in accordance
with the constitutional mandate. Section 2 of SEC-MC No. 8 goes beyond requiring a
60-40 ratio in favor of Filipino nationals in the voting stocks; it moreover requires the
60-40 percentage ownership in the total number of outstanding shares of stock,
whether voting or not. The term "capital" in Section 11, Article XII of the
Constitution refers only to shares of stock that can vote in the election of directors,
regardless of whether or not it is a common or preferred share. Therefore, to now insist
in the present case that preferred shares be regarded differently from their unambiguous
treatment in the Gamboa Decision is enough proof that the Gamboa Decision, which had
attained finality more than 4 years ago, is being drastically changed or expanded.
DOCTRINE: As a result of the Gamboa rulings, SEC Memorandum Circular No. 8, s.
2013, was issued and provides that: All covered corporations shall, at all times, observe
the constitutional or statutory ownership requirement in that “the required percentage of
Filipino ownership shall be applied to BOTH (a) the total number of outstanding shares of
stock entitled to vote in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote in the election of directors.”
FACTS:
1. On June 28, 2011, the Court issued the Gamboa Decision ruling:
a. The term “capital” in Section 11, Article XII of the 1987 Constitution refers
only to shares of stock entitled to vote in the election of directors, and thus
in the present case only to common shares, and not to the total outstanding
capital stock (common and non-voting preferred shares).
b. Chairperson of the SEC is directed to apply this definition of the term
“capital” in determining the extent of allowable foreign ownership in
PLDT.
2. Several MR were filed assailing the Gamboa Decision. They were denied in
the Gamboa Resolution issued by the Court on October 9, 2012.
The Gamboa Decision attained finality on October 18, 2012.
3. The SEC posted a Notice in its website inviting the public to attend a public dialogue
and to submit comments on the draft memorandum circular (attached thereto) on the
guidelines to be followed in determining compliance with the Filipino ownership
requirement in public utilities under Section 11, Article XII of the Constitution
pursuant to the Court's directive in the Gamboa Decision.
4. On January 8, 2013, the SEC received a copy of the Entry of Judgment from the Court
certifying that on October 18, 2012, the Gamboa Decision had become final and
executory.
5. SEC posted another Notice in its website soliciting from the public comments and
suggestions on the draft guidelines.
6. On April 22, 2013, petitioner Atty. Jose M. Roy III ("Roy") submitted his written
comments on the draft guidelines.
7. The SEC, through respondent Chairperson Teresita J. Herbosa, issued SEC-MC No.
8 entitled “Guidelines on Compliance with the Filipino-Foreign Ownership
Requirements Prescribed in the Constitution and/or Existing Laws by Corporations
Engaged in Nationalized and Partly Nationalized Activities.” Sec 2 states that:
a. “… For purposes of determining compliance therewith, the required
percentage of Filipino ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to vote in the election of
directors; AND (b) the total number of outstanding shares of stock, whether
or not entitled to vote in the election of directors.”
8. Roy, as a lawyer and taxpayer, filed the Petition, assailing the validity of SEC-MC
No. 8 for not conforming to the letter and spirit of the Gamboa Decision and
Resolution and for having been issued by the SEC with grave abuse of discretion.
a. Roy seeks to apply the 60-40 Filipino ownership requirement separately to
each class of shares of a public utility corporation, whether common,
preferred nonvoting, preferred voting or any other class of shares.
b. He also questions the ruling of the SEC that PLDT is compliant with the
constitutional rule on foreign ownership (dismissed by the SC).
9. The Petition-in-Intervention filed by intervenors Gamboa, et al. mirrored the issues,
arguments and prayer of petitioner Roy.
10. Respondent PLDT filed its Comment, positing that the Petition should be dismissed
because it violates the doctrine of hierarchy of courts as there are no compelling
reasons to invoke the Court's original jurisdiction among others. Respondents
Chairperson Herbosa and SEC also filed their Comment seeking the dismissal of the
petitions for lack of locus standi among others.
11. The Philippine Stock Exchange also filed its Motion to Intervene alleging that in the
Gamboa ruling, "capital" refers only to shares entitled to vote in the election of
directors and excludes those not so entitled; and the dispositive portion of the decision
is the controlling factor that determines and settles the questions presented in the case.

ISSUE:
1. WoN SEC gravely abused its discretion in issuing SEC-MC No. 8 in light of the
Gamboa decision and Gamboa Resolution – NO
RULING: WHEREFORE, premises considered, the Court DENIES the Petition and Petition-
in-Intervention.
RATIO:
Substantive Issue
1. The Court holds that, even if the resolution of the procedural issues were conceded in
favor of petitioners, the petitions, being anchored on Rule 65, must nonetheless fail
because the SEC did not commit grave abuse of discretion amounting to lack or
excess of jurisdiction when it issued SEC-MC No. 8.
2. The Gamboa Resolution stated:
a. The dispositive portion of the Court's ruling is addressed not to PLDT
but solely to the SEC, which is the administrative agency tasked to
enforce the 60-40 ownership requirement in favor of Filipino citizens in
Section 11, Article XII of the Constitution.
3. The sole issue in the Gamboa case was "whether the term 'capital' in Section 11,
Article XII of the Constitution refers to the total common shares only or to the total
outstanding capital stock (combined total of common and non-voting preferred
shares) of PLDT, a public utility."
4. The Court consistently defined the term “capital” as follows:
a. The term "capital" in Section 11, Article XII of the Constitution refers only
to shares of stock entitled to vote in the election of directors, and thus in the
present case only to common shares, and not to the total outstanding capital
stock comprising both common and non-voting preferred shares. The term
"capital" in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors.
5. The Court adopted the foregoing definition of the term "capital" in Section 11, Article
XII of the 1987 Constitution in furtherance of "the intent and letter of the Constitution
that the 'State shall develop a self-reliant and independent national
economy effectively controlled by Filipinos.
6. The Court, recognizing that the provision is an express recognition of the sensitive
and vital position of public utilities both in the national economy and for national
security, also pronounced that the evident purpose of the citizenship requirement is to
prevent aliens from assuming control of public utilities, which may be inimical to the
national interest.
7. As revealed in the deliberations of the Constitutional Commission, "capital" refers to
the voting stock or controlling interest of a corporation. In this regard, since Filipinos
own at least 60% of the outstanding shares of stock entitled to vote directors, which
is what the Constitution precisely requires, then the Filipino stockholders control the
corporation, i.e., they dictate corporate actions and decisions, and they have all the
rights of ownership including, but not limited to, offering certain preferred shares that
may have greater economic interest to foreign investors.
8. As owners of the corporation, the economic benefits will necessarily accrue to them.
There is thus no logical reason why Filipino shareholders will allow foreigners to have
greater economic benefits than them. It is illogical to speculate that they will create
shares which have features that will give greater economic interests or benefits than
they are holding and not benefit from such offering, or that they will allow foreigners
to profit more than them from their own corporation – unless they are dummies. But,
Commonwealth Act No. 108, the Anti-Dummy Law, is NOT in issue in these
petitions.
9. The Court observed further in the Gamboa Decision that reinforcing this interpretation
of the term "capital", as referring to interests or shares entitled to vote, is the definition
of a Philippine national in the Foreign Investments Act of 1991 ("FIA"), which is
explained in the Implementing Rules and Regulations:
a. For stocks to be deemed owned and held by Philippine citizens or Philippine
nationals, mere legal title is not enough to meet the required Filipino equity.
Full beneficial ownership of the stocks, coupled with appropriate voting
rights is essential. Thus, stocks, the voting rights of which have been
assigned or transferred to aliens cannot be considered held by Philippine
citizens or Philippine nationals.
10. This was reinforced in the Gamboa decision:
a. Mere legal title is insufficient to meet the 60 percent Filipino-owned
"capital" required in the Constitution. Full beneficial ownership of 60
percent of the outstanding capital stock, coupled with 60 percent of the
voting rights, is required. The legal and beneficial ownership of 60 percent
of the outstanding capital stock must rest in the hands of Filipino nationals
in accordance with the constitutional mandate. Otherwise, the corporation
is "considered as non-Philippine nationals."
11. For the most part of the Gamboa Resolution, the Court, reiterated that both the Voting
Control Test and the Beneficial Ownership Test must be applied to determine whether
a corporation is a "Philippine national" and that a "Philippine national," as defined in
the FIA and all its predecessor statutes, is "a Filipino citizen, or a domestic
corporation "at least sixty percent (60%) of the capital stock outstanding and
entitled to vote," is owned by Filipino citizens. A domestic corporation is a
"Philippine national" only if at least 60% of its voting stock is owned by Filipino
citizens. From the deliberations of the Constitutional Commission, it is evident that
the term "capital" refers to controlling interest of a corporation, and the framers of
the Constitution intended public utilities to be majority Filipino-owned and
controlled.
12. The "Final Word" of the Gamboa Resolution put to rest the Court's interpretation of
the term "capital":
a. Full beneficial ownership of stocks, coupled with appropriate voting
rights is essential. In effect, the FIA clarifies, reiterates and confirms the
interpretation that the term "capital" in Section 11, Article XII of the 1987
Constitution refers to shares with voting rights, as well as with full
beneficial ownership. This is precisely because the right to vote in the
election of directors, coupled with full beneficial ownership of stocks,
translates to effective control of a corporation.
13. SEC-MC No. 8 cannot be said to have been issued with grave abuse of discretion.
Section 2 of SEC-MC No. 8 clearly incorporates the Voting Control Test or the
controlling interest requirement. In fact, Section 2 goes beyond requiring a 60-40
ratio in favor of Filipino nationals in the voting stocks; it moreover requires the
60-40 percentage ownership in the total number of outstanding shares of stock,
whether voting or not.
14. A simple illustration involving Company X with three kinds of shares of stock, easily
shows how compliance with the requirements of SEC-MC No. 8 will necessarily
result to full and faithful compliance with the Gamboa Decision as well as
the Gamboa Resolution. The following is the composition of the outstanding capital
 stock of Company X:
a. 100 common shares
b. 100 Class A preferred shares (with right to elect directors)
c. 100 Class B preferred shares (without right to elect directors)
SEC-MC No. 8 Gamboa Decision
60% (required percentage of Filipino) "shares of stock entitled to vote in the
applied to the total number of election of directors"(60% of the
outstanding shares of stock entitled to voting rights)
vote in the election of directors
60% (required percentage of Filipino) "Full beneficial ownership of 60
applied to BOTH (a) the total number percent of the outstanding capital
of outstanding shares of stock, entitled stock, coupled with 60 percent of the
to vote in the election of directors; voting rights" or "Full beneficial
AND (b) the total number of ownership of the stocks, coupled with
outstanding shares of stock, whether appropriate voting rights shares with
or not entitled to vote in the election of voting rights, as well as with full
directors. beneficial ownership"
15. If at least a total of 120 of common shares and Class A preferred shares (in any
combination) are owned and controlled by Filipinos, Company X is compliant with
the 60% of the voting rights in favor of Filipinos requirement of both SEC-MC No. 8
and the Gamboa Decision.
16. If at least a total of 180 shares of all the outstanding capital stock of Company X are
owned and controlled by Filipinos, provided that among those 180 shares a total of
120 of the common shares and Class A preferred shares (in any combination) are
owned and controlled by Filipinos, then Company X is compliant with both
requirements of voting rights and beneficial ownership under SEC-MC No. 8 and
the Gamboa Decision and Resolution.
17. While SEC-MC No. 8 does not expressly mention the Beneficial Ownership Test or
full beneficial ownership of stocks requirement in the FIA, this will not, render it
invalid. It does not follow that the SEC will not apply this test in determining whether
the shares claimed to be owned by Philippine nationals are Filipino.
18. The minority justifies the application of the 60-40 Filipino-foreign ownership rule
separately to each class of shares of a public utility corporation by saying that the
words “own and control” reflects the importance of Filipinos having both control and
economic rights meaning they must own 60% of the controlling interest as well as
60% of the economic interest in a public utility.
19. As defined in the SRC-IRR, "beneficial owner or beneficial ownership means any
person who, directly or indirectly has or shares voting power (which includes the
power to vote or direct the voting of such security) and/or investment returns or power
(which includes the power to dispose of, or direct the disposition of such security).
20. Given that beneficial ownership of the outstanding capital stock of the public utility
corporation has to be determined for purposes of compliance with the 60% Filipino
ownership requirement, the definition in the SRC-IRR can now be applied to
resolve only the question of who the beneficial owner is or who has beneficial
ownership of each "specific stock" of the said corporation. Thus, if a "specific stock"
is owned by a Filipino in the books of the corporation, but the stock's voting power or
disposing power belongs to a foreigner, then that "specific stock" will not be deemed
as "beneficially owned" by a Filipino.
21. If the Filipino has the "specific stock's" voting power (he can vote the stock or direct
another to vote for him), OR the Filipino has the investment power over the "specific
stock" (he can dispose of the stock or direct another to dispose it for him), OR he has
both (he can vote and dispose of the "specific stock" or direct another to vote or
dispose it for him), then such Filipino is the "beneficial owner" of that "specific stock"
and that "specific stock" is considered (or counted) as part of the 60% Filipino
ownership of the corporation. In the end, all those "specific stocks" that are
determined to be Filipino (per definition of "beneficial owner" or "beneficial
ownership") will be added together and their sum must be equivalent to at least 60%
of the total outstanding shares of stock entitled to vote in the election of directors
and at least 60% of the total number of outstanding shares of stock, whether or not
entitled to vote in the election of directors.
22. Petitioners' insistence that the 60% Filipino equity requirement must be applied to
each class of shares is simply beyond the literal text and contemplation of Section 11,
Article XII of the 1987 Constitution. As worded, effective control by Filipino citizens
of a public utility is already assured in the provision. With respect to a stock
corporation engaged in the business of a public utility, the constitutional provision
mandates three safeguards: (1) 60% of its capital must be owned by Filipino citizens;
(2) participation of foreign investors in its board of directors is limited to their
proportionate share in its capital; and (3) all its executive and managing officers must
be citizens of the Philippines.
23. Section 6 of the Corporation Code of the Philippines classifies shares as common or
preferred:
a. “… that no share may be deprived of voting rights except those classified
and issued as “preferred” or “redeemable” shares, unless otherwise
provided in this Code
24. One of the rights of a stockholder is the right to participate in the control or
management of the corporation. This is exercised through his vote in the election of
directors because it is the board of directors that controls or manages the corporation.
In the absence of provisions in the articles of incorporation denying voting rights to
preferred shares, preferred shares have the same voting rights as common
shares. However, preferred shareholders are often excluded from any control, that is,
deprived of the right to vote in the election of directors and on other matters, on the
theory that the preferred shareholders are merely investors in the corporation for
income in the same manner as bondholders. Under the Corporation Code only
preferred or redeemable shares can be deprived of the right to vote. Common shares
cannot be deprived of the right to vote in any corporate meeting, and any provision in
the articles of incorporation restricting the right of common shareholders to vote is
invalid.
25. Considering that common shares have voting rights which translate to control, as
opposed to preferred shares which usually have no voting rights, the term "capital" in
Section 11, Article XII of the Constitution refers only to common shares. However, if
the preferred shares also have the right to vote in the election of directors, then the
term "capital" shall include such preferred shares because the right to participate in
the control or management of the corporation is exercised through the right to vote in
the election of directors. In short, the term "capital" in Section 11, Article XII of
the Constitution refers only to shares of stock that can vote in the election of
directors, regardless of whether or not it is a common or preferred share.
26. Therefore, to now insist in the present case that preferred shares be regarded
differently from their unambiguous treatment in the Gamboa Decision is enough
proof that the Gamboa Decision, which had attained finality more than 4 years
ago, is being drastically changed or expanded.
27. Since the Filipino directors comprise the majority, they, if united, do not even need
 the vote of the foreign directors to approve the intended corporate act. After approval
by the board, all the shareholders (with and without voting rights) will vote on the
corporate action. The required vote in the shareholders' meeting is 2/3 of the
outstanding capital stock. Given the super majority vote requirement, foreign
shareholders cannot dictate upon their Filipino counterpart. However, foreigners (if
owning at least a third of the outstanding capital stock) must agree with Filipino
shareholders for the corporate action to be approved. In short, if the Filipino officers,
directors and shareholders will not approve of the corporate act, the foreigners are
helpless.
28. Allowing stockholders holding preferred shares without voting rights to vote in the 8
corporate matters enumerated in Section 6 is an acknowledgment of their right of
ownership. In simple terms, the right to vote in the 8 instances enumerated in Section
6 is more in furtherance of the stockholder's right of ownership rather than as a mode
of control.
29. The pronouncement of the Court in the Gamboa Resolution – the constitutional
requirement to apply uniformly and across the board to all classes of shares, regardless
of nomenclature and category, comprising the capital of a corporation – is clearly
an obiter dictum that cannot override the Court's unequivocal definition of the term
"capital" in both the Gamboa Decision and Resolution. Nowhere in the discussion of
the definition of the term "capital" in Section 11, Article XII of the 1987 Constitution
in the Gamboa Decision did the Court mention the 60% Filipino equity requirement
to be applied to each class of shares.
30. While there is a passage in the body of the Gamboa Resolution that might have
appeared contrary to the fallo of the Gamboa Decision - capitalized upon by
petitioners to espouse a restrictive re-interpretation of "capital" - the definiteness and
clarity of the fallo of the Gamboa Decision must control over the obiter dictum in
the Gamboa Resolution regarding the application of the 60-40 Filipino-foreign
ownership requirement to "each class of shares, regardless of differences in voting
rights, privileges and restrictions."
Procedural Issues (you may skip this)
1. The first two requisites of judicial review are not met. There is no actual controversy
and the petitioners have no locus standi.
2. There is no actual controversy because petitioners' hypothetical illustration as to how
SEC-MC No. 8 "practically encourages circumvention of the 60-40 ownership rule"
is evidently speculative and fraught with conjectures and assumptions.
3. To establish his standing, petitioner Roy merely claimed that he has standing to
question SEC-MC No. 8 "as a concerned citizen, an officer of the Court and as a
taxpayer" as well as "the senior law partner of his own law firm, a subscriber of
PLDT." On the other hand, intervenors Gamboa, et al.allege, as basis of their locus
standi, their "being lawyers and officers of the Court" and "citizens and taxpayers."
a. The Court has previously emphasized that the locus standi requisite is not
met by the expedient invocation of one's citizenship or membership in the
bar.
b. Petitioners' status as taxpayers is also of no moment. SEC-MC No. 8 does
not involve an additional expenditure of public funds and the taxing or
spending power of Congress.
c. The allegation that petitioner Roy's law firm is a "subscriber of PLDT" is
ambiguous. It is unclear whether his law firm is a "subscriber" of PLDT's
shares of stock or of its various telecommunication services.
4. The Rule on the Hierarch of Courts has been violated. Petitioners' invocation of
"transcendental importance" is hollow and does not merit the relaxation of the rule on
hierarchy of courts. There being no special, important or compelling reason that
justified the direct filing of the petitions in the Court in violation of the policy on
hierarchy of courts, their outright dismissal on this ground is further warranted.
5. The petitioners failed to implead indispensable parties. Like the Philippine Stock
Exchange, Inc., petitioners should have impleaded not only PLDT but all other
corporations in nationalized and partly nationalized industries because the propriety
of the SEC's enforcement of the Court's interpretation of "capital" through SEC-MC
No. 8 affects them as well. Other than PLDT, the petitions failed to join or implead
other public utility corporations subject to the same restriction imposed by Section 11,
Article XII of the Constitution. These corporations are in danger of losing their
franchise and property if they are found not compliant with the restrictive
interpretation of the constitutional provision under review which is being espoused by
petitioners.
Sereno’s Concurring Opinion:
1. The circular limits the application of the ownership requirement only to the number
of stocks in the corporation. Compliance on the basis of the number of shares alone
does not result in keeping the required degree of beneficial ownership in favor of
Filipinos. The different combinations of shares with respect to the number, par value,
and dividend earnings must also be taken into account.
Velasco’s Concurring Opinion:
1. Common and preferred are the usual forms of stock. However, it is also possible for
companies to customize and issue different classes of stock in any way they want. A
company can likewise issue "hybrid stocks" or preferred shares that can be converted
to a fixed number of common stocks at a specified time. These stocks may or may not
be given voting rights.
2. Ownership of voting shares or power alone without economic control of the
company does not necessarily equate to corporate control. A shareholder's
agreement can effectively clip the voting power of a shareholder holding voting
shares. In the same way, a voting right ceiling, which is a restriction prohibiting
shareholders to vote above a certain threshold irrespective of the number of voting
shares they hold can limit the control that may be exerted by a person who owns voting
stocks but who does not have a substantial economic interest over the company.
3. If We follow the construction of "capital" in Sec. 11, Art. XII stated in the ponencia
of June 28, 2011, this Court may have veritably put a limit on the foreign
ownership of common shares but have indirectly allowed foreigners to acquire
greater economic right to the cash flow of public utility corporations.
Bersamin’s Concurring Opinion:
1. The objective of the Court in defining the term capital as used in Section 11, Article
XII of the Constitution was to ensure that both controlling interest and beneficial
ownership were vested in Filipinos. The decision of June 28, 2011 pronounced
that capital refers only to shares of stock that can vote in the election of directors
(controlling interest) and owned by Filipinos (beneficial ownership). Put differently,
60 percent of the outstanding capital stock (whether or not entitled to vote in the
election of directors), coupled with 60 percent of the voting rights, must rest in the
hands of Filipinos.
2. What Roy and the intervenors actually would have the Court do herein is to re-
define capital so that the 60-40 ownership requirement would apply separately to each
class of shares, as discussed in the body of the resolution promulgated on October 9,
2012. Such a re-definition, because it would contravene the June 28, 2011 decision or
 the resolution of October 9, 2012, would actually reopen and relitigate Gamboa v. juncture that the Grandfather Rule finds application. The Grandfather Rule may be
Teves. used as a supplement to the Control Test, that is, as a further check to ensure that
control and beneficial ownership of a corporation is in fact lodged in Filipinos.
Carpio’s Dissenting Opinion:
1. The 60 percent constitutional requirement of Filipino ownership applies uniformly
and across the board to all classes of shares comprising the capital of a corporation,
and not to the total outstanding capital stock as a single class of share.
2. The term “capital” does not refer to a specific share but to all shares of stock that are
subscribed, which constitute the “capital” of a corporation.
3. SEC Memorandum Circular No. 8 can be sustained as valid and fully compliant with
the Gamboa Decision and Resolution only if (1) the stocks with voting right and (2)
the stocks without voting rights, which comprise the capital of a corporation operating
a public utility have equal par values. (same view as Sereno)

Mendoza’s Dissenting Opinion:

1. I find that the petitioners as properly suited m their capacities as citizens. The
collective interest of the Filipino in the compliance of the SEC, being the statutory
regulator in charge of enforcing and monitoring observance with the Court's
interpretation of the constitutional limits on foreign participation in public utilities, is
a matter of public right.
2. My position is that SEC MC No. 8 is non-compliant with the final Gamboa ruling and
must be amended to conform thereto.
3. If Filipino controlling stockholders do not have commensurate level of interest in the
economic gains of a public utility, the disparity would allow foreigners to intervene
in the management, operation, administration or control of the corporation through
means that circumvent the limitations imposed by the Constitution. It would foster the
creation of falsely simulated existence of the required Filipino equity participation, an
act prohibited under Section 2 of Commonwealth Act No. 108, commonly known as
the Anti-Dummy Law, effectively circumventing the rationale behind the
constitutional limitations on foreign equity participation.
4. The variation in the classes of shares would allow foreigners to acquire preferential
interest and advantage in the remaining assets of the corporation after its dissolution
or termination. The only way to minimize, if not totally prevent disparity of control
and economic rights given to Filipinos, and to obstruct consequences not envisioned
by the Constitution, is to apply the 60-40 rule separately to each class of shares of
a public utility corporation.
5. Clear from the Court's previous discussions is the conclusion that controlling interest
in a public utility cannot be achieved by applying the 60-40 rule solely to shares with
the right to vote in the election of directors; it must be applied to all classes of shares
despite its fallo saying otherwise.

Leonen’s Dissenting Opinion:

1. In the most crucial corporate actions - those that go into the very constitution of the
corporation - even so-called non-voting shares may vote. Not only can they vote; they
can be pivotal in deciding the most basic issues confronting a corporation. Certainly,
the ability to decide a corporation's framework demonstrates not only a measure of
control, but even possibly overruling control. "Nonvoting" preferred and redeemable
shares are hardly irrelevant in controlling a corporation.
2. Full beneficial ownership is addressed both with respect to voting power and
investment returns or power. Nevertheless, ostensible equity ownership does not
preclude unscrupulous parties' resort to devices that undermine the constitutional
objective of full beneficial ownership of and effective control by Filipinos. It is at this
 007 ROY III vs. Teresita Herbosa “Resolution” (Rayos)
April 18, 2017 | Caguioa, J.| Corporate Nationality
PETITIONER: JOSE M. ROY III
RESPONDENTS: CHAIRPERSON TERESITA HERBOSA, THE
SECURITIES AND EXCHANGE COMMISSION, and PHILIPPINE LONG
DISTANCE TELEPHONE COMPANY
Summary: same with case 006 ROY III v. Teresita Herbosa
DOCTRINE: Definition of “beneficial owner or beneficial ownership” in the SRC-
IRR, which is in consonance with the concept of “full beneficial ownership” in the
FIA-IRR, is, as stressed in the Decision, relevant in resolving only the question of
who is the beneficial owner or has beneficial ownership of each “specific stock” of
the public utility company whose stocks are under review. If the Filipino has
the voting power of the “specific stock”, i.e., he can vote the stock or direct another
to vote for him, or the Filipino has the investment power over the “specific
stock”, i.e., he can dispose of the stock or direct another to dispose of it for him, or
both, i.e., he can vote and dispose of that “specific stock” or direct another to vote or
dispose it for him, then such Filipino is the “beneficial owner” of that “specific
stock.” Being considered Filipino, that “specific stock” is then to be counted as part
of the 60% Filipino ownership requirement under the Constitution. The right to the
dividends, jus fruendi - a right emanating from ownership of that “specific stock”
necessarily accrues to its Filipino “beneficial owner.”
FACTS:
1. Before the Court is the Motion for Reconsideration dated January 19, 2017
(the Motion) filed by petitioner Jose M. Roy III (movant) seeking the reversal
and setting aside of the Decision which denied the movant’s petition, and
declared that the Securities and Exchange Commission (SEC) did not commit
grave abuse of discretion in issuing Memorandum Circular No. 8, Series of
2013 (SEC-MC No. 8). The Motion presents no compelling and new
arguments to justify the reconsideration of the Decision.
2. Grounds raised by movant are:
a. He has the requisite standing because this case is one of
transcendental importance;
b. The Court has the constitutional duty to exercise judicial review
over any grave abuse of discretion by any instrumentality of
government;
c. He did not rely on an obiter dictum; and
d. The Court should have treated the petition as the appropriate device
to explain the Gamboa Decision.
3. The Decision has already exhaustively discussed and directly passed upon
these grounds. Movant’s petition was dismissed based on both procedural
and substantive grounds. This resolution is merely an reiteration of the
decision in ROY III v. Teresita Herbosa.
Gamboa decision:
Petitioner Gamboa questioned the indirect sale of shares involving almost 12 million
shares of the PLDT owned by PTIC to First Pacific. Thus, First Pacific’s common
shareholdings in PLDT increased from 30.7 percent to 37 percent, thereby increasing
the total common shareholdings of foreigners in PLDT to about 81.47%. The
petitioner contends that it violates the Constitutional provision on filipinazation of
public utility, stated in Section 11, Article XII of the 1987 Philippine Constitution,
which limits foreign ownership of the capital of a public utility to not more than
40%. Then, in 2011, the court ruled the case in favor of the petitioner, hence this new
case, resolving the motion for reconsideration for the 2011 decision filed by the
respondents. Issue: Whether or not the Court made an erroneous interpretation
of the term ‘capital’ in its 2011 decision? The Court said that the Constitution is
clear in expressing its State policy of developing an economy ‘effectively controlled’
by Filipinos. Asserting the ideals that our Constitution’s Preamble want to achieve,
that is – to conserve and develop our patrimony , hence, the State should fortify a
Filipino-controlled economy. In the 2011 decision, the Court finds no wrong in the
construction of the term ‘capital’ which refers to the ‘shares with voting rights, as
well as with full beneficial ownership’ (Art. 12, sec. 10) which implies that the right
to vote in the election of directors, coupled with benefits, is tantamount to an
effective control. Therefore, the Court’s interpretation of the term ‘capital’ was not
erroneous. Thus, the motion for reconsideration is denied.
ISSUE:
1. Procedural Issue
a. Whether or not there is a case or controversy & locus standi on
their part (petitioners) to warrant the court’s exercise of judicial
review? None
2. Substantive issue
a. Whether the SEC's issuance of SEC-MC No. 8 is tainted with
grave abuse of discretion? No
RULING: WHEREFORE, the subject Motion for Reconsideration is
hereby DENIED WITH FINALITY. No further pleadings or motions shall be
entertained in this case. Let entry of final judgment be issued immediately. SO
ORDERED.
RATIO:
1. Procedural Issue
a. Petitioners (movant and petitioners-in-intervention) failed to sufficiently
allege and establish the existence of a case or controversy and locus
standi on their part to warrant the Court’s exercise of judicial review; the
rule on the hierarchy of courts was violated; and petitioners failed to
implead indispensable parties such as the Philippine Stock Exchange,
Inc. and Shareholders’ Association of the Philippines, Inc.
b. An indispensable party is a party-in-interest without whom there can be
no final determination of an action. Indispensable parties are those with
 such a material and direct interest in the controversy that a final decree
would necessarily affect their rights, so that the court cannot proceed
without their presence.
i. The interests of such indispensable parties in the subject matter of
the suit and the relief are so bound with those of the other parties
that their legal presence as parties to the proceeding is an absolute
necessity and a complete and efficient determination of the equities
and rights of the parties is not possible if they are not joined. Their
legal presence is an absolute necessity and a complete & efficient
determination of the equities and rights of the parties is not possible
if they are not joined.
ii. Other than PLDT, petitions failed to implead other public utility
corporations, they should be afforded due notice and opportunity to
be heard, lest they be deprived of their property without due process.
iii. Petitioners’ disregard of the rights of these other corporations and
numerous shareholders constitutes another fatal procedural flaw,
justifying the dismissal of their petitions. Without giving all of
them their day in court, they will definitely be deprived of their
property without due process of law.
2. Substantive grounds
1. Pursuant to the Court’s constitutional duty to exercise judicial review, the
Court has conclusively found no grave abuse of discretion on the part of SEC
in issuing SEC-MC No. 8.
2. The heart of the controversy is the interpretation of Section 11, Article XII of
the Constitution, which provides: “No franchise, certificate, or any other form
of authorization for the operation of a public utility shall be granted except to
citizens of the Philippines or to corporations or associations organized under
the laws of the Philippines at least sixty per centum of whose capital is owned
by such citizens x x x.”
3. The Gamboa Decision already held, in no uncertain terms, that what the
Constitution requires is “[f]ull [and legal] beneficial ownership of 60 percent
of the outstanding capital stock, coupled with 60 percent of the voting rights
x x x must rest in the hands of Filipino nationals. And, precisely that is what
SEC-MC No. 8 provides.
4. For purposes of determining compliance [with the constitutional or statutory
ownership], the required percentage of Filipino ownership shall be applied to
BOTH (a) the total number of outstanding shares of stock entitled to vote
in the election of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote.
5. In construing “full beneficial ownership,” the Implementing Rules and
Regulations of the Foreign Investments Act of 1991 (FIA-IRR) provides:
a. For stocks to be deemed owned and held by Philippine citizens or
Philippine nationals, mere legal title is not enough to meet the
required Filipino equity. Full beneficial ownership of the stocks,
coupled with appropriate voting rights is essential. Thus, stocks,
the voting rights of which have been assigned or transferred to aliens
cannot be considered held by Philippine citizens or Philippine
nationals.
6. Beneficial owner or beneficial ownership - [A]ny person who, directly or
indirectly, through any contract, arrangement, understanding, relationship or
otherwise, has or shares voting power (which includes the power to vote or
direct the voting of such security) and/or investment returns or power (which
includes the power to dispose of, or direct the disposition of such security).
7. Thus, the definition of “beneficial owner or beneficial ownership” in the
SRC-IRR, which is in consonance with the concept of “full beneficial
ownership” in the FIA-IRR, is, as stressed in the Decision, relevant in
resolving only the question of who is the beneficial owner or has beneficial
ownership of each “specific stock” of the public utility company whose
stocks are under review.
8. If the Filipino has the voting power of the
a. “specific stock”, i.e., he can vote the stock or direct another to vote
for him,
b. or the Filipino has the investment power over the “specific
stock”, i.e., he can dispose of the stock or direct another to dispose
of it for him, or both, i.e., he can vote and dispose of that “specific
stock” or direct another to vote or dispose it for him, then such
Filipino is the “beneficial owner” of that “specific stock.” Being
considered Filipino, that “specific stock” is then to be counted as
part of the 60% Filipino ownership requirement under the
Constitution.
c. The right to the dividends, jus fruendi - a right emanating from
ownership of that “specific stock” necessarily accrues to its Filipino
“beneficial owner.”
9. Once more, this is emphasized anew to disabuse any notion that the
dividends accruing to any particular stock are determinative of that
stock’s “beneficial ownership.”
a. Dividend declaration is dictated by the corporation’s unrestricted
retained earnings.
b. On the other hand, the corporation’s need of capital for expansion
programs and special reserve for probable contingencies may limit
retained earnings available for dividend declaration.
10. Gamboa Decision’s definition of the term “capital” in Section 11, Article
XII of the 1987 Constitution in express recognition of the sensitive and
vital position of public utilities both in the national economy and for
national security, so that the evident purpose of the citizenship
requirement is to prevent aliens from assuming control of public utilities,
which may be inimical to the national interest.16 This purpose prescinds
from the “benefits"/ dividends that are derived from or accorded to the
particular stocks held by Filipinos vis-a-vis the stocks held by aliens.
11. So long as Filipinos have controlling interest of a public utility
corporation, their decision to declare more dividends for a particular
stock over other kinds of stock is their sole prerogative - an act of
 ownership that would presumably be for the benefit of the public utility
corporation itself.
12. As to how the SEC will classify or treat certain stocks with voting rights held
by a trust fund that is created by the public entity whose compliance with the
limitation on foreign ownership under the Constitution is under scrutiny, and
how the SEC will determine if such public utility does, in fact, control how
the said stocks will be voted, and whether, resultantly, the trust fund would
be considered as Philippine national or not - lengthily discussed in the
dissenting opinion of Justice Carpio - is speculative at this juncture. The
Court cannot engage in guesswork. Thus, there is need of an actual case
or controversy before the Court may exercise its power of judicial
review. The movant’s petition is not that actual case or controversy.
Dissenting Opinions:
Justice Carpio: votes to grant the Motion for Reconsideration
1. PLDT stocks - There is a disparity in the treatment of total outstanding voting
stock as a single class of shares. From 2013 to 2016, the declared dividends
on the common shares ranged from P26 to P69 per share per annum with
a par value of P5.00 per share, whereas the dividend on the 150,000,000
voting preferred shares amounted to P0.06517 per annum with a par
value of P1.00 per share. In short, the voting preferred shares comprised
40.98% of all voting shares but received only 0.04%18 of the dividends
for 2013, 0.04%19 for 2014, 0.03%20 for 2015, and 0.06%21 for 2016,
compared with the dividends received by the common shares for the
same period.
2. voting preferred shares are mere “mickey mouse” voting shares, created just
to ostensibly comply with the 60 percent Filipino ownership requirement of
the voting stock. In reality, the voting preferred shares have insignificant
beneficial returns to whoever owns it.
3. PLDT’s capital structure, as well as the disparity in the declared dividends
between common and voting preferred shares, illustrates clearly the anomaly
which will result in the interpretation by the SEC of the Gamboa
Decision and Resolution. Applying the 60 percent Filipino ownership to the
total voting stock and to the total outstanding stock, whether voting or non-
voting, and not to each class of shares of PLDT clearly amounts to a blatant
mockery of the Constitution.
4. The majority’s decision now allows foreigners to control all nationalized
industries, whether nationalized under the Constitution or existing
statutes. Under these existing laws, foreign ownership is limited to less
than a controlling interest. With the majority’s decision, the mere
expedient of creating “mickey mouse” voting preferred shares will turn
over control of nationalized industries, particularly strategic industries
like telecommunications and energy distribution, to foreigners. This is
what the majority’s decision is all about. This has, of course, far-reaching
ramifications to the country’s national economy, national security, and
even the future of our country as a sovereign state.
5. Carpio votes to grant the motion for reconsideration - The minimum 60
percent Filipino ownership requirement under Section 11, Article XII of the
Constitution must be applied to each class of shares, which comprises
“capital,” as used in the Constitution, in determining whether a corporation
can validly operate a public utility.
Justice Leonen: votes to grant the Motion for Reconsideration
1. The Grandfather Rule enables the piercing of ostensible control vested by
ownership of 60% of a corporation’s capital when methods are employed to
disable Filipinos from exercising control and reaping the economic benefits
of an enterprise. This is an examination of who actually controls and benefits
from holding such capital.
2. The application of the Grandfather Rule hinges on circumstances. It is an
extraordinary mechanism the operation of which is impelled by a reasonable
sense of doubt that even as 60% of a corporation’s capital is ostensibly owned
by Filipinos, a more scrupulous arrangement may underlie that compliance
and that Filipino owners have become parties to the besmirching of their own
national integrity.
3. As the 2015 Resolution in Narra Nickel explained, “‘[D]doubt’ refers to
various indicia that the ‘beneficial ownership’ and ‘control’ of the
corporation do not in fact reside in Filipino shareholders but in foreign
stakeholders.” It is necessary then, that proper evidentiary bases sustain resort
to the Grandfather Rule.
4. Adopting mechanisms that may be well-meaning, but ultimately inadequate,
reduces state organs to unwitting collaborators in the despoiling and pillaging
of the Filipino’s patrimony. Rather than work for and in the national interest,
they fall prey to regulatory capture; facilitating private over public, or worse,
foreign over national, gain.
5. The majority’s limitation of capital to so-called voting stocks entrenches
an operational definition that can be a gateway to violating the
Constitution’s righteous protection of our heritage. It licentiously
empowers foreign interests to overrun public utilities, which are
enterprises whose primary objectives should be the common good and
not commercial gain, to wrest control of rights to our natural resources,
and to takeover other crucial areas of investment.
6. The majority’s November 22, 2016 Decision may have set us along this
course. We have the opportunity to reverse that position and truly do justice
to the Filipino.
008 NARRA NICKEL MINING v. REDMONT
CONSOLIDATED MINES (Casey)
 April 21, 2014 | Velasco, Jr., J. | Unlawful corporate layering
PETITIONER: NARRA NICKEL MINING AND DEVELOPMENT CORP.,
TESORO MINING AND DEVELOPMENT, INC., and MCARTHUR MINING,
INC.
RESPONDENTS: REDMONT CONSOLIDATED MINES CORP.
SUMMARY: Redmont Consolidated Mines Corp. wanted to conduct exploration
and mining activities in certain areas of Palawan but it discovered that 3 companies
(Narra, McArthur, and Tesoro) already had filed Mineral Production Share
Agreement application for the certain areas. These companies were structured in a
way that 60% of their capital are Filipino owned while 40% were owned by
Canadian company, MBMI in order to comply with PH laws. (Check structure of
Narra after ratio as a guide) So Redmont wanted to have their applications
cancelled since there was a corporate layering scheme done by the 3 companies
where MBMI was the actual driving force of the licensing applications instead of
the 60-40 split presented on paper of the corporations.
The SC agreed with this since in the ownership of capital in Narra, MBMI had most
of the capital among the predecessors of Narra which are PLMDC and PASRDC,
which raises doubt as to whether such shares satisfy the rule that at least 60% of the
capital should be owned by Filipinos in order to apply the control test. and
discussed the difference between the control test and the grandfather rule. Because
such doubt was raised in the minds of the courts, the grandfather rule was applied
and Redmont won.
DOCTRINE: “Control test" is still the prevailing mode of determining whether or
not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art. II of the
1987 Constitution, entitled to undertake the exploration, development and
utilization of the natural resources of the Philippines. When in the mind of the
Court there is doubt, based on the attendant facts and circumstances of the case, in
the 60-40 Filipino-equity ownership in the corporation, then it may apply the
"grandfather rule."
Control Test: Shares belonging to corp. or partnerships where at least 60% of the
capital is Filipino owned: PH nationality
Grandfather Rule: Shares belonging to corp. or partnerships where less than 60% of
the capital is Filipino owned: only the no. of shares corresponding to such
percentage shall be counted as of PH nationality
FACTS:
2
a. "Qualified person" means any citizen of the Philippines with capacity to contract, or a
corporation, partnership, association, or cooperative organized or authorized for the purpose of engaging
in mining, with technical and financial capability to undertake mineral resources development and duly
1. Redmont Consolidated Mines Corp. (Redmont) is a domestic corporation
organized and existing under PH laws which took interest in mining and
exploring certain areas of the province of Palawan
2. Through inquiry with the DENR, Redmont learned the Palawan areas where
it could conduct exploration and mining activities but the said areas were
covered by Mineral Production Sharing Agreement (MPSA) applications
of Narra, Tesoro, and McArthur.
a. McArthur (through predecessor companies SMMI and MMC): filed
MPSA and Exploration Permit (EP) covering an area of 1,782
hectares in Barangay Sumbiling, Palawan and 3,720 hectares in
Barangay Malatagao, Palawan.
b. Narra: acquired MPSA from Palawan Alpha South Resources and
Development Corporation (PASRDC) and Patricia Louise Mining
& Devt Corp (PLMDC); covering 3,277 hectares in Barangay
Calategas and San Isidro, Narra, Palawan
c. Tesoro: acquired MPSA from SMMI covering 3,402 hectares in
Barangay Malinao and Princesa Urduja, Narra, Palawan
3. Redmont filed before the Panel of Arbitrators (POA) of the DENR 3 separate
petitions to deny the applications
a. Redmont alleged that at least 60% of the capital stock of McArthur,
Tesoro and Narra are owned and controlled by a 100% Canadian
corporation named MBMI Resources, Inc. (MBMI)
b. Essentially, Redmont argued that since MBMI is a considerable
stockholder of the three, it was the driving force behind the filing of
the MPSA since MBMI can only participate in mining activities
through corporations which are deemed Filipino citizens
4. Narra, Tesoro and McArthur filed their Answers averring that they were
qualified2 under Section 3(aq) of RA 7942 (PH Mining Act of 1995)
a. In addition, they argued that their nationality as applicants is
immaterial because they applied for Financial or Technical
Assistance Agreement (FTAA), which are granted to foreign-
owned corporations
b. They also claimed that Narra, Tesoro, McArthur are in fact Phil
Nationals as 60% of their capital is owned by citizens of the PH
5. POA issued a resolution ruling that McArthur, Tesoro, and Narra is
DISQUALIFIED for being a foreign corp. and their MPSA is declared
NULL AND VOID.
6. McArthur and Tesoro filed a joint Notice of Appeal and a Memorandum
of Appeal with the Mines Adjudication Board (MAB) while Narra filed a
separate Notice and Memorandum. They aver that:
registered in accordance with law at least sixty per cent (60%) of the capital of which is owned by citizens
of the Philippines: Provided, That a legally organized foreign-owned corporation shall be deemed a
qualified person for purposes of granting an exploration permit, financial or technical assistance
agreement or mineral processing permit.
 a. They are qualified under the law and that through a letter, they
informed MAB that they had their individual MPSA applications
converted into FTAAs as follows:
i. McArthur: AFTA-IVB-09 12 on May 2007
ii. Tesoro: AFTA-IVB-08 13 on May 28, 2007
iii. Narra: AFTA-IVB-07 14 on March 30, 2006
7. However, pending the resolution of the appeal with MAB, Redmont filed a
complaint before the Securities and Exchange Commission (SEC) seeking
revocation of the cert. of registration of Narra, McArthur, and Tesoro
on the ground that they are foreign-owned and controlled corp. in violation
of the PH laws.
8. Redmont also filed a complaint before the RTC Quezon City for injunction
with application for issuance of a temporary restraining order (TRO) and
prayed for the deferral of the MAB proceedings.
9. Before the RTC can resolve the complaint, MAB issued an order finding
the appeal of Narra, et al. meritorious which reversed the POA resolution
10. Redmont filed an MR and Supplemental MR of the MAB order but MAB
denied it
11. Petition for review was filed by Redmont before the CA which CA ruled in
favor of Redmont. But before the resolution of the case by the CA, Redmont
filed before the Office of the President (OP) seeking cancellation of the
FTAAs of Narra, et al which it rendered a Decision cancelling and revoking
Narra, et al.’s FTAAs for circumventing the Constitution, the Small Scale
Mining Law and Environmental Compliance Certificate as well as Sec 3 and
8 of the Foreign Investment Act and EO 584.
12. Narra, et al filed an MR but it was denied, hence this petition before the SC
ISSUE/s:
1. WoN CA erred in applying the Grandfather rule?- NO
RULING: Petition DENIED. Assailed CA decision is affirmed.
RATIO:
1. There are two acknowledged tests in determining the nationality of a
corporation: the control test and the grandfather rule.Paragraph 7 of DOJ
Opinion No. 020, Series 2005 (adopted 1967 SEC Rules) provides:
a. (IMPT)Shares belonging to corp. or partnerships:
i. at least 60% of the capital is Filipino owned: PH nationality
(CONTROL TEST)
ii. less than 60% of the capital is Filipino owned: only the no.
of shares corresponding to such percentage shall be
counted as of PH nationality (GRANDFATHER RULE)
2. Narra, et al. were constant in advocating the application of the “control test”
under RA 7042, as amended by RA 8179 (Foreign Investments Act/FIA)
rather than applying the grandfather rule. Sec 3 of the FIA provides:
a. (Almost the same as i. and ii. but this is the last portion) Provided,
That were a corporation and its non-Filipino stockholders own
stocks in a Securities and Exchange Commission (SEC)
registered enterprise, at least sixty percent (60%) of the capital
stock outstanding and entitled to vote of each of both corporations
must be owned and held by citizens of the Philippines and at least
sixty percent (60%) of the members of the Board of Directors,
in order that the corporation shall be considered a Philippine
national.
b. They also aver that the grandfather rule has no leg to stand on since
the definition of a Philippine National under Sec 3 is not provided
c. They also opined that the last portion of Sec. 3 of the FIA admits
the application of a "corporate layering" scheme of
corporations.
d. Narra, et al. claims that the clear and unambiguous wordings of the
FIA preclude the court from construing it and prevent the court’s
use of discretion in applying the law
3. Based on Ratio #2, the SC disagrees. “Corporate layering” is admittedly
followed by the FIA but if it is used to circumvent the Constitution and
pertinent laws, then it becomes illegal. Further, the pronouncement of Narra,
et al. that the grandfather rule has already been abandoned must be discredited
for lack of basis. Art. XII, Sec. 2 of the Constitution provides:
a. Sec. 2. All lands of the public domain, waters, minerals, coal,
petroleum and other mineral oils, all forces of potential energy,
fisheries, forests or timber, wildlife, flora and fauna, and other
natural resources are owned by the State. With the exception of
agricultural lands, all other natural resources shall not be alienated.
The exploration, development, and utilization of natural resources
shall be under the full control and supervision of the State. The State
may directly undertake such activities, or it may enter into co-
production, joint venture or production-sharing agreements with
Filipino citizens, or corporations or associations at least sixty per
centum of whose capital is owned by such citizens. Such agreements
may be for a period not exceeding twenty-five years, renewable for
not more than twenty-five years, and under such terms and
conditions as may be provided by law.
xxx
The President may enter into agreements with Foreign-owned
corporations involving either technical or financial assistance for
large-scale exploration, development, and utilization of minerals,
petroleum, and other mineral oils according to the general terms and
conditions provided by law, based on real contributions to the
economic growth and general welfare of the country. In such
agreements, the State shall promote the development and use of
local scientific and technical resources.
 4. The emphasized portion of Sec. 2 which focuses on the State entering into
different types of agreements for the exploration, development, and
utilization of natural resources with entities who are deemed Filipino due to
60 percent ownership of capital is pertinent to this case, since the issues are
centered on the utilization of our country’s natural resources or specifically,
mining. Thus, there is a need to ascertain the nationality of petitioners since
the Constitution provides that such agreements are only allowed to
corporations/associations with “at least 60% of such capital owned by PH
citizens.”
5. Deliberations in the Records of 1986 Consti Commission were provided to
shed light on how a citizenship of a corporation is determined. Apparent is
the intention of the framers of the Constitution to apply the grandfather
rule in case where corporate layering is present
(NOTE: at this point it’s Sec 3 of FIA v. Constitution; the SC says the
Consti prevails based on statutory construction)
6. Based on the SEC Rule and DOJ Opinionn (Ratio #1), the grandfather rule
applies only when the 60-40 Filipino-foreign equity ownership is in doubt (
a. Ex. In cases where the joint venture corporation with Filipino and
foreign stockholders with less than 60% Filipino stockholdings [or
59%] invests in other joint venture corporation which is either 60-
40% Filipino-alien or the 59% less Filipino)
7. This case calls for the application of the Grandfather Rule since the POA,
as affirmed by the OP, ruled that doubt prevails and persists in the corporate
ownership of Narra et al. CA also found doubt present in the 60-40 equity
ownership since their MBMI is their common investor (MBMI funded the 3).
8. The instant case presents a situation which exhibits a scheme employed by
stockholders to circumvent the law, creating a cloud of doubt in the Court’s
mind. So it is right to apply the grandfather rule in resolving this case.
(NOTE for Ratio #9-10: check the tables at the last part of this digest for reference)
9. What is notable among the 3 petitioners is that MBMI is a major investor and
“controls” the other similar shareholders within the respective companies.
10. Majority of the shareholders who have more shares than MBMI have not paid
any amount with respect to the number of shares they subscribed in the
corporation which is quite absurd since they are major stockholders in the
respective corporations.
11. Another thing to consider is MBMI’s Summary of Significant Accounting
Policies dated 2005 which explains the intricate corporate layering that
MBMI immersed itself in.
a. Olympic Group: PH companies holding this and the ownership and
interests are as follows
i. Olympic – PH
ii. Sara Marie – 33.3%
iii. Tesoro – 60%
b. Alpha Group: PH companies holding this and the ownership and
interests are as follows:
i. Alpha – PH
ii. PLMDC – 34.0%
iii. Narra – 60.4%
c. Both groups are under join venture agreements where the Company
holds directly and indirectly an effective equity interest in the
Olmypic and Alpha of about 60% each.
12. In conclusion, Narra, et al are not Filipino since MBMI, a 100% Canadian
corporation, owns 60% or more of their equity interests. Such conclusion is
derived from grandfathering Narra et al’s corporate owners (MMI, SMMI,
and PLMDC).
13. MBMI’s Summary of Significant Accoutning Policies statement (Ratio#11c)
involves SMMI, Tesoro, PLMDC and Narra.
14. Noticeably, the ownership of the "layered" corporations boils down to
MBMI, Olympic or corporations under the "Alpha" group wherein MBMI
has joint venture agreements with, practically exercising majority control
over the corporations mentioned. In effect, whether looking at the capital
structure or the underlying relationships between and among the
corporations, petitioners are NOT Filipino nationals and must be considered
foreign since 60% or more of their capital stocks or equity interests are owned
by MBMI. (TL;DR: Essentially, it was discovered that majority of the
capital of the 3 corporations are funded by MBMI so the 3 are NOT
Filipino nationals and must be considered foreign)
15. This fact creates serious doubt as to the true extent of MBMI’s control
over both PLMDC and Narra since “a reasonable investor would expect to
have greater control and economic rights than other investors who invested
less capital than him.” Thus the application of the Grandfather rule is
justified.
16. (Outline) “control test" is still the prevailing mode of determining whether
or not a corporation is a Filipino corporation, within the ambit of Sec. 2, Art.
II of the 1987 Constitution, entitled to undertake the exploration,
development and utilization of the natural resources of the Philippines. When
in the mind of the Court there is doubt, based on the attendant facts and
circumstances of the case, in the 60-40 Filipino-equity ownership in the
corporation, then it may apply the "grandfather rule."
Narra PASRDC (65.96%)
PLMDC(59.97%)
MDMI (Canadian) 39.98% MDMI (Canadian) 33.96%
McArthur Mining (note: MMC has a similar structure and composition as this) Tesoro Mining (SMM has a similar structure)

Madridejos Mining Corp (MMC; grandfather ni McArthur)

Sara Marie Mining (SMM; grandfather ni Tesoro)

Narra Nickel Mining and Development Corp (PLMDC has a similar structure)

Patricia Louise Mining & Development Corp.

009 NARRA NICKEL MINING AND DEVELOPMENT CORP.
v. REDMONT CONSOLIDATED MINES CORP. (MICA)
Jan. 28, 2015 | Velasco. Jr., J. | Grandfather Rule
PETITIONER: Narra Nickel Mining and Development Corp., Tesoro Mining and
Development, Inc. and McArthur Mining, Inc.
RESPONDENTS: Redmont Consolidated Mines Corp.
SUMMARY: (Paraphrased Kat Gaw summary) The Grandfather Rule and the
Control Test are complementary, not alternative. The Grandfather Rule is applied
after the Control Test. This is necessary for the satisfaction of the twin
requirements, namely: beneficial ownership and control. So, if in the control test,
the corporation passes the 60-40 test, then the grandfather rule should be applied
next IF there is doubt as to the twin requirements. In the case at hand, there is doubt
because of the indicia that the “beneficial ownership” and “control” of the
corporation do not in fact reside in Filipino shareholders but in foreign
stakeholders. The DOJ Opinion No. 165, Series of 1984 provides for situations
where there is doubt. These are:
1. That the foreign investors provide practically all the funds for the joint
investment undertaken by these Filipino businessmen and their foreign partner;
2. That the foreign investors undertake to provide practically all the technological
support for the joint venture;
3. That the foreign investors, while being minority stockholders, manage the
company and prepare all economic viability studies.
Further, the Court observed that the SEC, in its 1977 internal memorandum,
already suggested applying the Grandfather Rule in the following manner:
• For publicly-held corporations or where the shares are traded in the stock
exchanges, the Grandfather Rule is applied on two (2) levels of corporate relations;
• On the other hand, if the corporation is closely held or the shares of which are not
traded in the stock exchange, the Grandfather Rule is applied up to three (3) levels
of corporate relations.
As for the Control Test, the Court made specific reference to the test in Gamboa
(rather than Heirs of Gamboa). Thus, it said, in a situation where there are non-
voting shares, the Filipino ownership should conform to the test in Gamboa & in
SEC Memorandum Circular No. 8, Series of 2013, (SEC Memo No. 8), as follows:
The required percentage of Filipino ownership shall be applied to BOTH (a) the
total outstanding shares of stock entitled to vote in the election of directors; AND
(b) the total number of outstanding shares of stock, whether or not entitled to vote
in the election of directors.
DOCTRINE: The application of the “grandfather rule” does not eschew the
“control test”. The grandfather rule implements the intent of the Filipinization
provisions of the Constitution. There should be a distinction between the
“beneficial ownership” test from the “control test”.
FACTS:
1. This is an MR so check Casey’s digest for the facts
2. The challenged decision sustained the appellate court’s ruling that petitioners,
being foreign corporations, are not entitled to Mineral Production Sharing
Agreements (MPSAs)
3. Here, petitioners-movants arged that the decision was not in accord with law
and logic
4. Redmont countered that the petitioners only repeated their arguments and
thus, should be denied outright for being pro-forma
ISSUE/s:
1. WoN the case has been rendered moot and academic – No
2. WoN the application of the Granfather Rule is justified – Yes
3. WoN the application of the Grandfather Rule eschews the Control Test-No
RULING: The motion for reconsideration is denied
RATIO:
The case has not been rendered moot and academic
1. Petitioners criticized the Court for resolving in its Decision a substantive
issue, which, as argued, has supposedly been rendered moot by the fact that
their applications for MPSAs had already been converted to an application
for a Financial Technical Assistance Agreement (FTAA), as petitioners have
in fact been granted an FTAA.
2. Further, the nationality issue, so petitioners presently claim, had been
rendered moribund by the fact that MBMI had already divested itself and sold
all its shareholdings in the petitioners, as well as in their corporate
stockholders, to a Fil. corporation—DMCI Mining Corporation (DMCI).
3. Redmont avers that the present case has not been rendered moot by the
supposed issuance of an FTAA because this FTAA was subsequently revoked
by the Office of the President (OP) and is currently a subject of a petition
pending in the Court’s First Division.
4. Redmont likewise contends that the supposed sale of MBMI’s interest in the
petitioners and in their "holding companies" is a question of fact that is
outside the Court’s province to verify in a Rule 45 certiorari proceedings.
5. Redmont also avers that this is a matter of public concern
6. SC agreed with Redmont’s first argument but not its second.
7. However, SC also said that the moot and academic principle does not
automatically dissuade courts in resolving a case. There are 4 exceptions,
which are all present in the case:
a. Grave violation of the Constitution – the petitioners are owned and
controlled by a 100% foreign-owned corporation albeit the
corporate layering (violated Sec. 2, Art. XII of the Consti)
b. Situation is of exceptional character and paramount public interest
is involved – the corporate layering resorted to is exception in
 character. It is also of paramount public interest because it was
designed to circumvent the constitution.
c. The constitutional issue raised requires formulation of controlling
principles to guide the bench, the bar, and the public – this is an
opportunity to establish a controlling principle that will guide them
d. The case is capable of repetition yet evading review – as shown by
petitioners’ actions, foreign corporations can easily utilize dummy
Fil. Corps. Through various schemes and skirt the prohibition
The application of the Grandfather Rule is justified by the circumstances of the case
to determine the nationality of petitioners
A. The application of the Grandfather Rule in the present case does not eschew
the Control Test
1. SC said that nowhere in the disposition of the April 21, 2014 decision
did the Court foreclose the application of the Control Test in determining
which corps may be considered as Philippine nationals
2. The Court used the Grandfather Rule as a “supplement” to the Control
Test so that the intent underlying the averted Sec. 2, Art. XII of the
Consti be given effect
a. Dispostion: “control test is still the prevailing mode of
determining whether or not a corp is a Fil. Corp…When in the
mind of the Court, there is doubt, based on the attendant facts
and circumstances, then it may apply the Grandfather Rule”
B. The Grandfather Rule implements the intent of the Filipinization provisions
of the Constitution
1. The Grandfather Rule was originally conceived to look into the
citizenship of the individuals who ultimately own and control the shares
of stock of a corporation for purposes of determining compliance with
the constitutional requirement of Filipino ownership
2. Grandfather Rule (as defined by CLV – cited talaga siya) is the method
by which the percentage of Filipino equity in a corp engaged in
nationalized and/or partly nationalized areas of activities, provided for
under the Constitution and other nationalization laws, is computed, in
cases where corporate shareholders are present, by attributing the
nationality of the second or even subsequent tier of ownership to
determine the nationality of the corporate shareholder.
3. Thus, both the direct and indirect shareholdings in the corp must be
determined to arrive at the actual Filipino ownership
4. This concept of stock attribution is observed by the BIR in applying Sec.
127(B) of the NIRC on taxes imposed on closely held corporations, in
relation to Sec. 96 of the Corp. Code on close corps.
a. Comm. Kim Henares in BIR Ruling No. 148-10: “In the case of
a multi-tiered corporation, the stock attribution rule must be
allowed to run continuously along the chain of ownership until
it finally reaches the individual stockholders. This is in
consonance with the "grandfather rule" adopted in the
Philippines under Section 96 of the Corporation Code (Batas
Pambansa Blg. 68)”
5. In SEC-OCG Opinion No. 10-31, the SEC applied the Grandfather Rule
even if the corp engaged in mining passed the Control Test:
a. “In other words, if there are layers of intervening corporations
investing in a mining joint venture, we must delve into the
citizenship of the individual stockholders of each corporation.
This is the strict application of the grandfather rule, which the
Commission has been consistently applying prior to the 1990s.
Indeed, the framers of the Constitution intended for the
"grandfather rule" to apply in case a 60%-40% Filipino-Foreign
equity corporation invests in another corporation engaging in
an activity where the Constitution restricts foreign
participation.”
6. SEC En Banc also held in Redmont Consolidated Mines Corporation v.
McArthur Mining Inc., et al.: to attain the Constitutional objective of
reserving to Filipinos the utilization of natural resources, one should not
stop where the percentage of the capital stock is 60%
7. The method employed in the Grandfather Rule hews with the rule that
the “beneficial ownership” of corporations engaged in nationalized
activities must reside in the hands of 60-40 Filipino citizens
8. Thus, in a DOJ Opinion, it said that even if the 60-40 Filipino equity
requirement appears to have been satisfied, an agreement that may distort
the actual economic or beneficial ownership of a mining corporation may
be struck down as violative of the consti prohibition
a. “…intended to insure, among other purposes, the conservation
of indigenous natural resources for Filipino posterity.”
b. “beneficial ownerhip of the right to dispose, exploit, utilize, and
develop natural resources shall pertain to Filipino citizens, and
that the nationality requirementis not satisfied unless Filipinos
are the principal beneficiaries in the exploitation of the
country’s natural resources.”
c. “the service contract could be employed as a means of going
about or circumventing the constitutional limit on foreign
equity participation and the obvious constitutional policy to
insure that Filipinos retain beneficial ownership of our mineral
resources”
9. The nationality requirement is not satisfied unless it meets the criterion
of beneficial ownership i.e, Filipinos are the principal beneficiaires in the
exploration of natural resources, and that in applying the same, “the
primordial consideration is situs of control, whether in a stock or non-
stock corporation.”
10. The "Grandfather Rule" is applied specifically in cases where the
corporation has corporate stockholders with alien stockholdings,
otherwise, if the rule is not applied, the presence of such corporate
stockholders could diminish the effective control of Filipinos.
 11. Again, twin requirements: beneficial ownership and control suspicion that the Filipino shareholders do not actually have the requisite
a. “Full ownership of the stocks, coupled with appropriate voting number of control and beneficial ownership in petitioners Narra, Tesoro, and
rights, is essential.” McArthur.

Application of the Granfather Rule with the Control Test A doubt exists as to the extent of control and beneficial ownership of MBMI over the
1. The Control Test and the Granfather Rule are not incompatible petitioners and their investing corporate stockholders. (will put lang the relevant
2. These can, if appropriate, be used cumulatively in the determination of the parts ng table for easier understanding and ang haba eh)
ownership and control of corporations engaged in fully or partly nationalized TESORO
activities Supposedly Filipino corporation Sara Marie Mining, Inc. (Sara Marie) holds 59.97%
3. The Grandfather Rule, standing alone, should not be used to determine the of the 10,000 commonshares of petitioner Tesoro while the Canadian-owned
Filipino ownership and control in a corporation, as it could result in an company, MBMI, holds 39.98% of its shares.
otherwise foreign corporation rendered qualified to perform nationalized or
Name Nationality Numberof Amount Amount Paid
partly nationalized activities.
Shares Subscribed
4. Hence, it is only when the Control Test is first complied with that the
Grandfather Rule may be applied. Sara Marie Filipino 5,997 ₱5,997,000.00 ₱825,000.00
5. Put in another manner, if the subject corporation’s Filipino equity falls below Mining, Inc.
the threshold 60%, the corporation is immediately considered foreign-owned,
in which case, the needto resort to the Grandfather Rule disappears. MBMI Canadian 3,998 ₱3,998,000.00 ₱1,878,174.60
6. On the other hand, a corporation that complies with the 60-40 Filipino to Resources, Inc.
foreign equity requirement can be considered a Filipino corporation if there
is no doubtas to who has the "beneficial ownership" and "control" of the Name Nationality Number of Amount Amount Paid
corporation. Shares Subscribed
7. So, a resort to the Grandfather Rule is necessary if doubt exists as to the
locus of the “beneficial ownership” and “control.” Olympic Filipino 6,663 ₱6,663,000.00 P0.00
8. In this case, it is necessary. The doubt in this case refers to various indicia Mines &
that the "beneficial ownership" and "control" of the corporation do not in fact Development
reside in Filipino shareholders but in foreign stakeholders Corp.
9. As provided in DOJ Opinion No. 165, Series of 1984, which applied the
provisions of the Anti-DummyLaw in relation to the minimum Filipino MBMI Canadian 3,331 ₱3,331,000.00 ₱2,794,000.00
equity requirement in the Constitution, "significant indicators of the dummy Resources, Inc.
status" have been recognized in view of reports "that some Filipino investors Red – for Tesoro
or businessmen are being utilized or [are] allowing themselves to be used as Blue – for Sara Marie Mining (which is the first one sa Tesoro)
dummies by foreign investors" specifically in joint ventures for national
resource exploitation. 1. Filipino corporation Olympic Mines & Development Corp. (Olympic) holds
10. These indicators are: 66.63% of Sara Marie’s shares while the same Canadian company MBMI holds
a) That the foreign investors provide all the funds for the joint investment 33.31% of Sara Marie’s shares. Nonetheless, it is admitted that Olympic did not
undertaken by these Filipino businessmen and their foreign partner; pay a single peso for its shares. On the contrary, MBMI paid for 99% of the paid-up
b) That the foreign investors undertake to provide practically all the capital of Sara Marie.
technological support for the joint venture; 2. The fact that MBMI had practically provided all the funds in Sara Marie and
c) That the foreign investors, while being minority stockholders, manage the Tesoro creates serious doubt as to the true extent of its (MBMI) control and
company and prepare all economic viability studies. ownership over both Sara Marie and Tesoro since, as observed by the SEC, "a
11. Thus, when foreigners contribute more capital to an enterprise, doubt exists reasonable investor would expect to have greater control and economic rights than
as to the actual control and ownership of the subject corporation even if the other investors who invested less capital than him."
60% Filipino equity threshold is met. 3. The application of the Grandfather Rule is clearly called for, and as shown below,
12. even if at first glance the petitioners comply with the 60-40 Filipino to foreign the Filipinos’ control and economic benefits in petitioner Tesoro (through Sara
equity ratio, doubt exists in the present case that gives rise to a reasonable Marie) fall below the threshold 60%, viz:
 Filipino participation in petitioner Tesoro: 40.01%
66.67
(Filipino equity in Sara Marie) x 59.97 (Sara Marie’s
share in Tesoro) = 39.98%
100
39.98% + .03% (shares of individual Filipino shareholders
[SHs] in Tesoro)
=40.01%
Foreign participation in petitioner Tesoro: 59.99%
33.33
(Foreign equity in Sara Marie) x 59.97 (Sara Marie’s
share in Tesoro) = 19.99%
100
19.99% + 39.98% (MBMI’s direct participation in Tesoro) +
.02% (shares of foreign individual SHs in Tesoro)
= 59.99%
Thus, Tesoro did not comply with the minimum Filipino requirement.
McARTHUR
(won’t put the tables and values na, same concept and formula)
1. 59.97% of its 10, 000 common shares is owned by supposedly Filipino Madridejos
Mining Corporation (Madridejos), while 39.98% belonged to the Canadian MBMI.
2. In turn, 66.63% of Madridejos’ shares were held by Olympic while 33.31% of its
shares belonged to MBMI.
3. Yet again, Olympic did not contribute to the paid-up capital of Madridejos and it
was MBMI that provided 99.79% of the paid-up capital of Madridejos.
4. Again, the fact that MBMI had practically provided all the funds in Madridejos
and McArthur creates serious doubt as to the true extent of its control and ownership
of MBMI over both Madridejos and McArthur.
5. The application of the Grandfather Rule is clearly called for, and as will be shown
below, MBMI, along with the other foreign shareholders, breached the maximum
limit of 40% ownership in petitioner McArthur, rendering the petitioner disqualified
to an MPSA:
a. As with petitioner Tesoro, with only 40.01% Filipino ownership in
petitioner McArthur, as compared to 59.99% foreign ownership of its shares, it is
clear that petitioner McArthur does not comply with the minimum Filipino equity
requirement imposed in Sec. 2, Art. XII of the Constitution.
NARRA
1. 59.97% of its shares belonged to Patricia Louise Mining & Development
Corporation (PLMDC), while Canadian MBMI held 39.98% of its shares.
2. PLMDC’s shares, in turn, were held by Palawan Alpha South Resources
Development Corporation (PASRDC), which subscribed to 65.96% of PLMDC’s
shares, and the Canadian MBMI, which subscribed to 33.96% of PLMDC’s shares.
3. again, PASRDC did not pay for any of its subscribed shares, while MBMI
contributed 99.75% of PLMDC’s paid-up capital.
4. With 60.36% foreign ownership in petitioner Narra, as compared to only 39.64%
Filipino ownership of its shares, it is clear that petitioner Narra does not comply with
the minimum Filipino equity requirement imposed in Section 2, Article XII of the
Constitution.
5. Hence, the appellate court did not err in holding that petitioner McArthur is a
foreign corporation not entitled to an MPSA.
It must be noted that the foregoing determination and computation of petitioners’
Filipino equity composition was based on their common shareholdings, not preferred
or redeemable shares. Section 6 of the Corporation Code of the Philippines explicitly
provides that "no share may be deprived of voting rights except those classified as
‘preferred’ or ‘redeemable’ shares."
In mining disputes, the POA has jurisdiction to pass upon the nationality of
applications for MPSAs
1. The present case arose from petitioners' MPSA applications, in which they
asserted their respective rights to the mining areas each applied for.
2. Since respondent Redmont, itself an applicant for exploration permits over the
same mining areas, filed petitions for the denial of petitioners' applications, it should
be clear that there exists a controversy between the parties and it is POA's
jurisdiction to resolve the said dispute.
3. POA's ruling on Redmont's assertion that petitioners are foreign corporations not
entitled to MPSA is but a necessary incident of its disposition of the mining dispute
presented before it, which is whether the petitioners are entitled to MPSAs.
4. Indeed, as the POA has jurisdiction to entertain "disputes involving rights to
mining areas," it necessarily follows that the POA likewise wields the authority to
pass upon the nationality issue involving petitioners, since the resolution of this issue
is essential and indispensable in the resolution of the main issue, i.e., the
determination of the petitioners' right to the mining areas through MPSAs.
010 REGISTER OF DEEDS OF RIZAL v. UNG SIU SI TEMPLE 1. The religious organization’s deaconess, founder, trustees, and administrator
are all Chinese citizens and that the Constitution provides for the limiting
(PAT) of the acquisition of land in the PH to its citizens or corporations or
May 21, 1955 | Reyes, J.B.L., J. | Ownership of private land of an unincorporated associations at least 60% of the capital stock of which is owned by such
religious organization citizens.
9. Hence, this petition.
PETITIONER: The Register of Deeds of Rizal
RESPONDENTS: Ung Siu Si Temple ISSUE/s:
4. WON the Temple, whose members, founders, trustees, are of a foreign
SUMMARY: Jesus was a Filipino who owned a parcel of land. He donated this parcel of land to
nationality, can acquire or own private lands. – NO.
the Temple, an unregistered religious organization, whose members, founder, and trustees are of
Chinese nationality. The founder, Yu Juan, went to the Register of Deeds in order to record the
donation. But the ROD did not allow such. Yu Juan and the Temple went to the CFI and the CFI RULING: The resolution appealed from is AFFIRMED.
likewise affirmed the rejection of the ROD on the basis that the members, etc. are of Chinese
nationality and that under the Constitution, foreigners are not allowed to own lands. Hence, this RATIO:
petition. The issue in this case is whether or not the Temple, whose members, etc. are of foreign On whether the Temple, whose members, trustees, and founder are of a foreign
nationality, can acquire private lands. The SC upheld the decisions of the CFI and the ROD, nationality, can own lands
saying that the Constitution provides that no private agricultural land shall be transferred or 1. Temple: The acquisition of the land in question, for religious purposes is
assigned except to individuals, corporations, or associations qualified to acquire or hold lands of
authorized and permitted by Act No. 271 of the old Philippine Commission. 3

the public domain in the Philippines. And that the Constitution makes no exception in favor of
religious organizations. In addition, the fact that the organization doesn’t have a capital stock does
a. SC: The decision of the CFI and the Register of Deeds are correct.
not suffice to escape the Constitutional prohibition since it has already been admitted that its i. The 1935 Constitution’s provisions already repealed the provisions
members are of foreign nationality and the spirit of the Constitution demands that in the absence of Act No. 271 insofar as incompatible.
of capital stock, the controlling membership should be composed of Filipino citizens. ii. The Constitution provides that except in cases of hereditary
succession, no private agricultural land shall be transferred or
DOCTRINE: The donation of land to an unincorporated religious organization, whose trustees assigned except to individuals, corporations, or associations
are foreigners, would violate the constitutional prohibition and the refusal would not be in qualified to acquire or hold lands of the public domain in the
violation of the freedom of religion clause. The fact that the organization doesn’t have a capital Philippines.
stock does not suffice to escape the Constitutional prohibition since it has already been admitted
that its members are of foreign nationality and the spirit of the Constitution demands that in the
iii. The Consitution makes no exception in favor of religious
absence of capital stock, the controlling membership should be composed of Filipino citizens. associations and neither is there any saving found in restricting
the acquisition of public agricultural lands and other natural
resources to “corporations or associations at least 60% of the
FACTS: capital of which is owned by such citizens”.
5. Jesus Dy (Jesus), a Filipino citizen, owned a parcel of land. iv. The fact that the organization doesn’t have a capital stock does
6. He then conveyed this parcel of residential land in favor of the Ung Siu Si not suffice to escape the Constitutional prohibition since it has
Temple (Temple), which is an unregistered religious organization. already been established that their members are of foreign
1. All trustees in this unregistered religious organization are Chinese. nationality and the spirit of the Constitution demands that in the
2. Jesus conveyed this parcel of land through donation to the founder and absence of capital stock, the controlling membership should be
deaconess of the temple, Yu Juan, a Chinese who acted as representative composed of Filipino citizens.
on behalf of the organization and its trustees. v. The purpose of the 60% requirement is to ensre that corporations
7. When Yu Juan went to the Register of Deeds in the province of Rizal, they or associations allowed to acquire agricultural lands or to exploit
refused to accept for record the deed of donation. natural resources shall be controlled by Filipinos and that absent
8. Aggrieved, Yu Juan elevated the matter to the en Consultato of the CFI of a capital stock, the controlling membership should be composed
Manila. And the CFI affirmed the decision of the Register of Deeds on the basis of Filipinos.
that: vi. To permit religious orgs controlled by foreigners would be to revive
the issues that sparked the revolutions in 1896.

SEC. 2. Such religious institutions, if not incorporated, shall hold the land in the name of three Trustees for the use of such associations; . . ..
(Printed Rec. App. p. 5.)
3
SEC. 1. It shall be lawful for all religious associations, of whatever sort or denomination, whether incorporated in the Philippine Islands or in
the name of other country, or not incorporated at all, to hold land in the Philippine Islands upon which to build churches, parsonages, or
educational or charitable institutions.
 2. Temple: Disqualification is violative of the freedom of religion.
a. SC: Court is not convinced that the land tenure is indispensable to the free
exercise and enjoyment of religious profession or worship.
011 ROMAN CATHOLIC v. REGISTER OF DEEDS (MERILLES)
December 20, 1957 | Felix, J. | Corporation Sole
PETITIONER: The Roman Catholic Apostolic Administrator of Davao
RESPONDENTS: Land Registration Commission and Register of Deeds of
Davao City
SUMMARY: Roman Catholic Apostolic Administrator (RC) purchased a parcel
of land from a certain Rodis. When the Deed of Sale was sought to be registered,
the Register of Deeds (and Land Registration Commission) declined the
registration on the ground that for a corporation to own properties, its membership
must be composed of 60% filipino citizens. RC however is administered by a
canadian national, MSgr. Thibault.
Arguments were made regarding the propriety of acquisition of land by a
corporation sole. The SC held that a corporation sole is a special form of
corporation usually associated with the clergy, which is entitled to own property.
As to the determination of the nationality of a corporation sole, the SC held that
as the corporation sole existed prior to the constitution, it has no nationality. And
if nationality has to be determined, it would be the nationality of the majority of
the lay members. In the case of RC more than 60% of its faithful are Filipino
citizens.
DOCTRINE: A corporation sole being a creature prior to the constitution, has
no nationality. If a nationality is sought to be determined, the same depends of
the nationality of the majority of the lay members and not on the nationality of
the sole corporator.
FACTS:
1. Mateo L. Rodis, a Filipino citizen and resident of the City of Davao, executed
a deed of sale of a parcel of land located in the same city, in favor of the
Roman Catholic Apostolic Administrator of Davao Inc. (RC), a corporation
sole organized and existing in accordance with Philippine Laws, with Msgr.
Clovis Thibault, a Canadian citizen, as actual incumbent.
2. When the deed of sale was presented to the Register of Deeds for registration,
RC was required to submit an affidavit declaring that 60% of the members of
the corporation sole are Filipino citizens.
a. Requirement is because of a previous ruling involving Carmelite
Nuns of Davao
3. The Register of Deeds referred to the Land Registration Commissioner the
matter as it had doubts as to the registerablity of the document.
4. The LRC held that in view of the provisions of Section 1 and 5 of Article XIII
of the Philippine Constitution, the vendee was not qualified to acquire private
lands in the Philippines in the absence of proof that at least 60 per centum of
the capital, property, or assets of the Roman Catholic Apostolic
Administrator of Davao, Inc., was actually owned or controlled by Filipino
citizens, there being no question that the present incumbent of the corporation
sole was a Canadian citizen.
5. RC instituted an action for mandamus with the SC alleging that under the
Corporation Law as well as the settled jurisprudence on the matter, the deed
of sale executed by Mateo L. Rodis in favor of petitioner is actually a deed
of sale in favor of the Catholic Church which is qualified to acquire private
agricultural lands for the establishment and maintenance of places of
worship.
6. RC consistently maintained that a corporation sole, irrespective of the
citizenship of its incumbent, is not prohibited or disqualified to acquire and
hold real properties. The Corporation Law and the Canon Law are explicit in
their provisions that a corporation sole or "ordinary" is not the owner of the
of the properties that he may acquire but merely the administrator thereof.
7. Elaborating on the composition of the Catholic Church in the
Philippines, RC explained that as a religious society or organization, it is
made up of 2 elements or divisions — the clergy or religious members
and the faithful or lay members.
a. BASTA SABI NIYA HELLO LAHAT NG PINOY CATHOLIC
SO MORE THAN 60% NA FILIPINO
8. LRC contends that it would be RC who would exercise the rights of
ownership over the properties.
9. It is LRCs stand that the theory that properties registered in the name of the
corporation sole are held in true for the benefit of the Catholic population of
a place, as of Davao in the case at bar should be sustained because a
conglomeration of persons cannot just be pointed out as the cestui que trust
or recipient of the benefits from the property allegedly administered in their
behalf. Neither can it be said that the mass of people referred to as such
beneficiary exercise ant right of ownership over the same.
a. WALA NAMAN DAW RIGHT TO EXERCISE OWNERSHIP
YUNG MGA CATHOLIC, YUNG CHURCH PARIN YUNG NAG
DDICTATE NG OWNERSHIP SA LAND
ISSUE/s:
1. WoN a corporation sole may acquire private agricultural land - YES
RULING: SC affirmed the lower courts decision. Pwede rin wherefore.
RATIO:
1. A corporation sole is a special form of corporation usually associated with
the clergy. Conceived and introduced into the common law by sheer
 necessity, this legal creation which was referred to as "that unhappy freak of exercised its functions or ministry and for which it was created,
English law" was designed to facilitate the exercise of the functions of independently of the nationality of its incumbent unique and single
ownership carried on by the clerics for and on behalf of the church which was member and head, the bishop of the diocese.
regarded as the property owner. 11. It can be also maintained that the Roman Catholic Apostolic Church in
2. The stand of RC is supported by Section 154 of the Corporation Law: the Philippines has no nationality and that the framers of the
a. “For the administration of the temporalities of any religious Constitution did not have in mind the religious corporations sole when
denomination, society or church and the management of the estates they provided that 60% of the capital thereof be owned by Filipino
and the properties thereof, it shall be lawful for the bishop, chief citizens.
priest, or presiding either of any such religious denomination,
society or church to become a corporation sole, unless inconsistent
wit the rules, regulations or discipline of his religious denomination,
society or church or forbidden by competent authority thereof.”
3. That leaves no room for doubt that the bishops or archbishops, as the case JBL, dissenting:
may be, as corporation's sole are merely administrators of the church 1. It was in recognition of this basic rule that we held in Register of Deeds vs. Ung Siu
properties that come to their possession, in which they hold in trust for the Si Temple, that if the association had no capital, its controlling membership must
church. be composed of Filipinos. Because ownership divorced from control is not true
4. (Tapos may argument na yung Pope daw yung overall administrator ng ownership.
Catholic faith so in essence daw yung Pope yung magiging owner ng property 2. If his acts as administrator can not be overridden, or altered, except by himself, then
which is bawal kasi foreign siya. SC argument below) obviously the control of the corporation and its temporalities is in the bishop
5. The SC must therefore, declare that although a branch of the Universal himself, and he must be a Filipino citizen.
Roman Catholic Apostolic Church, every Roman Catholic Church in 3. That the law should have expressly conferred capacity to acquire land upon
different countries, if it exercises its mission and is lawfully incorporated in corporations sole was not due any special predilection for them; it was exclusively
accordance with the laws of the country where it is located, is considered an due to the principle that corporation, as artificial entities, have no inherent rights,
entity or person with all the rights and privileges granted to such artificial but only those granted by the sovereign. Unless conferred, the corporate right would
being under the laws of that country, separate and distinct from the not exist.
personality of the Roman Pontiff or the Holy See, without prejudice to its
religious relations with the latter which are governed by the Canon Law or
their rules and regulations.
6. According to law: only persons or corporations qualified to acquire hold
lands of the public domain in the Philippines may acquire or be assigned and
hold private agricultural lands.
7. As provided by law, lands held in trust for specific purposes me be
subject of registration , and the capacity of a corporation sole to register
lands belonging to it is acknowledged, and title thereto may be issued in
its name
8. There could be no controversy as to the fact that a duly registered
corporation sole is an artificial being having the right of succession and
the power, attributes, and properties expressly authorized by law or
incident to its existence.
9. A corporation sole does not have a nationality at all to disqualify it from
owning land in the Philippines even though its only corporator is a
Canadian Citizen.
10. Even before the establishment of the Philippine Commonwealth &
Republic, every corporation sole then organized and registered by
express provision of law the necessary power and qualification to
purchase in its name private lands located in the territory in which it
 012 PEOPLE v. QUASHA (Armand) articles of incorporation, and that the purpose for making this false statement
June 12, 1953 | Reyes, J. | Public Utilities was to circumvent the constitutional mandate that no corporation shall be
authorized to operate as a public utility in the Philippines unless 60 per cent of
its capital stock is owned by Filipinos.
PETITIONER: full name of first party, et al.
2. Found guilty after trial and sentenced to a term of imprisonment and a fine, the
RESPONDENTS: full name of first party, et al.
accused has appealed to this Court.
3. On November 4, 1946, the Pacific Airways Corporation registered its articles of
SUMMARY: William Quasha, a member of the Philippine Bar was charged with
incorporation with the Securities and Exchange Commission. The articles were
falsification of public and commercial documents in the CFI. He was entrusted with
prepared and the registration was effected by the accused, who was in fact the
the preparation and registration of the articles of incorporation of Pacific Airways
organizer of the corporation.
Corporation but he caused it to appear that Arsenio Baylon, a Filipino had
4. The articles stated that the primary purpose of the corporation was to carry on
subscribed to and was the owner of 60% of subscribed capital stock. Such was not
the business of a common carrier by air, land or water; that its capital stock was
case because the real owners of said portions were really American citizens. The
Pl,000,000, represented by 9,000 preferred and 100,000 common shares, each
purpose of such false statement was to circumvent the Constitutional mandate that
preferred share being of the par value of P100 and entitled to 1/3 vote and each
no corporation shall be authorized to operate as a public utility in the Philippines
common share, of the par value of P1 and entitled to one vote; that the amount
unless 60% of its capital is owned by Filipinos. The issue is WoN Quasha should
of capital stock actually subscribed was P200.000, and the names of the
be held criminally liable. – NO. For a corporation to be entitled to operate a public
subscribers were Arsenio Baylon, Eruin E. Shannahan, Albert W. Onstott, James
utility it is not necessary that it be organized with 60 per cent of its capital owned
O'Bannon, Denzel J. Cavin, and William H. Quasha, the first being a Filipino
by Filipinos from the start. A corporation formed with capital that is entirely alien
and the other five all Americans; that Baylon's subscription was for 1,145
may subsequently change the nationality of its capital through transfer of shares to
preferred shares, of the total value of P114,500, and for 6,500 common shares,
Filipino citizens. Conversely, a corporation originally formed with Filipino capital
of the total par value of P6,500, while the aggregate subscriptions of the
may subsequently change the national status of said capital through transfer of
American subscribers were for 200 preferred shares, of the total par value of
shares to foreigners. The moment for determining whether a corporation is entitled
P20,000, and 59,000 common shares, of the total par value of P59,000; and that
to operate as a public utility is when it applies for a franchise, certificate, or any
Baylon and the American subscribers had already paid 25 per cent of their
other form of authorization for that purpose. And that can be done after the
respective subscriptions.
corporation has already come into being and not while it is still being formed. And
5. Ostensibly the owner of, or subscriber to, 60.005 per cent of the
at that moment, the corporation must show that it has complied not only with the
subscribed capital stock of the corporation, Baylon nevertheless did not have the
requirement of the Constitution and pertinent laws.
controlling vote because of the difference in voting power between the preferred
shares and the common shares.
DOCTRINE: The nationality test for public utilities applies not at the time of the
6. Still, with the capital structure as it was, the articles of incorporation were
grant of the primary franchise that makes a corporation a juridical person, but at the
accepted for registration and a certificate of incorporation was issued by the
grant of the secondary franchise that authorizes the corporation to engage in a
Securities and Exchange Commission.
nationalized industry.
7. There is no question that Baylon actually subscribed to 60.005 per cent of the
subscribed capital stock of the corporation. But it is admitted that the money
paid on his subscription did not belong to him but to the American subscribers to
FACTS: the corporate stock
1. William H. Quasha, a member of the Philippine bar, was charged in the Court of 8. Defendant is accused under article 172, paragraph 1, in connection with article
First Instance of Manila with the crime of falsification of a public and 171, paragraph 4, of the Revised Penal Code (Falsification of document by
commercial document in that, having been entrusted with the preparation and public officer by making untruthful statements in a narration of facts and
registration of the articles of incorporation of the Pacific Airways Corporation, a Falsification by private individual and use of falsified document)
domestic corporation organized for the purpose of engaging in business as a
common carrier, he caused it to appear in said articles of incorporation that one ISSUE/s:
Arsenio Baylon, a Filipino citizen, had subscribed to and was the owner of 5. WoN Quasha should be held criminally liable - NO
60.005 per cent of the subscribed capital stock of the corporation when in
reality, as the accused well knew, such was not the case, the truth being that the RULING: the judgment appealed from is reversed and the defendant William H.
owners of the portion of the capital stock subscribed to by Baylon and the Quasha acquitted, with costs de oficio.
money paid thereon were American citizens whose names did not appear in the
RATIO:
45. The falsification imputed to Quasha consists in not disclosing in the Articles
of Incorporation that Baylon was a mere trustee of the Americans, thus giving
the impression that Baylon subscribed to 60% of the capital stock.
46. But contrary to the lower court’s assumption, the Constitution does not
prohibit the mere formation of a public utility corporation without the
required proportion of Filipino capital.
47. What it does prohibit is the granting of a franchise or other form of
authorization for the operation of a public utility to a corporation already in
existence but without the requisite proportion of Filipino capital.
48. From the language of the text, the terms “franchise”, “certificate”, and “other
form of authorization” are qualified by the phrase “for the operation of public
utility.” As such, these terms cannot and do not refer to the corporation’s
primary franchise, which vests a body of men with corporate existence, but
to its secondary franchise, or the privilege to operate as public utility after the
corporation has already gone into being.
49. Primary franchise refers to that franchise which invests a body of men with
corporate existence, while the secondary franchise is the privilege to operate
as a public utility after the corporation has already come into being.
50. For the mere formation of the corporation, such revelation was not essential
and the corporation law does not require it. Therefore, Quasha was under no
obligation to make it.
51. In the absence of such obligation and of the alleged wrongful intent,
Quasha cannot be legally convicted of the crime with which he is
charged. A corporation formed with capital that is entirely alien may
subsequently change the nationality of its capital through transfer of
shares to Filipino citizens. The converse may also happen. Thus for a
corporation to be entitled to operate a public utility, it is not necessary
that it be organized with 60% of its capital owned by Filipinos from the
start. Said condition, may at any time be attained through the necessary
transfer of stocks. The moment for determining whether a corporation is
entitled to operate as public utility is when it applies for a franchise,
certificate or any other form of authorization for that purpose and that can
only be done after the corporation has already come into being not while
being formed.
 013 KILOSBAYAN V. GUINGONA (MATSUMURA)
May 5, 1994 | Davide, Jr, J.| Public Utilities (Sec. 11 Art XII of the Constitution)
PETITIONER: Kilosbayan, Incorporated, Jovito Salonga, Cirilo Rigos, Erme
Camba, Emilio Capulong, Jr., Jose Apolo, et. al
RESPONDENTS: Teofisto Guingona, Jr. in his capacity as Executive Secretary
of the Office of the President, Renato Corona in his capacity as Assistant
Executive Secretary and Chairman of the Presidential Review Committee on the
Lotto, Office of the president, Philippine Charity Sweepstakes
SUMMARY: PCSO decided to establish an online lottery system to increase its
revenue. In line with this, it issued a Request for Proposal seeking a contractor to
build all the facilities needed, and to operate and maintain the system under a lease
agreement. Those eligible to bid must be a domestic corporation with at least 60%
of its stocks owned by Filipino shareholders. The Berjaya Group, a Malaysian
company, had 75% stocks in PGMC but sold 35% to local investors to that PGMC
could bid. Kilosbayan sent a letter to President Ramos opposing the online lottery
system claiming that it’s illegal and immoral. However, despite the letter, the
PCSO continued its online lottery system with PGMC as its contractor (it was the
winning bid). In line with this, a lease agreement was executed between PGMC
and PCSO. Kilosbayan filed a petition in court alleging that the lease contract is
invalid because it violated RA 1169 which states that the PCSO cannot conduct
lotteries in collaboration, association, or joint venture with any person,
association, or entity. Meanwhile, PGMC and the government contend that it is a
valid agreement and that Kilosbayan has no locus standi.
The SC ruled that first, Kilosbayan has locus standi. Second, that the lease contract
is NOT valid. Looking at the provisions of the lease agreement, it can be seen that
the contract is actually a collaboration or association, in the least, or joint
venture, at the most. Such, is prohibited by RA 1169. Some provisions that show
that the relationship is a Joint Venture are: (1) PGMC binds itself to bear all risks
if the revenue from the ticket sales, on an annualized basis, are insufficient to pay
the entire prize money. (2) In the event of pre-termination, PCSO binds itself to,
reimburse the PGMC the amount of its total investment. (3) The PGMC cannot
directly or indirectly undertake any activity or business in competition with or
adverse to the On-Line Lottery System of PCSO unless it obtains the latter’s prior
written consent
DOCTRINE:
When the lease mandates contribution into the venture on the part of the
purported lessee, and makes the lessee participate not only in the revenues
generated from the venture, and in fact absorb most of the risks involved therein,
a joint venture arrangement has really been constituted between the purported
lessor and lessee, since under the Law on Partnership, whenever there is an
agreement to contribute money, property or industry to a common fund, with an
agreement to share the profits and losses therein, then a partnership arises.
FACTS:
1. Section 1 of the charter of the PCSO, grants the PCSO authority to hold and
conduct “charity sweepstakes races, lotteries and other similar activities,”. In
line with this, PCSO decided to establish an online lottery system to increase
its revenue.
2. The Berjaya Group Berhad, one of the largest public companies in Malaysia
engaged in lottery operations, offered its services and resources to PCSO
upon leaning that PCSO was interested in operating an online lottery system.
3. PCSO then formally issued a Request for Proposal for the lease contract of
an online lottery system. The proposal included the ff provisions:
a. PCSO is seeking a suitable contractor to build, at its own expense,
all the facilities needed needed to operate and maintain a nationwide
online lottery system. PCSO will lease the facilities for a fixed
percentage of the quarterly gross receipts. All receipts from ticket
sales shall be turned over directly to PCSO. All capital, operating
expenses and expansion expenses and risks shall be for the exclusive
account of the Lessor.
b. The Lessor shall be a domestic corporation, with at least sixty
percent (60%) of its shares owned by Filipino shareholders.
c. Upon expiration of the lease, the Facilities shall be owned by PCSO
without any additional consideration
4. Considering the citizenship requirement in the proposal, the Berjaya Group
reduce its equity stakes in PGMC to 40% by selling 35% of its foreign
stockholdings to local investors.
5. PGMC then submitted its bid to the PCSO
6. After the bids were evaluated by the Special Pre-Qualification Bids and
Awards Committee, it was submitted to the Office of the President which
announced that the PGMC will operate the country’s online lottery system.
This announcement was published in Manila Standard, Daily Inquirer, and
Manila Times
7. A few days later, Kilosbayan, a non-stock domestic corporation composed of
civicspirited citizens, pastors, priests, nuns, and lay leaders committed to the
cause of truth, justice, and national renewal, sent an open letter to President
Fidel Ramos opposing the online lottery system because of serious moral and
ethical considerations. It believed that the lottery is illegal and immoral.
8. However, despite the opposition, the online lottery system pushed through
with PGMC as a lessor of PCSO.
9. Kilosbayan then requested copies of all documents pertaining to the lottery
award from Executive Secretary Teofisto Guingona, Jr. which Secretary
Guingona told would be ready before the end of the month.
10. On that same date, an agreement denominated as “Contract of Lease” was
finally executed by PCSO and PGMC.
11. Because the Office of the President denied the protest of Kilosbayan, it
decided to file a petition because only a court injunction can stop the
implementation of the contract of lease. According to Kilosbayan
 a. PCSO cannot validly enter into the assailed Contract of Lease with
the PGMC because said arrangement be in “collaboration” or
“association” with the PGMC which is in violation of Section 1(B)
of R.A. No. 1169, as amended by B.P. Blg. 42, which prohibits the
PCSO from holding and conducting charity sweepstakes races,
lotteries, and other similar activities in collaboration, association
or joint venture with any person, association, company, foreign or
domestic.
b. the Contract of Lease clearly shows that there is a “collaboration,
association, or joint venture between PCSO and PGMC in the
holding of the On-Line Lottery System, and that PGMC is the
actual lotto operator.
c. The contract of lease requires PGMC to establish a
telecommunications network, but PGMC cannot do that because it
has no franchise from Congress to operate such a network
d. PGMC is 75% foreign-owned or controlled, thus cannot lawfully
enter into the contract in question.
e. that the Articles of Incorporation of PGMC do not authorize it
to establish and operate an online lottery and
telecommunications systems
12. In response, PGMC contends that:
a. it is merely an independent contractor for a piece of work (building
and maintenance of the lottery system to be used by PCSO)
b. it isnot a co-operator of the lottery franchise, nor does PCSO share
its franchise in collaboration, association, or joint venture, with
PGMC
13. Meanwhile the Solicitor General, Executive Secretary Guingona, and Asst.
Exec. Secretary Corona (other respondents) contend:
a. the contract of lease in question does not violate Section 1 of R.A.
No. 1169, as amended by B.P. Blg. 42,
b. the role of PGMC is limited to that of a lessor of the facilities
c. the establishment of the telecommunications system stipulated in the
Contract of Lease does not require a congressional franchise
because PGMC will not operate a public utility
d. Assuming arguendo, PGMC can establish a telecommunications
system even without a legislative franchise because not every public
utility is required to secure a legislative franchise before it could
establish, maintain, and operate the service. In this case, the
establishment is stipulated in the contract of lease which is an
exception to the rule.
e. Kilosbayan has no locus standi
ISSUES:
1. WoN Kilosbayan has locus standi –YES. 7 justices voted yes while 6 voted
no.
2. WoN the Contract of lease is valid under Sec. 1 of RA 1169 – NO. it is
actually a joint venture between PCSO and PGMC which is not allowed by
the law
RULING: WHEREFORE, the instant petition is hereby GRANTED and the
challenged Contract of Lease executed on 17 December 1993 by respondent Philippine
Charity Sweepstakes Office (PCSO) and respondent Philippine Gaming Management
Corporation (PGMC) is hereby DECLARED contrary to law and invalid.
RATIO:
LOCUS STANDI ISSUE
1. In line with the liberal policy of this Court on locus standi, ordinary
taxpayers, members of Congress, and even association of planters, and non-
profit civic organizations are allowed to initiate and prosecute actions
before this Court to question the constitutionality or validity of laws, acts,
decisions, rulings, or orders of various government agencies or
instrumentalities
2. The instant petition to be of transcendental importance to the public. The
issues it raised are of paramount public interest.
3. The ramifications of such issues immeasurably affect the social, economic,
and moral well-being of the people even in the remotest barangays of the
country and the counter-productive and retrogressive effects of the
envisioned on-line lottery system are as staggering as the billions in pesos it
is expected to raise.
4. The legal standing then of the petitioners deserves recognition and, in the
exercise of its sound discretion, this Court hereby brushes aside the
procedural barrier which the respondents tried to take advantage of.
VALIDITY OF CONTRACT OF LEASE
1. Section 1 of R.A. No. 1169, as amended by B.P. Blg. 42, prohibits the
PCSO from holding and conducting lotteries “in collaboration, association
or joint venture with any person, association, company or entity, whether
domestic or foreign.”
2. No interpretation of the said provision to relax or circumvent the
prohibition can be allowed since the privilege to hold or conduct charity
sweepstakes races, lotteries, or other similar activities is a franchise granted
by the legislature to the PCSO
3. It is a settled rule that in all grants by the government to individuals or
corporations of rights, privileges and franchises, the words are to be taken
most strongly against the one who claims a franchise or privilege
4. Thus, PCSO cannot share its franchise with another by way of
collaboration, association or joint venture. Neither can it assign,
transfer, or lease such franchise.
5. In this case, although PGMC is designated as an independent contractor for
a piece of work (building and maintenance of the lottery system for the
PCSO), the intent of the parties must be gathered from the provisions of the
 contract itself. The intention of the party is the soul of the instrument.
6. to determine the intention of the contracting parties, their contemporaneous
and subsequent acts shall be principally considered (Art 1371 Civil Code)
7. A careful analysis and evaluation of the provisions of the contract and a
consideration of the contemporaneous acts of the PCSO and PGMC shows
that the contract is not in reality a contract of lease under which the PGMC is
merely an independent contractor for a piece of work, but one where the
statutorily proscribed collaboration or association, in the least, or joint
venture, at the most, exists between the contracting parties.
a. Collaboration - act of working together in a joint project
b. Association - the act of a number of persons in uniting together for
some special purpose or business
c. Joint venture - an association of persons or companies jointly
undertaking some commercial enterprise; generally, all contribute
assets and share risks.
8. The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO
had neither funds of its own nor the expertise to operate and manage an
on-line lottery system, and that although it wished to have the system, it
would have it “at no expense or risks to the government.”
9. In the proposal, the only contribution the PCSO would have is its
franchise or authority to operate the on-line lottery system; with the rest,
including the risks of the business, being borne by the proponent or
bidder.
10. The PCSO and the PGMC mutually understood that any arrangement
between them would necessarily leave to the PGMC the technical,
operations, and management aspects of the on-line lottery system while
the PCSO would, primarily, provide the franchise.
11. While the proposal cannot substitute for the Contract of Lease which was
subsequently executed by the PCSO and the PGMC. Nevertheless, the
Contract of Lease incorporates their intention and understanding.
12. The so-called Contract of Lease is not, therefore, what it purports to be. Its
denomination as such is a crafty device, carefully conceived, to provide a
built-in defense in the event that the agreement is questioned as violative of
the exception in Section 1(B) of the PCSO’s charter.
13. the managers, technicians or employees who shall operate the online lottery
system are not managers, technicians or employees of the PCSO, but of the
PGMC and that it is only after the expiration of the contract that the PCSO
will operate the system.
14. This joint venture is further established by the following:
a. The rent is not actually a fixed amount. Although it is stated to be
4.9% of gross receipts from ticket sales, payable net of taxes
required by law to be withheld, it may be drastically reduced or, in
extreme cases, nothing may be due or demandable at all because the
PGMC binds itself to bear all risks if the revenue from the ticket
sales, on an annualized basis, are insufficient to pay the entire
prize money.
b. In the event of pre-termination, PCSO binds itself to, reimburse the
PGMC the amount of its total investment cost associated with the
On-Line Lottery System
c. The PGMC cannot directly or indirectly undertake any activity
or business in competition with or adverse to the On-Line Lottery
System of PCSO unless it obtains the latter’s prior written consent
Cruz, J: Concurring
1. It should be quite clear, from way the contract has been drafted, that the
primary objective was to avoid the conclusion that PCSO will be operating a
lottery “in association, collaberation or joint venture with any person,
association, company or entity,” which is prohibited by Section 1 of Rep. Act
No. 1169 as amended by B.P. Blg. 42.
2. A careful study will reveal telling stipulations that it is PGMC and not PCSO
that will actually be operating the lottery. Thus, it is provided inter alia that
PGMC shall furnish all capital equipment and other facilities needed for the
operation, bear expenses, and assume all risks if the revenue will be
insufficient.
3. GMC is an indispensable co-worker because it has the equipment and the
technology and the management skills that PCSO does not have at this time
for the operation of the lottery.
4. PCSO cannot deny that it needs the assistance of PGMC for this purpose,
which was its reason for entering into the contract in the first place. When
PCSO does avail itself of such assistance, undoubtedly, it will be doing so
“in collaboration, association or joint venture” with PGMC, which, let it be
added, will not be serving as a mere “hired help” of PCSO subject to its
control.
5. PGMC will be functioning independently in the discharge of its own assigned
role as stipulated in detail under the contract. PGMC is plainly a partner of
PCSO in violation of law
Feliciano: Concurring
1. addressed only the question of locus standi. Basically agreed that there’s
locus standi
Padilla: Separate Concurring Opinion
1. When the contract of lease in question seeks to establish and operate a
nationwide gambling network with substantial if not controlling foreign
participation, then the issue is of paramount national interest and importance
as to justify and warrant a relaxation of the above-mentioned procedural rule
on locus standi.
2. I consider the agreement or arrangement between the PCSO and PGMC a
joint venture because each party to the contract contributes its share in the
enterprise or project. PGMC contributes its facilities, equipment and know-
how (expertise). PCSO contributes (aside from its charter) the market,
directly or through dealers—and this to me is most important—in the totality
 or mass of the Filipino gambling elements who will invest in lotto tickets.
PGMC will get its 4.9% of gross receipts (with assumption of certain risks in
the course of lotto operations); the residue of the whole exercise will go to
PCSO.
3. To any person with a minimum of business know-how, this is a joint venture
between PCSO and PGMC, plain and simple.

Melo: Dissenting
1. The petition before the Court deserves no less than outright dismissal for the
reason that petitioners, as concerned citizens and as taxpayers and as
members of Congress, do not possess the necessary legal standing to assail
the validity of the contract of lease entered into by the PCSO and the PGMC
2. The case before us is not a challenge to the validity of a statute or an attempt
to restrain expenditure of public funds pursuant to an alleged invalid
congressional enactment. What petitioners ask us to do is to nullify a simple
contract of lease entered into by a government-owned corporation with a
private entity. That contract, as earlier pointed out, does not involve the
disbursement of public funds but of strictly corporate money.

Puno: Dissenting
1. Kilosbayan has not shown that elemental injury in fact which will endow it
with a standing to sue. It must be stressed that Kilosbayan is seeking the
nullity not of a law but of a Contract of Lease. Not one of the petitioners is a
party to the Contract of Lease executed between PCSO and PGMC. None of
the petitioners participated in the bidding, and hence they are not losing
bidders. They are complete strangers to the contract. They stand neither to
gain nor to lose economically by its enforcement. It seems to me unusual that
an unaffected third party to a contract could be allowed to question its
validity.

Kapunan: Dissenting
1. The requirement for standing based on personal injury may of course be
bypassed, by considering the case as a “taxpayer suit” which would thereby
clothe a petitioner with the personality it would lack under ordinary
circumstances.
2. However, the act assailed by the Kilosbayan on the whole involves
the generation rather than disbursement of public funds.
 014 TATAD v. GARCIA (Marcos) Infrastructure Projects by the Private Sector, and For Other Purposes," or the
April 6, 1995 | Quiason, J. | Public Utility: Operation vs. Ownership Build-Operate-Transfer (BOT) Law
13. RA 6957 provides for two schemes for the financing, construction and
operation of government projects through private initiative and investment:
PETITIONER: Francisco S. Tatad, John H. Osmena, and Rodolfo G. Biazon
Build-Operate-Transfer (BOT) or Build-Transfer (BT).
RESPONDENTS: Hon. Jesus B. Garcia, Jr., in his capacity as the Secretary of the
14. The DOTC issued 2 Department Orders creating the Prequalification Bids
Department of Transportation and Communications, and EDSA LRT
and Awards Committee (PBAC) and the Technical Committee.
CORPORATION, LTD.
15. The PBAC issued guidelines for the prequalification of contractors for the
financing and implementation of the project.
SUMMARY: DOTC planned to construct light railway transit line along EDSA
16. Five groups responded to the invitation and out of the 5 only the EDSA LRT
therefore RA 6957 was signed by President Aquino which provides for provides for
Consortium met the requirements of garnering at least 21 points per criteria
two schemes for the financing, construction and operation of government projects
as declared by PBAC.
through private initiative and investment: Build-Operate-Transfer (BOT) or
17. The criteria totalling 100 percent, are as follows: (a) Legal aspects — 10
Build-Transfer (BT). The PBAC issued guidelines for the prequalification of
percent; (b) Management/Organizational capability — 30 percent; and (c)
contractors for the financing and implementation of the project. Five groups
Financial capability — 30 percent; and (d) Technical capability — 30
responded to the invitation and out of the 5 only the EDSA LRT Consortium met
percent.
the requirements. Such corporation is composed of ten foreign and domestic
18. The EDSA LRT Consortium is composed of ten foreign and domestic
corporations. Because of the comments of Drilon that there were certain
corporations
irregularities with the process, , the DOTC and private respondents re-negotiated
19. Secretary Prado sent a letter to President Aquino recommending the award of
the agreement. The parties entered into a Revised and Restated Agreement and a
the EDSA LRT III project to the sole complying bidder, the EDSA LRT
Supplemental Agreement. (See facts no. 16 to know what the agreements were).
Consortium, and requesting for authority to negotiate with the said firm for
However, Petitioners Tatad, Osmeña, and Biazon petitioners asserted that the
the contract pursuant to the Implementing Rules and Regulations of the BOT
Revised and Restated Agreement and the Supplemental Agreement of May 6, 1993
Law.
are unconstitutional and invalid since the EDSA LRT III is a public utility, and the
20. Executive Secretary Franklin Drilon informed Secretary Prado that the
ownership and operation thereof is limited by the Constitution to Filipino citizens
President could not grant the requested approval for the following reasons:
and domestic corporations, not foreign corporations like private respondent. The
(1) that DOTC failed to conduct actual public bidding in compliance with
Court held that it is not unconstitutional since what the corporation owns are the
Section 5 of the BOT Law;
rail tracks, rolling stocks like the coaches, rail stations, terminals and the power
(2) that the law authorized public bidding as the only mode to award BOT
plant, not a public utility. The right to operate a public utility may exist
projects, and the prequalification proceedings was not the public bidding
independently and separately from the ownership of the facilities thereof. One
contemplated under the law;
can own said facilities without operating them as a public utility, or
(3) that Item 14 of the Implementing Rules and Regulations of the BOT
conversely, one may operate a public utility without owning the facilities used
Law which authorized negotiated award of contract in addition to public
to serve the public.
bidding was of doubtful legality; and
(4) that congressional approval of the list of priority projects under the BOT
DOCTRINE: The Constitution requires a franchise for the operation of a public
or BT Scheme provided in the law had not yet been granted at the time the
utility; however, it does not require a franchise before one can own the facilities
contract was awarded
needed to operate a public utility so long as it does not operate them to serve the
21. In view of the comments of Executive Secretary Drilon, the DOTC and
public. There is a clear distinction between “operation” of a public utility and the
private respondents re-negotiated the agreement.
ownership of the facilities used to serve the public
22. The parties entered into a Revised and Restated Agreement and a
Supplemental Agreement.
FACTS: 23. According to the agreements:
10. DOTC planned to construct a light railway transit line along EDSA. • the EDSA LRT III will use light rail vehicles from the Czech and
11. The plan was referred to as EDSA Light Rail Transit III (EDSA LRT III) and Slovak Federal Republics and will have a maximum carrying
was intended to provide a mass transit system along EDSA and alleviate the capacity of 450,000 passengers a day, or 150 million a year to be
congestion and growing transportation problem in the metropolis. achieved-through 54 such vehicles operating simultaneously.
12. RA 6957 was signed by President Corazon Aquino entitled "An Act
Authorizing the Financing, Construction, Operation and Maintenance of
 • The EDSA LRT III will run at grade, or street level, on the
mid-section of EDSA for a distance of 17.8 kilometers from F.B.
Harrison, Pasay City to North Avenue, Quezon City.
• The system will have its own power facility.
• It will also have thirteen (13) passenger stations and one depot in
16-hectare government property at North Avenue.
• The corporation shall undertake and finance the entire project
required for a complete operational light rail transit system.
• Upon full or partial completion and viability thereof, private
respondent shall deliver the use and possession of the completed
portion to DOTC which shall operate the same
• DOTC shall pay private respondent rentals on a monthly basis
• The corporation’s capital shall be recovered from the rentals to be
paid by the DOTC which, in turn, shall come from the earnings of
the EDSA LRT III.
• After 25 years and DOTC shall have completed payment of the
rentals, ownership of the project shall be transferred to the latter for
a consideration of only U.S. $1.00.
24. On May 5, 1994, R.A. No. 7718, an "Act Amending Certain Sections of
Republic Act No. 6957, Entitled "An Act Authorizing the Financing,
Construction, Operation and Maintenance of Infrastructure Projects by the
Private Sector, and for Other Purposes" was signed into law by the President.
25. However, Petitioners Tatad, Osmeña, and Biazon petitioners asserted that the
Revised and Restated Agreement and the Supplemental Agreement of May
6, 1993 are unconstitutional and invalid since the EDSA LRT III is a public
utility, and the ownership and operation thereof is limited by the Constitution
to Filipino citizens and domestic corporations, not foreign corporations like
private respondent.
ISSUE/s: Can respondent EDSA LRT Corporation, Ltd., a foreign corporation own
EDSA LRT III; a public utility? – NO but in this case technically the corporation
merely owns the rail tracks etc, but does not operate the public utility.
RULING: WHEREFORE, the petition is DISMISSED.
 obligations and liabilities of a common carrier. For this purpose, DOTC shall
RATIO:
52. The phrasing of the question is erroneous; it is loaded. What the corporation
owns are the rail tracks, rolling stocks like the coaches, rail stations, terminals
and the power plant, not a public utility.
53. While a franchise is needed to operate these facilities to serve the public, they
do not by themselves constitute a public utility.
54. What constitutes a public utility is not their ownership but their use to
serve the public.
55. The Constitution, in no uncertain terms, requires a franchise for the operation
of a public utility. However, it does not require a franchise before one can
own the facilities needed to operate a public utility so long as it does not
operate them to serve the public.
56. In law, there is a clear distinction between the "operation" of a public utility
and the ownership of the facilities and equipment used to serve the public.
57. Ownership is defined as a relation in law by virtue of which a thing pertaining
to one person is completely subjected to his will in everything not prohibited
by law or the concurrence with the rights of another
58. The exercise of the rights encompassed in ownership is limited by law so that
a property cannot be operated and used to serve the public as a public utility
unless the operator has a franchise.
59. The exercise of the rights encompassed in ownership is limited by law so that
a property cannot be operated and used to serve the public as a public utility
unless the operator has a franchise.
60. The operation of a rail system as a public utility includes the transportation
of passengers from one point to another point, their loading and unloading at
designated places and the movement of the trains at pre-scheduled times.
61. The right to operate a public utility may exist independently and
separately from the ownership of the facilities thereof.
62. One can own said facilities without operating them as a public utility, or
conversely, one may operate a public utility without owning the facilities
used to serve the public. The devotion of property to serve the public may
be done by the owner or by the person in control thereof who may not
necessarily be the owner thereof.
63. While the corporation is the owner of the facilities necessary to operate the
EDSA LRT III, it admits that it is not enfranchised to operate a public utility.
64. In view of this incapacity, the corporation and DOTC agreed that on
completion date, it will immediately deliver possession of the LRT system
by way of lease for 25 years, during which period DOTC shall operate
the same as a common carrier and the corporation shall provide
technical maintenance and repair services to DOTC.
65. Technical maintenance consists of providing (1) repair and maintenance
facilities for the depot and rail lines, services for routine clearing and security;
and (2) producing and distributing maintenance manuals and drawings for the
entire system.
66. Since DOTC shall operate the EDSA LRT III, it shall assume all the
indemnify and hold harmless the corporation from any losses, damages,
injuries or death which may be claimed in the operation or implementation
of the system, except losses, damages, injury or death due to defects in the
EDSA LRT III on account of the defective condition of equipment or
facilities or the defective maintenance of such equipment facilities.
67. In sum, the corporation will not run the light rail vehicles and collect fees
from the riding public. It will have no dealings with the public and the
public will have no right to demand any services from it.
68. Indeed, a mere owner and lessor of the facilities used by a public utility is not
a public utility.
 69. Even the mere formation of a public utility corporation does not ipso facto
characterize the corporation as one operating a public utility.
70. The moment for determining the requisite Filipino nationality is when the
entity applies for a franchise, certificate or any other form of authorization
for that purpose.

SEPARATE OPINIONS: (nothing related to Corp)

CONCURRING
Mendoza, J.: basically just saying that peritioners do not have standing to sue. Yun
lang.

DISSENTING
Davide, Jr., J.: The contract is void at least two reasons:
(a) it is an-ultra-vires act of DOTC since under R.A. 6957 the DOTC has no
authority to enter into a Build-Lease-and-Transfer (BLT) contract; and (b)
even assuming arguendo that it has, the contract was entered into without
complying with the mandatory requirement of public bidding.

Feliciano, J.: Same as Davide’s argument.

 SECTION IV
01 LAND BANK OF THE PHILIPPINES VS. CA (ARIELLE)
September 4, 2001 | Quisumbing, J. | Piercing the veil of corporate fiction
PETITIONER: The Office of the Solicitor General
RESPONDENTS: Ayala Land, Incorporated, Robinson’s Land Corporation,
Shangri-La Plaza Corporation, and SM Prime Holdings, Inc.
SUMMARY: Land Bank of the Philippines extended a series of credit
accommodations to ECO, using the trust funds of Philippine Virginia Tobacco
Administration (PVTA) in the amount of P26,109,000. The proceeds of the
credit accommodations were received on behalf of ECO by Oñate. ECO failed
to pay the loans, so it proposed to LBP a “Plan of Payment. However, PVTA
rejected such plan. LBP then filed a complaint for Collection of Sum of Money
against ECO and and Oñate. A judgment was rendered in favor of LBP, but
Oñate was absolved from personal liability. The CA affirmed in toto the trial
court’s decision. The issue in this case is WoN the corporate veil of ECO should
be pierced.
The SC held that there is no showing that ECO and Oñate are one and the same.
A corporation, upon coming into existence, is vested by law with a personality
separate and distinct from those persons composing it. Generally, a stockholder
may not be made for acts or liabilities of the said corporation, and vice versa.
This separate and distinct personality is, however, merely a fiction created by
law for convenience and to promote the ends of justice. For this reason, it may
not be used to or invoked for ends subversive to the policy and purpose behind
its creation. This is likewise true where the corporate entity is being used as an
alter ego, or a business conduit for the sole benefit of the stockholders or of
another corporate entity. In all these cases, the notion of corporate entity will be
pierced. The mere fact that Oñate owned the majority of the shares of ECO is
not a ground to conclude that Oñate and ECO is one and the same. Mere
ownership by a single stockholder of all or nearly all of the capital stock
corporation is not by itself sufficient reason for disregarding the fiction of
separate corporate personalities.
DOCTRINE: In the absence of any malice or bad faith, a stockholder or an
officer of a corporation cannot be made personally liable for corporate
liabilities.
FACTS:
1. On various dates, appellant Land Bank of the Philippines (LBP) extended a
series of credit accommodations to appellee ECO, using the trust funds of and concrete explanation for the name ECO (lol again);
the Philippine Virginia Tobacco Administratio (PVTA) in the aggregate c.
amount of P26,109,000. The proceeds of the credit accommodations were or representative of ECO;
received on behalf of ECO by appellee Oñate. d.
2. On the maturity dates of the loans, ECO failed to pay the same. Oral and e.
written demands were made, but ECO was unable to pay.
3. ECO claimed that the company was in financial difficulty because it was
unable to collect its investments with companies which were affected by the
financial crisis brought about by the Dewey Dee scandal.
4. ECO then proposed and submitted to LBP a “Plan of Payment” whereby the
former would set up a financing company which would absorb the loan
obligations. It was proposed that LBP would participate in the scheme
through the conversion of P9,000,000 which was part of the total loan, into
equity.
5. LBP informed ECO of the action taken of the former, stating that they are
allowing the same provided that LBP shall not participate in the undertaking
in any manner.
6. ECO then submitted to LBP a “Revised Plan of Payment” deleting the latter’s
participation in the proposed financing company. The Trust Committee
deliberated on the revised plan and resolved to reject it.
7. The letter stated that if LBP did not hear from PVTA within 5 days from
receipt of the letter, such silence would be construed to be an approval of
LBP’s intention to file suit against ECO and its corporate officers. PVTA did
not respond to the letter.
8. LBP filed a complaint for Collection of Sum of Money against ECO and
Emmanuel C. Oñate. After trial on the merits, a judgment was rendered in
favor of LBP, but Oñate was absolved from personal liability for insufficiency
of evidence.
9. ECO questioned its being held liable for the amount of the loan. The trial
court then rendered an amended decision, ordering ECO to pay LBP
P26,109,000. The CA affirmed in toto the amended decision of the trial
court.
ISSUE/s:
1. WoN the corporate veil of ECO Management Corporation should be pierced
– NO; there is no showing of bad faith on the part of Oñate or ECO.
RULING: The petition is DENIED for lack of merit.
RATIO:
1. Petitioner contends that the personalities of Oñate and of ECO Management
should be treated as one, for the particular purpose of holding Oñate liable.
According to LBP, the corporation was formed ostensibly to allow Oñate to
acquire loans from LBP which he used for his personal advantage.
2. LBP submits as arguments to support its stand the following:
a. Oñate owns the majority of the interest holdings in ECO;
b. The acronym ECO stands for his initials (lol) which is the logical, sensible,
Oñate has always referred to himself as the debtor, not merely as an officer
Oñate personally paid P1 million taken from trust accounts in his name;
Oñate personally paid P1 million taken from trust accounts in his name;
 f. He made a personal offering to pay his personal obligation; to defraud LBP, then they could have just easily absconded instead of going
g. He controlled the corporate positions without benefit of election; out of their way to propose “Plans of Payment.” Oñate also volunteered to
h. ECO had not held any meeting of the stockholders or of the BoD, as shown pay a portion of the corporation’s debt. This demonstrates good faith on his
by the fact that no proceeding of such corporate activities was filed with the part.
SEC.
18. It is understandable that a shareholder would want to help his corporation and
3. ECO in turn contend that Oñate’s only participation in the transaction
in the process, assure that his stakes in the said corporation are secured. In
between LBP and ECO was his execution of the loan agreements and
this case, it was established that the P1 million did not come solely from
promissory notes as Chairman of the corporation’s BoD.
Oñate. It was taken from a trust account.
4. ECO likewise deny that ECO stands for Oñate’s name (lol) and they also note
that Oñate is no longer a majority stockholder of ECO and that the payment
by a third person of the debt of another is allowed under the Civil Code.
5. Hence, ECO concludes that there is no legal ground to pierce the veil of
ECO’s corporate personality.
6. The Court finds no reason to reverse the findings of the CA.
7. A corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those persons composing it as well
as from any other legal entity to which it may be related.
8. Generally, a stockholder may not be made for acts or liabilities of the
said corporation, and vice versa.
9. This separate and distinct personality is, however, merely a fiction
created by law for convenience and to promote the ends of justice.
10. For this reason, it may not be used to or invoked for ends subversive to
the policy and purpose behind its creation. This is particularly true when
the fiction is used to defeat public convenience, justify wrong, protect fraud,
defend crime, confuse legitimate or judicial issues, perpetrate deception, or
otherwise circumvent the law.
11. This is likewise true where the corporate entity is being used as an alter
ego, or a business conduit for the sole benefit of the stockholders or of
another corporate entity.
12. In all these cases, the notion of corporate entity will be pierced or
disregarded with reference to the particular transaction involved.
13. The burden is on the petitioner to prove that the corporation and its
stockholders are, in fact, using the personality of the corporation as a means
to perpetrate fraud. The wrongdoing must be clearly and convincingly
established.
14. In the absence of any malice or bad faith, a stockholder or an officer of
a corporation cannot be made personally liable for corporate liabilities.
15. The mere fact that Oñate owned the majority of the shares of ECO is not a
ground to conclude that Oñate and ECO is one and the same. Mere
ownership by a single stockholder of all or nearly all of the capital stock
corporation is not by itself sufficient reason for disregarding the fiction
of separate corporate personalities.
16. Neither is the fact that the name “ECO” represents the first three letters of
Oñate’s name sufficient reason to pierce the veil. A corporation may assume
any name provided it is lawful.
17. The ECO in this case was being sued as mere alter ego of Oñate to obtain
loans had not been shown. As the CA observed, if shareholders of ECO meant
 002 LANUZA V. BF CORPORATION (HIRANG)
October 1, 2014|J. Leonen | Application of the Main doctrine of Separate Juridical
Personality
PETITIONER: GERARDO LANUZA, JR. AND ANTONIO O. OLBES,
RESPONDENTS: BF CORPORATION, SHANGRI-LA PROPERTIES, INC.,
ALFREDO C. RAMOS, RUFO B. COLAYCO, MAXIMO G. LICAUCO III,
AND BENJAMIN C. RAMOS
SUMMARY: BF Corporation entered into an angreement with Shangri-La wherein
it would construct for Shangri-La a mall and a multilevel parking structure.
Shangri-La, initially was able to pay BF Corp. Subsequently, it defaulted in paying
and therefore, BF Copr instituted an action for collection. Such action was
eventually dismissed as BF Corp did not submit the dispute to arbitration in
accordance with their contract. Trial court ordered them to proceed with the
arbitration but both corporation filed a motion for clarification. They seek to clarify
the term “parties” and whether Shangri-La’s directors should be included in the
arbitration proceedings. The trial court ruled that all must be part of the arbitration
proceeding and such decision was also affirmed by the CA. Petitioners’ main
argument arises from the separate personality given to juridical persons vis-à-vis
their directors, officers, stockholders, and agents. Since they did not sign the
arbitration agreement in any capacity, they cannot be forced to submit to the
jurisdiction of the Arbitration Tribunal in accordance with the arbitration
agreement.
The issue in this case is WoN the petitioners should be made party to the
arbitration.
(CASE ALREADY MOOT AND ACADEMIC SEE RATIO #1)
SC ruled that the petitioners cannot be held as parties to the arbitration and that
they are also absolved from liability. SC said that as a corporation is an artificial
entity created by fiction of law, it can only exercise its rights and powers
through its directors, officers, or agents, who are natural persons. A
corporation’s representative is generally not bound by the terms of the
contract executed by the corporation and are not personally liable for the
obligations and liabilitites incurred by the corporation as it has its separate
and distinct personality. However, such is only the general rule. Disctinction
between the corporation and its representative can be disregarded. This
concept is the doctrine of piercing the veil of corporate fiction where the
personality of both the representatives of the corporation and the corporation
itself are treated as one. (PLEASE READ RATIO 6-13 FOR FULL
EXPLANATION). However, even under the doctrine of piercing the veil, the
petitioners still cannot be held liable as the Arbitration Tribunal has already ruled
that BF Corporation failed to prove the existence of the circumstances needed to
apply such doctrine.
DOCTRINE: A consequence of a corporation’s separate personality is that consent
by a corporation through its representatives is not consent of the representative,
personally. Its obligations, incurred through official acts of its representatives, are
its own. A stockholder, director, or representative does not become a party to a
contract just because a corporation executed a contract through that stockholder,
director or representative. Hence, a corporation’s representatives are generally not
bound by the terms of the contract executed by the corporation. They are not
personally liable for obligations and liabilities incurred on or in behalf of the
corporation. (Book Doctrine)
FACTS:
1. BF Corporation entered into an agreement with Shangri-La wherein it
undertook to construct for Shangri-La a mall and a multilevel parking
structure along EDSA.
2. Shangri-La had been consistent in paying BF Corporation in accordance with
its progress billing statements. However, by October 1991, Shangri-La started
defaulting in payment.
3. Because of this, BF Corporation filed a collection complaint with the
Regional Trial Court against Shangri-La and the members of its board of
directors: Alfredo C. Ramos, Rufo B. Colayco, Antonio O. Olbes, Gerardo
Lanuza, Jr., Maximo G. Licauco III, and Benjamin C. Ramos.
4. BF Corporation alleged that despite repeated demands, Shangri-La refused
to pay the balance owed to it. It also alleged that the Shangri-La’s directors
were in bad faith in directing Shangri-La’s affairs. Therefore, they should be
held jointly and severally liable with Shangri-La for its obligations as well as
for the damages that BF Corporation incurred.
5. Shangri-La, together with its directors, filed a motion to suspend the
proceedings as BF Corporation failed to submit the dispute to arbitration,
which was in accordance with their contract. RTC denied such motion but
the CA as well as the SC ruled to submit the dispute for arbitration. The trial
court issued the order directing the parties to conduct the arbitration in
accordance with RA 876 [Arbitration Law]
6. However, BF Corporation and Shangri-La filed a motion for clarification
seeking to clarify the term, "parties," and whether Shangri-La’s directors
should be included in the arbitration proceedings and served with separate
demands for arbitration. Petitioners prayed that they be excluded from the
arbitration proceedings for being non-parties to Shangri-La’s and BF
Corporation’s agreement.
7. The trial court issued the order directing service of demands for arbitration
upon all defendants in BF Corporation’s complaint. According to the trial
court, Shangri-La’s directors were interested parties who "must also be
served with a demand for arbitration to give them the opportunity to
ventilate their side of the controversy, safeguard their interest and fend
off their respective positions.
 8. Petitioners filed a petition for certiorari with the Court of Appeals, alleging corporation executed a contract through that stockholder, director or
grave abuse of discretion in the issuance of orders compelling them to representative. Hence, a corporation’s representatives are generally not
submit to arbitration proceedings despite being third parties to the bound by the terms of the contract executed by the corporation. They
contract between Shangri-La and BF Corporation. CA affirmed trial court’s are not personally liable for obligations and liabilities incurred on or in
ruling stating that Shangri-La’s directors were necessary parties in the behalf of the corporation.
arbitration proceedings. The petitioners cannot be deemed as non-parties 4. Furthermore, as provided in the case of Heirs of Augusto Salas, Jr. v. Laperal
to the contract as they were sued for their acts in representation of the Realty Corporation, arbitration clause can only bind the parties therto, as well
party to the contract pursuant to Art. 31 of the Corporation Code, and that as their assigns and heirs. In the case at hand, the petitioners are not
as directors of the defendant corporation, they, in accordance with Art. signatories thereto.
1217 of the Civil Code, stand to be benefited or injured by the result of the 5. As a general rule, therefore, a corporation’s representative who did not
personally bind himself or herself to an arbitration agreement cannot be
arbitration proceedings.
forced to participate in arbitration proceedings made pursuant to an
9. Petitioners’ main argument arises from the separate personality given to
agreement entered into by the corporation. He or she is generally not
juridical persons vis-à-vis their directors, officers, stockholders, and agents.
considered a party to that agreement.
Since they did not sign the arbitration agreement in any capacity, they cannot
6. However, there are instances when the distinction between personalities of
be forced to submit to the jurisdiction of the Arbitration Tribunal in
directors, officers, and representatives, and of the corporation, are
accordance with the arbitration agreement. Moreover, they had already
disregarded. We call this piercing the veil of corporate fiction.
resigned as directors of Shangri-La at the time of the alleged default.
7. Piercing the corporate veil is warranted when the separate personality of a
corporation is used as a means to perpetrate fraud or an illegal act, or as
ISSUE/s: WoN the petitioners should be made parties to the arbitration proceedings,
a vehicle for the evasion of an existing obligation, the circumvention of
pursuant to the arbitration clause provided in the contract between Shangri-La and
statutes, or to confuse legitimate issues. It is also warranted in alter ego
BF Corporation – No. Petitioners cannot be held as parties to the arbitration
cases where a corporation is merely a farce since it is a mere alter ego or
agreement since they did not bind themselves to do so.
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
RULING: WHEREFORE, the petition is DENIED. The Court of Appeals' decision instrumentality, agency, conduit or adjunct of another corporation.
of May 11, 2006 and resolution of October 5, 2006 are AFFIRMED. 8. When corporate veil is pierced, the corporation and persons who are
normally treated as distinct from the corporation are treated as one
RATIO: person, such that when the corporation is adjudged liable, these persons, too,
1. CASE WAS ALREADY MOOT AND ACADEMIC BECAUSE THE ARBITRAL become liable as if they were the corporation.
TRIBUNAL ALREADY RULED TO ABSOLVE THE PETITIONERS FROM LIABILITY, 9. Among the persons who may be treated as the corporation itself under certain
BUT THE COURT STILL CONTINUED TO TACKLE THE ISSUE AT HAND. circumstances are its directors and officers. Section 31 of the Corporation
2. As petitioners point out, their personalities as directors of Shangri-La are Code provides the instances when directors, trustees, or officers may become
separate and distinct from Shangri-La. A corporation is an artificial entity liable for corporate acts:
created by fiction of law. This means that while it is not a person, naturally,
the law gives it a distinct personality and treats it as such. A corporation, in When a director, trustee or officer attempt to acquire or acquires, in violation of his
the legal sense, is an individual with a personality that is distinct and separate duty, any interest adverse to the corporation in respect of any matter which has been
from other persons including its stockholders, officers, directors, reposed inhim in confidence, as to which equity imposes a disability upon him to deal
representatives, and other juridical entities and because a corporation’s in his own behalf, he shall be liable as a trustee for the corporation and must account
for the profits which otherwise would have accrued to the corporation.
existence is only by fiction of law, it can only exercise its rights and powers
through its directors, officers, or agents, who are natural persons. A
corporation cannot sue or enter into contracts without them. 10. Based on the above provision, a director, trustee, or officer of a corporation
3. A consequence of a corporation’s separate personality is that consent by may be made solidarily liable with it for all damages suffered by the
a corporation through its representatives is not consent of the corporation, its stockholders or members, and other persons in any of the
representative, personally. Its obligations, incurred through official acts following cases:
of its representatives, are its own. A stockholder, director, or
representative does not become a party to a contract just because a a) The director or trustee willfully and knowingly voted for or assented to a patently
unlawful corporate act;
 b) The director or trustee was guilty of gross negligence or bad faith in directing
corporate affairs; and

c) The director or trustee acquired personal or pecuniary interest in conflict with his
or her duties as director or trustee.

Solidary liability with the corporation will also attach in the following
instances:

a) "When a director or officer has consented to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file with the corporate secretary his
written objection thereto";

b) "When a director, trustee or officer has contractually agreed or stipulated to hold

himself personally and solidarily liable with the corporation"; and

c) "When a director, trustee or officer is made, by specific provision of law,

personally liable for his corporate action.

11. When there are allegations of bad faith or malice against corporate directors
or representatives, it becomes the duty of courts or tribunals to determine if
these persons and the corporation should be treated as one. Without a trial,
courts and tribunals have no basis for determining whether the veil of
corporate fiction should be pierced. If the court finds that there exists the
need to pierce the corporate veil, the corporate representatives are treated as
the corporation itself and should be held liable for corporate acts.
12. However, when the courts disregard the corporation’s distinct and separate
personality from its directors or officers, the courts do not say that the
corporation, in all instances and for all purposes, is the same as its
directors, stockholders, officers, and agents. It does not result in an
absolute confusion of personalities of the corporation and the persons
composing or representing it. Courts merely discount the distinction and
treat them as one, in relation to a specific act, in order to extend the terms
of the contract and the liabilities for all damages to erring corporate officials
who participated in the corporation’s illegal acts. This is done so that the legal
fiction cannot be used to perpetrate illegalities and injustices.
13. In the case at bar, the petitoners still cannot be held liable as the Arbitral
Tribunal already rendered a decision finding that BF Corporation failed to
prove the existence of the circumstances which would render the
petitioner solidarily liable.
 003 PACIFIC REHOUSE v. COURT OF APPEALS (Sabaupan)
March 24, 2014 | Reyes, J. | Major Equity Ownership and Interlocking Directorship
G.R. No. 199687
PETITIONER: Pacific Rehouse Corporation
RESPONDENTS: Court of Appeals and Export and Industry Bank, Inc.
G.R. No. 201537
PETITIONER: Pacific Rehouse Corporation, Pacific Concorde Corporation,
Mizpah Holdings, Inc., Forum Holdings Corporation and East Asia Oil Company,
Inc.
RESPONDENTS: Export and Industry Bank, Inc.
SUMMARY: E-Securities made unauthorized sales of DMCI shares belonging to
Pacific Rehouse. Pacific was able to obtain a favorable judgment from the lower
court and ordered E-Securities to return the said shares. The judgment was not
satisfied so Pacific asked the court to hold Export Bank liable because E-Securities
is a mere alter ego and business conduit of Export Bank. RTC ruled that E-
Securities is a mere alter ego of Export Bank and directed both E-Securities and
Export Bank to comply with the judgement. CA reversed the decision of RTC and
ruled that the alter ego theory cannot be applied because ownership of a subsidiary
by the parent company is not enough justification to pierce the veil of corporate
fiction. There must also be proof that Export Bank exploited or misused the
corporate fiction of E-Securities. The issue is whether the alter ego doctrine is
applicable in this case. The SC affirmed the decision of the CA and ruled that the
alter ego doctrine is not applicable in this case. The Court laid down a three-
pronged test in this case (See Ratio 5). In determining whether such doctrine is
applicable in a particular case, the courts are concerned with reality and not form,
with how the corporation operated and the individual defendant’s relationship to
that operation. Although there is some alleged control exercised by Export Bank
over E-Securities, the element of fraudulent intention by the parent company
through exercising control over the subsidiary is lacking in the instant case.
Ownership by Export Bank of a great majority or all of stocks of E-Securities and
the existence of interlocking directorates may serve as badges of control, but
ownership of another corporation, per se, without proof of actuality of the other
conditions are insufficient to establish an alter ego relationship or connection
between the two corporations, which will justify the setting aside of the cover of
corporate fiction.
DOCTRINE: Mere ownership by a single stockholder or by another corporation
of all or nearly all of the capital stocks of the corporation, is not by itself, a
sufficient ground for disregarding the separate corporate personality. Other than
mere ownership of capital stocks, circumstances showing that the corporation is
being used to commit fraud or proof of existence of absolute control over the
corporation have to be proven. Before the corporate fiction can be disregarded,
alter-ego elements must first be sufficiently established.
FACTS:
1. Pacific Rehouse Corporation (Pacific) was able to obtain a favorable
judgment from the RTC of Makati against EIB Securities Inc. (E-Securities).
The trial court ordered E-Securities to return Pacific’s 32,180,000 DMCI
shares which was sold by the former without authorization.
2. The writ of execution was returned unsatisfied so Pacific asked the court to
hold Export and Industry Bank, Inc. liable for the judgment obligation
through the issuance of an alias writ of execution because E-Securities “is
wholly-owned and controlled and dominated subsidiary of Export and
Industry Bank, Inc., and is thus, a mere alter ego and business conduit of the
latter.
3. E-Securities argued that it has a corporate personality that is separate and
distinct from Export and Industry Bank, Inc.
4. RTC ruled that E-Securities is a mere business conduit or alter ego of Export
and Industry Bank, Inc., the dominant parent corporation, which justifies
piercing of the veil of corporate fiction. Hence, the lower court directed EIB
Securities, Inc., and/or Export and Industry Bank, Inc., to fully comply with
the judgment.
5. The RTC ratiocinated that being one and the same entity in the eyes of the
law, the service of summons upon EIB Securities, Inc. (E-Securities) has
bestowed jurisdiction over both the parent and the wholly-owned subsidiary.
RTC issued a garnishment against all those holding moneys, properties of
any and all kinds, real or personal belonging to or owned by EIB Securities,
Inc. and/or Export and Industry Bank, Inc., in such amount as may be
sufficient to acquire 32,180,000 DMCI shares of stock to the Philippine Stock
Exchange.
6. Export and Industry Bank, Inc. filed before the CA a case seeking the
nullification of the RTC Order. Pacific Rehouse and other companies (the
petitioners named in the summary box) filed their comment and alleged that:
a. 499,995 out of 500,000 outstanding shares of stocks of E-Securities
are owned by Export Bank.
b. Export Bank had actual knowledge of the subject matter of litigation
as the lawyers who represented E-Securities are also lawyers of
Export Bank.
c. As an alter ego, there is no need for a finding of fraud or illegality
before the doctrine of piercing the veil of corporate fiction can be
applied.
7. CA ruled in favor of Export Bank and issued a writ of preliminary injunction
and made the same permanent. According to the CA:
a. The alter ego theory cannot be sustained because ownership of a
subsidiary by the parent company is not enough justification to
pierce the veil of corporate fiction.
b. There must be proof, apart from mere ownership, that Export Bank
exploited or misused the corporate fiction of E-Securities.
c. The existence of interlocking incorporators, directors, and officers
 between the two corporations is not a conclusive indication that they
are one and the same.
d. Moreover, it was solely E-Securities that contracted the obligation
in furtherance of its legitimate corporate purpose; thus, any fall out
must be confined within its limited liability.
8. Hence, the instant petition.
ISSUE/s:
1. Whether the judgment rendered against E-Securities can be enforced on
Export Bank. NO because the lower court never acquired jurisdiction
over Export Bank.
2. Whether the alter ego doctrine is applicable in this case. NO because
mere ownership of a parent company by a subsidiary company is not
enough to justify the application of such doctrine. The three elements
(control, fraud, injury) of the test laid down by the Court must concur.
RULING: Petition is DENIED for lack of merit. Decision of the Court of Appeals is
AFFIRMED.
RATIO:
Issue 1: Enforcement of judgment against Export Bank
1. The instant case sprang from Pacific Rehouse Corporation v. EIB Securities,
Inc. In the said case, Export Bank was not impleaded but was unexpectedly
included during the execution stage, in addition to E-Securities. In including
Export Bank, the RTC considered E-Securities as a mere business conduit of
Export Bank.
2. In the case of Kukan International Corporation v. Reyes, the Court ruled that
compliance with the recognized modes od acquisition of jurisdiction cannot
be dispensed with even in piercing the veil of corporate fiction. A corporation
not impleaded in a suit cannot be subject to the court’s process of piercing
the veil of its corporate fiction. In that situation, the court has not acquired
jurisdiction over the corporation and, hence, any proceedings taken against
that corporation and its property would infringe on its right to due process.
3. Piercing the veil of corporate entity applies to determination of liability not
of jurisdiction. The doctrine of piercing the veil of corporate fiction comes to
play only during the trial of the case after the court has already acquired
jurisdiction over the corporation.
4. Therefore, the court must first and foremost acquire jurisdiction over the
parties; and only then would the parties be allowed to present evidence for
and/or against piercing the veil of corporate fiction. If the court has no
jurisdiction over the corporation, it follows that the court has no business in
piercing its veil of corporate fiction because such action offends the
corporation’s right to due process.
5. Because Export Bank was neither served summons, nor has it voluntarily
appeared before the court, the judgement sought to be enforced against E-
Securities cannot be made against its parent company, Export Bank.
Issue 2: Separate juridical personality of E-Securities and Export Bank
1. It is a fundamental principle of corporation law that a corporation is an entity
separate and distinct from its stockholders and from other corporations to
which it may be connected. But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote
justice.
2. Therefore, when the notion of separate juridical personality is used to defeat
public convenience, justify wrong, protect fraud or defend crime, or is used
as a device to defeat the labor laws, this separate personal personality of the
corporation may be disregarded or the veil of corporate fiction pierced. This
is also true when the corporation is merely an adjunct, a business conduit or
an alter ego of another corporation.
3. Where one corporation is so organized and controlled and its affairs are
conducted so that it is, in fact, a mere instrumentality or adjunct of the other,
the fiction of the corporate entity of the “instrumentality” may be disregarded.
4. The control necessary to invoke the rule is not majority or even a complete
stock control but such domination of finances, policies and practices that the
controlled corporation has, so to speak, no separate mind, will or existence of
its own, and is but a conduit for its principal. Moreover, the control must be
shown to have been exercised at the time the acts complained of took place.
Also, the control and breach of duty must proximately cause the injury or
unjust loss for which the complaint is made.
5. The Court has laid down a three-pronged control test to establish when the
alter ego doctrine is applicable:
a. Control, not mere majority or complete stock control, but complete
domination, not only of finances but of policy and business practice in
respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own;
b. Such control must have been used by the defendant to commit fraud or
wrong, to perpetuate the violation of a statutory or other positive legal
duty, or dishonest and unjust act in contravention of plaintiff’s legal
right; and
c. The aforesaid control and breach of duty must [have] proximately caused
the injury or unjust loss complained of.
6. All these elements must concur to justify the piercing of the corporate veil by
the application of the alter ego doctrine. In determining whether such doctrine
is applicable in a particular case, the courts are concerned with reality and not
form, with how the corporation operated and the individual defendant’s
relationship to that operation.
7. Albeit the RTC bore emphasis on the alleged control exercised by Export
Bank upon its subsidiary E-Securities, control, by itself, does not mean that
the controlled corporation is a mere instrumentality or a business conduit of
the mother company. Even control over the financial and operational
concerns of a subsidiary company does not by itself call for disregarding its
corporate fiction. There must be a perpetuation of fraud behind the control or
 at least a fraudulent or illegal purpose behind the control to justify piercing
the veil of corporate fiction. Such fraudulent intent is lacking in this case.
8. There was nothing on record demonstrative of Export’s Bank wrongful intent
in setting up a subsidiary (E-Securities). If used to perform legitimate
functions, a subsidiary’s separate existence shall be respected, and the
liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business.
9. To justify treating the sole stockholder or holding company as responsible, it
is not enough that the subsidiary is so organized and controlled as to make it
“merely an instrumentality, conduit, or adjunct” of its stockholders. It must
further appear that to recognize their separate entities would aid in the
consummation of wrong.
10. Furthermore, ownership by Export Bank of a great majority or all of stocks
of E-Securities and the existence of interlocking directorates may serve as
badges of control, but ownership of another corporation, per se, without proof
of actuality of the other conditions are insufficient to establish an alter ego
relationship or connection between the two corporations, which will justify
the setting aside of the cover of corporate fiction. 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.”
11. Any application of the doctrine of piercing the corporate veil should be done
with caution. 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. The wrongdoing must be clearly and convincingly
established; it cannot be presumed.
 004 US v. Milwaukee Refrigerator Transit Co. (Steph)
December 28, 1905 | Sanborn | Source of Incantation
PETITIONER: US
RESPONDENTS: Milwaukee Refrigerator Transit Co.
SUMMARY: Milwaukee Refrigerator Transit Co. is a company incorporated to
lease refrigerator boxes to trains to facilitate interstate traffic of goods. Its acts,
allegedly in violation of the Elkins Act (this law prohibits any person or
corporations to receive any rebate from transportation companies in transporting
goods) and corporate personality is put into question in this case (no backstory of
how the case ended up in court), and the government is claiming Pabst brewing
company just incorporated the refrigerator company as a dummy to take advantage
of the money (received as rebates) it gets from the railroad companies. In other
words, they’re claiming na dummy corporation yun Milwaukee Refrigerator Transit
Co. and it’s operated by this unnamed brewing company so that the brewing
company will inderectly benefit from the money MRTC receives from the railroad
companies. To further support this claim, the majority of MRTC’s stock is owned
by persons who also own brewing company stock. But the brewing company pays
its freight in full, receives no rebates, and is not a party to the contracts between the
refrigerator and the railroad companies.
But despite this, the Court found that the two corporations had interests so related,
and that the Pabst actually controls MRTC to the point that MRTC is just a separate
name for Pabst.
DOCTRINE: A corporation will be looked upon as a legal entity as a general rule
until sufficient reason to the contrary appears; but, when the notion of legal entity is
used to defeat public convenience, justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association of persons, and where one
corporation was organized and is owned by the officers and stockholders of
another, making their interests identical, they may be treated as identical when
the interests of justice require it.
FACTS:
1. Milwaukee Refrigerator Transit Co. (MRTC) is a company incorporated to
lease refrigerator boxes to trains to facilitate interstate traffic of goods,
specifically the products of a brewing company.
2. Its corporate personality is put into question in this case (no backstory of how
the case ended up in court), and the government is claiming the brewing
company just incorporated the refrigerator company as a dummy to take
advantage of the money it gets from the railroad companies.
3. In other words, they’re claiming na dummy corporation yun Milwaukee
Refrigerator Transit Co. and it’s operated by Pabst brewing company so that
the brewing company will inderectly benefit from the money MRTC receives
from the railroad companies.
4. This assailed practice (receiving money as rebate from transportation
companies) is expressly prohibited under the Elkins Act.
1. to clarify, MRTC can receive money as rebate from the
transportation company, but Pabst brewery, being a brewery and not
related at all to transportation industry, cannot receive money as
rebate.
5. To further support this claim, the majority of MRTC’s stock is owned by
persons who also own brewing company stock. But the brewing company
pays its freight in full, receives no rebates, and is not a party to the contracts
between the refrigerator and the railroad companies.
6. But the brewing company pays its freight in full, receives no rebates, and is
not a party to the contracts between the refrigerator and the railroad com-
panies.
ISSUE/s:
1. WoN Pabst Brewing Company and MRTC are so united in interest, control
and management as to make them substantially the same – YES
RULING: Pabst and MRTC are to be treated as one corporation, and thus
Pabst violated the Elkins Act.
RATIO:
1. It clearly appears that the shipper practically controls the transit company,
and his shows a sufficient identity of interest among the shareholders of both
in these repayments to make them rebates, if paid and received with unlawful
intent.
2. MRTC is a mere separate name for the Pabst brewing company, being
in fact the same collection of persons and interests.
3. A corporation will be looked upon as a legal entity as a general rule until
sufficient reason to the contrary appears; but, when the notion of legal entity
is used to defeat public convenience, justify wrong, protect fraud, or defend
crime, the law will regard the corporation as an association of persons, and
where one corporation was organized and is owned by the officers and
stockholders of another, making their interests identical, they may be
treated as identical when the interests of justice require it.
 005 TRADERS ROYAL BANK v. COURT OF APPEALS
(MERILLES)
March 3, 1997 | Torres, Jr., J. | Negotiable Instruments vs. Certificate
of Indebtedness
PETITIONER: Traders Royal Bank
RESPONDENTS: Court of Appeals, Filriters Guaranty Assurance Corporation
and Central Bank of the Philippines
SUMMARY: Filriters Guaranty Assurance Corporation (FILRITERS) is the
registered owner of Central Bank Certificate of Indebtedness No. D891 (CBCI).
CBCI was then PHILFINANCE. Philfinance transferred the same CBCI to
Traders Royal Bank (TRB) under a repurchase agreement. However,
Philfinance failed to buy back the note. TRB then tried to transfer and register
the CBCI under its name. The Central Bank did not want to recognize this
transfer. Hence, the petition before the SC.
TRB assert that the assignment was valid because Philfinance and Filriters are
one and the same, therefore the act of one corporation is also the act of the
another. To TRB the doctrine of piercing the corporate veil must be used.
The Supreme Court held that the mentioned doctrine is not applicable. The court
must be sure that the corporate fiction was misused, to such an extent that
injustice, fraud, or crime was committed upon another to even apply the
doctrine. No fraud was found to have committed and no sufficient evidence was
presented to warrant the Court to pierce the veil of corporate fiction.
DOCTRINE: (under syllabus) Under the doctrine of piercing the veil of
corporate fiction, the courts look at the corporation as a mere collection of
individuals or an aggregation of persons undertaking business as a group,
disregarding the separate juridical personality of the corporation unifying the
group.
(applicable to the case) The Doctrine of piercing the veil of corporate entity is
an equitable remedy, and may be awarded only in cases when the corporate
fiction is used to defeat public convenience, justify wrong, protect fraud or
defend crime or where a corporation is a mere alter ego or business conduit of a
person.
FACTS:
1. Filriters Guaranty Assurance Corporation (FILRITERS) is the registered
owner of Central Bank Certificate of Indebtedness No. D891 (CBCI). Alfredo
Banaria (Senior VP of Treasury for Filriters) without authorization and
clearance from the Board of Directors transferred the CBCI using a deed of
assignment to Philippine Underwriters Finance Corporation
(PHILFINANCE).
2. Subsequently, Philfinance transferred the same CBCI to Traders Royal Bank
(TRB) under a repurchase agreement. However, Philfinance failed to buy
back the note on maturity date and executed a deed of assignment to convey
to TRB all its rights and title to CBCI No. D891.
3. The TRB tried to use the deed of assignment to transfer and register the CBCI
under its name. However, the Central Bank did not want to recognize the
transfer. Hence, TRB filed a special civil action for mandamus against the
Central Bank in the RTC.
4. RTC Decision:
a. Docketed as Civil Case No. 83-17966 in the Regional Trial Court of
Manila, Branch 32, the action was originally filed as a Petition for
Mandamus 5 under Rule 65 of the Rules of Court, to compel the
Central Bank of the Philippines to register the transfer of the subject
CBCI to petitioner Traders Royal Bank (TRB).
b. CBCI No. 891 is not a negotiable instrument
c. The deed of assignment of the CBCI to Philfinance is null and void.
5. CA Decision:
a. TRB’s appeal still failed.
b. CBCI is not a negotiable instrument.
c. Philfinance acquired no title or rights under CBCI No. D891, which
it could assign or transfer to Traders Royal Bank and which the latter
can register with the Central Bank.
d. Thus, the transfer of the instrument from Philfinance to TRB was
merely an assignment, and is not governed by the negotiable
instruments law.
6. TRB’s contentions before the SC:
a. Assignment from Philfinance to TRB is valid.
i. Philfinance owns 90% of Filriter’s equity and the two
corporations have identical corporate officers, thus
demanding the application of the Doctrine of piercing
the veil of corporate fiction to make the transfer of the
CBCI from the registered owner to TRB valid. Since,
TRB’s payment to Philfinance is in effect a payment to
Filriters as well.
ii. Filriters and Philfinance, though separate corporate
entities on paper, have used their corporate fiction to
defraud TRB into purchasing the subject CBCI
b. It admitted that the subject CBCI is not a negotiable instrument in
the absence of words of negotiability within the meaning of the
Negotiable Instruments Law (Act 2031).
ISSUES:
1. WON the CBCI is a negotiable instrument – NO.
2. WON the Assignment of registered certificate is valid – NO.
3. WON the Doctrine of piercing the veil of corporate fiction is applicable
– NO. (PROCEED TO RATIO #3)
RULING: ACCORDINGLY, the petition is DISMISSED and the decision appealed
from dated January 29, 1990 is hereby AFFIRMED.
RATIO:
1. THE CBCI IS NOT A NEGOTIABLE INSTRUMENT
a. The CBCI clearly indicated that it is payable to Filriters and no one else.
Moreover, the certificate lacked the words of negotiability, which serve as
an expression of consent that the instrument may be transferred by
negotiation.
i. A certificate of indebtedness is for the creation and maintenance
of a permanent improvement revolving fund and is similar to a
bond.
ii. Being equivalent to a bond it is understood as an
acknowledgement of an obligation to pay a fixed sum of money.
iii. The language of negotiability which characterize a negotiable
paper as a credit instrument is its freedom to circulate as a
substitute for money.
iv. Hence, freedom of negotiability is the touchstone relating to the
protection of holders in due course.
v. This freedom in negotiability is totally absent in a certificate of
indebtedness as it merely acknowledges to pay a sum of money
to a specified person or entity for a period of time.
b. Before the instruments become negotiable instruments, the instrument must
conform to the requirements under the Negotiable Instrument Law.
Otherwise, instrument shall not bind the parties.
i. CB Circular 769, Series of 1980 (Rules and Regulations
Governing CBCIs) provides that registered certificates are
payable only to the registered owner (Article II, Section 1).
ii. This is a sufficient notice that assignments do not give registered
owners rights as absolute owner of the CBCIs.
iii. The CBCI constitutes part of the reserve investments of Filriters
against liabilities required by the Insurance Code and its
assignment or transfer is expressly prohibited by law.
iv. TRB did not attempt to get any clearance or authorization from
the Insurance Commissioner. Petitioner knew that Philfinance is
not registered owner of the CBCI No. D891. The fact that a non-
owner was disposing of the registered CBCI owned by another
entity was a good reason for petitioner to verify of inquire as to
the title Philfinance to dispose to the CBCI.
2. THE ASSIGNMENT WAS NULL AND VOID.
a. It was done without the knowledge and consent of the directors of Filriters.
i. Under 1409 of the Civil Code those contracts which are
absolutely simulated or fictitious are considered void and
inexistent from the beginning.
b. There was no consideration involved.
i. The deed of assignment stated that the transfer was for ‘value
received,’ but there was really no consideration involved. What
happened was Philfinance merely borrowed CBCI No. D891
from Filriters, a sister corporation. Thus, for lack of any
consideration, the assignment made is a complete nullity.
c. It was not duly authorized in writing by the Board, as required by Article
V, Section 3 of CB Circular No. 769 otherwise known as the ‘Rules and
Regulations Governing Central Bank Certificates of Indebtedness.
d. The assignment was a personal act of Alfredo Banaria and not the corporate
act of Filriters
e. Hence, Philfinance never acquired title or rights under CBCI No. D891.
3. THE DOCTRINE OF PIERCING THE VEIL OF CORPORATE
FICTION IS NOT APPLICABLE
a. The Doctrine of piercing the veil of corporate entity is an
equitable remedy, and may be awarded only in cases when the
corporate fiction is used to defeat public convenience, justify
wrong, protect fraud or defend crime or where a corporation is
a mere alter ego or business conduit of a person.
b. It is the protection of the interests of innocent third persons dealing
with the corporate entity, which the law aims to protect by this
doctrine.
c. Piercing the veil of corporate entity requires the court to see
through the protective shroud which exempts its stockholders
from liabilities that ordinarily, they could be subject to, or
distinguished one corporation from a seemingly separate one,
were it not for the existing corporate fiction
d. But to do this, the court must be sure that the corporate fiction
was misused, to such an extent that injustice, fraud, or crime
was committed upon another, disregarding, thus, his, her, or its
rights.
e. The corporate separateness between Filriters and Philfinance
remains, despite Traders Royal Bank’s insistence on the contrary.
f. Other than the allegation that Filriters is 90% owned by Philfinance,
and the identity of one shall be maintained as to the other.
g. The fact that Philfinance owns majority shares in Filriters is not
by itself a ground to disregard the independent corporate status
of Filriters.
h. There are not enough evidences to show that TRB was defrauded
when it acquired the subject certificate of indebtedness from
Philfinance.
i. On its face, the subject certificates states that it is registered
in the name of Filriters. TRB knew that Philfinance is not
the registered owner of CBCI No. D891.
ii. No showing to the effect that petitioner had any dealings
whatsoever with Filriters, nor did it make inquiries as to the
ownership of the certificate.
b. Moreover, CBCI No. D891 is governed by CB Circular No. 769,
series of 1980. TRB, being a commercial bank, cannot claim
ignorance of Central Bank Circular 769, and its requirements.
 006 Indophil Textile Mill Workers Union v. Calica (Gonzales) to Section 1(c), Article I of the CBA: This Agreement shall apply to the
February 3, 1992 | Medialdea, J. | Piercing the veil of doctrine of corporate fiction Company's plant facilities and installations and to any extension and
expansion thereat.
PETITIONER: Indophil Textile Mill Workers Union-PTGWO 7. Union and Textile jointly requested Calica to act as voluntary arbitrator.
RESPONDENT: Voluntary Arbitrator Teodorico Calica, Indophil Textile Mills, 8. Calica rendered his decision: Sec. l, (c), Art. I, of the 1987 CBA do not extend
Inc to the employees of Acrylic as an extension or expansion of Textile.
9. Union now appeals before the SC.
SUMMARY: Textile and Union executed a CBA. Acryclic was then formed. a. The creation of Acrylic is but a devise of Textile to evade the
Union argues that the plant facilities bult and set up by Acryclic should be application of the CBA between Union and Textile.
considered as an extension or expansion of the facilities of Textile pursuant to their b. The articles of incorporation of the two corporations establish that
CBA. Abritrator Calica ruled that CBA does not extend to the employees of Acrylic the two entities are engaged in the same kind of business.
as an expansion or extension of Textile. Union now appeals to the SC and seeks to c. The two corporations have practically the same incorporators,
pierce the veil of corporate entity of Acryclic since the creation of Acyrlic is but a directors and officers.
devise of Textile to evade the application of the CBA between Union and Textile. d. Acrylic is but an extension or expansion of Textile
i. The two corporations have their physical plants, offices
The issues are: (1) WoN the operations in Acrylic are an extension or expansion of
and facilities situated in the same compound
Texile – NO. The legal corporate entity is disregarded only if it is sought to hold
ii. Many of Textile’s own machineries, such as dyeing
the officers and stockholders directly liable for a corporate debt or obligation. In the
instant case, Union does not seek to impose a claim against the members of the machines, reeling, boiler, Kamitsus among others, were
Acrylic. Thus, Acrylic is not an extension or expansion of Indophil Textile. transferred to and are now installed and being used in the
Acrylic plant;
(2) WoN the rank-and-file employees working at Acrylic should be recognized as iii. The services of a number of units, departments or sections
part of, and/or within the scope of the bargaining unit – NO. Since Acrylic is not an of Textile are provided to Acrylic; and
extension or expansion of Textile, the rank-and-file employees working at Acrylic iv. The employees of Textile are the same persons manning
should not be recognized as part of, and/or within the scope of the union, as the and servicing the units of Acrylic.
bargaining representative of Textile. 10. Calica, through the Solicitor General, argues that
a. Acrylic has a separate legitimate business purpose.
DOCTRINE: Piercing is not allowed unless the remedy sought is to make the b. The primary purpose of Textile is to engage in the business of
officer or another corporation pecuniarily liable for corporate debts. manufacturing yarns of various counts and kinds and textiles.
c. The primary purpose of Acrylic is to manufacture, buy, sell at
FACTS: wholesale basis, barter, import, export and otherwise deal in yarns
1. Indophil Textile Mill Workers Union-PTGWO (Union) is a legitimate labor of various counts and kinds.
organization duly registered with DOLE and the exclusive bargaining agent 11. Indophil Textile argues that the existence of a bonafide business relationship
of all the rank-and-file employees of Indophil Textile Mills, Inc. (Textile). between Acrylic and Textile is not a proof of being a single corporate entity
2. Textile is a corporation engaged in the manufacture, sale and export of yarns because the services which are supposedly provided by it to Acrylic are
of various counts and kinds and of materials of kindred character and has its auxiliary services or activities which are not really essential in the actual
plants at Barrio Lambakin. Marilao, Bulacan. production of Acrylic.
3. Union and Textile executed a collective bargaining agreement.
4. Indophil Acrylic Manufacturing Corporation (Acrylic) was then formed and ISSUES:
registered with the SEC. 1. WoN the operations in Acrylic are an extension or expansion of Texile –
5. The workers of Acrylic unionized and a duly certified collective bargaining NO, since Union does not seek to impose a corporate debt.
agreement was executed. 2. WoN the rank-and-file employees working at Acrylic should be recognized
6. A year after the workers of Acrylic have been unionized and a CBA executed, as part of, and/or within the scope of the bargaining unit – NO, since Acrylic
Union claimed that the plant facilities built and set up by Acrylic should be is not an extension or expansion of Textile.
considered as an extension or expansion of the facilities of Textile pursuant
RULING: The petition is DENIED.

RATIO:
First issue
1. Under the doctrine of piercing the veil of corporate entity, when valid
grounds therefore exist, the legal fiction that a corporation is an entity with
a juridical personality separate and distinct from its members or
stockholders may be disregarded.
2. In such cases, the corporation will be considered as a mere association of
persons. The members or stockholders of the corporation will be considered
as the corporation, that is liability will attach directly to the officers and
stockholders.
3. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, 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.
4. While we do not discount the possibility of the similarities of the businesses
of Textile and Acrylic, neither are we inclined to apply the doctrine invoked
by Union in granting the relief sought.
5. The fact that the businesses of Textile and Acrylic are related, that some of
the employees of the Textile are the same persons manning and providing
for auxilliary 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.
6. The legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation.
7. In the instant case, Union does not seek to impose a claim against the
members of the Acrylic.
8. Thus, Acrylic is not an extension or expansion of Indophil Textile.

Second issue
9. Since Acrylic is not an extension or expansion of Textile, the rank-and-file
employees working at Acrylic should not be recognized as part of, and/or
within the scope of the union, as the bargaining representative of Textile.


 007 LA CAMPANA v. KMM (Fordan)
May 25, 1953 | Reyes, J. | Piercing the veil of corporate fiction
PETITIONERS: La Campana Coffee Factory, Inc. and Tan Tong, doing business
under the trade name “La Campana Gaugau Packing”
RESPONDENTS: Kaisahan ng mga Manggagawa sa La Campana and Court of
Industrial Relations
SUMMARY: Tan Tong, since 1932, has been been engaged in the buying and
selling of gaugau under the trade name, LC Gaugau. In 1950, Tan Tong and his
family members organized the family corporation, LC Coffee. Tan Tong’s
employees formed KMM with an authorization from the Department of Labor to
become an affiliate of Kalipunan. KMM, with its 66 members, presented a demand
for higher wages and more privileges to LC Factory. The demand was not granted
and so a case was filed in CIR. Both LC Gaugau and LC Coffee filed a motion to
dismiss alleging that the action was directed against 2 different entities with distinct
personalities. CIR denied said motion (based on fact no. 8).
The issue is whether or not LC Gaugau and LC Coffee pertains to only one entity
for the CIR to take cognizance of the case.
The SC held that both pertains to only one entity since they operating under one
single management (as one business). The doctrine that a corporation is a legal
entity existing separate and apart from the person composing it is a legal theory
introduced for purposes of convenience and to subserve the ends of justice. The
concept cannot, therefore, be extended to a point beyond its reason and policy, and
when invoked in support of an end subversive of this policy, will be disregarded by
the courts. Tan Tong appears to be the owner of the LC Gaugau and LC Coffee,
though an incorporated business, is in reality owned exclusively by him and his
family. Further, the two factories have but one office, one management, one
payroll, and above all, the laborers were interchangeable.
DOCTRINE: In an appropriate case and in furtherance of the ends of justice, a
corporation and the individual or individuals owning all its stocks and assets will be
treated as identical, the corporate entity being disregarded where used as a cloak or
cover for fraud or illegality – doctrine of disregarding of corporate entity (or
piercing the veil of corporate fiction).
FACTS:
26. Tan Tong, since 1932, has been engaged in the business of buying and selling
gaugau under the trade name “La Campana Gaugau Packing” (LC Gaugau)
located in España Extension, Quezon City.
27. On July 1950, Tan Tong, with himself and members of his family as sole • while LC Coffee is a family corporation with Tan Tong, his wife, and
incorporators and stockholders, organized a family corporation known as children as the incorporators and stockholders, the LC Gaugau is merely
“La Campana Coffee Factory Co., Inc.” (LC Coffee), with its principal office
located in the same place as that of LC Gaugau.
28. A year before the formation of LC Coffee, Tan Tong had entered into a
collective bargaining agreement with the Philippine Legion of Organized
Workers (PLOW), to which the union of Tan Tong's employees was then
affiliated.
29. However, Tan Tong's employees later on formed their own organization
known as Kaisahan Ng Mga Manggagawa Sa La Campana (KMM) and
applied for registration in the Department of Labor (Department) as an
independent entity. Pending consideration of this application, the
Department gave the new organization legal standing by issuing it a permit
as an affiliate to the Kalipunan Ng Mga Kaisahang Manggagawa
(Kalipunan).
30. On July 1951, KMM, with 66 members which are all workers of both LC
Gaugau and LC Coffee, presented a demand for higher wages and more
privileges which were being addressed to La Campana Starch and Coffee
Factory (LC Factory), the name designated to represent both LC Gaugau and
LC Coffee.
31. As the demand was not granted and an attempt at settlement had given no
result, a case was filed to the Court of Industrial Relations (CIR). While the
case was pending, the Secretary of Labor revoked the Kalipunan's permit as
a labor union on the strength of information received that it was dominated
by subversive elements, and, in consequence, also suspended the permit of
its affiliate, KMM.
32. With the revocation of the KMM’s permit, both LC Gaugau and LC Coffee
and PLOW, which was allowed to intervene, filed separate motions for
dismissal on the case claiming that:
• the action is directed against 2 different entities with distinct
personalities (LC Gaugau and LC Coffee);
• KMM has no legal capacity to sue because its registration as an organized
union has been revoked by the Department; and
• there is an existing valid contract between LC Gaugau and PLOW, where
in the KMM's members are contracting parties bound by said contract.
33. After hearing and on the basis of evidences presented, CIR denied the
motions and held that:
a business name
 • In the contract of lease, Tan Tong, proprietor and manager of the LC convenience and to subserve the ends of justice cannot be invoked to further
2
Gaugau, leased 200 m in the bodega housing the gaugau factory to his an end subversive of that purpose.
son, Tan Keng Lim, manager of the LC Coffee
• there is only one entity LC Factory as shown by the signboard, the 73. The doctrine that a corporation is a legal entity existing separate and
advertisement in the delivery trucks, the packages of gaugau, and apart from the person composing it is a legal theory introduced for
delivery form purposes of convenience and to subserve the ends of justice. The concept
cannot, therefore, be extended to a point beyond its reason and policy, and
• all the laborers working in the gaugau or in the coffee factory receive
when invoked in support of an end subversive of this policy, will be
their pay from the same cashier and secretary of Tan Tong, Natividad disregarded by the courts. Thus, in an appropriate case and in furtherance
Garcia (Garcia) of the ends of justice, a corporation and the individual or individuals
• the workers are transferred from the gaugau to the coffee and vice-versa owning all its stocks and assets will be treated as identical, the corporate
as the management so requires entity being disregarded where used as a cloak or cover for fraud or
• there has been only one payroll for the entire personnel and only illegality – doctrine of disregarding of corporate entity (or piercing the
Natividad was preparing it but after the case was filed, they began to veil of corporate fiction).
separate the payroll account for LC Gaugau and LC Coffee
• both LC Gaugau and LC Coffee use the same delivery trucks 74. Furthermore, a subsidiary or auxiliary corporation which is created by a
Thus, there is only one management for the business of gaugau and coffee parent corporation merely as an agency for the latter may sometimes be
with whom the laborers are dealing with regarding their work. regarded as identical with the parent corporation, especially if the
stockholders or officers of the two corporations are substantially the same or
34. Hence, the current petition by LC Coffee and PLOW. LC Coffee claimed that their system of operation unified.
CIR has no jurisidiction to take cognizance of the case since it has only 14
employees, 5 of whom are members of the KMM and therefore the absence 75. In this case, Tan Tong appears to be the owner of the LC Gaugau and LC
Coffee, though an incorporated business, is in reality owned exclusively by
of the jurisdictional number (30) as provided by sections 1 and 4 of
4 him and his family.
Commonwealth Act No. 103 (C.A. 103).
76. As confirmed by CIR, the two factories have but one office, one management
ISSUE: Whether or not LC Gaugau and LC Coffee pertains to only one entity for the
and one payroll, except after the case was filed, when the person who was
CIR to take cognizance of the case. –Yes, since both have one office, one
discharging the office of cashier for both branches of the business began
management and one payroll.
preparing separate payrolls for the two. Above all, the laborers of the LC
Gaugau and LC Coffee were interchangeable, that is, the laborers from the
RULING: The petition was denied. gaugau factory were sometimes transferred to the coffee factory and vice-
versa.
RATIO:
71. The SC held that the contention of LC Coffee of lack of jurisdiction loses 77. In view of all these, the attempt to make the two factories appears as two
force since it is the same entity with LC Gaugau where the latter’s employees separate businesses, when in reality they are but one, is but a device to
is more than the jurisdictional number (30) provided by C.A.103. defeat the ends of the law (the Act governing capital and labor relations)
and should not be permitted to prevail.
72. As found by the CIR, LC Gaugau and LC Coffee are operating under one
single management (as one business) with two trade names. Although, LC
Coffee is a corporation and, by legal fiction, an entity existing separate and
apart fro the persons composing it, that is, Tan Tong and his family but it is
settled that this fiction of law, which has been introduced as a matter of

4
An Act to Afford Protection of Labor by Creating a Court of Industrial Relations Empowered to Fix Arbitration Between Employees or Landlords, and Employees or Tenants, Respectively; and by
Minimum Wages for Laborers and Maximum Rentals to be Paid by Tenants, and to Enforce Compulsory Prescribing Penalties for the Violation of its Orders
 008 Francisco Motors Corporation vs. CA (Gueco)
June 25, 1999 | Quisimbing, J. | Doctrine of Piercing the Veil of Corporate Fiction
PETITIONER: Francisco Motors Corporation
RESPONDENTS: Court of Appeals and Spouses Gregorio and Librada Manuel
SUMMARY:
Atty. Manuel purchased a jeep body from FMC. He allegedly failed to pay for
it, so FMC filed a complaint against him for the recovery of the unpaid balance.
In his answer, Atty. Manuel interposed a counterclaim of P50,000 stating that he
was not paid for the legal services that he rendered for FMC when he took care
of the intestate proceedings of Benita Trinidad, one of the incorporators of
FMC. FMC failed to answer the counterclaim so the trial court declared FMC in
default and evidence ex parte was presented. Both the RTC and CA granted
Atty. Manuel’s counterclaim and applied the doctrine of piercing the veil of
corporate fiction by holding the CORPORATION liable for the cost being
claimed by Atty. Manuel. FMC filed this present petition questioning the
propriety of it being made a party to case. It alleges that it is the individual
members of the Francisco family who are the real parties in interest. ISSUE:
WoN the lower courts were correct in applying the doctrine of piercing the veil
of corporate fiction—NO, THEY WERE WRONG BECAUSE THEY
APPLIED THE DOCTRINE UPSIDE DOWN (CORPORATION WAS HELD
LIABLE FOR THE PERSONAL OBLIGATIONS OF THE
INCORPORATORS). RULING: The doctrine was erroneously applied in this
case. The rationale behind piercing a corporation’s identity is to remove the
barrier between the corporation and the persons comprising it, so as to thwart
the fraudulent and illegal schemes of those who use the corporate personality as
a shield for undertaking certain proscribed activities. However, in this case,
instead of holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is FMC as a corporation
which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned. Hence, the
doctrine has been turned upside down because of its erroneous invocation.
DOCTRINE:
The rationale behind piercing a corporation’s identity in a given case is to remove
the barrier between the corporation from the persons comprising it to thwart the
fraudulent and illegal schemes of those who use the corporate personality as a
shield for undertaking certain proscribed activities. However, in the case at bar,
instead of holding certain individuals or person responsible for an alleged
corporate act, the situation has been reversed. It is the petitioner as a corporation
which is being ordered to answer for the personal liability of certain individual
directors, officers and incorporators concerned. Hence, it appears to us that the
doctrine has been turned upside down because of its erroneous invocation.
FACTS:
1. Atty. Gregorio Manuel purchased a jeep body from Francisco Motors
Corporation (“FMC”). He allegedly failed to pay for it, so FMC filed a
complaint against him for the recovery of P3,412 (cost of the jeep body), P20,
454 (cost of repair of the vehicle), and P6,000 (for cost of suit and attorneys
fees).
2. In his answer, Atty. Manuel interposed a counterclaim in the amount of
P50,000, alleging that he was the Assistant Legal Officer for FMC and that
he rendered legal services for the Francisco family (incorporators of FMC)
when they needed him to take care of the intestate proceedings of Benita
Trinidad. He claims that he was not paid for said legal service; hence, the
counterclaim.
3. FMC failed to answer the counterclaim so the trial court declared FMC in
default and evidence ex parte was presented.
4. Both the RTC and CA granted Atty. Manuel’s counterclaim. It applied the
doctrine of piercing the veil of corporate fiction by holding the corporation
liable for the cost being claimed by Atty. Manuel.
5. FMC filed this present petition questioning the propriety of it being made a
party to case. It alleges that it is the individual members of the Francisco
family who are the real parties in interest.
ISSUES:
1. WoN the lower courts were correct in applying the doctrine of piercing the
veil of corporate fiction—NO, THEY WERE WRONG BECAUSE THEY
APPLIED THE DOCTRINE UPSIDE DOWN (CORPORATION WAS
HELD LIABLE FOR THE PERSONAL OBLIGATIONS OF THE
INCORPORATORS).
RULING: WHEREFORE, the petition is hereby GRANTED and the assailed
decision is hereby REVERSED insofar only as it held Francisco Motors Corporation
liable for the legal obligation owing to private respondent Gregorio Manuel; but this
decision is without prejudice to his filing the proper suit against the concerned
members of the Francisco family in their personal capacity. No pronouncement as to
costs.
RATIO:
1. Basic in corporation law is the principle that a corporation has a separate
personality distinct from its stockholders and from other corporations to
which it may be connected. However, under the doctrine of piercing the veil
of corporate entity, the corporation’s separate juridical personality may be
disregarded, for example, when the corporate identity is used to defeat
public convenience, justify wrong, protect fraud, or defend crime. Also,
where the corporation is a 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, then its distinct personality may be ignored.
In these circumstances, the courts will treat the corporation as a mere
 aggrupation of persons and the liability will directly attach to them. The
legal fiction of a separate corporate personality in those cited instances, for
reasons of public policy and in the interest of justice, will be justifiably set
aside.
2. In this case, the doctrine was erroneously applied. The rationale behind
piercing a corporation’s identity is to remove the barrier between the
corporation from the persons comprising it, so as to thwart the fraudulent
and illegal schemes of those who use the corporate personality as a shield
for undertaking certain proscribed activities. However, in this case, instead
of holding certain individuals or persons responsible for an alleged
corporate act, the situation has been reversed. It is FMC as a corporation
which is being ordered to answer for the personal liability of certain
individual directors, officers and incorporators concerned. Hence, the
doctrine has been turned upside down because of its erroneous
invocation.
3. Note that according to Atty. Manuel’s legal services were solicited as
counsel for members of the Francisco family to represent them in the
intestate proceedings over Benita Trinidads estate. These estate
proceedings did not involve any business of FMC. Hence, FMC could not be
made liable for the obligations of its stockholders.
 009 PNB vs. RITRATTO GROUP (Elach)
July 31, 2001 | Kapunan, J. | Piercing Doctrine is solely an “equitable remedy”
PETITIONERS: Philippine National Bank
RESPONDENTS: Ritratto Group Inc., Riatto International, Inc., and Dadasan
General Merchandise
SUMMARY: PNB-IFL, a subsidiary company of PNB extended credit to Ritratto
and secured by the real estate mortgages on four parcels of land. Since there was
default, PNB-IFL thru PNB, foreclosed the property and were subject to public
auction. Ritratto Group filed a complaint for injunction. PNB filed a motion to
dismiss on the grounds of failure to state a cause of action and the absence of any
privity between respondents and petitioner. Issue is whether or not PNB is privy
to the loan contracts entered into by Ritratto Group and PNB-IFL being that PNB-
IFL is owned by PNB as they are merely alter egos? No. The contract questioned
is one entered into between Ritratto and PNB-IFL. PNB was admittedly an agent
of the latter who acted as an agent with limited authority and specific duties under
a special power of attorney incorporated in the real estate mortgage.
The mere fact that a corporation owns all of the stocks of another corporation,
taken alone is not sufficient to justify their being treated as one entity. If used to
perform legitimate functions, a subsidiary’s separate existence may be respected,
and the liability of the parent corporation as well as the subsidiary will be confined
to those arising in their respective business. The courts may, in the exercise of
judicial discretion, step in to prevent the abuses of separate entity privilege and
pierce the veil of corporate entity.
DOCTRINE: The doctrine of piercing the corporate veil is an equitable doctrine
developed to address situations where the separate corporate personality of a
corporation is abused or used for wrongful purposes. The doctrine applies when
the corporate fiction is used to defeat public convenience, justify wrong, protect
fraud or defend crime, 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.
FACTS:
1. Petitioner Philippine National Bank is a domestic corporation organized and
existing under Philippine law while respondents are domestic corporations,
likewise, organized and existing under Philippine law.
2. PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB,
organized and doing business in Hong Kong, extended a letter of credit in
favor of the respondents in the amount of US$300,000.00 secured by real
estate mortgages constituted over four (4) parcels of land in Makati City. This
credit facility was later increased.
3. Respondents made repayments of the loan incurred by remitting those
amounts to their loan account with PNB-IFL in Hong Kong.
4. However, their outstanding obligations stood at US$1,497,274.70. Pursuant
to the terms of the real estate mortgages, PNB-IFL, through its attorney-in-
fact PNB, notified the respondents of the foreclosure of all the real estate
mortgages and that the properties subject thereof were to be sold at a public
auction.
5. Respondents filed a complaint for injunction. The Executive Judge of the
RTC of Makati issued a 72-hour temporary restraining order, and then the
trial judge set a hearing on June 8, 1999.
6. Trial court judge issued an Order for the issuance of a writ of preliminary
injunction, then denied Petitioner’s motion to dismiss.
7. PNB, thereafter, filed a petition for certiorari and prohibition before CA.
8. Ritratto’s allegation:
a. even assuming arguendo that PNB and PNB-IFL are two separate
entities, PNB is still the party-in-interest in the application for
preliminary injunction because it is tasked to commit acts of
foreclosing respondents' properties
b. the entire credit facility is void as it contains stipulations in violation
of the principle of mutuality of contracts
c. the act of the court a quo in applying the doctrine of "Piercing the
Veil of Corporate Identity", by stating that petitioner is merely an
alter ego or a business conduit of PNB-IFL, is justified
ISSUE/s
W/N PNB is an alter ego of PNB-IFL – NO
RULING: IN VIEW OF THE FOREGOING, the petition is hereby GRANTED. The
assailed decision of the Court of Appeals is hereby REVERSED. The Orders dated
June 30, 1999 and October 4, 1999 of the Regional Trial Court of Makati, Branch 147
in Civil Case No. 99-1037 are hereby ANNULLED and SET ASIDE and the complaint
in said case DISMISSED.
RATIO:
1. The general rule is that as a legal entity, a corporation has a personality
distinct and separate from its individual stockholders or members, and is not
affected by the personal rights, obligations and transactions of the latter.
2. The mere fact that a corporation owns all of the stocks of another corporation,
taken alone is not sufficient to justify their being treated as one entity. If used
to perform legitimate functions, a subsidiary's separate existence may be
respected, and the liability of the parent corporation as well as the subsidiary
will be confined to those arising in their respective business.
3. The courts may in the exercise of judicial discretion step in to prevent the
abuses of separate entity privilege and pierce the veil of corporate entity.
 4. Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner
PNB, there is now showing of the indicative factors that the former These are as follows:
corporation is a mere instrumentality of the latter are present.
5. Neither is there a demonstration that any of the evils sought to be prevented (a) The parent corporation owns all or most of the capital stock of the subsidiary.
by the doctrine of piercing the corporate veil exist. Inescapably, therefore, the
doctrine of piercing the corporate veil based on the alter ego or (b) The parent and subsidiary corporations have common directors or officers.
instrumentality doctrine finds no application in the case at bar.
6. In any case, the parent-subsidiary relationship between PNB and PNB-IFL is (c) The parent corporation finances the subsidiary.
not the significant legal relationship involved in this case since the petitioner
was not sued because it is the parent company of PNB-IFL. (d) The parent corporation subscribes to all the capital stock of the subsidiary or
7. Rather, the petitioner was sued because it acted as an attorney-in-fact of PNB- otherwise causes its incorporation.
IFL in initiating the foreclosure proceedings. A suit against an agent cannot
without compelling reasons be considered a suit against the principal. (e) The subsidiary has grossly inadequate capital.
8. Under the Rules of Court, every action must be prosecuted or defended in the
name of the real party-in-interest, unless otherwise authorized by law or these (f) The parent corporation pays the salaries and other expenses or losses of the
Rules. In mandatory terms, the Rules require that "parties-in-interest without subsidiary.
whom no final determination can be had, an action shall be joined either as
plaintiffs or defendants." In the case at bar, the injunction suit is directed only (g) The subsidiary has substantially no business except with the parent
against the agent, not the principal. corporation or no assets except those conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the
subsidiary is described as a department or division of the parent corporation, or its
business or financial responsibility is referred to as the parent corporation's own.
Note:
(i) The parent corporation uses the property of the subsidiary as its own.
The SC cited a US case in their decision to show circumstances that may be used to
determine if a subsidiary is a mere instrument of the parent corporation: (j) The directors or executives of the subsidiary do not act independently in the
interest of the subsidiary but take their orders from the parent corporation.
The case of Garrett vs. Southern Railway Co. is enlightening. The case involved a suit
against the Southern Railway Company. Plaintiff was employed by Lenoir Car Works (k) The formal legal requirements of the subsidiary are not observed.
and alleged that he sustained injuries while working for Lenoir. He, however, filed a
suit against Southern Railway Company on the ground that Southern had acquired the The Tennessee Supreme Court thus ruled:
entire capital stock of Lenoir Car Works, hence, the latter corporation was but a mere
instrumentality of the former. The Tennessee Supreme Court stated that as a general In the case at bar only two of the eleven listed indicia occur, namely, the ownership of
rule the stock ownership alone by one corporation of the stock of another does most of the capital stock of Lenoir by Southern, and possibly subscription to the capital
not thereby render the dominant corporation liable for the torts of the subsidiary stock of Lenoir. . . The complaint must be dismissed.
unless the separate corporate existence of the subsidiary is a mere sham, or unless
the control of the subsidiary is such that it is but an instrumentality or adjunct of
the dominant corporation. Said Court then outlined the circumstances which may
be useful in the determination of whether the subsidiary is but a mere
instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly
impossible to catalogue the infinite variations of fact that can arise but there are certain 010 Umali v. CA (Celaje)
common circumstances which are important and which, if present in the proper Sept. 13, 1990 | Regalado, J. | Piercing the corporate veil is remedy of last resort and
combination, are controlling. is not available when other remedies are still available

PETITIONER: BUENAFLOR C. UMALI, MAURICIA M. VDA. DE
CASTILLO, VICTORIA M. CASTILLO, BERTILLA C. RADA, MARIETTA
C. ABAÑEZ, LEOVINA C. JALBUENA and SANTIAGO M. RIVERA.
RESPONDENTS: COURT OF APPEALS, BORMAHECO, INC. and
PHILIPPINE MACHINERY PARTS MANUFACTURING CO., INC.
SUMMARY: Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia
Meer Vda. de Castillo. The Castillo family are the owners of a parcel of land
located in Lucena City which was given as security for a loan from the
Development Bank of the Philippines. These parcels of land were eventually
mortgaged by Rivera in favor of ICP as security for ICP guaranteeing the
obligation of Slobec/Rivera with Bormaheco for the balance of P180,000 for
payment for a tractor. ICP eventually foreclosed on the parcels of land. In the
case at bar, petitioners seek to pierce the of corporate entity of Bormaheco, ICP
and PM Parts, alleging that these corporations employed fraud in causing the
foreclosure and subsequent sale of the real properties belonging to petitioners.
It is our considered opinion that piercing the veil of corporate entity is not the
proper remedy in order that the foreclosure proceeding may be declared a
nullity under the circumstances obtaining in the legal case at bar. In the first
place, the legal corporate entity is disregarded only if it is sought to hold the
officers and stockholders directly liable for a corporate debt or obligation. In the
instant case, petitioners do not seek to impose a claim against the individual
members of the three corporations involved; on the contrary, it is these
corporations which desire to enforce an alleged right against petitioners.
DOCTRINE: Applying the piercing the veil doctrine is improper when the
relief sought is merely for the declaration of the nullity of the foreclosure sale
because such relief may be obtained without having to disregard the aforesaid
corporate fiction attaching to corporations.
FACTS:
1. Plaintiff Santiago Rivera is the nephew of plaintiff Mauricia Meer Vda. de
Castillo. The Castillo family are the owners of a parcel of land located in
Lucena City which was given as security for a loan from the Development
Bank of the Philippines.
2. For their failure to pay the amortization, foreclosure of the said property was
about to be initiated. This problem was made known to Santiago Rivera, who
proposed to them the conversion into subdivision of the four (4) parcels of
land adjacent to the mortgaged property to raise the necessary fund.
3. The idea was accepted by the Castillo family and to carry out the project, a
Memorandum of Agreement was executed by and between Slobec Realty and
Development, Inc., represented by its President Santiago Rivera and the
Castillo family.
4. In this agreement, Santiago Rivera obliged himself to pay the Castillo family
the sum of P70,000.00 immediately after the execution of the agreement and
to pay the additional amount of P400,000.00 after the property has been
converted into a subdivision.
5. Rivera, armed with the agreement, approached Mr. Modesto Cervantes,
President of defendant Bormaheco, and proposed to purchase from
Bormaheco two (2) tractors Model D-7 and D-8 Subsequently, a Sales
Agreement was executed on December 28,1970.
6. On January 23, 1971, Bormaheco, Inc. and Slobec Realty and Development,
Inc., represented by its President, Santiago Rivera, executed a Sales
Agreement over one unit of Caterpillar Tractor D-7 with Serial No. 281114,
as evidenced by the contract marked Exhibit '16'.
7. As shown by the contract, the price was P230,000.00 of which P50,000.00
was to constitute a down payment, and the balance of P180,000.00 payable
in eighteen monthly installments.
8. On the same date, Slobec, through Rivera, executed in favor of Bormaheco a
Chattel Mortgage (Exh. K, p. 29, Record) over the said equipment as security
for the payment of the aforesaid balance of P180,000.00.
9. As further security of the aforementioned unpaid balance, Slobec obtained
from Insurance Corporation of the Phil. a Surety Bond, with ICP (Insurance
Corporation of the Phil.) as surety and Slobec as principal, in favor of
Bormaheco, as borne out by Exhibit '8' (p. 111, Record).
10. The aforesaid surety bond was in turn secured by an Agreement of Counter-
Guaranty with Real Estate Mortgage (Exhibit I) executed by Rivera as
president of Slobec and Mauricia Meer Vda. de Castillo, Buenaflor Castillo
Umali, etc., as mortgagors and Insurance Corporation of the Philippines
(ICP) as mortgagee.
11. In this agreement, ICP guaranteed the obligation of Slobec with Bormaheco
in the amount of P180,000.00. In giving the bond, ICP required that the
Castillos mortgage to them the properties in question, namely, four
parcels of land covered by TCTs in the name of the aforementioned
mortgagors, all of the Register of Deeds for Lucena City.
12. Meanwhile, for violation of the terms and conditions of the Counter-Guaranty
Agreement (Exh. 1), the properties of the Castillos were foreclosed by ICP
as the highest bidder with a bid of P285,212.00, a Certificate of Sale was
issued and Transfer Certificates of Title over the subject parcels of land were
issued by the Register of Deeds of Lucena City in favor of ICP.
13. The mortgagors had 1 year from the date of the registration of the certificate
of sale, that is, until October 1, 1974, to redeem the property, but they failed
to do so. ICP then consolidated its ownership over the parcels of land.
14. On April 10, 1975, ICP sold to Phil. Machinery Parts Manufacturing Co. (PM
 Parts) the four (4) parcels of land and by virtue of said conveyance.
15. Thereafter, PM Parts, through its President, Mr. Modesto Cervantes, sent a
letter dated August 9,1976 addressed to plaintiff Mrs. Mauricia Meer Castillo
requesting her and her children to vacate the subject property, who (Mrs.
Castillo) in turn sent her reply expressing her refusal to comply with his
demands.
16. On September 29, 1976, the heirs of the late Felipe Castillo, particularly
plaintiff Buenaflor M. Castillo Umali as the appointed administratrix of the
properties in question filed an action for annulment of title before the then
Court of First Instance of Quezon.
17. They contended that all the aforementioned transactions starting with the are
void for being entered into in fraud and without the consent and approval of
the Court of First Instance of Quezon, (Branch IX) before whom the
administration proceedings have been pending.
18. RTC: Ruled in favor of petitioners. Nullified the documents, the foreclosure
and the sales.
19. CA: Reversed RTC decision.
ISSUES:
1. W/N the CA erred in holding and finding that the actions entered into between
petitioner Rivera with Cervantes are all fair and regular and therefore binding
between the parties thereto. No.
2. W/N the CA erred in setting aside the finding of the lower court that there
was necessity to pierce the veil of corporate existence. No.
3. W/N ICP could validly foreclose the mortgaged lands. No.
RULING: WHEREFORE, the decision of respondent Court of Appeals is
hereby REVERSED and SET ASIDE, and judgment is hereby rendered declaring the
following as null and void: (1) Certificate of Sale … in favor of the Insurance
Corporation of the Philippines; (2) Transfer Certificates of Titles … issued in the
name of the Insurance Corporation of the Philippines; and (3) the sale by Insurance
Corporation of the Philippines in favor of Philippine Machinery Parts Manufacturing
Co., Inc. of the four (4) parcels of land covered by the aforesaid certificates of title.
RATIO:
1. I. Petitioners aver that the transactions entered into between Santiago M.
Rivera, as President of Slobec Realty and Development Company (Slobec)
and Mode Cervantes, as Vice-President of Bormaheco, such as the Sales
Agreement, Chattel Mortgage and the Agreement of Counter-Guaranty
6 7
with Chattel/Real Estate Mortgage, are all fraudulent and simulated and
should, therefore, be declared nun and void.
2. Petition raised questions of facts. CA already ruled against petitioners. Under
the circumstances, we find no compelling reason to deviate from the long-
standing jurisprudential pronouncement that questions of facts are ordinarily
binding on the SC.
3. There is absolute simulation, which renders the contract null and void, when
the parties do not intend to be bound at all by the same.
4. The subsequent act of Rivera in receiving and making use of the tractor
subject matter of the Sales Agreement and Chattel Mortgage, and the
simultaneous issuance of a surety bond in favor of Bormaheco, concomitant
with the execution of the Agreement of Counter-Guaranty with Chattel/Real
Estate Mortgage, conduce to the conclusion that petitioners had every
intention to be bound by these contracts. No evidence that the contracts were
simulated.
5. II. Under the doctrine of piercing the veil of corporate entity, when valid
grounds therefore exist, the legal fiction that a corporation is an entity with a
juridical personality separate and distinct from its members or stockholders
may be disregarded.
6. In such cases, the corporation will be considered as a mere association of
persons. The members or stockholders of the corporation will be considered
as the corporation, that is, liability will attach directly to the officers and
stockholders.
7. The doctrine applies when the corporate fiction is used to defeat public
convenience, justify wrong, protect fraud, or defend crime, or when it is
made as a shield to confuse the legitimate issues or where a corporation is
14
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.
8. In the case at bar, petitioners seek to pierce the of corporate entity of
Bormaheco, ICP and PM Parts, alleging that these corporations employed
fraud in causing the foreclosure and subsequent sale of the real properties
belonging to petitioners
9. While we do not discount the possibility of the existence of fraud in the
foreclosure proceeding, neither are we inclined to apply the doctrine invoked
by petitioners in granting the relief sought.
10. It is our considered opinion that piercing the veil of corporate entity is
not the proper remedy in order that the foreclosure proceeding may be
declared a nullity under the circumstances obtaining in the legal case at
bar.
11. In the first place, the legal corporate entity is disregarded only if it is sought
to hold the officers and stockholders directly liable for a corporate debt or
obligation.
12. In the instant case, petitioners do not seek to impose a claim against the
individual members of the three corporations involved; on the contrary, it is
these corporations which desire to enforce an alleged right against petitioners.
13. Assuming that petitioners were indeed defrauded by private respondents in
the foreclosure of the mortgaged properties, this fact alone is not, under the
circumstances, sufficient to justify the piercing of the corporate fiction, since
petitioners do not intend to hold the officers and/or members of respondent
corporations personally liable therefor.
14. Petitioners are merely seeking the declaration of the nullity of the foreclosure
sale, which relief may be obtained without having to disregard the aforesaid
corporate fiction attaching to respondent corporations.
15. Secondly, petitioners failed to establish by clear and convincing evidence that
private respondents were purposely formed and operated, and thereafter
transacted with petitioners, with the sole intention of defrauding the latter.
16. The mere fact, therefore, that the businesses of two or more corporations are
interrelated is not a justification for disregarding their separate personalities,
absent sufficient showing that the corporate entity was purposely used as a
shield to defraud creditors and third persons of their rights.
17. III. The main issue for resolution is whether there was a valid foreclosure of
the mortgaged properties by ICP.
18. 1. Petitioners asseverate that there was no notice of default issued by
Bormaheco to ICP which would have entitled Bormaheco to demand
payment from ICP under the suretyship contract.
19. It is basic that liability on a bond is contractual in nature and is ordinarily
restricted to the obligation expressly assumed therein. Fundamental likewise
is the rule that, except where required by the provisions of the contract, a
demand or notice of default is not required to fix the surety's liability.
20. In the case at bar, the suretyship contract expressly provides that ICP shall
not be liable for any claim not filed in writing within thirty (30) days from
the expiration of the bond.
21. In its decision dated May 25 1987, the court a quo categorically stated that
'(n)o evidence was presented to show that Bormaheco demanded payment
from ICP nor was there any action taken by Bormaheco on the bond posted
by ICP to guarantee the payment of plaintiffs obligation. There is nothing in
the records of the proceedings to show that ICP indemnified Bormaheco for
the failure of the plaintiffs to pay their obligation. "
22. The failure, therefore, of Bormaheco to notify ICP in writing about Slobec's
supposed default released ICP from liability under its surety bond.
Consequently, ICP could not validly foreclose that real estate mortgage
executed by petitioners in its favor since it never incurred any liability under
the surety bond.
23. 2. It is possible that the period of suretyship may be shorter than that of the
principal obligation, as where the principal debtor is required to make
payment by installments. In the case at bar, the surety bond issued by ICP
was to expire on January 22, 1972, twelve months from its effectivity date,
whereas Slobec's installment payment was to end on July 23, 1972.
24. Thus, from January 23, 1972 up to July 23, 1972, the liability of Slobec
became an unsecured obligation. The default of Slobec during this period
cannot be a valid basis for the exercise of the right to foreclose by ICP since
its surety contract had already been terminated.
25. Consequently, the foreclosure of the mortgage, after the expiration of the
surety bond under which ICP as surety has not incurred any liability, should
be declared null and void.
26. IV. Private respondent PM Parts posits that it is a buyer in good faith and,
therefore, it acquired a valid title over the subject properties. The submission
is without merit and the conclusion is specious
27. We have stated earlier that the doctrine of piercing the veil of corporate
fiction is not applicable in this case. However, its inapplicability has no
bearing on the good faith or bad faith of private respondent PM Parts.
28. It must be noted that Modesto N. Cervantes served as Vice-President of
Bormaheco and, later, as President of PM Parts. On this fact alone, it cannot
be said that PM Parts had no knowledge of the aforesaid several transactions
executed between Bormaheco and petitioners.
29. In addition, Atty. Martin de Guzman, who is the Executive Vice-President of
Bormaheco, was also the legal counsel of ICP and PM Parts. These facts were
admitted without qualification in the stipulation of facts submitted by the
parties before the trial court.
30. Hence, the defense of good faith may not be resorted to by private respondent
PM Parts which is charged with knowledge of the true relations existing
between Bormaheco, ICP and herein petitioners. Accordingly, the transfer
certificates of title issued in its name, as well as the certificate of sale, must
be declared null and void since they cannot be considered altogether free of
the taint of bad faith.
011 GREGORIO ARANETA INC v. TUASON DE PATERNO
(Galindez)
22 August 1952 | Tuason, J. | Piercing of the Doctrine as an Equitable Remedy
 PETITIONER:
RESPONDENTS:
SUMMARY: Paz Tuason owned a lot in Sta. Mesa which was 40k sqm. Parts of
the land were leased to tenants. Their lease contracts contained stipulations of
rights of first refusal. Paz entered into a mortgage contract with Vidal in which
she borrowed sums of money, and constituted mortgages on her property as
security.
Paz had negotiations with Gregorio Araneta Inc. in which they agreed that the
latter would purchase the property for P400k. Their first agreement was attached
as Exhibit 1. Since the rights of first refusal were to be respected, Paz sent out
letters to the tenants and the others took advantage of their right and purchased the
lots they occupied. A deed of sale was then executed between Paz and Gregorio
Araneta Inc., taking into account Paz’ loan to Vidal and the conveyance of the
land to those tenant-purchasers.
Gregorio Araneta Inc. then demanded Paz to deliver clean titles to the parcels of
land he purchased, and Paz refused invoking the fact that she made the sale to her
agent, Jose Araneta, who was also the president of Gregorio Araneta Inc. She also
invoked the principle which states "The courts, at law and in equity, will disregard
the fiction of corporate entity apart from the members of the corporation when it
is attempted to be used as a means of accomplishing a fraud or an illegal act."
The Court however ruled that such was inapplicable to the case at hand because
Araneta Inc. had been long organized and engaged in real estate business. The
corporate entity was not used to circumvent the law or perpetrate deception. There
is no denying that Araneta Inc. entered into the contract for itself and for its benefit
as a corporation. The contract and the roles of the parties who participated therein
were exactly as they purported to be and were fully revealed to the Paz.
DOCTRINE: Piercing doctrine is meant to prevent fraud, and cannot be
employed when the net result would be to perpetrate fraud or a wrong.
FACTS:
9. Paz Tuason de Paterno is the registered owner of a 40k sqm land in Sta. Mesa,
Manila. Most of the lots were occupied by lessees who had contracts of lease
which were to expire on the end of December 1952.
10. The contracts had a stipulation that in the event the owner and lessor should
decide to sell the property the lessees were to be given priority over other
buyers if they should desire to buy their leaseholds, all things being equal.
11. Smaller lots were being occupied by tenants without formal contracts.
12. In the years 1940&41, Paz Tuason obtained from Jose Vidal several loans
totaling P90k and constituted a first mortgage on his property to secure the
loan.
13. In January and April of 1943, she obtained additional loands of P30k and
P20k on the same security.
14. In the first novated contract the time of payment was fixed at two years and
in the second and last at four years.
15. There was also a separate written agreement entitled “Penalidad del
Documento de Novacion de Esta Fecha” which was not registered. All copies
of such were alleged to have been destroyed or lost and was the subject of
conflicting evidence.
16. In 1943 Paz Tuason decided to sell the entire property fo P400k and entered
into negotiations with Gregoria Araneta, Inc. (Araneta Inc)
17. The result was the execution of the contract on October 1943 entitled
“Promesa de Compra y Venta” (Exhibit 1)
18. Said contract provided that subject to preferred right of the lessees and that
of Jose Vidal as mortgagee, Paz Tuason would sell to Araneta Inc. and the
latter would buy for P400k the entire estate (under terms which were all in
Spanish, some of which included:)
a. The price would be paid as follows:
i. 40% together with the letter of acceptance of the tenant
ii. 20% of the price to be granted the deed of sale
iii. 40% upon granting the definitive deed of sale, which will be
granted after the mortgage in favor of Jose Vidal has been
cancelled
b. Splitting of the rentals to be received on November and December
c. Acknowledgement of Paz Tuason of receiving P190,000 from Araneta Inc.
19. Letters were sent to the lessees giving them until the end of August 1943 as
an option to buy the lots they occupied at the price and terms stated in the
letters.
20. Most of the tenants made stipulated payments and were given deeds of
conveyance. These sales have been respected by the seller (Paz)
21. Due to the purchased lands by the lessees, Paz Tuason and Araneta Inc.
executed an absolute deed of sale (Exhibit A)
a. That the deed of sale was executed by Paz free from all liens and
encumbrances
b. It is therefore clearly understood that Paz will pay the existing mortgage on
her property in favor of Jose Vidal
c. Paz also acknowledges having received an advance of P190,000
22. Before the execution of the deed, Paz Tuason had offered to Vidal the check
for P143,150 (the one which Araneta Inc. paid to her) in full settlement of her
mortgage obligation, but Vidal refused to receive the check/cancel the
mortgage because their separate agreement before mentioned payment of the
mortgage was not to be effected totally or partially 4 years from April 1943.
23. Because of Vidal’s refusal, Paz Tuason through Atty. Ponce Enrile
commenced an action against him on October 1943. The record of that case
was destroyed and no copy of the complaint ws presented in evidence.
24. The action never came on for trial and the case was not reconstituted after the
war operations.
25. Paz Tuason repudiated the terms of her agreement with Araneta Inc because
of the failure of Vidal’s mortgage cancellation, destruction of checks, and the
tremendous rise of real estate value.
 26. Araneta Inc. then compelled Paz Tuason to deliver to Araneta Inc. a clear title
to the lot free from all liens and encumbrances, and a deed of cancellation of
Vidal’s mortgage.
27. The lower court misinterpreted the contract (Exhibit 1) and invalidated such.
28. Now Paz Tuason avers that there was fraud in the contracts as there were
discrepancies between Exhibit 1 and Exhibit A.
29. She alleged that Attorneys Salvador Araneta and J. Antonio Araneta who the
Paz said had been her attorneys and had drawn Exhibit A, and not informed
or had misinformed her about its contents; that being English, she had not
read the deed of sale; that if she had not trusted the said attorneys she would
not have been so foolish as to affix her signature to a contract so one-sided.
ISSUE/s:
12. WoN Jose Araneta employed fraud in the transaction hence the corporate
entity of Gregorio Araneta Inc. must be put aside – NO, because Gregorio
Araneta Inc. had been long organized and engaged in real estate business.
The corporate entity was not used to circumvent the law or perpetrate
deception.
RULING: Summary of the Court’s findings and decision (yes, this is the wherefore
part which is 8 paragraphs long but I chose the important ones instead)
1. Exhibit A is valid and enforceable, but the loss of the checks and invalidation
of deposit is to be borne by Araneta Inc.
2. Araneta Inc. is entitled to the rents which Paz may have collected after the
date of the sale
3. Paz should pay Vidal the amount of mortgage and interest until her tender of
payment, and P30k as penalty
4. Vidal’s mortgage is superior to Araneta Inc’s right.
RATIO:
13. Exhibit A was a substantial compliance with Exhibit 1 in furtherance of
which Exhibit A was made.
14. One departure was the proviso that 10% of the purchase price should be paid
only after Vidal's mortgage should have been cancelled.
15. This provisional deduction was not onerous or unusual. It was not onerous or
unusual that the vendee should withhold a relatively small portion of the
purchase price before all the impediments to the final consummation of the
sale had been removed.
16. The tenants who had bought their lots had been granted the privilege to deduct
as much as 40 per cent of the stipulated price pending discharge of the
mortgage, although his percentage was later reduced to 10 as in the case of
Gregorio Araneta, Inc.
17. The validity of the sales to the tenants has not been contested.
18. The Court believs that had Araneta Inc. not insisted on charging to Paz the
loss of the checks deposited with the court, the sale in question would have
gone smooth way of the sales to the tenants.
19. The other stipulation embodied in Exhibit A which had no counterpart in
Exhibit 1 was that by which Araneta Inc. would hold Paz Tuason liable for
the lost checks and which, as stated, appeared to be at the root of the whole
trouble between the two.
20. The stipulation reads:
o In view of the foregoing liquidation, the Vendor acknowledges fully and
unconditionally, having received the sum of P125,174.99 of the present
legal currency and hereby expressly declares that she will not hold the
Vendee responsible for any loss that she might suffer due to the fact that
two of the checks paid to her by the Vendee were used in favor of Jose Vidal
and the latter has, up to the present time, not yet collected the same.
21. It was argued that no one in their right sense would knowingly have agreet to
such an iniquitous and unreasonable contract. However, it is difficult to
believe that Paz was deceived into signing Exhibit A.
o She had an intelligent and well-educated son who managed her affairs
o She had a good lawyer
o If Paz signed Exhibit A without being apprised of its import, it can hardly
be conceived that she did not have her attorney or her son read it to her
afterward
o It is only when she was confronted with the signed copy of the document
on the witness did she spring up the defense of fraud.
o It would look as if she gambled on the chance that no signed copy of the
deed had been saved from the war. She could not have forgotten having
signed so important a document even if she had not understood some of its
provisions.
22. It was highly possible that she did not attach much importance to it,
convinced that Vidal could be forced to accept the checks and not foreseeing
the fate that lay in store for the case against the mortgagee.
Technical objections are made against the deed of sale (Corp-related)
23. First of these is that Jose Araneta was Paz’ agent and at the same time the
president of Gregorio Araneta Inc.
24. The trial court found that he was not Paz’ agent or broker.
25. Paragraph 8 of Exhibit 1 shows that Jose Araneta as referred to as agent or
broker “who acts in this transaction” and who as such was to receive a
commission of 5%, although the commission was to be charged to the
purchasers, while in paragraph 13 Paz promised, in consideration of Jose
Araneta's services rendered to her, to assign to him all her right, title and
interest to and in certain lots not embraced in the sales to Gregorio Araneta,
Inc. or the tenants.
26. The trial court however pointed out that it was not Jose Araneta but Araneta
Inc. that was the purchaser, citing the well-known distinction between the
corporation and its stockholders. In other words, the court opined that the sale
to Gregorio Araneta, Inc. was not a sale to Jose Araneta the agent or broker.
27. Paz would have the court ignore such distinction and apply instead a principle
which states "The courts, at law and in equity, will disregard the fiction of
corporate entity apart from the members of the corporation when it is
attempted to be used as a means of accomplishing a fraud or an illegal act."
 28. However, such principle does not fit into the case at hand. obligation to pay interest.
29. Araneta Inc. had been long organized and engaged in real estate business. 41. Vidal however is entitled to penalties, which Paz seems to grant.
The corporate entity was not used to circumvent the law or perpetrate
deception.
30. There is no denying that Araneta Inc. entered into the contract for itself and
for its benefit as a corporation. The contract and the roles of the parties who
participated therein were exactly as they purported to be and were fully
revealed to the Paz.
31. There is no pretense that if Paz had known Jose Araneta was president of
Araneta Inc., that she would not have gone ahead with the deal. It would have
made no difference, except for the brokerage fee, whether Gregorio Araneta,
Inc. or Jose Araneta was the purchaser.
32. On the other hand, a perusal of the provisions on agency would show that
Jose Araneta was not an agent within the meaning of Article 1459 because he
was nothing more than a go-between or middleman between the the parties,
bringing them together to make the contract themselves.
33. Jose Araneta was not authorized to make a binding contract in behalf of
Araneta Inc. He was not to fix the price of the sale nor make the terms of
payments. He had no power or discretion whatsoever, which he could abuse
to his advantage and to the owner's prejudice.
34. Another ground for Paz’ repudiation of Exhibit A was that the law firm of
Araneta & Araneta who handled the preparation of that deed and represented
by Gregorio Araneta, Inc. were her attorneys also.
35. The fact that Attys. Salvador and Araneta and J. Antonio Araneta drew
Exhibits 1 and A, undertook to write the letters to the tenants and the deeds
of sale to the latter, and charged the defendant the corresponding fees for all
this work, did not themselves prove that they were the Paz’ attorneys.
36. And granting that they were her attorneys, they were not forbidden to buy the
property in question. Attorneys are only prohibited from buying their client's
property which is the subject of litigation. The questioned sale was effected
before the subject thereof became involved in the present action.
37. However, although Exhibit A is valid, it does not follow that Paz should be
held liabile for the loss of the checks.
38. The checks were never collected and the account against which they were
drawn was not used or claimed by Gregorio Araneta, Inc.; and since that
account "was opened during the Japanese occupation and in Japanese
currency," the checks "became obsolete as the account subject thereto is
considered null and void”
39. In these circumstances the stipulation in Exhibit A that the defendant or seller
"shall not hold the vendee responsible for any loss of these checks" was
unconscionable, void and unenforceable in so far as the said stipulation would
stretch the defendant's liability for this checks beyond 90 days.

On the mortgage of Vidal (not Corp-related anymore)

40. The Court concluded that Paz’ tender of payment to Vidal (which he rejected,
see Ratio 14 & 15) was in accordance with their contract and terminated Paz’
 012 BOYER-ROXAS v. CA (TIMBOL)
July 14, 1992 | Gutierrez, J. | Piercing the veil of corporate fiction
PETITIONER: Rebecca Boyer-Roxas and Guillermo Roxas
RESPONDENTS: Hon. Court of Appeals and Heirs of Eugenia V. Roxas, Inc.
SUMMARY: The Heirs of Eugenia Roxas inherited several properties, which is
the subject of this case. The Heirs put up a corporation, Heirs of Eugenia Roxas,
Inc. (HERI), and used the inherited lands as capital of the corporation. A portion
of this land was used by HERI to build a resort, Hidden Valley Springs Resort.
Rebecca occupied a house within the resort, which was supposed to be used as
the staff house; meanwhile, Guillermo occupied another property within the
resort, which was supposed to be used as a recreation hall. Their possession was
tolerated by the BOD of HERI, until such time that Rebecca and Guillermo
committed acts that impeded the normal use and operation of the resort. This
prompted HERI to file the immediate action to eject them. Rebecca and
Guillermo answered that they cannot be ejected because they are heirs of Eugenia
and as such, they are co-owners of the property. On the day of hearing, Rebecca
and Guillermo failed to appear, and HERI filed a motion ex parte to decide on the
evidence on record. The lower court ruled in HERI’s favor, hence this appeal:
whether or not (1) Rebecca and Guillermo were not given due process; and (2)
the veil of corporate fiction should be pierced.
As to the first, the SC held that they were given their day in court. Rebecca,
Guillermo and their counsel failed to appear on several hearings, prior to the
assailed order deciding on the merits. They received the notice, stating that failure
to appear on the hearing, the court will submit the case for decision based on the
evidence presented. As to the piercing of the veil of corporate fiction, the court
held that this is not applicable. The veil of corporate fiction may only be
pierced when such is used as a cloak or cover for fraud or illegality, which is
not present in this case. Furthermore, it must be emphasized that HERI is a
separate juridical entity. Thus, it is HERI who is the owner of the questioned
properties and not its shareholders. The shareholders only have the right to
share in its proceeds or those provided by law and equity, but not as to the capital
of the corporation. Nor is the shareholder entitled to a definite portion of its
property or assets. With regard to the consent of Eufrocino Roxas allowing
Rebecca and Guillermo to occupy such properties within the resort, there is no
law or provision allowing them to stay forever. Hence they may be ejected.
DOCTRINE: The separate personality of the corporation may be disregard only
when the corporation is used “as a cloak or cover for fraud or illegality, or to work
injustice, or where necessary to achieve equity or when necessary for the
protection of the creditors”.
Properties registered in the name of the corporation are owned by it as an entity
separate and distinct from its members. While shares of stock constitute personal
property, they do not represent property of the corporation. The corporation has
property of its own which consists chiefly of real estate. A share of stock only
typifies an aliquot share of the corporation’s property, or the right to share in its
proceeds to that extent when distributed according to law and equity, but its
holder is not the owner of any part of the capital of the corporation. Nor is he
entitled to the possession of any definite portion of its property or assets. The
stockholder is not a co-owner or tenant in common of the corporate property.
FACTS:
1. Eugenia V. Roxas was the owner of the questioned lots in Laguna. After her
death, the heirs of Eugenia V. Roxas, among them Rebecca and Guillermo,
decided to form a corporation – Heirs of Eugenia V. Roxas, Incorporated
(HERI) – with the inherited properties as the capital of the corporation.
2. The primary purpose of the corporation was originally to engaige in
agriculture, but it was amended to allow it to engage in the resort business.
Thus, HERI put up a resort known as Hidden Valley Springs Resort on a
portion of its land.
3. Improvements were introduced in the resort by HERI and among them were
cottages, houses or buildings, swimming pools, tennis court, restaurant and
open pavilions.
a. That the house near the Balugbugan Pool being occupied by
Rebecca was originally intended as staff house but later used as
the residence of Eriberto Roxas, deceased husband of Rebecca
and father of Guillermo.
b. That the third building presently being occupied by Guilermo
Roxas was originally intended as a recreation hall but later
converted as a residential house; that this house was also built
from corporate funds.
4. After the death of Eriberto Roxas, Rebecca and Guillermo committed acts
that impeded HERI’s expansion and normal operation of the resort, that HERI
could not even use its own pavilions, kitchen and other facilities.
5. This prompted HERI to filed two ejectment cases against Rebecca and
Guillermo. Moreover, they ignored the demand letters for them to vacate the
buildings as per resolution of the Board of Directors.
6. In their separate answers, Rebecca and Guillermo traversed the allegations in
the complaint by stating that they are heirs of Eugenia V. Roxas and therefore,
co-owners of the Hidden Valley Springs Resort; and as co-owners of the
property, they have the right to stay within its premises.
7. On the date of the hearing, Rebecca and Guillermo failed to appear, and upon
motion of HERI, the court issued an Order ex parte ruling in favor of HERI.
Hence this appeal.
ISSUES:
1. WoN Rebecca and Guillermo were denied due process– NO
2. WoN the CA erred in not piercing the veil of corporate fiction - NO
RULING: WHEREFORE, the present petition is partly GRANTED. The questioned
decision of the Court of Appeals affirming the decision of the Regional Trial Court of
Laguna, Branch 37, in RTC Civil Case No. 802-84-C is MODIFIED in that
subparagraphs (c) and (d) of Paragraph 1 of the dispositive portion of the decision are
deleted. In their stead, the petitioner Rebecca Boyer-Roxas and the respondent
corporation are ordered to follow the provisions of Article 448 of the Civil Code as
regards the questioned unfinished building in RTC Civil Case No. 802-84-C. The
questioned decision is affirmed in all other respects.
RATIO:
REBECCA AND GUILLERMO WERE GIVEN DUE PROCESS
1. Rebecca and Guillermo are to be blamed for the order issued by the lower
court submitting the cases for decision. They received notices of the
scheduled hearings and yet they did not do anything. More specifically, the
parties received notice of the Order with the warning that if they fail to attend
the hearing, the cases would be submitted for decision based on the evidence
on record.
2. Earlier, at the scheduled hearing on, the counsel for HERI moved that the
cases be submitted for decision for failure of Rebecca, Guillermo and their
counsel to attend despite notice. The lower court denied the motion and gave
Rebecca and Guillermo and their counsel another chance by rescheduling.
3. Indeed, Rebecca and Guillermo knew all along that their counsel was not
attending the scheduled hearings. They did not take steps to change their
counsel or make him attend to their cases until it was too late. On the contrary,
they continued to retain the services of Atty. Manicad knowing fully well his
lapses vis-à-vis their cases. They therefore, cannot raise the alleged gross
negligence of their counsel resulting in their denial of due process to
warrant the reversal of the lower court’s decision.
PIERCING THE VEIL OF CORPORATE FICTION IS NOT APPLICABLE
1. Rebecca and Guillermo contend that their possession of the questioned
properties must be respected in view of their ownership of an aliquot portion
of all the properties of HERI being stockholders thereof. They propose that
the veil of corporate fiction be pierced, considering the circumstances under
which HERI was formed.
2. The Supreme Court held however that HERI is a bona fide corporation.
As such, it has a juridical personality of its own separate from the members
composing it. There is no dispute that title over the questioned land where
the Hidden Valley Springs Resort is located is registered in the name of the
corporation.
3. The records also show that the staff house being occupied by Rebecca and
the recreation hall which was later on converted into a residential house
occupied by Guillermo are owned by HERI.
4. Properties registered in the name of the corporation are owned by it as
an entity separate and distinct from its members. While shares of stock
constitute personal property, they do not represent property of the
corporation. The corporation has property of its own which consists
chiefly of real estate. A share of stock only typifies an aliquot share of
the corporation’s property, or the right to share in its proceeds to that
extent when distributed according to law and equity, but its holder is
not the owner of any part of the capital of the corporation. Nor is he
entitled to the possession of any definite portion of its property or assets.
The stockholder is not a co-owner or tenant in common of the corporate
property. (Stocholders of F. Guanzon and Sons, Inc. v. Register of Deeds of
Manila)
5. Again we must emphasize that HERI has a distinct personality separate from
its members. The corporation transacts its business only through its officers
or agents. Whatever authority these officers or agents may have is derived
from the board of directors or other governing body unless conferred by the
charter of the corporation. An officer’s power as an agent of the corporation
must be sought from the state, charter, the by-laws or in a delegation of
authority to such officer, from the acts of the board of directors, formally
expressed or implied from a habit or custom of doing business.
6. In the present case, the record shows that Eufrocino V. Roxas who then
controlled the management of the corporation, being the majority
stockholder, consented to Rebecca and Guillermo’s stay within the
questioned properties.
7. Specifically, Eufrocino Roxas gave his consent to the conversion of the
recreation hall to a residential house, now occupied by Guillermo. The BOD
did not object to the actions of Eufrocino Roxas. Rebecca and Guillermo
allowed to stay within the questioned properties until such date, when the
BOD approved a Resolution ejecting them.
8. The SC finds nothing irregular in the adoption of the Resolution by the BOD.
Rebecca and Guillermo’s stay within the questioned proeprties was merely
by tolerance of HERI in deference to the wishes of Eufrocino Roxas, who
during his lifetime, controlled and managed the corporation.
9. Eufrocino Roxas’ actions could not have bound the corporation forever.
Rebecca and Guillermo have not cited any provision of the corporate
by-laws or any resolution or act of the BOD which authorized Eufrocino
Roxas to allow them to stay within the company premises forever. We
rule that in the absence of any existing contract between Rebecca and
Guillermo with HERI, the corporation may elect to eject theim at any time
it wishes for the benefit and interest of the corporation.
10. The suggestion of Rebecca and Guillermo that the veil of corporate fiction
should be pierced is untenable. The separate personality of the
corporation may be disregard only when the corporation is used “as a
cloak or cover for fraud or illegality, or to work injustice, or where
necessary to achieve equity or when necessary for the protection of the
creditors”.
 013 Siain Enterprises, Inc., v. Cupertino Realty Corp.(Dim)
June 22, 2009 | Justice Nachura | Real Estate Mortgage – Piercing the Veil
PETITIONER: Siain Enterprises, Inc.,
RESPONDENTS: Cupertino Realty Corporation and Edwin R. Catacutan
SUMMARY: Siain Enterprises took a 37M peso loan from Cupertino Realty covered
by a promissory note secured by a real estate mortgage. An additional PN was signed
by the officers to secure another 160M peso loan and the mortgage was amended to
secure the entire 197M peso indebtedness. Siain Enterprises wrote and demanded to
be released from the mortgage over the 160M peso loan because it allegedly never
received the proceeds. Cupertino denied this and filed for extrajudicial foreclosure.
Siain filed an injunction to prevent the public auction. The RTC and the CA applied
the doctrine of piercing the veil of corporate fiction to preclude Siain from denying
the receipt of the 160M peso proceeds. It concluded that Siain's affiliates (Siain
transport, Yuyek Manufacturing Corp, Cua Leleng, who was the President of Siain,
and Alberto Lim). The SC affirmed the lower court rulings and noted that the affiliates
and Siain have a common President, common accountant and bookkeeper, same office
address, same majority stockholder, and that Cua Leleng and Alberto Lim had been
living as common-law spouses. Hence Siain Enterprises was just the alter ego of these
affiliate individuals and companies. They cannot be allowed to use the separate
juridical personality of Siain Enterprises to defraud Cupertino. Thus, the SC upheld
the validity of the real estate mortgage which secured the loans, even if such
consideration given to Siain Enterprises was actually received by the affiliates, who
benefitted from the proceeds and were the alter-egos of the debtor-corporation.
DOCTRINE: The veil of corporate fiction may be pierced when it is used as a shield
to further an end subversive of justice, or for purposes that could not have been
intended by the law that created it; or to justify wrong, or for evasion of an existing
obligation.
FACTS:
1. Siain Enterprises, Inc. (Siain) obtained a loan of P37,000,000 from
respondent Cupertino Realty Corporation (Cupertino) covered by a
promissory note signed by both petitioner and Cupertino's authorized officers
(Presidents).
2. The promissory note authorizes , as the creditor, to place in escrow the loan
proceeds of P37,000,000 with Metropolitan Bank & Trust Company to pay
off Siain's loan obligation with Development Bank of the Philippines (DBP).
3. To secure the loan, Siain executed a real estate mortgage over two (2) parcels
of land and other immovables, such as equipment and machineries.
4. Another promissory note was signed to amend the previous one, providing
for a higher 17% interest per annum on the loan. An additional promissory
note was signed by the officers of Cupertino in their personal capacity to
secure the loan of P160,000,000. The real estate mortgage was also amended
to secure the entire indebtedness of P197,000,000.
5. Curiously however, and contrary to the tenor of the foregoing loan
documents, Siain wrote and demanded the release of the original
P160,000,000.00 loan increase covered by the amendment of real estate
mortgage.
6. Siain claims that Cupertino never gave the proceeds of the loan, but
Cupertino denies this and accuses Sian of trying to abscond from its
obligations.
7. Cupertino extrajudicially foreclosed the property. Siain filed an action to
restrain the public auction at the RTC. The RTC and the CA both affirmed
that amended real estate mortgage was valid and that Siain failed to debunk
Cupertino's evidence that the mortgage had a consideration (it was allegedly
given by Cupertino's President to Siain's affiliate companies) and that Siain
failed to receive the proceeds.
8. The lower courts applied the doctrine of piercing the veil of corporate
fiction to preclude Siain from disavowing receipt of the P160,000,000.00
and paying its obligation under the amended real estate mortgage. (The
money was supposedly received by Siain's affiliate companies)
ISSUES:
(1) WoN the lower courts erred in applying the doctrine of piercing the veil
of corporate fiction to uphold the validity of the real estate mortgage-
NO.
RULING: WHEREFORE, the petition is DISMISSED.
RATIO:
1. As a general rule, a corporation will be deemed a separate legal entity until
sufficient reason to the contrary appears. But the rule is not absolute.
2. A corporations separate and distinct legal personality may be
disregarded and the veil of corporate fiction pierced when the notion of
legal entity is used to defeat public convenience, justify wrong, protect
fraud, or defend crime.
3. In this case, presented overwhelming evidence that Siain and its affiliate
corporations had received the loan proceeds:
◦ That the checks, debit memos and the pledges of the jewelries,
condominium units and trucks were constituted not exclusively in the
name of [Siain] but also either in the name of Yuyek Manufacturing
Corporation, Siain Transport, Inc., Cua Leleng and Alberto Lim.
(affiliate companies and individuals)
4. The conjunction of the identity of the [Siain] corporation in relation to Siain
Transport, Inc. (Siain Transport), Yuyek Manufacturing Corp. (Yuyek), as
well as the individual personalities of Cua Leleng and Alberto Lim has been
established by the following facts:
◦ Siain and Yuyek have [a] common set of [incorporators], stockholders
and board of directors;
◦ They have the same internal bookkeeper and accountant in the person
 of Rosemarie Ragodon;
◦ They have the same office address at 306 Jose Rizal St., ;
◦ They have the same majority stockholder and president in the person
of Cua Le Leng; and
◦ In relation to Siain Transport, Cua Le Leng (President of Siain
Enterprises) had the unlimited authority by and on herself, without
authority from the Board of Directors, to use the funds of Siain
Trucking to pay the obligation incurred by the [petitioner] corporation.
5. J. Nachura quoted (copy-pasted) the rulings of the lower courts:
◦ While this Court agrees with Siain that a corporation has a
personality separate and distinct from its individual stockholders or
members, this legal fiction cannot, however, be applied to its benefit
in this case where to do so would result to injustice and evasion of a
valid obligation, for well settled is the rule in this jurisdiction that
the veil of corporate fiction may be pierced when it is used as a shield
to further an end subversive of justice, or for purposes that could
not have been intended by the law that created it; or to justify wrong,
or for evasion of an existing obligation.
◦ Resultantly, the obligation incurred and/or the transactions entered into
either by Yuyek, or by Siain Trucking, or by Cua Leleng, or by Alberto
Lim with are deemed to be that of Siain Enterprises itself.


014 General Credit Corp. v. Alsons Dev. And Investment Corp (Cruz)
January 29, 2007 | Garcia, J. | Classification of Piercing
PETITIONER: General Credit Corporation (now Penta Capital Finance Corporation
RESPONDENTS: Alsons Development and Investment Corporation and CCC Equity
Corporation
SUMMARY: GCC organized Equity for the purpose of, among other things, taking over
the operations and management of the various franchise companies. ALSONS and the
Alcantara family, for a consideration of (P2,000,000.00), sold their shareholdings a total
of 101,953 shares, more or less in the CCC franchise companies to EQUITY to which
Equity issued a bearer promissory note for P2M. The Alcantara Family assigned their
rights and interest in the not to Alsons. But even before the assignment, Equity pleaded
inability to pay the stipulated interest, EQUITY no longer then having assets or property
to settle its obligation nor being extended financial support by GCC. Alson, thus filed a
a complaint for a sum of money against EQUITY and GCC. The issue in the case is
WoN the doctrine of piercing the veil ofcorpora te fiction be applied to Equity
Corporation. The SC ruled in the affirmative. the Court has the right to
pierce GCC’s corporate veil because evide nce point to the following
facts: 1) Equity is but an instrumentality of GCC a nd has always been
dependent on the latter for its operations, 2) the commona lity of
directors, stockholders and sharing of office between the two c o m p a n i e s
shows that they should clearly be regarded merely as an
a g g r e g a t e o f persons in a business enterprise; 3) the establishment of Equity is
primarily for GCC to circumvent Central Bank rules specifically the Anti-Usury
Law, using it as a conduit to its non-quasi bank affiliates; and 4),the funds invested
by Equity to GCC franchises are from GCC funds as well. A p p l y i n g t h e
3 b a s i c a r e a s o f c o r p o r a t e v e i l p i e r c i n g , G C C c l e a r l y defeated
public convenience when it established Equity to extend credit to its
investors which in turnis not allowed by the law; it justified a
w r o n g b y fraud ulently evading the Anti-Usury Law established by the
Central Bank to quasi-banking businesses, and lastly, Equity was but a
mere instrumentality of GCC for it to get away with its obligations.
DOCTRINE: Authorities are agreed on at least three (3) basic areas where piercing
the veil, with which the law covers and isolates the corporation from any other legal
entity to which it may be related, is allowed. These are: 1) defeat of public
convenience, as when the corporate fiction is used as vehicle for the evasion of an
existing obligation; 2) fraud cases or when the corporate entity is used to justify a
wrong, protect fraud, or defend a crime; or 3) alter ego cases, where a corporation is
merely a farce since it is a mere alter ego or business conduit of a person, or where the
corporation is so organized and controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of another corporation.
FACTS:
30. Shortly after its incorporation in 1957 as a finance and investment company,
General Credit Corporation (GCC), then known as Commercial Credit
Corporation (CCC), established CCC franchise companies in different urban
centers of the country.
31. In furtherance of its business, GCC had, as early as 1974, applied for and
was able to secure license from the then Central Bank (CB) of the Philippines
and the Securities and Exchange Commission (SEC) to engage also in quasi-
banking activities. On the other hand, CCC Equity Corporation (EQUITY)
was organized in November 1994 by GCC for the purpose of, among other
things, taking over the operations and management of the various franchise
companies.
32. At a time material hereto, Alsons Development and Investment Corporation
(ALSONS) and Conrado, Nicasio, Editha and Ladislawa, all surnamed
Alcantara, and Alfredo de Borja (the Alcantara family), each owned, just like
GCC, shares in the aforesaid GCC franchise companies, e.g., CCC Davao
and CCC Cebu.
33. In December 1980, ALSONS and the Alcantara family, for a consideration
of (P2,000,000.00), sold their shareholdings a total of 101,953 shares, more
or less in the CCC franchise companies to EQUITY.
a. On January 2, 1981, EQUITY issued ALSONS et al., a bearer
promissory note for P2,000,000.00 with a one-year maturity date,
at 18% interest per annum.
34. 4 years later, the Alcantara family assigned its rights and interests over the
bearer note to ALSONS which thenceforth became the holder thereof.
35. But even before the execution of the assignment deal, letters of demand for
interest payment were already sent to EQUITY, through its President,
Wilfredo Labayen, who pleaded inability to pay the stipulated interest,
EQUITY no longer then having assets or property to settle its obligation nor
being extended financial support by GCC.
36. ALSONS, having failed to collect on the bearer note, filed a complaint for a
sum of money against EQUITY and GCC.
a. GCC is being impleaded as party-defendant for any judgment
ALSONS might secure against EQUITY and, under the doctrine of
piercing the veil of corporate fiction, against
GCC, EQUITY having been organized as a tool and mere conduit
of GCC.
b. Equity argues: 1) It was purposely organized by GCC for the latter
to avoid CB Rules and Regulations on DOSRI (Directors, Officers,
Stockholders and Related Interest) limitations, and that it acted
 merely as intermediary or bridge for loan transactions and other corporations are distinct entities and treat them as identical or one
dealings of GCC to its franchises and the investing public; and 2) It and the same.
is solely dependent upon GCC for its funding requirements, to settle, d. Whether the separate personality of the corporation should be
among others, equity purchases made by investors on the franchises; pierced hinges on obtaining facts, appropriately pleaded or
hence, GCC is solely and directly liable to ALSONS, the former proved. However, any piercing of the corporate veil has to be done
having failed to provide EQUITY the necessary funds to meet its with caution, albeit the Court will not hesitate to disregard the
obligations to ALSONS. corporate veil when it is misused or when necessary in the interest
c. GCC: it is a distinct and separate entity from EQUITY and alleging,
of justice. After all, the concept of corporate entity was not meant
in essence that the business relationships with each other were
to promote unfair objectives.
always at arms length
e. Authorities are agreed on at least three (3) basic areas where piercing
37. The trial court decided in favor of Alson.
the veil, with which the law covers and isolates the corporation from
38. GCC went on appeal to the CA but the appeal was denied. GCC moved for
any other legal entity to which it may be related, is allowed.
reconsideration followed by a motion for oral argument, but both motions
i. defeat of public convenience, as when the corporate
were denied.
fiction is used as vehicle for the evasion of an existing
39. Hence, this petition for review on certiorari under Rule 45 of the Rules of
obligation;
Court.
ii. fraud cases or when the corporate entity is used to justify
a wrong, protect fraud, or defend a crime; or
ISSUE/s:
iii. alter ego cases, where a corporation is merely a farce since
3. WoN the doctrine of piercing the veil of corpora te fiction be applied it is a mere alter ego or business conduit of a person, or
to Equity Corporation? – YES. where the corporation is so organized and controlled and
its affairs are so conducted as to make it merely an
RULING: WHEREFORE, the instant petition is DENIED and the appealed instrumentality, agency, conduit or adjunct of another
Decision and Resolution of the Court of Appeals are accordingly AFFIRMED. corporation.
Costs against the petitioner. f. The Court agrees with the disposition of the appellate court on the
SO ORDERED. application of the piercing doctrine to the transaction subject of this
case. Per the Courts count, the trial court enumerated no less than 20
RATIO: documented circumstances and transactions, which, taken as a
42. the corporate veil of Equity Corporation be pierced. package, indeed strongly supported the conclusion that respondent
a. A corporation is an artificial being vested by law with a personality EQUITY was but an adjunct, an instrumentality or business conduit
distinct and separate from those of the persons composing it as well of GCC.
as from that of any other entity to which it may be related. The first g. Foremost of what the trial court referred to as certain circumstances
consequence of the doctrine of legal entity of the separate are the commonality of directors, officers and stockholders and even
personality of the corporation is that a corporation may not be made sharing of office between petitioner GCC and respondent EQUITY;
to answer for acts and liabilities of its stockholders or those of legal certain financing and management arrangements between the two,
entities to which it may be connected or vice versa. allowing the petitioner to handle the funds of the latter; the virtual
b. The notion of separate personality, however, may be disregarded domination if not control wielded by the petitioner over the finances,
under the doctrine piercing the veil of corporate fiction as in fact business policies and practices of respondent EQUITY; and the
the court will often look at the corporation as a mere collection of establishment of respondent EQUITY by the petitioner to
individuals or an aggregation of persons undertaking business as a circumvent CB rules.
group, disregarding the separate juridical personality of the i. as characterized by their business relationship,
corporation unifying the group. EQUITY and GCC had common directors and/or
c. Another formulation of this doctrine is that when two (2) business officers as well as stockholders. This is revealed
enterprises are owned, conducted and controlled by the same by the proceedings recorded in Avelina Ramoso,
parties, both law and equity will, when necessary to protect the et al., vs. GCC, et al., where it was established,
rights of third parties, disregard the legal fiction that two thru the testimony of EQUITYs own President
 that more than 90% of the stockholders of been satisfactorily and indubitably shown that the said relationships
EQUITY were also stockholders of GCC .. had been used to perform certain functions not characterized with
Disclosed likewise is the fact that when EQUITYs legitimacy, this Court feels amply justified to pierce the veil of
President sold the shareholdings of EQUITY in corporate entity and disregard the separate existence of the
said franchise companies, practically the entire percent and subsidiary the latter having been so controlled by
proceeds thereof were surrendered to GCC, and the parent that its separate identity is hardly discernible thus
not received by EQUITY becoming a mere instrumentality or alter ego of the former.
Consequently, as the parent corporation, GCC maybe held
ii. It was likewise shown by a preponderance of
responsible for the acts and contracts of its subsidiary EQUITY -
evidence that not only had GCC financed
most especially if the latter (who had anyhow acknowledged its
EQUITY and that the latter was heavily indebted liability to ALSONS) maybe without sufficient property with which
to the former but EQUITY was, in fact, a wholly to settle its obligations. For, after all, GCC was the entity which
owned subsidiary of GCC. Thus, as affirmed by initiated and benefited immensely from the fraudulent scheme
EQUITYs President, the funds invested by perpetrated in violation of the law.
EQUITY in the CCC franchise companies actually
came from CCC Phils. or GCC. that, as disclosed
by the Auditors report, past due receivables
alone of GCC exceeded P101,000,000.00 mostly
to GCC affiliates especially CCC EQUITY. ; that
[CBs] Report of Examination shows that EQUITY
which has a paid-up capital of only P500,000.00
was the biggest borrower of GCC with a total loan
of P6.70 Million .
iii. It has likewise been amply substantiated by
ALSONS evidence that not only did GCC cause the
incorporation of EQUITY, but, the latter had
grossly inadequate capital for the pursuit of its
line of business to the extent that its business
affairs were considered as GCCs own business
endeavors.
iv. ALSONS has likewise shown that the bonuses of
the officers and directors of EQUITY was based
on its total financial performance together with
all its affiliates both firms were sharing one and
the same office when both were still operational
and that the directors and executives of EQUITY
never acted independently but took their orders
from GCC.
v. The evidence has also indubitably established
that EQUITY was organized by GCC for the
purpose of circumventing [CB] rules and
regulations and the Anti-Usury Law.
h. as the relationships binding between EQUITY and GCC have been
that of parent-subsidiary corporations the foregoing principles and
doctrines find suitable applicability in the case at bar; and, it having
 015 CONCEPT BUILDERS v. NLRC (CALLUENG)
May 29, 1996 | Hermosisima, Jr., J. | Summary of Probative Factors
PETITIONER: Concept Builders, Inc.
RESPONDENTS: The National Labor Relations Commission, Norberto Marabe,
Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio Giducos, Pedro
Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve,
Dominador Sabina, Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand
Torres, Felipe Basilan, and Ruben Robalos
SUMMARY: Concept Builders is a domestic corporation engaged in the
construction business. Private respondents (employees in this case) were employed
by said company as laborers, carpenters and riggers. However, they were illegally
dismissed. It was stated in the individual notices, that their contracts of employment
had expired and the project in which they were hired had been completed.
However, NLRC found that this was not true and that the project had not yet been
finished. Aggrieved, employees filed a complaint for illegal dismissal. The Labor
Arbiter rendered judgment ordering Concept Builders to reinstate the employees
and to pay them back wages. It became final and executory. The alias Writ of
Execution cannot be enforced by the sheriff because all the employees inside
petitioner’s premises at 355 Maysan Road, Valenzuela, Metro Manila, claimed that
they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not by petitioner.
Thus, NLRC issued a break-open order against Concept Builders and HPPI.
ISSUE: WoN the issuance of the “break-open order” was correct. YES. SC said
that the corporate veil may be pierced when it is the alter ego of a person of another
corporation. There is no hard and fast rule to this because of a dependence on the
facts and circumstances of every case. But there are some probative factors of
identity that will justify the application of the doctrine. Summary probative factors:
(1) stock membership by one or common ownership of both (2) identity of directors
and officers (management) (3) manner of keeping corporate books and records
(management) (4) methods of conducting business (management). Clearly,
petitioner ceased its business operations in order to evade the payment to private
respondents of back wages and to bar their reinstatement to their former positions.
HPPI is obviously a business conduit of Concept Builders and its emergence was
skillfully orchestrated to avoid the latter’s financial liability.
DOCTRINE: The corporate mask may be lifted and the corporate veil may be
pierced when a corporation is just but the alter ego of a person or of another
corporation. Where badges of fraud exist; where public convenience is defeated;
where a wrong is sought to be justified thereby, the corporate fiction or the notion
of legal entity should come to naught.
FACTS:
1. Concept Builders, Inc. (Concept Builders), a domestic corporation, with
principal office at 355 Maysan Road, Valenzuela, Metro Manila, is engaged
in the construction business. Private respondents (employees) were
employed by said company as laborers, carpenters and riggers.
2. On November, 1981, employees were served individual written notices of
termination of employment by Concept Builders effective on November 30,
1981. It was stated in the individual notices that their contracts of
employment had expired and the project in which they were hired had been
completed.
3. NLRC found it to be, the fact, however, that at the time of the termination
of the employees, the project in which they were hired had not yet been
finished and completed. Concept Builders had to engage the services of sub-
contractors whose workers performed the functions of the employees
4. Aggrieved, the employees filed a complaint for illegal dismissal, unfair labor
practice and non-payment of their legal holiday pay, overtime pay and
thirteenth-month pay against petitioner.
5. The Labor Arbiter rendered judgment ordering Concept Builders to reinstate
the employees and to pay them back wages equivalent to one year or three
hundred working days (amounting to P199,800.00)
6. The National Labor Relations Commission (NLRC) dismissed the motion for
reconsideration filed by Concept Builders on the ground that the said
decision had already become final and executory.

7. The Labor Arbiter issued a writ of execution directing the sheriff to execute
the Decision, dated December 19, 1984. The writ was partially satisfied
through garnishment of sums from Concept Builder’s debtor, the
Metropolitan Waterworks and Sewerage Authority, in the amount of
P81,385.34. Said amount was turned over to the cashier of the NLRC.
8. An Alias Writ of Execution was issued by the Labor Arbiter directing the
sheriff to collect from Concept Builders the sum of P117,414.76,
representing the balance of the judgment award, and to reinstate the
employees to their former positions.
9. The sheriff issued a report stating that he tried to serve the alias writ of
execution on Concept Builders through the security guard on duty but the
service was refused on the ground that petitioner no longer occupied the
premises.
10. Upon motion of the employees, the Labor Arbiter issued a second alias writ
of execution.
11. The said writ had not been enforced by the special sheriff because, as stated
in his progress report:
a. All the employees inside petitioner’s premises at 355 Maysan Road, Valenzuela,
Metro Manila, claimed that they were employees of Hydro Pipes Philippines,
Inc. (HPPI) and not by respondent;
b. Levy was made upon personal properties he found in the premises;

 c. Security guards with high-powered guns prevented him from removing the entity separate and distinct from its stockholders and from other
properties he had levied upon. corporations to which it may be connected. But, this separate and distinct
12. The said special sheriff recommended that a break-open order be issued to personality of a corporation is merely a fiction created by law for
enable him to enter Concept Builder’s premises so that he could proceed convenience and to promote justice. So, when the notion of separate
with the public auction sale of the aforesaid personal properties juridical personality is used to defeat public convenience, justify wrong,
13. A certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter protect fraud or defend crime, or is used as a device to defeat the labor laws,
alleging that the properties sought to be levied upon by the sheriff were this separate personality of the corporation may be disregarded or the veil
owned by Hydro (Phils.), Inc. (HPPI) of which he is the Vice-President.
of corporate fiction pierced. This is true likewise when the corporation is
14. The employees filed a Motion for Issuance of a Break-Open Order, alleging
merely an adjunct, a business conduit or an alter ego of another corporation.
that HPPI and Concept Builders were owned by the same incorporator 2. The conditions under which the juridical entity may be disregarded vary
stockholders. They also alleged that Concept Builders temporarily according to the peculiar facts and circumstances of each case. No hard and
suspended its business operations in order to evade its legal obligations to fast rule can be accurately laid down, but certainly, there are some
them and that private respondents were willing to post an indemnity bond probative factors of identity that will justify the application of the doctrine
to answer for any damages which petitioner and HPPI may suffer because of piercing the corporate veil, to wit:
of the issuance of the break-open order. a. Stock ownership by one or common ownership of both
15. In support of their claim against HPPI, the employees presented duly corporations.
certified copies of the General Information Sheet, submitted by Concept b. Identity of directors and officers.
Builders to the Securities and Exchange Commission (SEC) and the General c. The manner of keeping corporate books and records.
Information Sheet, submitted by HPPI to the Securities and Exchange d. Methods of conducting the business.
Commission. 3. The SEC en banc explained the instrumentality rule which the courts have
16. HPPI filed an Opposition to the employees’ motion for issuance of a break- applied in disregarding the separate juridical personality of corporations as
open order, contending that HPPI is a corporation which is separate and follows:
distinct from petitioner. HPPI also alleged that the two corporations are a. Where one corporation is so organized and controlled and its affairs are
engaged in two different kinds of businesses, i.e., HPPI is a manufacturing conducted so that it is, in fact, a mere instrumentality or adjunct of the
firm while petitioner was then engaged in construction. other, the fiction of the corporate entity of the instrumentality may be
17. The Labor Arbiter issued an Order which denied the employees’ motion for disregarded. The control necessary to invoke the rule is not majority or
break-open order. even complete stock control but such domination of finances, policies and
practices that the controlled corporation has, so to speak, no separate
18. The employees then appealed to the NLRC. The NLRC set aside the order of
mind, will or existence of its own, and is but a conduit for its principal. It
the Labor Arbiter, issued a break-open order and directed the employees to
must be kept in mind that the control must be shown to have been
file a bond. Thereafter, it directed the sheriff to proceed with the auction exercised at the time the acts complained of took place. Moreover, the
sale of the properties already levied upon. It dismissed the third-party claim control and breach of duty must proximately cause the injury or unjust loss
for lack of merit. for which the complaint is made.
19. Concept Builders moved for reconsideration but the motion was denied by 4. The test in determining the applicability of the doctrine of piercing the veil
the NLRC in a Resolution. of corporate fiction is as follows:
20. Hence, this petition. a. Control, not mere majority or complete stock control, but
complete domination, not only of finances but of policy and
ISSUE/s: business practice in respect to the transaction attacked so that the
6. WoN the issuance of the “break-open order” was correct. YES. corporate entity as to this transaction had at the time no separate
mind, will or existence of its own;
RULING: WHEREFORE, the petition is DISMISSED and the assailed resolutions b. Such control must have been used by the defendant to commit
of the NLRC, dated April 23, 1992 and December 3, 1992, are AFFIRMED. fraud or wrong, to perpetuate the violation of a statutory or other
positive legal duty, or dishonest and unjust act in contravention of
RATIO:
plaintiffs legal rights; and
1. It is a fundamental principle of corporation law that a corporation is an
c. The aforesaid control and breach of duty must proximately cause
 the injury or unjust loss complained of. a corporate fiction whose veil in the present case could, and should, be
d. The absence of any one of these elements prevents piercing the pierced as it was deliberately and maliciously designed to evade its financial
corporate veil. in applying the instrumentality or alter ego obligation to its employees.
doctrine, the courts are concerned with reality and not form, with 11. In view of the failure of the sheriff, in the case at bar, to effect a levy upon
how the corporation operated and the individual defendants the property subject of the execution, private respondents had no other
relationship to that operation. recourse but to apply for a break-open order after the third-party claim of
5. Thus, the question of whether a corporation is a mere alter ego, a mere HPPI was dismissed for lack of merit by the NLRC. This is in consonance with
sheet or paper corporation, a sham or a subterfuge is purely one of fact. Section 3, Rule VII of the NLRC Manual of Execution of Judgment which
6. In this case, the NLRC noted that, while Concent Builders claimed that it provides that:
ceased its business operations on April 29, 1986, it filed an Information a. Should the losing party, his agent or representative, refuse or prohibit the
Sheet with the Securities and Exchange Commission stating that its office Sheriff or his representative entry to the place where the property subject
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other of execution is located or kept, the judgment creditor may apply to the
Commission or Labor Arbiter concerned for a break-open order.
hand, HPPI, the third-party claimant, submitted on the same day, a similar
information sheet stating that its office address is at 355 Maysan Road, 12. Furthermore, our perusal of the records shows that the twin requirements
Valenzuela, Metro Manila. of due notice and hearing were complied with. Petitioner and the third-
7. Furthermore, the NLRC stated that: party claimant were given the opportunity to submit evidence in support of
a. Both information sheets were filed by the same Virgilio O. Casino as the their claim.
corporate secretary of both corporations. It would also not be amiss to 13. Hence, the NLRC did not commit any grave abuse of discretion when it
note that both corporations had the same president, the same board of affirmed the break- open order issued by the Labor Arbiter.
directors, the same corporate officers, and substantially the same
subscribers.
b. From the foregoing, it appears that, among other things, the respondent
(herein petitioner) and the third- party claimant shared the same address
and/or premises. Under this circumstances, (sic) it cannot be said that the
property levied upon by the sheriff were not of respondents.
8. Clearly, Concept Builders ceased its business operations in order to evade
the payment to the employees’ backwages and to bar their reinstatement
to their former positions. HPPI is obviously a business conduit of Concept
Builders and its emergence was skillfully orchestrated to avoid the
financial liability that already attached to Concept Builders
9. The facts in this case are analogous to Claparols v. Court of Industrial

Relations where we had the occasion to rule:
a. Respondent courts findings that indeed the Claparols Steel and Nail Plant,
which ceased operation of June 30, 1957, was SUCCEEDED by the Claparols
Steel Corporation effective the next day, July 1, 1957, up to December 7,
1962, when the latter finally ceased to operate, were not disputed by
petitioner. it is very clear that the latter corporation was a continuation
and successor of the first entity x x x. Both predecessors and successor were
owned and controlled by petitioner Eduardo Claparols and there was no
break in the succession and continuity of the same business. This avoiding-
the-liability scheme is very patent, considering that 90% of the subscribed
shares of stock of the Claparols Steel Corporation (the second corporation)
was owned by respondent x x x Claparols himself, and all the assets of the
dissolved Claparols Steel and Nail Plant were turned over to the emerging
Claparols Steel Corporation.
10. It is very obvious that the second corporation seeks the protective shield of
 027 REPUBLIC v. MEGA PACIFIC eSOLUTIONS (Yap)
June 27, 2016 | Sereno, C.J. | Fraud Piercing
PETITIONER: Republic of the Philippines
RESPONDENTS: Mega Pacific eSolutions, Inc., Willy Yu, Bonnie Yu, Entrique
Tansipek, and Rosita Tansipek
SUMMARY: COMELEC initiated a public bidding for the automation of the
2004 national elections. Mega Pacific Consortium (MPC) entered its bid and was
eventually awarded the automation contract. Despite such award to MPC, it was
Mega Pacific eSolutions, Inc. (MPEI) that actually entered into the automation
contract with COMELEC. The contract was not fully implemented as the SC
declared the contract VOID for violation of the bidding process. In the instant
case, the Republic (petitioner) seeks to recover payments it already made, through
attachment of MPEI properties, as well as those of its incorporators and
stockholders. Willy Yu, et. al. (stockholders) claim that their right to due process
will be violated if they are made to pay for corporate debts.
This pertinent issue is whether the doctrine of piercing the veil of corporate fiction
applies – YES, the facts and cirucmstances and the earlier pronouncements of the
Court have established the fraud perpetuated by the individual incorporators.
The SC ruled that there are “red flags” showing the fraudulent schemes employed
herein include: (1) Overly narrow specifications; (2) unjustified recommendations
and unjustified winning bidders; (3) failure to meet the terms of the contract; and
(4) “shell” or “fictitious” company. (check ratio for explanation of each red flag)
More importantly, Willy Yu, et. al. have admitted their actual participation when
they stated that “they dealt with the COMELEC with full transparency and in
utmost good faith.” Hence, their participation is not in question, but they merely
claim good faith in order to negate fraud. However, evident fraud had already been
established and proven in the 2004 Decision and in the 2005 and 2006 Resolutions.
DOCTRINE: Fraud piercing (ie, veil-iercing in fraud cases) requires that the legal
fiction of separate juridical personality is used for fraudulent or wrongful ends.
FACTS:
40. This case involves the automation contracted entered into by Mega Pcific
eSolutions, Inc. (MPEI) and COMELEC – for the supply of automated
counting machines (ACMs) for the 2004 national elections.
a. It was already decided in Information Technology Foundation v.
COMELEC that the automation contract was VOID.
41. Republic (petitioner) now seeks to cause the attachment of the properties
owned by MPEI as well as its incorporators and stockholders – in order to
secure Republic’s interest and to ensure recovery of the payments it made to
respondents for the invalidated automation contract.
42. BACKGROUND STORY:
a. COMELEC initiated a public bidding for the automation of the 2004
national elections.
b. Mega Pacific Consortium (MPC) entered its bid and was eventually
awarded the automation project.
c. Despite such award to MPC, it was MPEI who entered into the
automation contract with COMELEC – for the supply of 1,991 units
of ACMs.
d. The full implementation of the automation contract was rendered
impossible by the 2004 Decision of this Court which declared the
contract NULL and VOID on the ground that COMELEC
committed a (1) clear violation of law and jurisprudence; as well as
(2) a reckless disregard of its own bidding rules and procedures.
e. The SC found that: (1) Although MPC was awarded the project, it
was MPEI who entered into the contract with COMELEC; (2)
MPEI’s claim that it was a “consortium” of MPC and other
companies was a falsity – there were 4 Memorandum of Agreements
(MOAs) between MPEI and other companies, but the SC found that
such MOAs were individual agreements between MPEI and such
individual companies, and did not even denote any intent to form a
consortium; (3) MPEI was incorporated only 11 days prior to the
bidding itself; (4) COMELEC bidding rules were not followed,
specifically the failure to pass the accuracy test, and the failure to
include in its Eligibility Envelope a copy of a Joint Venture
Agreement or any other proof that there was a JV/Consortium. (5)
Despite No. 4, COMELEC still awarded the project to MPEI; and
(6) Lastly, MPEI failed to comply with the terms of the contract.
43. Willy Yu, et. al. now claim that the factual findings or conclusions in the
2004 case cannot be used against them since they not parties therein. Hence,
they cannot be bound by the judgment. They claim that their fundamental
right to due process would be violated if their properties were to be attached
for a purported corporate debt on the basis of a court ruling in a case which
they were nt given the right or opportunity to be heard.
ISSUE/s:
4. Whether the doctrine of piercing the veil of corporate fixtion applies
(specifically, fraud piercing) – YES, the facts and cirucmstances and the
earlier pronouncements of the Court have established the fraud perpetuated
by the individual incorporators.
RULING: WHEREFORE, petition GRANTED.
RATIO:
43. HOW WILLY YU, ET. AL.’S ACTS CONSTITUTED FRAUD – Art. 1339 of
the Civil Code provides that “silence or concealment does not by itself,
constitute fraud, unless there is a special duty to disclose certain facts, or
unless the communication should be made accofding to good faith and
 the usages of commerce.” they have no experience. In this case, MPEI obviously had “no
a. MPEI had no excuse not to be forthright with the documents experience” because it was incorporated only 11 days prior to the
showing MPC’s eligibility to bid as a joint venture. The Invitation actual bidding. As a new company, it was not eligible to participate
to Bid, as quoted in the 2004 Decision, could not have been any as a bidder, which is way it pretended that it was “acting as an agent
clearer when it stated that only bids from qualified entities, such of the putative consortium.”
as joint ventures, would be entertained. 45. Without the incorporation of MPEI, the defraudation of the government
b. MPEI’s act of not including its JVA or consortium agreement in its would not have been possible. Furthermore, the doctrine of piercing the veil
Eligibility Envelope, among others, constituted fraud. of corporate fiction applies mainly because it was shown that invidivudal
44. Fraud piercing (ie, veil-iercing in fraud cases) requires that the legal fiction repsondents Willy Yu et. al. were directly involved in the contract.
of separate juridical personality is used for fraudulent or wrongful ends. a. Furthermore, in their pleadings they admitted involvement but
a. “Red flags” showing the fraudulent schemes employed herein claimed that they “dealt with the COMELEC with full
include: (1) Overly narrow specifications; (2) unjustified transparency and in utmost good faith.”
recommendations and unjustified winning bidders; (3) failure to b. Evidence fraud having been established, and involvement by the
meet the terms of the contract; and (4) “shell” or “fictitious” individual respondents Willy Yu, et. al. having been proven and
company. admitted, piercing the veil of corporate fiction is warranted.
b. Overly narrow specifications – where in a competitive market for
goods and services, any specifications that seem to be drafted in a
way that favors a particular company deserve closer scrutiny –
specifications that are too narrow can be used to exclude other
qualified bidders or justify improper sole source awards. In this case,
the accuracy test required a percentage of 99.9995%.
c. Unjustified recommendations and unjustified winning bidders
– It was MPEI that actually participated in the bidding process, but
t was not qualified to be a bidder in the first place. Its ACMs failed
the accuracy requirement set by COMELEC. Despite such MPC, the
“nonentity,” obtained a favorable recommendation from the Bids
and Awards Committee (BAC), and the automation contract was
awarded thereto.
d. Failure to meet contract terms – the SC had, in the 2004 Decision,
already found the ACMs to be substandard and did not comply with
the terms set by COMELEC – (1) could not prevent reenter of
previous results; (2) could not provide receipts to show who
was/were operating the machine; (3) failed the accuracy test. Such
was reiterated in the 2005 and 2006 resolutions; (4) the bidding
process required the bidder to show audited financial statements for
the last 3 calendar years – but MPEI could not have had such
document since it was incorporated only 11 days prior to actual
bidding; and (5) MPEI’s claim that it had delivered 1,991 ACMs
does not suffice, as such were proven to be substandard.
e. Shell or fictitious company – “Fictitious companies” involve
corrupt government officials creating a fictitious company that will
serve as a “vehicle” to secure contract awards. Often, the fictitious
– or ghost – company will subcontract work to lower cost and
sometimes unqualified firms. “Shell companies” often hide the
interests of project or government officials, concealing a conflict of
interest and opportunities for money laundering. Also, by definition,
 016 LIPAT v. PBC (COSCOLLUELA) Mystical Fashions. Teresita also executed a REM over their property. The
April 30, 2003 | Quisumbing, J. | Alter ego same property also secured “other additional or new loands, discounting
lines, overdrafts and credit acccomodations, of whatever amount which the
Mortgagor and/or Debtor may subsequently obtain from the Morgagee as
PETITIONER: Estelita Burgos Lipat and Alfredo Lipat
well as any renewal or extension by the Mortgagor and/or Debtor of the whole
RESPONDENTS: Pacific Banking Corporation Register of Deeds, RTC Ex-
or part of said original, additional or new loans, discounting lines, overdrafts
Officio Sheriff of Quezon City and the Heirs of Eugenio D. Trinidad
x x x.”
39. BET was then incorporated into a family corporation named “Bela’s Export
SUMMARY: BET was owned by Sps. Lipat which was a single proprietorship in
Corporation” (BEC) in order to facilitate in the management of the business.
the Philippines. They also owned Mystical Fashions which operated in the United
Its incorporators and directors included the Sps. Lipat (300 of 420 shares),
States; it imported garments from BET and was sold in the US. Estelita authorized
Teresita (20 of 420 shares), and other close relatives and friends. Estelita was
her daughter Teresita to obtain loans from Pacific Bank and to secure them with a
the President of BEC while Teresita was the Vice-President and general
REM. The same REM covered all other obligations which Pacific Bank will
manager
extend. BET was then incorporated into a family corporated called BEC. The major
40. The loan with Pacific Banking was restructured in the name of BEC and
stockholder was Sps. Lipat with 300 shares, meanwhile Teresita had 20 shares. The
subsequent loans were also obtained by BEC. Teresita also opened a letter of
loan with Pacific Bank was restructed in the name of BEC and subsequent loans
credit in favor of AO Knitting Manufacturing Co., Inc. upon the request of
were obtained by BEC. The PNs, export bills and trust receipt (see fact #6) became
BEC after BEC executed the corresponding trust receipt.
due and BEC and Estelita failed to settle the obligations. The property was
41. The promissory notes, export bills and trust receipt eventually became due
foreclosed. Sps. Lipat then filed a complaint in the trial court saying that the PNs,
and demandable. BEC, and despite Estelita’s promise to personaly settle
trust receipt, and export bills were ultra vires acts of Teresita. They also argued that
BEC’s obligations, defaulted.
assuming the obligations were binding on BEC, it was the same’s sole obligation, it
42. The REM was forclosed and a certificate of sale was issued to respondent
having a personality distinct and separate from Sps. Lipat. The trial court pierced
Eugenio Trinidad as the highest bidder.
the veil of corporate fiction and helf BEC and Sps. Lipat are one and the same. The
43. Sps Lopat argued that the PNs, trust receipt, and export bills were all ultra
CA affirmed the same. The issue is WoN the doctrine of piercing the veil of
vires acts of Teresita as they were executed without the requisite board
corporate fiction is applicable in this case. The Supreme Court held that there were
resolution of the Board of Directors of BEC. They also argued that assuming
factual circumstances that proved that BEC was a mere alter ego of the Lipats (see
the obligations were binding on BEC, it was the same’s sole obligation, it
enumeration in Ratio #3). BET and BEC were so intertwined with each other in
having a personality distinct and separate from Sps. Lipat. They also averred
terms of ownership, business purpose, and management. BEC is a mere conduit of
that Teresita’s authority to secure a loan was limited to Estelita’s sole use and
and merely succeeded BET.
benefit and that the REM was executed to secure Sps. Lipat’s and BET’s loan
only.
DOCTRINE: When one corporation is so organized and controlled and its affairs
44. The trial court ruled that BEc was a mere extension of Sps. Lipat’s personality
are conducted so that it is a mere instrumentality or adjunct of the other, the fiction
and business and a mere alter ego or business conduit. The trial court pierced
of the corporate entity of the instrumentality may be disregarded
the veil of corporate fiction and held that BEC and the Sps. Lipat are one and
the same.
FACTS: 45. CA affirmed the trial court. Hence this appeal.
35. Sps. Alfredo Lipat and Estelita Lipat owned “Bela’s Export Trading” (BET)
a single proprietorship which operated in the Philippines. BET was engaged ISSUE/s:
in the manufacture of garments for domestic and foreign consumption. The 7. WoN the doctrine of piercing the veil of corporate fiction is applicable in this
Lipats also owned the “Mystical Fashions” in the US which sells goods case – YES, because BEC was a mere conduit and merely succeeded BET.
imported from the Philipines through BET. 8. WoN Sps. Lipat’s property under the REM is liable not only for the amount
36. Estelita designated her daughter Teresita as manager of BET while she of loan but also for the value of the PNs, trust receipt, and export bills
managed Mystical Fashions in the US. subsequently incurred by BEC – YES, because the contract Teresita entered
37. Armed with a special power of attorney, Teresita obtained loans and was into extended to other obligations extended by Pacific Bank
authorized to execute mortgage contracts on properties owned or co-owned
by her as security for the obligations to be extended by Pacific Bank
38. Teresita was able to secure for and in behalf of Estelita and BET a loan from
Pacific Bank to buy fabrics to be manufacture by BET and exported to
RULING: WHEREFORE, the petition is DENIED. The Decision dated October 21, whole or part of said original, additional or new loans, discounting lines,
1999 and the Resolution dated February 23, 2000 of the Court of Appeals in CA- overdrafts x x x.”
G.R. CV No. 41536 are AFFIRMED. Costs against petitioners. 83. BEC merely succeeded BET as Sps. Lipat’s alter ego; hence, Sps. Lipat’s
SO ORDERED. mortgaged property must be held liable for the subsequent loans and credit
lines of BEC.
RATIO: 84. It was also impossible for BEC to release a board resolution because since
First Issue per admission by Estelita and Alice Burgos (relative) no business or
78. When the corporation is the mere alter ego or business conduit of a person,
stockholders’ meting were conducted nor were there election of officers
the separate personality of the corporation may be disregarded
held since its incorporation.
79. When one corporation is so organized and controlled and its affairs are
conducted so that it is a mere instrumentality or adjunct of the other, the 85. The principle of estoppel precludes Sps. Lipat from denying the vality of the
fiction of the corporate entity of the instrumentality may be disregarded transactions entered into by Teresita with Pacific Bank who in good faith
80. Estelita admitted that she and Alfredo were the owners of BET and were the relied on the authority of Teresita as manager to act on behalf of Estelita
incorporators and majority stockholders of BEC. It is also undisputed that and both BEC and BET.
Estelita executed a special power of attorney in favor of Teresita to obtain
loands and credit lines from Pacific Bank on her behelf. The Supreme Court
noted furthere these facts:
a. Estelita and Alfredo are the owners and majority shareholders of BET
and BEC
b. Both firms were managed by their daughter Teresita
c. Both firms were engaged in the garment business
d. Both firms held office in the same building owned by Sps. Lipats
e. BEC is a family corporation with the Sps. Lipat as its majority
stockholders
f. The business operations of BEC were so merged with those of Estelita
that they were practically indistinguishable
g. The corporate funds were held by Estelita and the corporation itself had
no visible assets
h. The board of directors of BEC was composed of the Burgos (relatives)
and Lipat family members
i. Estelita had full control over the activities of and decided business
matters of the corportation
j. EStelita had benefitted from the loands secured from Pacific bank to
finance her business aborad and from the export bills secured by BEC
for the account of Mystical Fashion.
81. It could not have been incidental that BET and BEC are so intertwined with
each other in terms of ownership, business purpose, and management.
Apparently, BET and BEC are one and the same and the latter is a conduit of
and merely succeeded the former.
Second Issue
82. The mortgaged property is not limited to answer for the loan only. The
agreement covered “other additional or new loands, discounting lines,
overdrafts and credit acccomodations, of whatever amount which the
Mortgagor and/or Debtor may subsequently obtain from the Morgagee as
well as any renewal or extension by the Morgagor and/or Debtor of the
 017 RAMIREZ TELEPHONE CORP. V. BANK OF AMERICA
(CASTRO)
29 August 1969 | Capistrano, J. | Doctrine of Piercing the veil of corporate entity
PETITIONER: Ramirez Telephone Corporation
RESPONDENTS: Bank of America, E.F. Herbosa, The sheriff of Manila, and The
Court of Appeals
SUMMARY: Herbosa at first leased the premises of his Sta. Mesa building to
Ruben Ramirez who is the President of Ramirez Telephone Corp. Afterwards,
Ramirez transferred the offices of his corporation to the Sta. Mesa building leased
to Herbosa. The time came wherein Ramirez failed to pay his rentals so Herbosa
filed an ejectment suit where he was given a favorable judgment so he also
obtained a garnishment suit against Ramirez and forwarded to Bank of America.
However, the Bank said that there is no personal deposit from Ruben Ramirez but
instead an account in the name of Ramirez Corporation. The sheriff still garnished
the account of Ramirez Corporation. One day, when Ruben Ramirez issued several
checks to pay for the purchases of Ramirez Corp, his checks were rejected because
the accounts of Ramirez corp was garnished. The corporation lawyer then filed a
demand against the bank saying that there is a separate entity between the
corporation and Ruben. CA, ruled in favor of Bank of America and Herbosa and
the Issue is whether or not CA erred in appreciating the separate juridical
personality the SC said that NO. CA did not err for the doctrine of piercing the veil
has been applied already to satisfy the ends of justice
DOCTRINE: As to administer the ends of justice, which in this case to remunerate
E.F. Herbosa for the unpaid rentals of the leased premises the SC allowed the
piercing of the veil of the corporate entity
ISSUE/s:
FACTS:
1. Herbosa owns bldg. no. 612 in Sta Mesa. Herbosa leased it to Ruben Ramirez
who is the President of the Ramirez Telephone corporation
2. Although the corporation’s head office is in Escolta Natividad building, he
was able to transfer the said premises but he failed to pay the rent. Thus,
urging Herbosa to file an eviction suit against cRamirez before the Municipal
Court of Manila which he later elevated to CFI.
3. Herbosa was able to get a favorable decision on 1950. Before the
promulgation of the sentence Herbosa already obtained a freezing order
against Ramirez served at Bank of America
4. A letter of garnishment was served to Bank of America, the said bank replied
on the same day saying that they do not hold any fund in the name of Ruben
Ramirez.
5. The sheriff is insisting now that they are seizing the interest or participation
by Ruben to the deposit of the Ramirez Telephone Inc. sufficient to cover the
amount of 2,400 pesos
6. The bank then responded to the sheriff saying that they are already holding
the amount subject to the orders of the sheriff
7. However, the bank mentioned that the remaining free funds of Ramirez
Telephone is only 2,300 pesos and the next day 1,500 was withdrawn leaving
an insufficient fund of 800 pesos. From this arose the present contest
8. Ruben Ramirez was said to have issued some checks in favor of Ray
electronics to pay certain equipment sold by the latter. The checks was then
presented by Bank of America but rejected
9. Ramirez Telephone’s lawyer sent a letter request that Bank of America had
suffered considerable damage and embarrassment warning him that if he
were not given complete satisfaction, he would submit the corresponding
demand without further notice.
10. The bank responded that the said hold of the funds is a mere obedience to the
the garnishment proceedings
11. Ramirez Telephone’s lawyer continued to initiate the action on the basis that
the bank should have known that Ruben Ramirez who is the defendant of the
said garnishment case has no personal deposit to the bank and that Ramirez
Telephone Corp is entirely distinct and separate entity regardless of the fact
that Ruben is its President and Manager
12. Also, the company alleged that because of the return of the checks the
company suffered its operations because of its failure to pay Ray Electronics
13. Also the lower court reiterated the testimony of Herbosa stating that athough
it was Ruben who is initially the tenant it was later on occupied by Ramirez
Telephone company specifically the rented premises on the first floor. Also
there are also several checks issued for payment of previous rentals from
Bank of America
14.
1. Whether or not the Court of Appeals erred in not applying the settled
principle that a corporation has a separate personality and that the funds of
the corporation cannot be reached to satisfy the debt of its stockholders –
No, for it was proven that there are instances also that it is the corporation
itself who is renting and benefitting from the premises and rent
2. Whether or not he Court of Appeals erred in not taking into account the
significant fact that when the events that gave rise to this case took place,
the lawyer of both respondents, i.e., the Bank of America and E. F. Herbosa,
was one and the same -Yes, CA erred but it did not warrant reversal and SC
did not dwell to much because it is merely factual circumstance
RULING: PREMISES CONSIDERED, the judgment Of the Court of Appeals
of February 27, 1964 is affirmed, with costs against petitioner Ramirez
Telephone Corporation.

RATIO:
1. The only paragraph that says SC allowed the CA’s piercing of the veil:
2. While respect for the corporate personality as such is the general rule,
there are exceptions. In appropriate cases, the veil of corporate fiction
may be pierced. From the facts as found which must remain undisturbed,
this is such a case. This assignment of error has no merit, in view of a number
of cases decided by this Court, the latest of which is Albert v. Court of First
Instance reaffirming a 1965 resolution in Albert v. University Publishing Co.,
Inc. 8 In that resolution, the principle is restated thus: "Even with regard to
corporations duly organized and existing under the law, we have in many
a case pierced the veil of corporate fiction to administer the ends of
justice

 018 LBP v. CA (Marcos)
Sept. 4, 2001 | Quisumbing, J. | Alter-Ego Piercing
PETITIONER: Land Bank of the Philippines
RESPONDENTS: The Court of Appeals, ECO Management Corporation, and
Emmanuel C. Oate.
SUMMARY: LBP extended series of credit accomodations to ECO using the trust
fund of PVTA. The proceeds were received by Oate, a stockholder, on behalf of
ECO. ECO failed to pay on the maturity date. ECO therefore proposed to LBP a
Plan of Payment whereby ECO would set up a financing company to absorb the
loan obligations. The Trust Committee of LBP agreed with the plan provided they
would not participate in any way. It then asked ECO to revise the plan. ECO
complied however after deliberation again from the Trust Committee, they
decided to reject it. LBP sent a letter to PVTA asking for its comments regarding
the plan. In such letter, it said that if it did not hear from PVTA within 5 days, this
would mean as an approval to sue against ECO and its officers. PVTA did not
respond therefore LBP filed a complaint against ECO and Oate. The RTC and CA
only ordered ECO to pay, while Oate was absolved from liability. The issue before
the SC is WoN the corporate veil of ECO Management Corporation should be
pierced – NO, because to disregard the separate juridical personality of a
corporation, the wrongdoing must be clearly and convincingly established. The
SC held that the burden is on LBP to prove that the corporation and its
stockholders are, in fact, using the personality of the corporation as a means to
perpetrate. LBP failed to show bad faith on the part of ECO and Oate.
DOCTRINE: The fact that the majority stockholder had used his own money to
pay part of the loan of the corporation cannot be used as the basis to pierce: “It is
understandable that a shareholder would want to help his corporation and in the
process, assure that his stakes in the said corporation are secured. Further, use of
a controlling stockholder’s initials in the corporate name is not sufficient reason
to pierce, since by that practice alone does it mean that the said corporation is
merely a dummy of the individual stockholder, provided such act is lawful.
FACTS:
44. Land Bank of the Philippines (LBP) extended series of credit accomodations
to ECO Management Corp. (ECO), using the trust fund of Philippine Virginia
Tobacco Administration. (PVTA)
45. The aggregate amount reached P26,109,000.00.
46. The proceeds were received by Emmanuel Oate (Oate) on behalf of ECO.
47. ECO failed to pay the same on the respective maturity dates.
48. Despite oral and written demands, ECO was unable to pay claiming that it
was affected by the financial crisis brought about by the Dewey Dee scandal.
49. ECO proposed to LBP a Plan of Payment whereby ECO would set up a
financing company which would absorb the loan obligations.
50. It was proposed that LBP would participate in the scheme through the
conversion of P9,000,000 into equity.
51. LBP’s Trust Committee deliberated on the plan and arrived at a decision that
ECO may proceed with the Plan of Payment provided that Land Bank shall
not participate in the undertaking in any manner.
52. LBP then instructed ECO to make the necessary revisions and submit the
same as soon as possible.
53. ECO submitted to LBP a Revised Plan of Payment deleting LBP’s
participation in the proposed financing company.
54. The Trust Committee again deliberated on the same but resolved to reject it.
55. LBP sent a letter to PVTA to ask for its comments regarding the Plan of
Payment.
56. The letter stated that if LBP did not hear from PVTA within 5 days, such
silence would be construed to be an approval of LBP’s intention to file a suit
against ECO and its corporate officers.
57. PVTA did not respond therefore LBP filed a complaint for a Sum of Money
against ECO and Oate before the RTC of Manila.
58. The trial court rendered judgment in favor of LBP, however Oate was
absolved from personal liability for insufficiency of evidence.
59. Both parties filed a Motion for Reconsideration.
60. LBP questioned the dismissal of the case with regard to Oate. On the other
hand, ECO questioned its being liable for the amount of the loan.
61. The trial court rendered an Amended Decision however the decision still
order ECO only to pay LBP.
62. The CA affirmed in toto the amended decision of the RTC.
ISSUE/s:
5. WoN the corporate veil of ECO Management Corporation should be pierced
– NO, because to disregard the separate juridical personality of a corporation,
the wrongdoing must be clearly and convincingly established.
RULING: WHEREFORE, the petition is DENIED for lack of merit.
RATIO:
46. A corporation, upon coming into existence, is invested by law with a
personality separate and distinct from those persons composing it as well as
from any other legal entity to which it may be related.
47. By this attribute, a stockholder may not, generally, be made to answer for acts
or liabilities of the said corporation, and vice versa.
48. This separate and distinct personality is, however, merely a fiction created by
law for convenience and to promote the ends of justice. For this reason, it
may not be used or invoked for ends subversive to the policy and purpose
behind its creation or which could not have been intended by law to which it
owes its being.
49. The burden is on LBP to prove that the corporation and its stockholders are
using the personality of the corporation as a means to perpetrate fraud and/or
escape a liability and responsibility demanded by law.
50. In order to disregard the separate juridical personality of a corporation, the
wrongdoing must be clearly and convincingly established.
51. In the absence of any malice or bad faith, a stockholder or an officer of
a corporation cannot be made personally liable for corporate liabilities.
52. The mere fact that Oate owned the majority of the shares of ECO is not a
ground to conclude that Oate and ECO is one and the same. Mere ownership
by a single stockholder of all or nearly all of the capital stock of a
corporation is not by itself sufficient reason for disregarding the fiction
of separate corporate personalities.
53. Neither is the fact that the name ECO represents the first three letters of
Oates name sufficient reason to pierce the veil. Even if it did, it does not
mean that the said corporation is merely a dummy of Oate. A corporation
may assume any name provided it is lawful. There is nothing illegal in a
corporation acquiring the name or as in this case, the initials of one of its
shareholders.
54. Bad faith or fraud on the part of ECO and Oate was not shown.
55. If the shareholders of ECO meant to defraud LBP, then they could have just
easily absconded instead of going out of their way to propose Plans of
Payment.
56. Likewise, Oate volunteered to pay a portion of the corporation’s debt. This
offer demonstrated good faith on his part to ease the debt of the corporation
of which he was a part. It is understandable that a shareholder would want
to help his corporation and in the process, assure that his stakes in the
said corporation are secured. This circumstance should not be construed
as an admission that he was really the debtor and not ECO.

 019 Telephone Engineering and Service Co v. WCC (Castillo, I) properties of TESCO.
May 13, 1981 | Melencio-Herrera, J. | Confuse Legitimate Issues
ISSUES:
1. WoN there was an employee-employer relationship between Gatus and
PETITIONER: Telephone Engineering & Service Company, Inc. TESCO – YES, because TESCO has always represented itself as Gatus’
RESPONDENTS: Workmen’s Compensation Commission, Provincial Sheriff employer
of Rizal and Leonila Santos Gatus, for herself and in behalf of her minor children,
Teresita, Antonina and Reynaldo, all surnamed GATUS
RULING: WHEREFORE, this Petition is hereby dismissed.
SUMMARY: The petitioner in this case was the employer of one Pacifica Gaitus
who died while working of liver disease. His spouse, Private Res, claimed RATIO:
damages. The respondents won in the Workman‘s compensation section (Lower 1. The arguments of the petitioners were documentary. UMACOR was the only
Tribunal). This was appealed by petitioners who alleged that TESCO was not the company that actually contracted with the deceased. Hence, the respondents
deceased‘s employer but a sister company, UMACOR. Issue is WoN there was claimed estoppel.
an employee-employer relationship between Gatus and TESCO. The Court ruled 2. In all its motions, TESCO has always represented itself as the employer of
in the affirmative stating that this is one of the exceptions where a corporate veil the deceased. It never alleged that it was not Gatus’ employer.
may be pierced and also that this was the first time the issue was being raised on 3. The SC ruled not to disturb the factual findings of the lower tribunal because
appeal and must necessarily must fail. it was that tribunal that had competence to rule on such matters.
4. Petitioner even admitted that TESCO and UMACOR are sister companies
DOCTRINE: Although respect for the separate corporate personality is the operating under one single management and housed in the same building.
general rule, there are exceptions such as the current case. The veil of corporate 5. The SC ruled that this was a legitimate exception to when the corporate veil
fiction may be pierced as when the same is made a shield to confuse legitimate could be pierced.
issues. 6. Although respect for the corporate personality as such, is the general
rule, there are exceptions. In appropriate cases, the veil of corporate
fiction may be pierced as when the same is made as a shield to confuse
the legitimate issues.
7. Also, this is the first time the issue was being raised on appeal thus the
FACTS: petition must fail.
1. This is a Petition for Certiorari on the Award rendered against the petitioners
in the lower court and in favor of the respondents in the instant case.
2. The petitioner is a domestic corporation engaged in the business of
manufacturing Telephone Equipment. The EVP is a Jose Luis Santiago. It
has a sister company Utilities Management Corp. (UMACOR) Both of the
above companies kept the same location and management.
3. UMACOR employed one Pacifica L. Gatus as a purchasing agent. He started
working in 1965 but halted in 1967 due to health concerns and died the very
same year due to liver sirrhosis. The RES then filed a case for a ―Notice and
Claim for Compensationǁ with the Workmen‘s Compensation Section.

4. She alleged that her husband was an employee of TESCO and he died of liver

sirrhosis. It was presented to Jose Luis Santiago who signed it. It‘s important
to note here that he worked for UMACOR but it was the EVP of TESCO that
signed his stuff. (The Employee‘s Report of Accident or Sickness.)
5. The “Referee” of the workman‘s compensation section adjudicated 5K of
compensation in the favor of RES . TESCO requested some time to refute the
claim of PETs. They were alleging that the sickness had nothing to do with
his compensation. This was denied. 020& 025 EMILIO CANO ENTERPRISES v. CIR (Buenaventura)
6. This decision was appealed but only after the Sheriff in QC had attached the Feb 26, 1965 | Bautista Angelo, J. | Legal technecalities
 ISSUE/s:
PETITIONER: Emilo Cano Enterprises, Inc
RESPONDENTS: Court of Industrial Relations 1. Can the judgment rendered against Emilio and Rodolfo Cano in their
capacity as officials of the corporation be made effective against the
SUMMARY: Honorata Cruz filed a complaint for unfair labor practices against property of the corporation which was not a party to the case? -YES,
Emilio et al in heir capacity as officers of Emilio Cano Enterprises Inc. CIR ruled because they were sued as president and manager, of Emilio Cano
in her favor and ordered her reinstatement and payment of backwages. Emilio Enterprises, Inc. in representation of the corporation.
died. The judgement was executed against the properties of the corporation intead
of Emilio’s, and the corporation claims that they have a separate juridical
RULING: WHEREFORE, petition is dismissed, with costs.
personality from Emilio and that it was not named as a party to the case. The issue
is WoN the judgement rendered against the officials are binding on the company.
SC held that Emilio et al were sued not in their private capacity, but as president RATIO:
and manager, of Emilio Cano Enterprises, Inc in the representation of the
corporation and that (see doctrine) 1. The answer must be in the affirmative. A corporation has a personality
DOCTRINE: While a corporation is a legal entity existing separate and apart separate and distinct from its members or stockholders because of a fiction
from the persons composing it, that concept cannot be extended to a point beyond of the law, Emilio Cano Enterprises, Inc. is a closed family corporation where
its reason and policy, and when invoked in support of an end subversive of this the incorporators and directors belong to one single family. Here is an
policy it should be disregarded by the courts instance where the corporation and its members can be considered as one.
2. To hold such entity liable for the acts of its members is not to ignore the legal
fiction but merely to give meaning to the principle that such fiction cannot be
FACTS:
invoked if its purpose is to use it as a shield to further an end subversive of
justice.
63. In a complaint for unfair labor practice filed before the Court of Industrial 3. While a corporation is a legal entity existing separate and apart from the
Relations, Emilio, Ariston and Rodolfo, all surnamed Cano, were made persons composing it, that concept cannot be extended to a point
respondents in their capacity as president and proprietor, field supervisor beyond its reason and policy, and when invoked in support of an end
and manager, respectively, of Emilio Cano Enterprises, Inc. subversive of this policy it should be disregarded by the courts
64. Presiding Judge Jose S. Bautista rendered decision finding Emilio Cano and 4. A factor that should not be overlooked is that Emilio and Rodolfo Cano are
Rodolfo Cano guilty of the unfair labor practice charge, but absolved here indicted, not in their private capacity, but as president and
Ariston for insufficiency of evidence. As a consequence, the two were manager, of Emilio Cano Enterprises, Inc. Having been sued officially their
ordered, jointly and severally, to reinstate Honorata Cruz, to her former connection with the case must be deemed to be impressed with the
position with payment of backwages from the time of her dismissal up to representation of the corporation.
her reinstatement, together with all other rights and privilege 5. The court's order is for them to reinstate Honorata Cruz to her former
65. Emilio Cano died position in the corporation and incidentally pay her the wages she had
66. The case was appealed to the court en banc, which affirmed the decision been deprived of during her separation. The order against them is in effect
of Judge Bautista. against the corporation.
67. The order of execution was directed against the properties of Emilio Cano 6. No benefit can be attained if this case were to be remanded to the
Enterprises, Inc. instead of those of the Emilio and Rodolfo court a quo merely in response to a technical substitution of parties for
68. Thecorporation filed an ex parte motion to quash the writ on the ground such would only cause an unwarranted delay that would work to
that the judgment sought to be enforced was not rendered against it Honorata's prejudice. This is contrary to the spirit of the law which enjoins
which is a juridical entity separate and distinct from its officials. a speedy adjudication of labor cases disregarding as much as possible the
69. The motion was denied. The corporation interposed the present petition technicalities of procedure.
for certiorari.1äwphï1.ñët


021 McCONNEL v. CA (PLEYTO)
March 17, 1961 | Reyes, J.B.L, J. | Equity Piercing
PETITIONER-APPELLANTS: M. McConnel, W.P. Cochrane, Ricardo
Rodriguez, et. al.
RESPONDENTS-APPELLEES: The Court of Appeals and Dominga de los
Reyes, assisted by her husband, Sabino Padilla
FACTS:
SUMMARY: Park Rite Co., Inc. is a Philippine corporation. It leased from
Rosales a lot, which it used for parking motor vehicles for a consideration.
Apparently, it also occupied the adjacent lot owned by Spouses Padilla, without
their knowledge and consent. When Spouses Padilla found out, they demanded for
payment. Paredes and Tolentino, who were then the owners disclaimed liability
and blamed the original incorporators. Spouses Padilla filed for a complaint for
forcible entry. MTC held that Park Rite should pay the amount of P7k, which
eventually turned into P11k. Upon the execution, it was found out that Park Rite
only had an asset amounting to P550.00, which was deposited in court. Spouses
Padilla then filed to recover the unsatisfied amount from the corporation and/or its
stockholders. CFI denied the recovery. CA reversed the ruling because it found
the corporation as a mere alter ego or business conduit of the principal
stockholders and so they were adjudged to be responsible for the amounts. The
issue in this case is WoN the individual stockholders may be held liable for
obligations contracted by the corporation – SC held Yes because the
circumstances show that the corporate entity is being used as an alter ego for the
sole benefit of the stockholders, or else to defeat public convenience, justify
wrong, potect fraud, or defend crime. The evidence clearly shows that these
persons completely dominated and controlled the corporation and that the
functions of the corporation were solely for their benefits: (1) Paredes and
Tolentino owned 1496 of 1500 shares of stock, (2) same office, (3) funds were
kept by Paredes in his own name, (4) not much visible assets. To hold the latter
liable for the corporation's obligations is not to ignore the corporation's separate
entity, but merely to apply the established principle that such entity can not be
invoked or used for purposes that could not have been intended by the law that
created that separate personality
DOCTRINE:
Whenever the corporate entity is being used as an alter ego or business conduit for
the sole benefit of the stockholders, or to defeat public convenience, justify wrong,
protect fraud, or defend crime, the individual stockholders may be held liable for
the obligations contracted by the corporation (sabi sa case)
PERO SABI NI CLV (sa book):
McConnel imply that incorporation of an entity without reasonable assets to
support the undertaking or venture for which it is organized constitute a fraud
against the corporate creditors.
Under-capitalizing a corporate enterprise may therefore be a species of alter ego
or defeat of holders. The court decided for piercing, holding the stockholders liable
for deficiency. Although it held that mere ownership of all or nearly all of the
stocks does not make a corporation a business conduit of stockholders, but in that
case, the operation of the corporation was so merged with those of the stockholders
as to be practically indistinguishable. Furthermore, they had the same office, the
funds were held by the stockholders, and the corporation had no visible assets.
1. Park Rite Co., Inc. is a Philippine corporation originally organized on or
about April 15, 1947, with a capital stock of 1,500 shares at P1.00 a share.
2. It leased from Rafael Perez Rosales y Samanillo (Rosales) a vacant lot on
Juan Luna Street in Manila, which it used for parking motor vehicles for a
consideration
3. It turned out that in operating its parking business, the corporation occupied
and used not only the Samanillo lot it had leased but also an adjacent lot
belonging to the repondents (Spouses Padilla), without their knowledge and
consent
4. So, when the Spouses found out, they demanded for payment for the use and
occupation of the lot
5. The corporation (then controlled by petitioners Paredes and Tolentino, who
had purchased and held 1,496 of its 1,500 shares) disclaimed liability,
blaming the original incorporators (McConnel, Rodriguez and Cochrane.)
6. Spouses Padilla then filed a complaint for forcible entry
7. MTC decision: Park Rite Co., Inc. should pay P7.410.00 plus legal interest
as damages from April 15, 1947 until return of the lot
8. Restitution not having been made until Jan 31 1948, the judgment amounted
to P11,-732.50
9. Upon execution, the corporation was found without any assets other than
P550.00 deposited in court
10. So there was a balance of P11,182.50 (after judgment credit)
11. The judgment creditors then filed in the CFI against the corporation and its
past and present stockholders to recover from them, jointly and severally, the
unsatisfied balance plus legal interest and costs
12. CFI: denied recovery
13. CA: reversed the ruling
a. Found that the corporation was a mere alter ego or business conduit
of the principal stockholders that controlled it for their own benefit,
and adjudged them responsible for the amounts by the Spouses
Padilla
b. Paredes and Tolentino are declared liable to the Spouses Padilla for
the rentals due from Aug. 22, 1917 to Jan. 31, 1948 at the rate of
P1235.00/month, with legal interest from the filing of the complaint
c. They are required to pay the sum of P6,036.66 with legal interest
 d.Rodriguez is ordered to pay the Spouses Padilla the sum of
P1,742.64 with legal interest
e. The costs shall be paid proportionately
14. Hence, Paredes and Ursula filed a petition for certiorari
ISSUE/s:
1. WoN the individual stockholders may be held liable for obligations
contracted by the corporation – Yes because the circumstances show that the
corporate entity is being used as an alter ego for the sole benefit of the
stockholders, or else to defeat public convenience, justify wrong, potect
fraud, or defend crime.
a. WoN the decision of the CA was correct, that under the
circumstances of record, there was justification for disregarding the
corporate entity of the Park Rite Co., Inc., and holding its controlling
stockholders personally responsible for a judgment against the
corporation (other way it was composed sa case but same lang)
RULING: Finding no error in the judgment appealed from, the same is hereby
affirmed, with costs and petitioner-appellants Circo Pareses and Tax win win.
RATIO:
1. The individual stockholder may be held liable for obligations contracted
by the corporation wherever circumstances show that the corporate
entity is being used as an alter ego for the sole benefit of the stockholders,
or else to defeat public convenience, justify wrong, potect fraud, or
defend crime.
2. CA found that Park Rite wronged the Spouses Padilla when it occupied the
adjacent lot without the latter’s prior knowledge and consent and without
paying the reasonable rentals for the occupation of said lot
a. Also no doubt that the corporation was a mere alter ego or business
conduit of Paredes and Tolentino and before them—the McConnel,
Cochrane, and Rodriguez
3. The evidence clearly shows that these persons completely dominated and
controlled the corporation and that the functions of the corporation were
solely for their benefits
4. When it was originally organized on or about April 15, 1947, the original
incorporators (McConnel, Cochrane and Rodriguez, Dario and Ordrecio)
with a capital stock of P1500 divided into 1500 shares at P1.00/share.
5. McConnel and Cochrane each owned 500 shares, Rodriguez 48 shares and
Dario and Ordrecio 1 share each.
6. Obviously, the shares of the last two named persons were merely qualifying
shares.
7. Then on or about Aug. 22, 1947, Paredes and Tolentino purchased 1,496
shares of the said corporation and the remaining four shares were acquired
by Claudio, Paredes (different Paredes, this one is Quintin Paredes. You
know, the road), Tarictican, and Marquez at one share each
a. Obviously, again, these shares were merely qualifying shares and
that to all intents and purposes Paredes and Tolentino (spouses sila,
end na ng ruling sinabi) composed the Park Rite Co,, Inc.
8. Other facts that showed why the corporation is merely an alter ego:
a. That the corporation was a mere extenstion of their personality is
shown by the fact that the office of Paredes and that of Park Rite
Co., Inc. were located in the same building, in the same floor and in
the same room – 507 Wilson Building (BUT WHO CARES
ABOUT THE ADDRESS OF THE BUILDING – Something CLV
would say)
b. The funds of the corporation were kept by Paredes in his own name
c. The corporation itself had no visible assets except perhaps the toll
house, the wire fence around the lot and the signs thereon
d. This is why the judgment against it could not be fully satisfied
9. Whenever the corporate entity is being used as an alter ego or business
conduit for the sole benefit of the stockholders, or to defeat public
convenience, justify wrong, protect fraud, or defend crime, the individual
stockholders may be held liable for the obligations contracted by the
corporation
10. To hold the latter liable for the corporation's obligations is not to ignore
the corporation's separate entity, but merely to apply the established
principle that such entity can not be invoked or used for purposes that
could not have been intended by the law that created that separate
personality
11. The petitioners-appellants insist that the Court could have no jurisdiction over
an action to enforce a judgment within five (5) years from its rendition, since
the Rules of Court provide for enforcement by mere motion during those five
years. The error of this stand is apparent, because the second action,
originally begun in the Court of First instance, was not an action to enforce
the judgment of the Municipal Court, but an action to have non-parties to the
judgment held responsible for its payment.
 022 HALLEY v. PRINTWELL, INC. (YAP)
May 30, 2011 | Bersamin, J. | Thinly-Capitalized Corporations 47. BMPI commissioned Printwell, Inc. (respondent) for the printing of the
magazine Philippines, Inc., together with wrappers and subscription cards,
that BMPI published and sold.
PETITIONER: Donnina C. Halley
48. BMPI placed with Printwell several orders on credit evidenced by invoices
RESPONDENTS: Printwell, Inc.
and delivery receipts.
49. BMPI failed to pay Printwell for the orders, hence Printwell sued BMPI for
SUMMARY: Halley (incorporator-stockholder) subscribed to Business Media
the collection of the balance – because BMPI was insolvent, Prtinwell
Philippines, Inc. (BMPI / corporation-debtor) shares, which she had not fully paid.
amended the complaint and impleaded all the original stockholders and
BMPI commissioned Printwell, Inc. (printing press / creditor) for the printing of its
incorporators, by virtue of the articles of incorporation, in order to recover
magazine, wrappers and subscriptions cards which it sold to the public. Since
their unpaid subscriptions.
BMPI failed to pay in full, and was insolvent, Printwell impleaded the stockholders
50. Hally denies liability to Printwell, and raises the following contentions:
in an amended complaint. Halley, however, argues that she cannot be held liable.
1. RTC violated §14, Art. VIII of the Constitituion and §1 Rule 36 of
She invokes the defense of corporate personality, and that she had no hand in the
the Rules of Court when it copied, in verbatim, the memorandum of
transaction between BMPI and Printwell.
Printwell; and
2. Lower courts erroneously pierced the veil of corporate fiction
The pertinent issue is whether the doctrine of piercing the veil of corporate fiction
despite absence of proof showing that Halley had any hand in
applies in this case.
transacting with Printwell.
The SC ruled in the affirmative. The general rule is that a corporation is looked
ISSUE/s:
upon as a legal entity, separate and distinct from its stockholders/members, unless
9. Whether the RTC violated the Constitution and the Rules of Court – NO
and until a sufficient reason dictates otherwise. Although nowehere was it in
10. Whether the doctrine of piercing the veil of corporate fiction applies – YES
Printwell’s complaint or testimonies that Halley was instrumental in persuading
11. Whether the trust fund doctrine applies – YES
BMPI to renege on its obliation to pay, her personal liability remained because the
CA found her and her co-stockholders to be in charge of the operations of BMPI at
RULING: WHEREFORE, petition DENIED. CA ruling AFFIRMED with
the time the unpaid obliation was transacted and incurred. The corporate
MODIFICATION as to the amount to be paid by Halley.
personality cannot be used to foster injustice – if applied herein, then Printwell
would be put on limbo as to where to assert its claim since the stockholders are
RATIO:
invoking corporate personality, and the corporation itself is insolvent. (so anuna)
86. RTC did not violate the Constitution and the Rules of Court –
1. Halley failed to specify either the portions allegedly lifted verbatim
DOCTRINE: Where a corporation is under the control of its stockholders during
from the memorandum, or why she regards the decision as copied.
a particular transaction, it is irrelevant whether a stockholder actually had a hand in
2. Such omission renders the petition for review insufficient to support
persuading third parties (creditors) into transacting with the corporation.
her contention, considering that the mere similarity in language or
thought between Printwell’s memorandum and the trial court’s
Here, BMPI was under the control of its stockholders (includes Halley) when it
decision did not necessarily justify the conclusion that the RTC
commissioned Printwell Hence, the argument of Halley that she had no hand in
simply lifted verbatim or copied from the memorandum.
persuading Printwell to enter into the contract with BMPI has no leg to stand on.
87. Corporate personality cannot be used to foster injustice –
FACTS: 1. Doctrine of piercing the veil of corporate fiction – the corporate
46. Donnina Halley (petitioner) was an incorporator and original director of personality may be disregarded, and the individuals composing the
Business Media Philippines, Inc. (BMPI). She subscribed to 35,000 shares corporation will be treated as individuals, if the corporate entity is
with a total subscription price of PHP350,000, and paid PHP87,500 thereof. being used as a cloak or cover for fraud or illegality; as a justification
for a wrong; as an alter ego, an adjunct, or a business conduit for the
No. of Shares Total Unpaid sole benefit of the stockholders.
Amount Paid
of Halley Subscription Subscription
35,000 PHP350,000 PHP87,500 PHP262,500
 2. General rule: A corporation is looked upon as a legal enity. that checks are not considered legal tender until
Exception: Unless and until sufficient reason to the contrary encashed)
appears. 5. Lastly, the liability of stockholders for corporate debt is up to the
3. Although nowehere was it in Printwell’s complaint or testimonies extent of their unpaid subscription, not only to the extent of what
that Halley was instrumental in persuading BMPI to renege on its they had actually contributed. Hence, the need to modify the CA
obliation to pay, her personal liability remained because the CA ruling.
found her and her co-stockholders to be in charge of the operations
of BMPI at the time the unpaid obliation was transacted and
incurred.
4. To deny Printwell from recovering from Halley and her co-
stockholders would place Printwell in a limbo on where to assert its
right to collect from BMPI since the stockholders are availing the
defense of corporate fiction to evade payment from its obligations.

88. Trust Fund Doctrine applies; Unpaid creditor may satisfy its claim from
unpaid subscriptions; stockholders must prove full payment of their
subscriptions –
1. Trust Fund doctrine – the property of a corporation is a trust fund
for the payment of creditors, but such property can be called a trust
fund only by way of analogy or metaphor. As between the
corporation itself and its creditors it is a simple debtor, and as
between its creditors and stockholders its assets are in equity a fund
for the payment of its debts.
2. The doctrine is not limited to reaching the stockholders’ unpaid
subscriptions – the scope, when the corporation is insolvent,
encompasses not only the capital stock, but also other property and
assets generally regarded in equity as a trust fund for the payment of
corporate debts.
3. Furhermore, a corporation has no legal capacity to release an
original subscriber to its capital stock from the obligation of paying
for his shares, in whole or in part, without a valuable consideration,
or fraudulently, to the prejudice of creditors.
4. Hence, the creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for
the satisfaction of its debt – and to establish a prima facie case, it is
necessary to establish only that the stockholders have not in good
faith paid the par value fo the stocks of the corporation.
1. In civil cases, the party who pleads payment has the
burden of proving it. Here, Halley had the burden of
proving payment, rather than Printwell proving
nonpayment. Apparently, Halley failed to discharge her
burden.
2. Halley’s mere submission of the receipt issued in
exchange of the check did not satisfactorily establish
her allegation of full payment of her subscription – she
could not even identify her drawee bank. (remember
 023 YUTIVO SONS HARDWARE v. CTA (BALISONG)
28 Jan. 1961 | Gutierrez David, J. | Avoidance or minimization of taxes
PETITIONER: Yutivo Sons Hardware Company
RESPONDENTS: Court of Tax Appeals and Collector of Internal Revenue
SUMMARY: The CTA and CIR held Yutivo Sons liable for deficiency sales taxes
and penalty surcharges for fraudulent sales allegedly made to Southern Motors.
The CTA and CIR held that Southern Motors was an alter ego of Yutivo Sons,
organized to evade taxes. The issue in this case is whether Yutivo Sons is liable
for the deficiency sales taxes for its transactions with Southern Motors, and
whether it is liable for the penalty surcharges. The Court held on the matter of
penalty surcharges that Yutivo Sons and Southern Motors that they are not liable
therefore considering that Southern Motors could not have been organized to
defraud the government of the taxes due. Yutivo Sons is entitled to reduce or
endeavor to exempt itself from taxes through lawful means. However, on the score
of deficiency sales taxes, the Court held that Yutivo Sons is liable therefore on
account of Southern Motors being a mere department, subsidiary, or
instrumentality of Yutivo Sons. But, the Court allowed Yutivo Sons, through
Southern Motors, to deduct the sales taxes already paid for by Yutivo Sons from
the amount due. In fine, the Court finds Yutivo Sons liable for deficiency tax
assessments less the amounts already paid for by Yutivo Sons.
DOCTRINE: The use of the corporate entity to gain an advantage, such as the
minimization of tax, is not by itself a fraudulent scheme. However, in appropriate
cases, revenue officersmay disregard the separate corporate entity of a corporation
where it serves as shield for tax evasion.
FACTS:
70. A Yutivo is a corporation involved in importation and sale of hardware
supplies & equipment. It bought trucks and cars from General Motors (GM),
an American corporation licensed to do business in the Philippines. As the
importer, GM paid sales tax based on the selling price to Yutivo. Since the
tax is collected only on original sales, Yutivo no longer paid any tax for its
retail to the public.
71. Later on, the descendants of the founders of Yutivo formed Southern Motors
Inc. (SMI), a company engaged in selling cars, trucks and spare parts. Yutivo
resold cars (bought from GM) to SMI.
72. Much later on, GM pulled out of the Philippines. As a result of this, the
dynamics of the importation & distribution of the cars had to change. The US
manufacturer of GM cars appointed Yutivo as importer for Visayas and
Mindanao. Like GM, as an importer, Yutivo paid taxes based on its selling
price to SMI. SMI, in turn, was the one who resold the cars to the public in
Visayas and Mindanao.
73. The CIR made an assessment demanding deficiency sales tax plus surcharge
against Yutivo, claiming that the taxable sales were the retail sales by SMI to
the public and not the wholesale by Yutivo to SMI. CIR also alleged that SMI
and Yutivo were one and the same, SMI being a subsidiary of Yutivo. It was
claimed that there was no legitimate purpose for organizing SMI, except to
evade taxes; that it was owned (or at least the majority of stocks are owned)
and controlled by Yutivo as a mere subsidiary, branch, conduit, or alter ego
of the latter.
ISSUE/s:
6. Whether the CIR and CTA correctly held that SMI was created to evade taxes
– NO. Fraud is never lightly presumed and any doubt must be resolved in
favor of the taxpayer.
RULING: SMI and Yutivo are liable only for deficiency taxes less the payments
already made by Yutivo, but not for penalty surcharges for fraud.
RATIO:
57. Before GM withdrew from the Philippines, Yutivo was already reselling the
cars & trucks of GM to SMI. As importer, only GM was liable for the taxes.
Yutivo only bore tax liability when it became an importer after GM left. The
decision of the CTA therefore supporting the theory that SMI was only
organized for tax evasion runs contrary to the fact that Yutivo did not even
have a tax liability to evade at that time. The intention to minimize taxes,
when used in the context of fraud, must be proved by clear and convincing
evidence not by mere preponderance or speculation.
58. On the other hand, if tax saving was the purpose for creating SMI, this may
be justified. The Tax Code provides that sales tax shall be collected once only
on every original sale, barter, exchange, to be paid by the manufacturer,
producer or importer. The words use makes it open to different
interpretations. In this connection, it should be stated that a taxpayer has the
legal right to decrease the amount of what otherwise would be his taxes or
altogether avoid them by means which the law permits.
59. HOWEVER, the Court agreed that SMI was actually owned and controlled
by Yutivo, as to make it a mere subsidiary or branch of the latter, created for
the purpose of selling the vehicles at retail and maintaining stores for spare
parts as well as service repair shops. Yutivo completely controlled SMI, so
 much so that SMI was just like a branch of Yutivo. Therefore, it was right for
the CTA to disregard the technical defense of separate corporate entity to
arrive at the tax liability of Yutivo.

60. ULTIMATELY, the Court held that Yutivo did have a tax deficiency, but
was not liable to pay extra surcharges for the evasion of taxes. Yutivo was in
good faith thinking that the right procedure was merely to follow GM’s
former practice of paying sales taxes based on the sale price to SMI, rather
than the price of the sale to the public. However, since Yutivo & SMI are the
same entity, the taxes should have been based on SMI’s sale to the public,
which would certainly be based on a higher tax base.


024 PADILLA v. CA (VARGAS) right of first refusal to develop and/or improve the property sold should
November 22, 2001 | Quisumbing, J. | Piercing Doctrine and Due Process Clause LRTA decide to lease and/or assign to any person the right to develop and/or
PETITIONER: Luisito Padilla and Phoenix-Omega Development and Management
Corporation
RESPONDENTS: The Honorable Court of Appeals and Susana Realty, Inc.
SUMMARY: SRI sold lands to LRTA but with a right of first refusal reserved to SRI
for the development of said lands. Thereafter, LRTA and Phoenix Omega entered into
a Concession Contract for the construction of commercial stalls. SRI opposed this for
being violative of its right of first refusal. The parties thereafter entered into a tripartite
agreement whereby SRI agreed to honor the terms of the concession contract. SRI
and Phoenix Omega therefore agreed that Phoenix would construct said stalls subject
to SRI’s approval. By virtue of a deed of assignment, Phoenix assigned its rights to
PKA. So PKA and SRI entered into a new contract of lease. When SRI refused to
approve the amended plans submitted by PKA, PKA filed a case for rescission of the
contract of lease. SRI argued that it refused to approve said plans because PKA failed
to pay rent. RTC ruled in favor of SRI and ordered PKA to surrender the property and
pay rent. However, only the possession of property was restored to SRI while the
monetary award remained unsatisfied. Thus, RI filed a motion for issuance of an alias
writ against PKA, Padilla and Phoenix Omega based on the trial court’s observation
that PKA and Phoenix Omega are one and the same entity. The RTC issued said alias
writ of execution. Padilla and Phoenix Omega now assert that said execution cannot
be enforced against them as they were never parties to the case filed by PKA against
SRI and they were unable to present evidence on their behalf. The issue is WON the
trial court had jurisdiction over petitioners, to justify the issuance of an alias writ of
execution against their properties. The SC held that the trial court never acquired
jurisdiction over Padilla and Phoenix Omega as they were never summoned nor did
they appear voluntarily in the proceedings.
DOCTRINE: Although both lower courts found sufficient basis for the conclusion
that PKA and Phoenix Omega were one and the same, and the former is merely a
conduit of the other, the Supreme Court held void the application of a writ of
execution on a judgment held only against PKA, since the RTC obtained no
jurisdiction over the person of Phoenix Omega which was never summoned as formal
party to the case. The general principle is that no person shall be affected by any
proceedings to which he is a stranger, and strangers to a case are not bound by the
judgment rendered by the court.
FACTS: PKA and Phoenix-Omega also shared officers, laborers, and offices.
1. Susana Realty, Inc. (SRI) sold several parcels of land to Light Rail Transit
Authority (LRTA). Under par. 7 of the Deed of Sale, SRI reserve to itself the
improve the property.
2. Thereafter, LRTA and Phoenix Omega entered into a Commercial Stall
Concession Contract authorizing the latter to construct and develop
commercial stalls on a certain part of the sold property. SRI opposed said
contract for being violative of the Deed of Sale between SRI and LRTA.
Accordingly, a tripartite agreement was later entered into by the parties
whereby SRI agreed to honor the terms of the concession contract.
3. A contract was thus entered into between Phoenix Omega and SRI with
LRTA whereby Phoenix Omega undertook to construct commercial stalls
which would begin only upon SRI’s approval. On the same day, Phoenix
Omega executed a deed of assignment for the transfer of its rights and
interests over the property unto its sister company - PKA Corp. through its
President (Padilla).
4. The development having been assigned to PKA, it entered into a contract of
lease with SRI (Phoenix not a party to this contract). SRI then sold the
remaining portion of the land to a third party. Accordingly, PKA and SRI
entered into an amended contract of lease (Phoenix made a party to the
contract) whereby the parties agreed to substitute the sold property with two
lots also owned by SRI.
5. PKA’s building permit was revoked by DPWH. Later, DPWH allowed PKA
to resume construction subject to PKA’s compliance with the requirements
of the Building Code. The amended plans of PKA was sent to SRI for
approval but SRI refused to approve it.
6. By virtue of SRI’s refusal, PKA filed a case for rescission of the contract of
lease. On the other hand, SRI countered by saying that it was PKA which
failed to pay rentals.
7. RTC ruled in favor of SRI and ordered PKA to surrender the property and
pay rentals to SRI. Possession of the subject properties was restored to SRI.
However, the monetary award was left unsatisfied. Thus, SRI filed a motion
for issuance of an alias writ against PKA, Padilla and Phoenix Omega based
on the trial court’s observation that PKA and Phoenix Omega are one and the
same entity. The RTC issued said alias writ of execution.
8. Padilla and Phoenix Omega now assert that said execution cannot be enforced
against them as they were never parties to the case filed by PKA against SRI
and they were unable to present evidence on their behalf. RTC ruled against
Padilla and Phoenix Omega.
9. CA agreed with RTC finding that there is evidence on record to support the
RTCs conclusion that PKA and Phoenix-Omega are one and the same, or that
the former is a mere conduit of the latter. It pointed out that petitioner Padilla
is both president and general manager of PKA and at the same time chairman
of the board of directors and controlling stockholder of Phoenix-Omega.
 protect fraud, or defend crime. For the separate juridical personality of a
ISSUE/s: corporation to be disregarded, the wrongdoing must be clearly and
1. WON the trial court had jurisdiction over petitioners, to justify the issuance convincingly established. It cannot be presumed.
of an alias writ of execution against their properties - NO. The trial court
never acquired jurisdiction over Padilla and Phoenix Omegaas they were
never summoned nor did they appear voluntarily in the proceedings.

RULING: WHEREFORE, the instant petition is GRANTED. The assailed decision
and resolution of the Court of Appeals in CA-G.R. SP No. 36685 are SET ASIDE, and
the order of the trial court dated November 29, 1994 and the alias writ of execution
issued on the same date in connection with Civil Case No. 7302, are declared NULL
and VOID.

RATIO:
1. A court acquires jurisdiction over a person through either a valid service of
summons or the persons voluntary appearance in court. A court must
necessarily have jurisdiction over a party for the latter to be bound by a court
decision. Generally accepted is the principle that no man shall be affected by
any proceeding to which he is a stranger, and strangers to a case are not bound
by judgment rendered by the court.
2. In this case, the trial court never acquired jurisdiction over petitioners through
any of the modes mentioned above. Neither of the petitioners was even
impleaded as a party to the case. To levy upon their properties to satisfy a
judgment in a case in which they were not even parties is not only
inappropriate; it most certainly is deprivation of property without due process
of law.
3. The courts a quo ruled that petitioner Padilla, in particular, had his day in
court. As general manager of PKA, he actively participated in the case in the
trial court. He ha(d) the right to control the proceedings, to make defense, to
adduce and cross examine witnesses, and to appeal from a decision. To begin
with, it is clear that Padilla participated in the proceedings below as general
manager of PKA and not in any other capacity. The fact that at the same time
he was the chairman of the board of Phoenix-Omega cannot, by any stretch
of reasoning, equate to participation by Phoenix-Omega in the same
proceedings. We again stress that Phoenix-Omega was not a party to the case
and so could not have taken part therein.
4. The general rule is that a corporation is clothed with a personality separate
and distinct from the persons composing it. It may not be held liable for the
obligations of the persons composing it, and neither can its stockholders be
held liable for its obligations.
5. The veil of corporate fiction may only be disregarded in cases where the
corporate vehicle is being used to defeat public convenience, justify wrong,
protect fraud, or defend crime. PKA and Phoenix Omega are admittedly
sister companies, and may be sharing personnel and resources, but there is
no allegation, much less positive proof, that their separate corporate
personalities are being used to defeat public convenience, justify wrong,
 026 Jacinto v CA (GUSTILO) FACTS:
June 6 1991 | David Jr, J. | Piercing Doctrine 51. This case is an appeal by certiorari to partially set aside the decision of the
CA which affirmed the decision of the RTC wherein judgment was rendered
ordering Inland Industries & Roberto Jacinto (defendants in that case) to pay
PETITIONER: Roberto A. Jacinto
jointly and severally, Metropolitan Bank & Trust Co (Metropolitan Bank) the
RESPONDENTS:CA & Metropolitan Bank & Trust Company
principal obligation of P382, 015.80 with interest/charges at the rate of 16%
per annum from Jan. 1, 1979 up to the time the amount is fully paid plus the
SUMMARY: Jacinto dealt with Metropolitan Bank through the signing of Trust
sum of P20,000 as attorney’s fees. They were also ordered to pay in solidum
Receipts in favor of the corporation, Inland Industries. However, when the Trust
the costs of the suit.
Receipts were already due, Jacinto tried to escape liability and shift the entire blame
52. In the appeal, Inland Industries did not join its co-defendant in that case,
under the trust receipts solely and exclusively on Inland Industries corporation. He
Jacinto. The SC required Metropolitan Bank to file its comment and required
asserted that he cannot be held solidarily liable corporation because he just signed
Jacinto to file a reply. Both parties submitted their respective memorandum.
said instruments in his official capacity as president of Inland Industries, Inc. and the
Thus, Jacinto is raising the following issues.
corporation has a juridical personality distinct and separate from its officers and
stockholders.However, the RTC held that Jacinto was jointly and severally liable
ISSUE/s:
with Inland Industries to pay Metropolitan Bank the principal obligation plus interest
12. WoN the CA can validly pierce the fiction of corporate identity of Inland
plus attorney’s fees. The CA affirmed such decision. Hence, this appeal by Jacinto.
Industries, Inc even if there is no allegation in the complaint regarding the
The SC held that it was found that Jacinto is in fact the corporation itself since it was
same nor is there anything in the prayer demanding the piercing of the
Jacinto himself who dealt entirely with Metropolitan Bank and when he signed, it did
corporate veil of Inland Industries?-YES because there was no serious
not mention that he was doing so in his official capacity. Jacinto in his direct
objection from Jacinto
testimony presented a different corporate scenario regarding Inland Industries, Inc.
13. WoN the CA can validly pierce the fiction of corporate identity of Inland
and vehemently declared that it is Bienvenida Catabas who is its President, while
Industries, Inc even if absolutely no proof was presented in court to serve as
Aurora Heresa is its Chairman of the Board. He stated that he was simply General
legal justification for the same?- YES, because there was actually sufficient
Manager and a stockholder of the corporation. His assertion on this point, however,
evidence presented
is not convincing in view of his admission in the same breath, that his wife, Hedy U.
Jacinto, own with him 52% of the shares of stock of said corporation.
RULING: WHEREFORE, the instant petition is dismissed with costs against
The Court held that when the veil of corporate fiction is made as a shield to
Jacinto.
perpetuate fraud and/or confuse legitimate issues, the same should be pierced. Where
a corporation is merely an adjunct, business conduit or alter ego, the fiction of
RATIO:
separate and distinct corporate entity should be disregarded.
89. It was found that as to the liability of Jacinto, it would appear that he is
Jacinto, faults the courts below for piercing the veil of corporate fiction despite the
in fact the corporation itself known as Inland Industries, Inc. Aside from
absence of any allegation in the complaint questioning the separate identity and
the fact that he is admittedly the President and General Manager of the
existence of Inland Industries, Inc. However, the Court stated that while on the face
corporation and a substantial stockholders thereof, it was Jacinto who
of the complaint there is no specific allegation that the corporation is a mere alter ego
dealt entirely with Metropolitan Bank in those transactions. In the Trust
of Jacinto, subsequent developments, from the stipulation of facts up to the
Receipts that he signed supposedly in behalf of Inland Industries, Inc., it
presentation of evidence and the examination of witnesses, unequivocally show that
is not even mentioned that he did so in this official capacity.
Metropolitan Bank sought to prove that Jacinto and the corporation are one or that he
90. Jacinto, tried to escape liability and shift the entire blame under the trust
is the corporation. There was no serious objection from Jacinto. Thus, the petition
receipts solely and exclusively on Inland Industries corporation. He asserted
was dismissed with costs against Jacinto.
that he cannot be held solidarily liable corporation because he just signed said
instruments in his official capacity as president of Inland Industries, Inc. and
DOCTRINE:There is no denial of due process to hold officers liable under the
the corporation has a juridical personality distinct and separate from its
piercing doctrine, provided that evidential basis has been adduced during trial to
officers and stockholders.
apply the piercing doctrine.
91. It is a fact that Jacinto through his admission stated that he and his wife own
52% of the stocks of the corporation. The Court cannot accept as true the
assertion of Jacinto that he only acted in his official capacity as President and
General Manager of Inland Industries, Inc. when he signed the aforesaid trust
 receipts. The same is just a clever ruse and a convenient ploy to thwart his
personal liability therefor by taking refuge under the protective mantle of the
separate corporate personality of defendant corporation.
92. Jacinto in his direct testimony presented a different corporate scenario
regarding Inland Industries, Inc. and vehemently declared that it is
Bienvenida Catabas who is its President, while Aurora Heresa is its Chairman
of the Board. He stated that he was simply General Manager and a
stockholder of the corporation. His assertion on this point, however, is not
convincing in view of his admission in the same breath, that his wife, Hedy
U. Jacinto, own with him 52% of the shares of stock of said corporation.
93. A cursory perusal of the Stipulation of facts clearly shows that Jacinto
acted in his capacity as President and General Manager of Inland
Industries, Inc. when he signed said trust receipts. Pertinent portions as
follows: All the goods covered by the three (3) Letters of Credit (Annexes
"A", "B" & "C") and paid for under the Bills of Exchange (Annexes
"D", "E" & "F") were delivered to and received by Inland Industries,
Inc. through Jacinto, its President and General Manager, who signed for
and in behalf of Inland and agreed to the terms and conditions of three
(3) separate trust receipts covering the same.
94. The principle of piercing the fiction of corporate entity should be applied
with great caution and not precipitately, because a dual personality by a
corporation and its stockholders would defeat the principal purpose for
which a corporation is formed.
95. Thus, the Court concluded that the corporate veil that enshrouds Inland
Industries, Inc could be validly pierced, and a host of cases decided by our
High Court is supportive of this view. Thus it held that "when the veil of
corporate fiction is made as a shield to perpetuate fraud and/or confuse
legitimate issues, the same should be pierced. Where a corporation is
merely an adjunct, business conduit or alter ego, the fiction of separate
and distinct corporate entity should be disregarded.
96. Jacinto, faults the courts below for piercing the veil of corporate fiction
despite the absence of any allegation in the complaint questioning the
separate identity and existence of Inland Industries, Inc. However, the Court
stated that while on the face of the complaint there is no specific
allegation that the corporation is a mere alter ego of Jacinto, subsequent
developments, from the stipulation of facts up to the presentation of
evidence and the examination of witnesses, unequivocally show that
Metropolitan Bank sought to prove that Jacinto and the corporation are
one or that he is the corporation. No serious objection was heard
from Jacinto.
97. When evidence is presented by one party, with the express or implied consent
of the adverse party, as to issues not alleged in the pleadings, judgment may
be rendered validly as regards those issues, which shall be considered as if
they have been raised in the pleadings. There is implied consent to the
evidence thus presented when the adverse party fails to object thereto
 SECTION V
001 CAGAYAN FISHING v. SINDIKO (PERRAL)
Dec, 23, 1937 | Laurel, J. | Corporate Cotract Law
PETITIONER: CAGAYAN FISHING CO INC.
RESPONDENTS: Teodoro Sandiko
SUMMARY: Tabora owns 4 parcels of land. He mortgaged these lands 3 times.
He first mortgaged it to PNB to secure the payment of a loan, later on he mortgaged
it again in favor of the latter to secure the additional loan that was granted to him.
And for the 3rd time, he mortgaged it to Buzon to secure his indebtedness to the
latter. On May 31, 1930, he sold these lands to Cagayan Fishing subject to the
mortgages in favor of PNB and Buzon and with the condition that it would only be
transferred to the name of Cagayan Fishing until the latter has fully paid Tabora’s
indebtedness to PNB. On Pct. 22, 1930, Cagayan fishing filed its articles of
incorporation and a year later the BoD of the said company adopted a resolution
authorizing its President, Ventura, to sell the 4 parcels of land to Sindiko. Pursuant
to this transaction, 3 documents were executed (see fact no. 4). Due to the failure of
Sindiko to pay the sum stated in the promissory note (1 of the documents
executed), Cagayan Fishing brought and action before the CFI against Sindiko to
pay them P25,300. However, the trial court absolved Sindiko instead. Cagayan
Fishing presented a motion for new trial, which motion was denied by the trial
court. After due exception and notice, Cagayan Fishing has appealed to this court
and makes an assignment of various errors. The issue in this case is WoN the sale
of the parcels of land to Sindiko was valid.
The Court held in the negative. The SC held that The transfer (of the 4 parcels of
land) made by Tabora to the Cagayan Fishing Development Co., Inc. was made
before the incorporation of the latter. corporation, until organized, has no being,
franchises or faculties. Nor do those engaged in bringing it into being have any
power to bind it by contract, unless so authorized by the charter there is not a
corporation nor does it possess franchise or faculties for it or others to exercise,
until it acquires a complete existence. The contract here was entered into not
between Manuel Tabora and a non-existent corporation but between the Manuel
Tabora as owner of the four parcels of lands on the one hand and the same Manuel
Tabora, his wife and others, as mere promoters of a corporation on the other hand.
This is not saying that under no circumstances may the acts of promoters of a
corporation be ratified by the corporation if and when subsequently organized
(Doctrine of ratification). But such doctrine cannot be applied in this case because
if such were to be applied, it would result in injustice or fraud.
DOCTRINE: A corporation, until organized, has no being, franchises or faculties,
nor do those engaged in bringing it into being have any power to bind it by
contract—it is, as it were, a child in ventre sa mere. The acts of promoters of a
corporation may be ratified by the corporation if and when subsequently organized,
but under the peculiar facts and circumstances of the present case we decline to
extend the doctrine of ratification which would result in the commission of injustice
or fraud to the candid and unwary.
“Promoter” is a person who, acting alone or with others, takes initiative in
founding and organizing the business or enterprise of the issuer and receives
consideration therefor. Sec. 3.10, Securities Regulation Code (R.A. 8799) 

FACTS:
53. Manuel Tabora (Tabora) is the registered owner of 4 parcels of lands
situated in Aparri, Cagayan.
54. To guarantee the payment of the loan in the sum of P8K, Tabora, executed
on Aug. 4, 1929, in facor of PNB a 1st mortgage on the said parcels. A 2nd
mortgage in favir of the same bak was in April of 1930 executed by Tabora
over the same lands to guarantee the payment of another loan amounting to
P7K. A 3rd mortgage on the same lands was executed on April 16, 1930 in
favor of Severina Buzon (Buzon) to whom Tabora was indebted in the sum
of P2,900. These mortgages were registered and annotations thereof appear
at the back of TCT.
55. On May 31, 1930 (date is important in this case), Tabora executed a public
document entitled “"Escritura de Traspaso de Propiedad Inmueble" by
virtue of which the 4 parcels of land owned by him were sold to Cagayan
Fishing Co INC (Cagayan Fishing), said to be under process of
incorporation, in consideration of P1.00 subject to the mortgages in favor of
PNB and Buzon and, to the condition that said lands shall no be transferred
to the name of the Cagayan fishing until the latter has fully paid Tabora’s
indebtedness to the PNB.
56. Subsequently, Cagayan fishing filed its articles of incorporation with the
Bureau of Commere and Industry on October 22, 1930. Aa year later, the
board of directors of the said company adopted a resolution authorizing its
president, Jose Ventura, to sell the 4 parcels of land in question to Teodoro
Sindiko (Sindiko) for P42K. Thereafter, the following documents were
executed:
1. Deed of sale executed before a notary public by the terms of which
Cagayan fishing sold, ceded and transferred to Sandiko all its
rughts, titles and interest in and to the 4 lands in question for
P25,300. Sindiko in turn obligated himself to shoulder the 3
mortgages hereinbefore mentioned.
2. Promissory note for P25,300 drawn by Sindiko in favor of
Cagayan Fishing, payable after 1 year from date thereof
3. Deed of mortgage executed before a notary public in accordance
with which the 4 parcels of land were given as security for the
payment of the promissory note. (all these 3 docs were date Feb
15, 1932)
 57. Sindiko failed to pay the sum stated in the promissory note, Cagayan
Fishing brought an action in the CFI praying that judgment be rendered
against Sandiko for the sum of P25,300. After trial the court below, on Dec
18, 1934, rendered judgment absolving Sandiko, woth cost agaist Cagayan
Fishing.
58. Cagayan Fishing presented a motion for new trial, which motion was denied
by the trial court. After due exception and notice, Cagayan Fishing has
appealed to this court and makes an assignment of various errors.
ISSUE/s:
14. WoN the sale of the parcels of land to Sindiko was valid – NO.
o Sandiko always regarded Tabora as the owner and dealt with him
directly.
o Ventura, the President, intervened only to sign but always treated
Tabora as owner.
o PNB threatened to foreclose the mortgages but Tabora approached
Sandiko and succeeded in making him sign the necessary documents
and in making him assume the payment of Tabora’s indebtedness.
o The promissory note was made payable to Cagayan Fishing so that
it may not be attached by Tabora’s creditors.

RULING: SC affirmed the lower courts decision.

RATIO:
1. No, because of vice in consent and repugnancy to law
• The transfer (of the 4 parcels of land) made by Tabora to the Cagayan Fishing
Development Co., Inc. was made before the incorporation of the latter.
• Before a corporation may be said to be lawfully organized, many things
have to be done. Among other things, the law requires the filing of
articles of incorporation.
• A corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or
transact any business.
• A corporation, until organized, has no being, franchises or faculties. Nor
do those engaged in bringing it into being have any power to bind it by
contract, unless so authorized by the charter there is not a corporation
nor does it possess franchise or faculties for it or others to exercise, until
it acquires a complete existence.
• The contract here was entered into not between Manuel Tabora and a non-
existent corporation but between the Manuel Tabora as owner of the four
parcels of lands on the one hand and the same Manuel Tabora, his wife and
others, as mere promoters of a corporation on the other hand.
• This is not saying that under no circumstances may the acts of promoters
of a corporation be ratified by the corporation if and when subsequently
organized (Doctrine of ratification). But such doctrine cannot be applied
in this case because if such were to be applied, it would result in injustice
or fraud.
o Tabora mortgaged the parcels of land so that he may have the
necessary funds to convert and develop the lands into fisheries.
o Titles to the land remained in the name of Tabora
o Tabora formed a corporation composed of him, his wife and others.
Out of the Php 48,700 capital stock, P 45,000 was subscribed by
Tabora and P 500 by his wife. Out of the P 43,300 amount paid on
subscription, P 42,100 was made to appear as paid by Tabora and P
200 by his wife.
002 RIZAL LIGHT v. PUBLIC SERVICE COMMISSION (Escalona)
September 28, 1968 | Zaldivar, J. | Valid contractual agreements under process of
incorporation
PETITIONER: Rizal Light & Ice Co., Inc.
RESPONDENTS: The Municipality of Morong Rizal, the Public Service
Commission, and Morong Electric Company
SUMMARY: Rizal Light was tasked to provide electric light, heat, and power
services in Morong, Rizal. Its certificate of public convenience and necessity was
cancelled and revoked by the Public Service Commission (PSC) due to violations
of the stipulations in the certificate (case did not say which exactly), and
regulations of the commission. Morong Electric then applied for the same
certificate to supply the same services. The PSC then awarded Morong Electric
the certificate. Rizal Light assails that the application for such was invalid because
when Morong Electric applied for the certificate, its incorporation was not yet
complete with the SEC, thus did not create a proper contractual commitment due
to the lack of the juridical entity. The issue is WoN the awarding of the certificate
was valid despite the incomplete incorporation. The Court held that Morong
Electric still had a valid contractual commitment with the Municipality. The Court
used American authority to explain that the grant of the job to do the service is not
affected by its incomplete incorporation. It is only that the grant does not take
effect until such incorporation was completed. Such subsequent certificate of
incorporation cures the defect. The Court also cites Cagayan Fishing Development
Co., Inc. vs. Teodoro Sandiko as a basis to provide this case as an exception to its
doctrine. Lastly, the financial capability of Morong Electricity was proven through
the documents provided in the lower courts, and the Court held that it need not
delve into facts already established. Morong Electricity thus had financial
capability. Therefore, Morong Electricity fulfilled the three requisites to be
granted the certificate of public convenience and necessity:
1. The applicant must be a citizen of the Philippines or of the United States, or a
corporation or co-partnership, association or joint-stock company constituted and
organized under the laws of the Philippines, upon which at least 60% of the stock
or paid-up capital belongs entirely to the citizens of the Philippines or the United
States
2. The applicant must be financially capable of undertaking the proposed service
and meeting the responsibilities incident to its operation
3. The applicant must prove that the operation of the public service proposed and
the authorization to do business will promote the public interest in a proper and
suitable manner
DOCTRINE: A franchise granted to a corporation at the time it was still in the
process of incorporation would still constitute a valid contractual commitment,
with the corporation’s acceptance after the completion of the incorporation.
FACTS:
14. The following are two consolidated cases concerning Rizal Light.
15. First Case:
16. The Public Service Commission cancelled and revoked the certificate of
public convenience and necessity and forfeiting the franchise of Rizal Light.
The Rizal Light filed for a writ of preliminary injunction from such act.
17. Rizal Light is a domestic corporation that installs, operates, and maintains
electric light, heat, and power services in Morong, Rizal.
18. The Public Service Commission required Rizal Light to appear and prove
why it should not be penalized for violation of the conditions of the certificate
of public convenience, the regulations of the commission, failure to comply
with the directives to raise its service voltage and maintain them within the
limits prescribed in the Revised Order No. 1 of the Commission, and lastly,
to acquire and install a kilowatt meter to indicate the load in kilowatts at any
particular time of the generating unit.
19. Rizal Light failed to appear at the hearing, thus the Commission ordered for
the cancellation and revocation of the their certificate of public convenience
and necessity and the forfeiture of its franchise.
20. Rizal Light argued that their failure to appear was due to the illness of its
manager, Juan Francisco. The order was set aside, but petitioners still failed
to appear later on.
21. Second Case:
22. The Public Service Commission granted a certificate of public convenience
and necessity to Morong Electric Company instead. Rizal Light opposed this,
arguing that such grant would only result to ruinous and wasteful
competition. One other ground (relevant to topic) is that the application for
the certificate should be dismissed on the basis that Morong Electric had no
legal personality when it filed its application because its certificate of
incorporation was issued by the SEC after they had applied. The motion to
dismiss was denied on the basis that Morong Electric was a de facto
corporation. The Commission still approved the application of Morong
Electric and ordered the issuance of the certificate.
ISSUES:
2. Relevant issue: WoN the Commission erred in granting the application of
the certificate despite the fact that at the time Morong Electric filed for the
certificate, its incorporation was incomplete - NO
RULING: The granting of the certificate to Morong Electric is valid. It validly
entered into the contractual commitment to provide the public service.
RATIO:
61. The Court first established three requisites for the certificate to be granted:
a. The applicant must be a citizen of the Philippines or of the United
States, or a corporation or co-partnership, association or joint-stock
company constituted and organized under the laws of the
Philippines, upon which at least 60% of the stock or paid-up capital
 belongs entirely to the citizens of the Philippines or the United
States
b. The applicant must be financially capable of undertaking the
proposed service and meeting the responsibilities incident to its
operation
c. The applicant must prove that the operation of the public service
proposed and the authorization to do business will promote the
public interest in a proper and suitable manner
62. Morong Electric is a corporation duly organized and existing under the laws
of the Philippines, the stockholders are Filipino citizens, that it is financially
capable of operating an electric light, heat, and power service, and that at the
time the decision was rendered there was an absence of electric service in
Morong, Rizal.
63. Petitioner's arguments assailing the personality of Morong Electric dwells
on the proposition that since a franchise is a contract, at least two competent
parties are necessary to the execution thereof, and parties are not competent
except when they are in being. It is contended that until a corporation has
come into being, in this jurisdiction, by the issuance of a certificate of
incorporation by the Securities and Exchange Commission (SEC) it cannot
enter into any contract as a corporation. The certificate of incorporation of
the Morong Electric was issued by the SEC on October 17, 1962, so only
from that date, not before, did it acquire juridical personality and legal
existence. Petitioner concludes that the franchise granted to Morong
Electric on May 6, 1962 when it was not yet in esse is null and void and
cannot be the subject of the Commission's consideration
64. Petitioner's contention that Morong Electric did not yet have a legal
personality on May 6, 1962 when a municipal franchise was granted to it is
correct. The juridical personality and legal existence of Morong Electric
began only on October 17, 1962 when its certificate of incorporation was
issued by the SEC. Before that date, or pending the issuance of said
certificate of incorporation, the incorporators cannot be considered as de
facto corporation. But the fact that Morong Electric had no corporate
existence on the day the franchise was granted in its name does not render
the franchise invalid, because later Morong Electric obtained its certificate
of incorporation and then accepted the franchise in accordance with the
terms and conditions thereof
a. Basis is American authority:
i. McQuiuin says - The fact that a company is not
completely incorporated at the time the grant is made to it
by a municipality to use the streets does not, in most
jurisdictions, affect the validity of the grant. But such
grant cannot take effect until the corporation is organized.
And in Illinois it has been decided that the ordinance
granting the franchise may be presented before the
corporation grantee is fully organized, where the
organization is completed before the passage and
acceptance
ii. Thompson gives the reason for the rule - ordinance
granting a privilege to a corporation is not void because
the beneficiary of the ordinance is not fully organized at
the time of the introduction of the ordinance. It is enough
that organization is complete prior to the passage and
acceptance of the ordinance. The reason is that a privilege
of this character is a mere license to the corporation until
it accepts the grant and complies with its terms and
conditions.
65. The Court ruled that the incorporation of Morong Electric on October 17,
1962 and its acceptance of the franchise as shown by its action in
prosecuting the application filed with the Commission for the approval of
said franchise, not only perfected a contract between the respondent
municipality and Morong Electric but also cured the deficiency pointed out
by the petitioner in the application of Morong EIectric.
66. The Court also draws its strength from the case of Cagayan Fishing
Development Co., Inc. vs. Teodoro Sandiko. This Court held that a
corporation should have a full and complete organization and existence as
an entity before it can enter into any kind of a contract or transact any
business. It should be pointed out, however, that this Court did not say in
that case that the rule is absolute or that under no circumstances may the
acts of promoters of a corporation be ratified or accepted by the corporation
if and when subsequently organized. Of course, there are exceptions. It will
be noted that American courts generally hold that a contract made by the
promoters of a corporation on its behalf may be adopted, accepted or
ratified by the corporation when organized.
67. As to the company’s financial capability, the Petitioner challenges the
financial capability of Morong Electric, by pointing out the inconsistencies
in the testimony of Mr. Jose P. Ingal, president of said company, regarding
its assets and the amount of its initial investment for the electric plant. In
this connection it should be stated that on the basis of the evidence
presented on the matter, the Commission has found the Morong Electric to
be "financially qualified to install, maintain and operate the proposed
electric light, heat and power service." This is essentially a factual
determination which, in a number of cases, this Court has said it will not
disturb unless patently unsupported by evidence.
 003 CARAM JR. v. CA (Presh)
June 30, 1987 |Cruz, J. | Liabilities of a Bona Fide Corporation
PETITIONER: Fermin Z. Caram, Jr. and Rosa O. De Caram
RESPONDENTS: The Honorable Court of Appeals and Alberto V. Arellano
SUMMARY: The services of Baretto was requested to initiate the incorporation
of a company called Filipinas Orient Airways (FOA). Barretto was referred to as
the “moving spirit” of said corporation because it was through his effort that it
was created. Before FOA’s creation though, Barretto contracted with a third party,
Alberto Arellano, for the latter to prepare a project study for the feasibility of
creating a corporation like FOA. The project study was then presented to the
would-be incorporators and investors. On the basis of said project study, Fermin
Caram, Jr. and Rosa Caram agreed to be incorporators of FOA. Later however,
Arellano filed a collection suit against FOA, Barretto, and the Carams. Arellano
claims that he was not paid for his work on the project study.
The issue is WoN the Carams are personally and solidarily liable considering
that the project study was contracted before FOA became a corporation. – No.
The Supreme Court h The SC held that the petitioners cannot be held personally
liable for the compensation claimed by the Arellano for the services performed
by him in the organization of the corporation. The Carams did not contract such
services. It was only the results of such services that Barretto and Garcia
presented to them and which persuaded them to invest in the proposed airline.
They benefited from such services, but that surely is no justification to hold them
personally liable therefor.
The FOA is now a bona fide corporation. As such, FOA alone should alone be
liable for its corporate acts as duly authorized by its officers and directors. This
includes acts which ultimately led to its incorporation i.e., the project study made
by Arellano. FOA has a separate and distinct personality from its incorporators.
It is not justified to make the Carams, as principal stockholders, to be responsible
for FOA’s obligations.
DOCTRINE: A bona fide corporation is liable for its corporate acts as duly
authorized by its officers and directors.
FACTS:
74. The services of Baretto was requested to initiate the incorporation of a
company called Filipinas Orient Airways (FOA). Barretto was referred to as
the “moving spirit” of said corporation because it was through his effort that
it was created.
75. The project study was undertaken by the Alberto Arellano at the request of
Barretto and Garcia who, upon its completion, presented it to the Carams to
induce them to invest in the proposed airline. The study could have been
presented to other prospective investors.
76. At any rate, the airline was eventually organized on the basis of the project
study with the Carams as major stockholders and, together with Barretto
and Garcia, as principal officers.
77. Later however, Arellano filed a collection suit against FOA, Barretto, and
the Carams. Arellano claims that he was not paid for his work on the project
study.
78. Lower Court: Ordered the Carams to jointly and severally pay to Arellano the
amount of P50,000.00 for the preparation of the project study and his
technical services that led to the organization of the defendant corporation,
plus P10,000.00 attorney's fees;
a. It was upon the request of defendants Barretto and Garcia that
Arellano handled the preparation of the project study which project
study was presented to defendant Caram so the latter was convinced
to invest in the proposed airlines.
b. The project study was revised for purposes of presentation to
financiers and the banks. It was on the basis of this study that FOA
was actually organized and rendered operational.
c. Garcia and Caram, and Barretto became members of the Board
and/or officers of defendant corporation.
d. Thus, not only the defendant corporation, FOA, but all the other
defendants who were involved in the preparatory stages of the
incorporation, who caused the preparation and/or benefited from the
project study and the technical services of plaintiff must be liable
79. The Carams claim that this order has no support in fact and law because they
had no contract whatsoever with the Arellano regarding the above-mentioned
services. Their position is that as mere subsequent investors in the corporation
that was later created, they should not be held solidarily liable with the
Filipinas Orient Airways, a separate juridical entity, and with Barretto and
Garcia, their co-defendants in the lower court, who were the ones who
requested the said services from the private respondent.
ISSUE/s:
1. WoN the Carams are personally and solidarily liable considering that the
project study was contracted before FOA became a corporation. – No.
RULING: WHEREFORE, the petition is granted. The petitioners are declared not
liable under the challenged decision, which is hereby modified accordingly.
RATIO:
1. The petitioners were not involved in the initial stages of the organization of
the airline, which were being directed by Barretto as the main promoter. It
was he who was putting all the pieces together, so to speak. The Carams were
merely among the financiers whose interest was to be invited and who were
 in fact persuaded, on the strength of the project study, to invest in the
proposed airline.
2. There was no showing that the Filipinas Orient Airways was a fictitious
corporation and did not have a separate juridical personality, to justify
making the petitioners, as principal stockholders thereof, responsible for its
obligations. As a bona fide corporation, the Filipinas Orient Airways should
alone be liable for its corporate acts as duly authorized by its officers and
directors.
3. The SC held that the petitioners cannot be held personally liable for the
compensation claimed by the private respondent for the services performed
by him in the organization of the corporation. To repeat, the petitioners did
not contract such services. It was only the results of such services that
Barretto and Garcia presented to them and which persuaded them to invest in
the proposed airline. The most that can be said is that they benefited from
such services, but that surely is no justification to hold them personally liable
therefor. Otherwise, all the other stockholders of the corporation, including
those who came in later, and regardless of the amount of their share holdings,
would be equally and personally liable also with the petitioners for the claims
of the private respondent.
4. The petition is rather hazy and seems to be flawed by an ambiguous
ambivalence. Our impression is that it is opposed to the imposition of solidary
responsibility upon the Carams but seems to be willing, in a vague,
unexpressed offer of compromise, to accept joint liability. While it is true that
it does here and there disclaim total liability, the thrust of the petition seems
to be against the imposition of solidary liability only rather than against any
liability at all, which is what it should have categorically argued.
5. The petitioners are not liable at all, jointly or jointly and severally, under the
first paragraph of the dispositive portion of the challenged decision. The
Court finds it unnecessary to examine at this time the rules on solidary
obligations, which the parties-needlessly, as it turns out have belabored unto
death.
 004 ARNOLD HALL v. PICCIO (Arcenas)
June 29, 1950 | Bengzon, J. | De Facto Corporation
PETITIONERS: C. Arnold Hall and Bradley P. Hall (Hall et al)
RESPONDENTS: Edmundo S. Piccio (Judge of CFI Leyte), Fred Brown, Emma
Brown, Hipolita Capuciong (in his capacity as receiver of the Far Eastern Lumber
and Commercial Co., Inc) (private respondents = Brown et al)
SUMMARY: Arnold Hall, Bradley Hall, Fred Brown, Emma Brown, Hipolita
Chapman and Ceferino Abella signed and acknowledged the articles of
incporation of FELCO as a general lumber business. Immediately after the
execution of the articles, the corporation proceeded to do business. On December
2, 1947, the articles were filed in the office of SEC for the issuance of the
certificate of incorporation. However, pending the action on the issuance of the
certificate, Brown et al filed before the CFI civil case numbered 381 to wish for
the dissolution of the unregistered partnership, due to bitter dissension among
members, mismanagement and fraud by managers and heavy financial losses.
Hon. Piccio ordered the dissolution and at the request of Brown et al, appointed
receivership to Pedro Capuciongthe properties, upon filing of a Php 20,000 bond.
Hall et al offered to file a counter-bond for the discharge of the receiver but Piccio
refused to the offer and discharge. Hence, this present action before the SC. The
issue before the court is whether or not the court has jurisdiction to order the
dissolution since dissolution can only be ordered in a quo warranto proceeding
for de facto corporations. SC held that the court had jurisdiction and dismissed the
petition based on two reasons. First, not having obtained the certificate of
incorporation, FELCO, even its stockholders, may not claim “in good faith” to be
a corporation. Second, this is not a suit in which the corporation is a party. The
present case is between stockholders of the allaged corporation, for the purpose of
obtaining its dissolution. Even the existence of a de jure corporation may be
terminated in a private suit, without the intervention of the state. SC held that the
petition may not prosper since Hall et al have the remedy of appealing the order
of dissolution at the proper time.
DOCTRINE: De facto doctrine applies to contracts and transactions made by or
on behalf of the corporation with “outsiders” and has no application in intra-
corporate disputes.
FACTS:
80. May 28, 1947 – Hall et al and Brown et al, signed and acknowledged in Leyte,
the article of incorporation of the Far Eastern Lumber and Commercil
Co, Inc (FELCO), which engages in a general lumber business as a general
contractor, operater and manager, etc. Attached to the article as an affidavit
of the treasure stating that 23, 428 shares of stock had been subscribed and
fully paid with certain properties transferred to the corporation.
a. Immediately after the execution of the articles of incorporation,
FELCO proceeded to do business with the adoption of by-laws and
the election of officers.
81. December 2, 1947 – the articles of incorporation were filed in the office of
the Securities and Exchange Commissioner (SEC) for the issuance of
certificate of incorporation
82. March 22, 1948 – pending certificate of incorporation, Brown et al filed
before the CFI of Leyte Civil Case 381, alleging that FELCO was an
unregistered partnership and their wish to dissolve it due to bitter dissension
among members, mismanagement and fraud by the managers and heavy
financial losses.
a. Hall et al filed a motion to dismiss contesting the court’s jurisdiction
and the sufficiency of cause of action.
b. After hearing, Hon. Piccio ordered the dissolution of the company
and, at the request of Brown et al, appointed receivership to Pedro
Capuciongthe properties, upon filing of a Php 20,000 bond.
c. Hall et al offered to file a counter-bond for the discharge of the
receiver but Piccio refused to the offer and discharge.
d. Hence, this present action before the SC
ISSUE/s:
7. WoN the court had no jurisdiction in Civil Case 381 to decree the
dissolution of the company because since it is a de facto corporation,
dissolution may only be ordered in a quo warranto proceeding instituted
under Section 19 of the Corporation Law – Yes. The court has jurisdiction;
Section 19 and de facto corporation doctrine does not apply
8. WoN Fred Brown and Emma Brown had signed the article of incorporation
but only a partnership – SC dismissed this, since estoppel cannot be applied
RULING: The petition will, therefore, be dismissed, with costs. The preliminary
injunction heretofore issued will be dissolved.
RATIO:
Second issue
1. SC dismissed the second proposition because all the parties are informed that
the SEC has not issued the certificate of incorporation yet. They also know
that the personality of a corporation begins to exist only from themoment
such certificate is issued, not before it (Section 11, Corporation Law).
2. Hall et al argue that since Brown et al already signed the articles of
incorporation, they were estopped from claiming that it is not a corporation
but only a partnership. The SC, however, held that the principle of estoppel
does not apply because the complaining associates have not represent to
others that they were incorporated and nobody was led to believe anything
to his prejudice and damage.
First issue – De facto corporation
1. Section 19 provides that “the due incorporation of any corporations claiming
in good faith to be a corporation under this Act and its right to exercise
corporate powers shall not be inquired into collaterally in any private suit to
 which the corporation may be a party, but such inquiry may be had at the
suit of the Insular Government on information of the Attorney-General.”
2. SC held that Section 19 cannot be applied to the case at bar based on two
grounds:
a. FELCO, even stockholders, cannot claim in good faith to be a
corporation absent the certificate of incorporation.
i. Fisher on the PH Law of Stock Corporations: Under our
statute (Section 11) the issuance of a certificate of
incorporation by the Director of Bureau of Commerce and
Industry calls a corporation into being. Unless there has
been evident attempt to comply with the law, the claim to
be a corporation “under this act” could not be made “in
good faith.”
b. This is not a suit in which the corporation is a party. This is actually
a litigation between stockholders of the alleged corporation for the
purpose of obtaining its dissolution (i.e. intra-corporate dispute). As
well, dissolution of a de jure corporation may be terminated in a
private suit, without the intervention of the state.
3. SC held that the petition may not prosper since Hall et al have the remedy of
appealing the order of dissolution at the proper time. Furthermore, there was
no error in rejecting the counter-bond as the court had already declared its
dissolution.
 005 VDA. DE SALVATIERRA v. GARLITOS (APASAN)
May 23, 1958 | Felix, J. | Corporation by Estoppel
PETITIONER: Manuela T. Vda. De Salvatierra
RESPONDENTS: Hon. Lorenzo C. Garlitos and Segundino Refuerzo
SUMMARY: Manuela Salvatierra (Salvatierra) is an owner of a parcel of land in
Leyte. She entered into a contract of lease with the Philippine Fibers Producers
Co., Inc., which was represented by its president, Segundino Refuerzo (Refuerzo).
It was stipulated in the contract that Salvatierra (lessor) would be entitled to 30
percent of the net income accruing from the harvest of any crop and that after
every harvest, the corporation (lessee) is bound to declare the income derived
therefrom and to deliver the corresponding share due to the lessor. However, the
corporation failed to comply with such obligation so Salvatierra filed with the
Court of First Instance a civil cse for accounting, rescission and damages. The
lower court granted the plaintiff’s prayer. Subsequently, the defendant filed a
motion claiming that such decision was null and void with respect to him because
he cannot be held personally liable since he was only acting as a representative on
behalf of the corporation. The lower court granted the defendant’s motion. Hence
this petition. Issue is whether or not the defendant can be held personally liable
for the obligations of the corporation. The court held that the defendant could be
held personally liable. The court said that as a rule, corporate officers acting on
behalf of the corporation, even the president, couldn’t be held laible for the
corporation’s personal liabilities by virtue of its separate juridical personality.
However, this rule does not apply when a corporation is an unregistered
corporation simply because it has no separate juridical personality which is
recognized by law, and consequently, such corporation cannot create agents and
representatives to act on its behalf. Thus, those persons who act on behalf of such
unregistered assocations do so without authority and at their own risk. (Note: the
next last sentence was not really stated by the court but it can be harmonized with
what is stated in the syllabus) Furthermore, the defendant cannot also invoke the
corporation by estoppel doctrine because the present case involves a claim of an
innocent third-party, which is Salvatera’s claim for the share in the net income
from the harvest of the land by virtue of the stipulation in the lease contract.
DOCTRINE: As stated in the syllabus: The corporation by estoppel doctrine
cannot be applied against the claims of an innocent third-party (Salvatierra in this
case) who seeks to enforce the contract against the person who entered into a
contract in behalf of a non-existent corporation on the ground of separate juridical
personality. The doctrine that is application is one found in the Law on Agency,
i.e., a purported agent who enters into a contract in the name of the non-existing
principal shall be personally liable for contract so entered into
FACTS:
1. Manuela T. Vda. de Salvatierra is the owner of a parcel of land located in
Leyte. On March 7, 1954, she entered into a contract of lease with the
Philippine Fibers Producers Co., Inc., allegedly a corporation "duly organized
and existing under the laws of the Philippines, domiciled at Burauen, Leyte,
Philippines, and with business address therein, represented in this instance by
Mr. Segundino Q. Refuerzo, the President." It was provided in said contract,
among other things, the following:
a. lifetime of the lease would be for a period of 10 years;
b. that the land would be planted to kenaf, ramie or other crops suitable
to the soil;
c. that the lessor would be entitled to 30 per cent of the net income
accruing from the harvest of any crop without being responsible for
the cost of production thereof;
d. and that after every harvest, the lessee was bound to declare at the
earliest possible time the income derived therefrom and to deliver
the corresponding share due the lessor.
2. Apparently, the aforementioned obligations imposed on the alleged
corporation were not complied with because on April 5, 1955, Manuela T.
Vda. de Salvatierra filed with the Court of First Instance of Leyte a complaint
against the Philippine Fibers Producers Co., Inc., and Segundino Q. Refuerzo,
for accounting, rescission and damages (civil case 1912). She averred the
following:
a. sometime in April 1954, defendants planted kenaf on 3 hectares of the
leased property which crop was, at the time of the commencement of the
action, already harvested, processed and sold by defendants;
b. that notwithstanding that fact, defendants refused to render an
accounting of the income derived therefrom and to deliver the lessor’s
share;
c. that the estimated gross income was P4,500, and the deductible expenses
a mounted to P1,000;
d. that as defendants’ refusal to undertake such task was in violation of the
terms of the covenant entered into between the plaintiff and defendant
corporation, a rescission was but proper.
3. Defendants failed to file their answer to the complaint and the Court declared
them in default and proceeded to receive plaintiff’s evidence. Thereafter, the
lower Court rendered judgment granting plaintiff’s prayer, and required
defendants to render a complete accounting of the harvest of the land subject
of the proceeding and to deliver 30 per cent of the net income realized from
the last harvest to plaintiff, with legal interest from the date defendants
received payment for said crop. It was further provided that upon defendants’
 failure to abide by the said requirement, the gross income would be fixed at
P4,200 or a net income of P3,200 after deducting the expenses for
productions, 30 per cent of which or P960 was held to be due the plaintiff
pursuant to the aforementioned contract of lease, which was declared
rescinded.
4. No appeal was made by the defendant from such decision. Subsequently,
upon motion of plaintiff, the Court issued a writ of execution, in virtue of
which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of
land registered in the name of Segundino Refuerzo. No property of the
Philippine Fibers Producers Co., Inc., was found available for attachment.
5. Defendant Segundino Refuerzo filed a motion claiming that the decision
rendered in said Civil Case No. 1912 was null and void with respect to him,
there being no allegation in the complaint pointing to his personal liability
and thus prayed that an order be issued limiting such liability to defendant
corporation.
6. The Court a quo granted the same and ordered the Provincial Sheriff of Leyte
to release all properties belonging to the movant that might have already been
attached, after finding that the evidence on record made no mention or
referred to any fact which might hold movant personally liable therein.
7. Hence, this petition to nullify the order of the Judge.
ISSUE/s:
9. WoN the defendant, acting as a president on behalf of the said corporation,
can be made personally liable – Yes, because the the corporation was not
registered and therefore, he cannot invoke the separate juridical personality
of the corporation
RULING: GRANTED. Wherefore, the order of the lower Court, amending its
previous decision on this matter and ordering the Provincial Sheriff of Leyte to release
any and all properties of movant therein which might have been attached in the
execution of such judgment, is hereby set aside and nullified as if it had never been
issued.
RATIO:
PROCEDURAL
1. In the present case, the petitioner sought to nullify the order of the Judge
granting the motion pursuant to Rule 38 of the Rules of Court. Section 3 of
said Rule, however, in providing for the period within which such a motion
may be filed, prescribes that:
SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION.
— A petition provided for in either of the preceding sections of this rule must
be verified, filed within sixty days after the petitioner learns of the
judgment, order, or other proceeding to be set aside, and not more than
six months after such judgment or order was entered, or such proceeding
was taken; and must be accompanied with affidavit showing the fraud,
accident, mistake, or excusable negligence relied upon, and the facts
constituting the petitioner’s good and substantial cause of action or defense,
as the case may be, which he may prove if his petition be granted." (Rule 33)
2. The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner
learns of the judgment, and not more than 6 months after the judgment
or order was rendered, both of which must be satisfied. As the decision
in the case at bar was under date of June 8, 1955, whereas the motion filed
by respondent Refuerzo was dated January 31, 1956, or after the lapse of 7
months and 23 days, the filing of the aforementioned motion was clearly
made beyond the prescriptive period provided for by the rules. Considering
the nature of such relief and the purpose behind it, the periods fixed by said
rule are non-extendible and never interrupted; nor could it be subjected to any
condition or contingency because it is of itself devised to meet a condition or
contingency. On this score alone, therefore, the petition for a writ
of certiorari filed herein may be granted. However, taking note of the
question presented by the motion for relief involved herein, We deem it
wise to delve in and pass upon the merit of the same.
CORP. RELATED
3. Contentions of the Defendant: to be exonerated from personal liability, the
defendant interposed the defense that the complaint filed with the lower court
contained no allegation which would hold him liable personally, for while it
was stated therein that he was a signatory to the lease contract, he did so in
his capacity as president of the corporation. And this allegation was found by
the Court a quo to be supported by the records.
4. Contentions of the Plaintiff: plaintiff, on the other hand, tried to refute this
averment by contending that her failure to specify defendant’s personal
liability was due to the fact that all the time she was under the impression
that the Philippine Fibers Producers Co., Inc., represented by Refuerzo
was a duly registered corporation as appearing in the contract, but a
subsequent inquiry from the Securities & Exchange Commission yielded
 otherwise. he knew to be unregistered, he assumed the risk of reaping the
consequential damages or resultant rights, if any, arising out of such
5. SC: While as a general rule a person who has contracted or dealt with an transaction.
association in such a way as to recognize its existence as a corporate body is
estopped from denying the same in an action arising out of such transaction
or dealing, yet this doctrine may not be held to be applicable where fraud
takes a part in the said transaction. In the instant case, on plaintiff’s charge
that she was unaware of the fact that the Philippine Fibers Producers Co.,
Inc., had no juridical personality, defendant Refuerzo gave no confirmation
or denial and the circumstances surrounding the execution of the contract lead
to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra
was really made to believe that such corporation was duly organized in
accordance with law.

6. There can be no question that a corporation when registered has a juridical

personality separate and distinct from its component members or
stockholders and officers such that a corporation cannot be held liable for the
personal indebtedness of a stockholder even if he should be its president and
conversely, a stockholder or member cannot be held personally liable for any
financial obligation by the corporation in excess of his unpaid subscription.
But this rule is understood to refer merely to registered corporations and
cannot be made applicable to the liability of members of an
unincorporated association. The reason behind this doctrine is obvious
— since an organization which before the law is non-existent has no
personality and would be incompetent to act and appropriate for itself
the powers and attribute of a corporation as provided by law; it cannot
create agents or confer authority on another to act in its behalf; thus,
those who act or purport to act as its representatives or agents do so
without authority and at their own risk. And as it is an elementary
principle of law that a person who acts as an agent without authority or
without a principal is himself regarded as the principal, possessed of all the
rights and subject to all the liabilities of a principal, a person acting or
purporting to act on behalf of a corporation which has no valid existence
assumes such privileges and obligations and becomes personally liable for
contracts entered into or for other acts performed as such agent.

7. Considering that defendant Refuerzo, as president of the unregistered

corporation Philippine Fibers Producers Co., Inc., was the moving spirit
behind the consummation of the lease agreement by acting as its
representative, his liability cannot be limited or restricted to that imposed
upon corporate shareholders. In acting on behalf of a corporation which
 006 ALBERT v. UNIVERSITY PUBLISHING CO., INC. (Adrias)
January 30, 1965 | Bengzon, J. | Corporation by Estoppel (Sec. 21)
PLAINTIFF-APPELLANT: Mariano A. Albert
DEFENDANT-APPELLEE: University Publishing Co., Inc.
SUMMARY: Albert sued University Publishing Co. Inc. (represented by Aruego)
for failure to comply with their publishing agreement. He was awarded by the
court P 15,000.00. Now, Albert seeks to obtain a writ of execution against Aruego
alleging that he was the real party to the case – presenting a certification from the
SEC that University Publishing is an inexistent corporation, and alleging that he
was induced into believing its existence. University alleges that a separate
proceeding should have been instituted against Aruego – and had this been the
case, Albert would have to deal with the Statute of Limitations. The issue in this
case is WoN judgment may be executed against Jose M. Aruego, supposed
President of University Publishing Co., Inc., as the real defendant. The SC held in
the affirmative. Since University Publishing Co. has no independent personality,
it cannot be sued independently. It is just a name and Aruego is, in reality, the
defendant.
On account of non-registration, University Publishing could not be considered as
a corporation de facto. Thus, it has no personality apart form Aruego that can be
sued independently. The doctrine of corporation by estoppel, though not
invoked, is not applicable to this case. Aruego led Albert (and the court) to
believe his representation. He even signed the contract as “President” of the
corporation. The corporation was represented by Aruego’s law firm during the
proceedings. One who induced another to act upon his willful
misrepresentation that a corporation was duly organized cannot thereafter
set up against his victim the principle of corporation by estoppel. Neither can
Aruego claim that he was denied his day in court – as he was, in fact, the one who
litigated and controlled the proceedings. Due process was substantially served.
DOCTRINE:
*From the outline*
We reiterate Salvatiera in that one who has induced another to act upon his willful
misrepresentation that a corporation was duly organized and existing under the
law, cannot thereafter set up against his victim the principle of corporation by
estoppel. For even when there is an existing corporate entity, we have applied the
doctrine of piercing of the veil of corporate fiction to make the actors behind the
corporation personally liable for the contract entered into in the name of the
corporation.
FACTS:
83. In Albert vs. University Publishing Co., Inc., L-9300, April 18, 1958, we
found plaintiff entitled to damages (for breach of contract) but reduced the
amount from P23, 000.00 to P15, 000.00.
84. Then in Albert vs. University Publishing Co., Inc., L-15275, October 24,
1960, we held that the judgment for P15,000.00 which had become final and
executory, should be executed to its full amount, since in fixing it, payment
already made had been considered
85. Mariano Albert’s complaint:
a. University Publishing through Jose M. Aruego, its President,

 entered into a contract with Mariano Albert
b. That University Publishing agreed to pay Albert P30,000.00 for the

 exclusive right to publish his revised Commentaries on the
Revised Penal Code and for his share in previous sales of the book's
first edition 

c. University Publishing had undertaken to pay in 8 quarterly
installments; that per contract failure to pay one installment would
render the rest due (acceleration clause); and that University
Publishing had failed to pay the second installment. 

86. University Publishing’s answer:
a. Admitted its corporate existence 

b. Admitted the execution and terms of the contract 

c. But alleged that it was Albert who breached their contract by failing
to 
 deliver his manuscript. 

d. Counterclaimed for damages. 

87. Albert died before trial and Justo R. Albert, his estate's administrator, was
substituted for him. 

88. CFI Manila ruled in favor of Albert. Court ordered issuance of an execution
writ against University Publishing Co., Inc. 

89. Albert’s counsel and the sheriff of Manila found out that there is no such
entity as University Publishing Co under the SEC evidenced by a
certification. So, Albert petitioned for the writ of execution against Jose
Aruego as the real defendant. 

90. The SC notes that University Publishing Co doesn’t want Aruego to be a
party to the case because if he’s not a party, a separate action will have to be
filed by Justo Albert, which will result in him dealing with the statute of
limitations.
91. Aruego raised the point that the contract was not personal, but one with a
juridical entity. 

ISSUE/s:
1. WoN judgment may be executed against Jose M. Aruego, supposed President
of University Publishing Co., Inc., as the real defendant. - YES. Since
University Publishing Co. has no independent personality, it cannot be sued
independently. It is just a name and Aruego is, in reality, the defendant.
RULING: PREMISES CONSIDERED, the order appealed from is hereby set aside
and the case remanded ordering the lower court to hold supplementary proceedings
for the purpose of carrying the judgment into effect against University Publishing
Co., Inc. and/or Jose M. Aruego. So ordered.
RATIO:
1. The non-registration of University Publishing Co., Inc. in the SEC has not
been disputed. On the account of the non-registration it cannot be
considered a corporation, not even a corporation de facto. It has no
personality separate from Aruego; it cannot be sued independently.
2. ESTOPPEL DOCTRINE WAS NOT INVOKED IN THIS CASE.
However, the Court still ruled that it is
 inapplicable in this case.
3. Aruego represented a non-existent entity and induced not only 
 Albert, but
even the court to believe in such representation. He signed the contract as
"President" of "University Publishing Co., Inc.," stating that this was "a
corporation duly organized and existing under the laws of the Philippines,"
and obviously misled Albert into believing the same. 
 1. The Court presented in this case an option: to establish a corporation by
4. One who has induced another to act upon his willful misrepresentation that a
corporation was duly organized and existing under the law, cannot thereafter
set up against his victim the principle of corporation by estoppel (Salvatiera
vs. Garlitos) 
 2. Salvatierra and Albert both demonstrate the old corporation by estoppel
5. For even when there is an existing corporate entity, we have applied the
doctrine of piercing of the veil of corporate fiction to make the actors behind
the corporation personally liable for the contract entered into in the name of
the corporation.
6. The doctrine of corporation by estoppel cannot be set up against Albert since
it was Aruego who had induced him to act upon his (Aruego’s) willful
representation that University had been duly organized and was existing
under the law.
7. Hence, Jose M. Aruego, acting as representative of a non-existent principal,
was the real party to the contract sued upon; that he was the one who reaped
the benefits resulting from it, so much so that partial payments of the
consideration were made by him; that he violated its terms, thereby
precipitating the suit in question; and that in the litigation he was the real
defendant.
8. ADDITIONAL ISSUE ON DUE PROCESS: Had Jose M. Aruego been
named as party defendant instead of, or together with, “University Publishing
Co., Inc.,” there would be no room for debate as to his personal liability. Since
he was not so named, the matters of “day in court” and “due process” have
arisen.
9. Parties to a suit are persons who have a right to control the proceedings, to
make defense, to adduce and cross-examine witnesses, and to appeal from a
decision – and Aruego was, in reality, the person who had and exercised these
rights.
10. Even though it was “University Publishing Co”., who came to court, it does
not have an independent personality, it is just but a name. In reality, it was
Aruego who answered and litigated through his counsel and law firm.
11. Clearly, then, Aruego had his day in court as the real defendant; and due
process of law has been substantially observed. 
 007 PAZ v. NEW INT’L ENVIRONMENTAL UNIVERSALITY, INC.
RELEVANT PROVISION:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided,
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
On who assumes an obligation to an ostensible corporation as such, cannot resist
performance thereof on the ground that there was in fact no corporation.
DISCUSSION FROM KAT GAW
estoppel doctrine, and then to pierce this corporation established via estoppel,
using the corporate veil. However, this option was not particularly applied
in this case. 

doctrine – a person who acts in behalf of a corporation which in fact does
not exist cannot set up the lack of juridical personality in order to avoid the
obligations from the contracts entered into by the person. Likewise, a person
who enters into a contract with a corporation, which does not actually exist
cannot set up the lack of existence to avoid his obligations under the contract.


a. The old corporation by estoppel doctrine was meant to VALIDATE
the contract.
b. SALVATIERRA says it’s not true – you don’t need to masquerade
that the contract actually existed in order to uphold the validity of
the contract; under the law on agency, the contract could still be
upheld without using corporation by estoppel doctrine.
c. In agency law, an agent who acts without fraud for a principal that
actually does not exist is not in bad faith and thus, cannot be held
liable under a contract.
3. Under the PRESENT VERSION, the contract would be upheld but it would
be unenforceable. When those acting without fraud act as if there is a
corporation, they are liable, but only LIMITEDLY liable, and NOT liable as
general partners. Those acting with fraud would be liable as GENERAL
PARTNERS, and therefore would be personally liable.
a. With fraud – equivalent to fraud piercing (consistent with contract
law expectations)
b. Without fraud – consistent with corporate law expectations and
contract law expectations (lack of diligence makes one personally
liable)
(Villavicencio)
April 20, 2015 | Perlas-Bernabe, J. | Corporation by Estoppel

PETITIONER: Priscilo B. Paz
RESPONDENTS: New International Environmental Universality, Inc.
SUMMARY: Paz, officer-in-charge of the Aircraft Hangar at the Davao
International Airport, entered into a MOA with Capt Clarke, President of Intl
Environmental Universality, obligating himself to allow Clarke to use the hangar
exclusively for company aircraft/helicopter. However, the hangar was used for
different purposes, thus Paz sent 4 letters to Clarke that Paz would terminate the
contract because of the said breach. On Paz’s final letter, he asked Clarke to
vacate the hangar space and ordered the security guards to block the hangar
space and disconnect its electric and telephone lines. New International
Environmental Universality, Inc. filed a complaint against Paz for breach of
contract. Paz argues that New International had no cause of action against him as
the MOA was executed between him and Capt. Clarke in his personal capacity.
RTC found that New International was only issued of its certificate of
incorporation on Sept 3, 2001 which was later than when the MOA was executed
(March 1, 2000). CA ruled that while there was no corporate entity at that time,
Clarke signed as "President of International Environmental University," Paz is
nonetheless estopped from denying that he had contracted with respondent as a
corporation, having recognized the latter as the "Second Party" in the MOA that
"will use the hangar space exclusively for company aircraft/helicopter." WoN
Paz is estopped from denying that he had contracted with New Intl as a
corporation– YES, because Paz obligated himself to allow the use of the hangar
space for COMPANY aircraft/helicopter.
DOCTRINE: Section 21 of the Corporation Code explicitly provides that one
who assumes an obligation to an ostensible corporation, as such, cannot resist
performance thereof on the ground that there was in fact no corporation. Clearly,
Paz is bound by his obligation under the MOA not only on estoppel but by
express provision of law.
FACTS:
92. Paz, as the officer-in-charge of the Aircraft Hangar at the Davao International
Airport entered into a Memorandum of Agreement (MOA) with Captain
Allan J. Clarke (Capt. Clarke), President of International Environmental
University.
93. For a period of 4 years, unless pre-terminated by both parties with 6 months
advance notice, the Paz shall allow Capt. Clarke to use the aircraft hangar
space at the said Airport "exclusively for company aircraft/helicopter."
94. On August 19, 2000, Paz complained in a letter addressed to "MR. ALLAN
J. CLARKE, International Environmental Universality, Inc. x x x" that the
hangar space was being used "for trucks and equipment, vehicles
maintenance and fabrication,"
95. threatened to cancel the MOA if the "welding, grinding, and fabrication jobs"
were not stopped immediately.
96. On January 16, 2001, Paz sent another letter that he will terminate the MOA
due to the safety of the aircrafts parked nearby. He further offered a vacant
space along the airport road that was available and suitable for Capt. Clarke's
operations.
97. On July 19, 2002, Paz sent a third letter, this time, addressed to "MR. ALLAN
JOSEPH CLARKE, CEO, New International Environmental University,
Inc.," demanding that the latter vacate the premises due to the damage caused
by an Isuzu van driven by its employee to the left wing of an aircraft parked
inside the hangar space, which Capt. Clarke had supposedly promised to buy,
but did not.
98. On July 23, 2002, Paz sent a final letter emanding the latter to immediately
vacate the hangar space. He further informed Capt. Clarke that the company
will "apply for immediate electrical disconnection with the Davao Light and
Power Company (DLPC) so as to compel Clarke to desist rom continuing
with [the] works" thereon
99. New International Environmental Universality, Inc. filed a complaint against
Paz for breach of contract
100. claiming that: (a) Paz had disconnected its electric and telephone lines; (b)
upon Paz's instruction, security guards prevented its employees from entering
the leased premises by blocking the hangar space with barbed wire; and (c)
Paz violated the terms of the MOA when he took over the hangar space
without giving respondent the requisite 6-month advance notice of
termination.
101. Paz’s defense: (a) New Intl had no cause of action against him as the MOA
was executed between him and Capt. Clarke in the latter's personal capacity;
(b) there was no need to wait for the expiration of the MOA because Capt.
Clarke performed highly risky works in the leased premises that endangered
other aircrafts within the vicinity; and (c) the 6-month advance notice of
termination was already given in the letters he sent to Capt. Clarke.
102. RTC’s decision: finding Paz: (a) guilty of indirect contempt for
contumaciously disregarding its Order, by not allowing respondent to possess
occupy the leased premises pending final decision in the main case; and (b)
liable for breach of contract for illegally terminating the MOA even before
the expiration of the term thereof.
103. RTC also held that the MOA, between Paz and Capt Clark as first party and
as second party respectively, was executed by the parties not only in their
personal capacities but also in representation of their respective corporations
or entities.
104. RTC’s finding: New Intl was issued a Certificate of Incorporation on
September 3, 2001 as New International Environmental Universality, Inc.
(MOA was executed on March 1, 2000)
105. CA affirmed RTC’s decision that Paz is liable for breach of contract.
106. The CA ruled that, while there was no corporate entity at the time of the
execution of the MOA on March 1, 2000 when Capt. Clarke signed as
"President of International Environmental University," Paz is nonetheless
 estopped from denying that he had contracted with respondent as a
corporation, having recognized the latter as the "Second Party" in the MOA
that "will use the hangar space exclusively for company aircraft/helicopter."
107. Paz: raised as an additional issue the death of Capt. Clarke which allegedly
warranted the dismissal of the case.
108. Clarke was merely an agent of respondent, who is the real party in the case.
Thus, Capt. Clarke's death extinguished only the agency between him and
respondent, not the appeal against petitioner.

ISSUE/s:
10. WoN Paz is estopped from denying that he had contracted with New Intl as
a corporation– YES, because Paz obligated himself to allow the use of the
hangar space for COMPANY aircraft/helicopter. (main issue)
11. WoN Capt. Clarke should have been impleaded as an indispensible party-
NO, because Capt. Clark was merely an agent of the corporation.

RULING: WHEREFORE, the petition is DENIED. The Decision dated January

31, 2012 and the Resolution dated October 2, 2012 of the Court of Appeals in CA-
G.R. CV No. 00903- MIN are hereby AFFIRMED.

RATIO:
68. Issue 1: Paz obligated and contracted himself with New Intl as a
corporation
69. The CA had correctly pointed out that, from the very language itself of the
MOA entered into by Paz whereby he obligated himself to allow the use of
the hangar space "for company aircraft/helicopter," Paz cannot deny that he
contracted with New Intl.
70. Paz further acknowledged this fact in his final letter, where he reiterated and
strongly demanded the former to immediately vacate the hangar space his
"company is occupying/utilizing.
71. Section 21 of the Corporation Code explicitly provides that one who assumes
an obligation to an ostensible corporation, as such, cannot resist performance
thereof on the ground that there was in fact no corporation.
72. Clearly, Paz is bound by his obligation under the MOA not only on estoppel
but by express provision of law.
73. Issue 2: Capt. Clarke was merely an agent of respondent.
74. While Capt. Clarke's name and signature appeared on the MOA, his
participation was, nonetheless, limited to being a representative of
respondent.
75. As a mere representative, Capt. Clarke acquired no rights whatsoever, nor did
he incur any liabilities, arising from the contract between petitioner and
respondent. Therefore, he was not an indispensable party to the case at bar.
 008 PEOPLE v. GARCIA (VICENCIO)
April 18, 1997 | Puno, J. | Corporation by Estoppel
PETITIONER: People of the Philippines
RESPONDENTS: Engr. Carlos Garcia y Pineda, Patricio Botero y Vales, Luisa
Miraples
SUMMARY: Complainants went to Ricron Philippine International Shipping
Lines, Inc. (Ricorn) to apply as seamen, cook, waiter, chambermaid or
laundrywomen overseas. Most applied to Garcia, acting as the president, and one
applied to Botero, as the vice president of Ricorn. They were required to submit
clearances, passports and other documents. Since they were not able to provide all
the documents, they were asked to pay a P5,000 processing fee to the treasurer,
Miraples. They were assured employment by the 1992 elections. After the
elections however, they found out that Ricorn had abandoned its office in the
Mandaluyong for non-payment of rentals. Garcia, Botero and Miraples were
charged with illegal recruitment in a large scale. RTC convicted Garcia and Botero
but archived the case of Miraples for being at large.
The SC affirmed the convictions. All the requisites of illegal recruitment are
present in the case at bar. They should be liable as general partners since they
represented themselves as officers of the unregistered corporation. They are
estopped to claim otherwise. (Read Doctrine for further explanation).
DOCTRINE: (From the Syllabus) When the incorporators represent themselves
to be officers of the corporations which was never duly registered with SEC, and
engage in the name of the purported corporation in illegal recruitment, they are
estopped from claiming that they are not liable as corporate officers under Sec. 25
of Corporation Code which provides that all persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as general
partners for all the debts, liabilities and damages incurred or arising as a result
thereof.
FACTS:
109. Complainants were Edgardo Belen, Gloria Silaras, Alfredo Estinoso, Jose
Erwin Esclada, Elsa Delubio and Ariel Rivada.
110. They testified that on various dates in March 1992, they went to Ricorn
Philippine International Shipping Lines, Inc. (Ricorn), an entity which
recruits workers for overseas employment, with office at Jovan Building,
Shaw Blvd., Mandaluyong.
111. They applied as seamen, cook, waiter, chambermaid or laundrywoman
overseas. Esclada applied to accused Botero. All the other complainants
coursed their application to accused Garcia who represented himself as
president of Ricorn.
112. They were required to submit their NBI and police clearance, birth certificate,
passport, seaman’s book and Survival of Life at Sea (SOLAS).
113. As they did not have the last three documents, they were asked to pay P5,000
as processing fee. They paid to Ricorn’s treasurer, Luisa Miraples.
114. Garcia and Botero assured complainants of employment after the May 11,
1992 election.
115. After the election, complainants went back to Ricorn to check on their
applications. They discovered that Ricorn had abandoned its office at Jovan
Building for non-payment of rentals.
116. Their persistence was to no avail for Garcia and Botero were nowhere to be
found. They then went to the Mandaluyong Police Station and filed their
complaints.
117. They also checked with the Securities and Exchange Commission (SEC) and
discovered that Ricorn was not yet incorporated. They also found that Ricorn
was not licensed by the Department of labor and Employment (DOLE) to
engage in recruitment activities.
118. Accused Garcia testified that:
a. He is an electrical engineer by profession. According to him, the
group of Teresita Celso, Patricio Botero, Alice Mayonte, Luisa
Miraples and Edna Hemolaga approached him at a baptismal party
to join Ricorn. He was asked to contribute one hundred thousand
pesos (P100,000.00).
b. Then they asked him to become Ricorn’s president and to contribute
only twenty thousand pesos (P20,000.00). He declined the offer.
Allegedly, he already knew that Ricorn was not licensed.
119. Accused Botero testified that:
a. He is a marine engineer by profession but was working as a barber
when the trial took place.
b. He testified that he became acquainted with Ricorn when he applied
for overseas employment as a machinist. He dealt with accused
Garcia who claimed to be the President of Ricorn.
c. Eventually, he gained the trust of Garcia and became an employee
of Ricorn.
d. He left Ricorn when he discovered it was not licensed by the POEA
nor was it registered with the SEC.
120. Patricio Botero with Carlos Garcia and Luisa Miraples were charged with the
crime of illegal recruitment in a large scale.
121. Botero and Garcia were convicted by the RTC. The case against Miraples
was archived as she was at large. Only Botero appealed.
ISSUE/s:
12. WoN the accused are guilty as general partners of the unlicensed purported
corporation – YES, they are estopped for claiming that they are not liable
because they represente themselves to be officers of the corporation.
RULING: The RTC decision is affirmed.
RATIO:
76. The SC rejects appellant Botero’s pretense that he is also a victim rather than incurred or arising as a result thereof: Provided, however, That when any
a culprit in this case. such ostensible corporation is sued on any transaction entered by it as a
a. He insists he was a mere applicant of Ricorn and not a conspirator corporation or on any tort committed by it as such, it shall not be allowed
of the other accused who defrauded the complainants. He claims that to use as a defense its lack of corporate personality.”
even as a Ricorn employee, he merely performed “minimal 84. The fact that all the accused were co-conspirators in defrauding the
activities” like following-up applicants’ passports, seaman’s book complainants could be inferred from their acts. They played different roles in
and SOLAS, and conducting simple interviews. defrauding complainants: accused Garcia was the president, appellant Botero
b. He denies he had a hand in the selection of workers to be employed was the vice-president and accused-at-large Miraples was the treasurer of
abroad. These submissions are at war with the evidence on record. Ricorn.
c. His co-accused Garcia introduced him to the complainants as the 85. Each one played a part in the recruitment of complainants. They were
vice-president of Ricorn. He used a table with a nameplate indispensable to each other.
confirming he was the vice-president of Ricorn. He procured the
passports, seaman’s books and SOLAS for the applicants.
d. It was from him that the complainants inquired about the status of
their applications. He also admitted he gave money to accused
Garcia for Ricorn’s incorporation.
77. All the essential elements of the crime of illegal recruitment in large scale are
present in this case, to wit:
a. the accused engages in the recruitment and placement of workers,
as defined under Article 13 (b) or in any prohibited activities under
Article 34 of the Labor Code; 

b. accused has not complied with the guidelines issued by the
Secretary of Labor and Employment, particularly with respect to the
securing of a license or an authority to recruit and deploy workers,
either locally or overseas; and 

c. accused commits the same against three (3) or more persons,
individually or as a group.”
78. For engaging in recruitment of workers without obtaining the necessary
license from the POEA, Botero should suffer the consequences of
Ricorn’s illegal act for “(i)f the offender is a corporation, partnership,
association or entity, the penalty shall be imposed upon the officer or
officers of the corporation, partnership, association or entity responsible
for violation; x x x.”
79. The evidence shows that appellant Botero was one of the incorporators of
Ricorn.
80. For reasons that cannot be discerned from the records, Ricorn’s
incorporation was not consummated. Even then, appellant cannot avoid
his liabilities to the public as an incorporator of Ricorn.
81. He and his co-accused Garcia held themselves out to the public as officers
of Ricorn. They received money from applicants who availed of their
services.
82. They are thus estopped from claiming that they are not liable as
corporate officials of Ricorn.
83. Section 25 of the Corporation Code provides that “(a)ll persons who
assume to act as a corporation knowing it to be without authority to do so
shall be liable as general partners for all the debts, liabilities and damages
 009 International Express Travel and Tours v. CA (Valle)
19 October 2000 | Kapunan, J. | Two Levels: With fraud and without fraud
PETITIONER: International Express Travel & Tour Services Inc.
RESPONDENTS: Court of Appeals, Henri Kahn, Philippine Football
Federation
SUMMARY:
International had offered its services as a travel agency to the Federation.
International was to secure airline tickets to the athletes of the Federation and
Federation would pay International. But International had failed several times
to pay the Federation. At one time, Kahn, as the president of the Federation,
issued a personal check in favor of International. Since International still
failed to pay the entire amount, International filed a civil suit against Kahn
and the Federation. Kahn argued that he cannot be held liable for the
obligation because the Federation has a separate and distinct juridical
personality. The RTC rejected this contention. The CA, however, upheld the
corporate existence of the Federation basing its decision on RA 3135 and PD
604.
The issue in this case is whether or not the Federation has corporate existence
and whether or not Kahn can be held liable for the unpaid obligation.
The SC held that the Federation has no corporate existence. The two laws
merely recognize the Federation as a national sports association that can attain
juridical personality. But this is NOT automatically granted to them. The
State’s consent is still needed for its corporate existence. However, Kahn was
unable to substantiate the fact that the State had recognized the Federation as
one with corporate existence.
As for Kahn’s liability, Kahn should be held liable since as the President he
knew of the corporate existence or non existence of the Federation. Since it is
a principal in corporate law that any person acting or purporting to act on
behalf of a corporation which has no valid existence assumes such privileges
and becomes personally liable for the contracts entered, Kahn can be held
personally liable for the unpaid obligation.
SC said that it cannot agree with the CA when the CA had applied the doctrine
of corporation by estoppel. The SC said that the CA had mistakenly applied
this doctrine. This doctrine only applies to a third party when he tries to escape
liability on a contract from which he has benefitted on the irrelevant ground
of defective incorporation. But in this case, International was not escaping
liability but trying to claim a liability.
DOCTRINE: The one in the outline
We cannot subscribe to the position taken by the appellate court that even
assuming that the Federation was defectively incorporated, the petitioner
cannot deny the corporate existence of the Federation because it had
contracted and dealt with the Federation in such a manner as to recognize and
in effect admit its existence. The doctrine of corporation by estoppel is
mistakenly applied by the respondent court to the petitioner. The application
of the doctrine applies to a third party only when he tries to escape liabilities
on a contract from which he has benefited on the irrelevant ground of
defective incorporation. In the case at bar, the petitioner is not trying to escape
liability from the contract but rather is the one claiming from the contract.
FACTS:
122. International Express Travel and Tours Services Inc (International) through
its managing director wrote a letter to the Philippine Football Federation
(Federation) through its president, Henri Kahn (Kahn). In this letter,
International offered its services as a travel agency to the Federation. The
Federation accepted the offer.
123. International secured the airline tickets for the trips of the athletes and
officials to the SEA Games in Kuala Lumpur as well as other trups to China
and Brisbane. The tickets totaled Php449, 654.83. The Federation made two
partial payments.
124. International then wrote the Federation a demand letter requesting for the
amount of Php 265, 894.33. The Federation through Project Gintong Alay
paid Php 31, 603.
125. Kahn issued a personal check for Php 50, 000 as partial payment. But never
paid again despite demands.
126. International filed a civil case in the RTC of Manila. Kahn was sued in his
personal capacity and Federation was impleaded as an alternative
defendant. International is claiming that it can hold Kahn asliable for the
balance since he was the one who guaranteed the obligation.
127. Kahn argues that International has no cause of action against him either in
his personal capacity or his official capacity. He claims that he did not
guarantee the obligation but only acted as an agent of the Federation which
has a separate and distinct juridical personality.
128. RTC:
a. Kahn would have been correct if it had been established that
Federation was a corporation. But neither parties have adduced any
evidence proving corporate existence.
b. In its complaint, the Federation was called a sports association. This
was not denied by Kahn in his answer. Since Kahn is the president
of the Federation, the corporate existence would have been personal
knowledge to him. He could have denied International’s assertion
 that it was only an association. But he did not.
129. Court of Appeals
a. Recognized the juridical existence of the Federation. Since
International failed to prove that kahn guaranteed the obligation, he
should NOT be liable since the entity has a separate and distinct
personality.
b. Cited RA 3135 which is the Revised Charter of the Philippine
Amateur Athletic Federation and PD 604 as the laws from which the
Federation derives its existence.
ISSUE/s:
13. WoN the Federation is a corporation– no. it is not a corporation because it
was not accredited nor recognized by the Philippine Amateur Athletic
Federation and the Department of Youth and Sports Development.
14. WoN Kahn can be held liable --
RULING: Wherefore, the decision appealed from is REVERSED and SET ASIDE.
The decision of the RTC of Manila is hereby REINSTATED.
Federation.
c. The SC cannot take the position of the CA even assuming that the
Federation was defectively incporated, International can no longer
deny the corporate existence of Federation since it had contracted
with the Federation as to recognize its existence.
d. The doctrine of corporation by estoppel is mistakenly applied by
the CA. the application of the doctrine applies to a third party
only when he tries to escape liability on a contract from which
he has benefitted on the irrelevant ground of defective
incorporation.
e. In this case, International is not trying to escape liability from the
contract but is claiming from the contract.s

RATIO:
86. The federation has no corporate existence.
87. Both the RA and PD recognize the juridical existence of national sports
associations. The powers and functions given to these national sports
associations indicate that they can acquire juridical personality. But it does
not mean that they automatically take place by mere passage of the laws.
88. Before a corporation can acquire a juridical personality, the State must give
its consent either in the form of special law or a general enabling act.
89. The SC does not agree with the CA that the Federation came into existence
upon the passage of these laws. Since these laws merely recognized their
existence as national sports associations.
90. The provisions in both laws require that before an entity may be considered
as a national sports association, it must be recognized by the accrediting
organization which is the Philippine Amateur Athletic Federation. But Kahn
had failed to substantiate this fact of recognition. Kahn merely attached in his
MR a copy of the constitution and by-laws. But this does not prove that the
Federation is recognized and accredited by the Philippine Amateur Athletic
Federation nor the Department of Youth and Sports Development.
91. Therefore, the SC said that the Federation is NOT a national sports
association and does NOT have a corporate existence of its own.
92. Kahn should be held liable for the unpaid obligations.
a. It is a settled principal in corporation law that any person acting or
purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable
for contracts entered into or for other acts performed as such
agent.
b. Since Kahn is the President of the Federation, he is presumed to have
known about the corporate existence or non-existence of the
 010 PIONEER INSURANCE v. CA (Tolentino)
July 28, 1989 | Gutierrez, Jr., J. | Defective Corporation
G.R. No. 84197
PETITIONER: Pioneer Insurance & Surety Corporation
RESPONDENTS: CA, Border Machinery and Heavy Equipment
Inc.(BORMAHECO), Constancio M. Maglana, and Jacob S. Lim
G.R. No. 84157
PETITIONER: Jacob S. Lim
RESPONDENTS: CA, Pioneer Insurance and Surety Corporation, Border
Machinery and Heavy Equipment Inc.(BORMAHECO), Francisco and Modesto
Cervantes, and Constancio M. Maglana
SUMMARY: Lim was engaged in the airline business of SAL as its owner-
operator. Lim entered into contract of sale with JDA for the sale and purchase of
2 aircrafts and 1 set of necessary spare parts to be paid in installments. For this,
Pioneer Insurance issued a security bond in favor of JDA, in behalf of Lim.
Meanwhile, it appears that Bormaheco, the Cervanteses, and Maglana all
contributed funds for the purchase of the air craft and spare parts by virtue of
Lim’s promise that it would be used as their contribution to a new corporation.
Lim then executed a chattel mortgage using the 2 aircrafts as security to Pioneer.
Unfortunately, Lim defaulted and Pioneer wanted to foreclose the property.
Maglana, Bormaheco and the Cervanteses sought for damages because they
argued that they were not privies to the contracts signed by Lim. RTC and CA
held Lim to be the only one liable to Pioneer. Lim assailed the decision stating
that since they failed to incorporate, there was a de facto partnership which
makes them liable for all losses and gains in proportion to their contribution.
W/N Lim is the only one liable – YES. SC said that it is ordinarily held that
persons who attempt, but fail, to form a corporation and who carry on business
under the corporate name occupy a position of partners inter se. However, such a
relation does not necessarily exist, for ordinarily persons cannot be made to
assume the relation of partners, as between themselves, when their purpose is
that no partnership shall exist, and it should be implied only when necessary to
do justice between the parties. The record shows that Lim was acting on his own
and not in behalf of his other would-be incorporators in transacting the sale of
the airplanes and spare parts (Ratio 2 a, b, and c).
DOCTRINE: While it is ordinarily held that persons who attempt, but fail, to
form a corporation and who carry on business under the corporate name occupy
the position of partners inter se, however, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall exist, and it
should be implied only when necessary to do justice between the parties. Thus,
one who takes no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with other subscribers
who engage in business under the name of the pretended corporation, so as to be
liable as such in an action for settlement of the alleged partnership and
contribution. A partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in the absence of an
agreement, so as to make the former liable to contribute for payment of debts
illegally contracted by the latter. (doctrine found in syllabus)
FACTS:
130. Jacob S. Lim was engaged in the airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.
131. At Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract for the sale and purchase of two DC-3A Type
aircrafts and one set of necessary spare parts for the total agreed price of US
$109,000.00 to be paid in installments.
132. Pioneer Insurance and Surety Corporation, as surety, executed and issued a
surety bond in favor of JDA, in behalf of its principal, Lim, for the balance
price of the aircrafts and spare parts.
133. It appears that Border Machinery and Heavy Equipment Company, Inc.
(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) and
Constancio Maglana contributed some funds used in the purchase of the
above aircrafts and spare parts. The funds were supposed to be their
contributions to a new corporation proposed by Lim to expand his airline
business. They executed two separate indemnity agreements in favor of
Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL,
Bormaheco and the Cervanteses.
a. The indemnity agreements stipulated that the indemnitors principally agree and bind
themselves jointly and severally to indemnify and hold and save harmless Pioneer
from and against any/all damages, losses, costs, damages, taxes, penalties, charges
and expenses of whatever kind and nature which Pioneer may incur in consequence
of having become surety upon the bond/note and to pay, reimburse and make good
to Pioneer, its successors and assigns, all sums and amounts of money which it or its
representatives should or may pay or cause to be paid or become liable to pay on
them of whatever kind and nature.
134. Lim, doing business under the name and style of SAL, executed in favor of
Pioneer as deed of chattel mortgage (registered) as security for the latter's
suretyship in favor of the former. It was stipulated therein that Lim transfer
and convey to the surety the two aircrafts.
135. Lim defaulted on his subsequent installment payments prompting JDA to
request payments from the surety. Pioneer paid a total sum of P298,626.12.
136. Pioneer then led a petition for the extrajudicial foreclosure of the said chattel
mortgage before the Sheriff of Davao City. The Cervanteses and Maglana,
however, filed a third party claim alleging that they are co-owners of the
aircrafts.
137. Pioneer led an action for judicial foreclosure with an application for a writ of
preliminary attachment against Lim and respondents, the Cervanteses,
Bormaheco and Maglana.
 138. In their Answers, Maglana, Bormaheco and the Cervanteses led cross-claims
against Lim alleging that they were not privies to the contracts signed by Lim
and, by way of counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they advanced to Lim for
the purchase of the aircrafts in question.
139. RTC: a decision was rendered holding Lim liable to pay Pioneer but
dismissed Pioneer's complaint against all other defendants.
140. CA affirmed the RTC’s decision
141. Lim’s theory that as a result of the failure of respondents Bormaheco,
Spouses Cervantes, Constancio Maglana and Lim to incorporate, a de facto
partnership among them was created, and that as a consequence of such
relationship all must share in the losses and/or gains of the venture in
proportion to their contribution. Lim questions the CA’s findings ordering
him to reimburse certain amounts given by the Bormaheco, Cervanteses, and
Maglana to the him as their contributions to the intended corporation.
ISSUE/s:
15. W/N Lim should reimburse because he is the only one liable – YES, there
was no de facto partnership created.
RULING: WHEREFORE, the instant petitions are DISMISSED. The questioned
decision of the Court of Appeals is AFFIRMED.
RATIO:
G.R. No. 84157 is the case related to our topic.
1. While it has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed by
the supposed charter and the laws of the state relating thereto and not by the
rules governing partners, it is ordinarily held that persons who attempt,
but fail, to form a corporation and who carry on business under the
corporate name occupy a position of partners inter se. Thus, where
persons associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come short of
creating a corporation within the statute, they become in legal effect partners
inter se, and their rights as members of the company to the property acquired
by the company will be recognized. However, such a relation does not
necessarily exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their purpose is that
no partnership shall exist, and it should be implied only when necessary
to do justice between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never legally formed
does not become a partner with other subscribers who engage in business
under the name of the pretended corporation, so as to be liable as such in an
action for settlement of the alleged partnership and contribution.
2. In the instant case, it is to be noted that the Lim was declared non-suited for
his failure to appear during the pre-trial despite notification. In his answer,
the Lim denied having received any amount from Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however,
found that the Lim received the amount of P151,000.00 representing the
participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that
Maglana gave P75,000.00 to Jacob Lim thru the Cervanteses.
a. It is therefore clear that the Lim never had the intention to form
a corporation with the respondents despite his representations
to them. This gives credence to the cross-claims of the respondents
to the effect that they were induced and lured by the Lim to make
contributions to a proposed corporation which was never formed
because Lim reneged on their agreement.
b. According to Maglana, sometime in May 1965, he gave Cervantes
his share of P75,000.00 for delivery to Lim which Cervantes did and
Lim acknowledged receipt thereof Cervantes, likewise, delivered
his share of the undertaking. Lim in an undertaking sometime on or
about August 9, 1965, promised to incorporate his airline in
accordance with their agreement and proceeded to acquire the
planes on his own account. Since then up to the filing of this answer,
Lim has refused, failed and still refuses to set up the corporation or
return the money of Maglana.
c. According to Bormaheco and the Cervanteses, arrangements and
negotiations were undertaken by Lim. Down payments were
advanced by Bormaheco and the Cervanteses and Constancio
Maglana. Contrary to the agreement among the them, Lim in
connivance with the Pioneer, signed and executed the alleged chattel
mortgage and surety bond agreement in his personal capacity as the
alleged proprietor of the SAL. They learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when
Pioneer foreclosed the chattel mortgage allegedly executed by Lim,
thereby forcing them to file an adverse claim in the form of third
party claim. Notwithstanding repeated oral demands made by
Bormaheco and Cervanteses, to Lim, to surrender the possession of
the two planes and their accessories and or return the amount
advanced by the former amounting to an aggregate sum of
P178,997.14 as evidenced by a statement of accounts, the latter
ignored, omitted and refused to comply with them.
3. Applying therefore the principles of law earlier cited to the facts of the
case, necessarily, no de facto partnership was created among the parties
which would entitle the Lim to a reimbursement of the supposed losses
of the proposed corporation. The record shows that Lim was acting on
his own and not in behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare parts.
G.R. No. 84197 is about REM (just in case)
1. Pioneer argued that CA erred when it dismissed the appeal on the sole ground
that it already collected the proceeds of the reinsurance on its bond in favor
of the JDA and that it cannot represent a reinsurer to recover the amount from
Lim, Bormaheco, Cervanteses and Maglana.
2. We find the trial court's findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors are not liable. Pioneer,
having foreclosed the chattel mortgage on the planes and spare parts, no
longer has any further action against the defendants as indemnitors to recover
any unpaid balance of the price. The indemnity agreement was ipso jure
extinguished upon the foreclosure of the chattel mortgage. These defendants,
as indemnitors, would be entitled to be subrogated to the right of Pioneer
should they make payments to the latter.
a. "Art. 2207. If the plaintiffs property has been insured, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the loss or injury."
b. "Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the rights
of the insured against the wrongdoer and if the amount paid by the insurer does not
fully cover the loss, then the aggrieved party is the one entitled to recover the
deficiency. Evidently, under this legal provision, the real party in interest with regard
to the portion of the indemnity paid is the insurer and not the insured." (Emphasis
supplied).
3. It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer. Accordingly, the appellate court did not
commit a reversible error in dismissing the Pioneer’s complaint as against the
respondents for the reason that the Pioneer was not the real party in interest
in the complaint and, therefore, has no cause of action against the
respondents.
 011 LIM TONG LIM V. PHIL. FISHING GEAR INC (PAUL)
Nov. 3, 1999 | Panganiban, J. | Corporation by Estoppel Doctrine
PETITIONERS: Lim Tong Lim
RESPONDENS: Philippine Fishing Gear Industries, Inc.
SUMMARY: Here, Chua and Yao, on behalf of Ocean Quest Fishing
Corp, which was actually unincorporated, entered into a contract of sale
with Philippine Fishing Gear Industries, wherein the former bought nets
and floats from the latter. Chua and Yao claimed that they were in a
business venture with Lim Tong Lim. Unfortunately, they defaulted in the
payment. This led to Ocean Quest filing a collection case against the 3 of
them as general partners. The RTC then issued a writ of attachment over
the fishing nets on board F/B Lourdes, a boat under the name of Tong
Lim. When Lim asked for the writ to be lifted, the RTC held that there was
a partnership between him, Chua, and Yao as seen in a compromise
agreement which they executed in another civil case. This stated they in
the selling of 4 vessels, the 3 of them will equally share in the loss/profit.
This was affirmed by the CA. The issue is whether or not there was a
partnership between them and if the doctrine of corporation by estoppel
applied. The SC said yes to these two contention. First, the SC held that
the essential considerations of a partnership were present – common intent
to contribute to a common fund, and the agreement to share the profits and
losses between them. This was mainly evidenced by how they established
a venture for commercial fishing, and that they were to share in the profit
and losses when their 4 vessels were sold. More importantly, the doctrine
of incorporation applies as well. The Court held here that Sec. 21 of the
Corporation Code provides that even 3rd persons, as Lim Tong was
arguing himself as such to be here, can be liable if they knew that the
ostensible corporation actually had no legal existence, and if such 3rd
persons benefitted from the transactions entered into by the said
corporation. These were seen in the case at bar.
DOCTRINE: The doctrine of corporation by estoppel may apply to the
alleged corporation and to a 3rd party. If such 3rd party knows that the
corporation is actually unincorporated, but still treats it as a valid
corporation and receives benefits from it, is barred from denying its
corporate existence. Therefore, all who benefitted from the transaction,
despite their knowledge, will be liable for the contracts they assented
to/took advantage of.
FACTS:
1. Antonio Chua and Peter Yao, on behalf of “Ocean Quest Fishing
Corporation” entered into a contract of sale for the purchase of different
fishing nets and floats from respondent Philippine Fishing Gear Industries.
2. Chua and Yao claimed that they were in a business venture with petitioner
Lim Tong Lim who was not a signatory to the contract.
3. After the delivery of the products however, Chua and Yao defaulted on their
payment, and this led to the filing of Philippine Fishing for collection against
the 2 buyers and Lim, who were sued as general partners.
4. Philippine Fishing alleged that Ocean Quest was a non-existent corporation
as shown by a certification from SEC.
5. The RTC then issued a Writ of Preliminary Attachment, and such was
enforced by the sheriff by attaching the fishing nets on board F/B Lourdes.
6. Chua admitted his liability, Yao deemed to have waived his right to cross-
examine witnesses, but Lim moved for the writ to be lifted.
7. The nets were then sold at a public auction, wherein Phil. Fishing was the
highest bidder.
8. The RTC held that there was a partnership between the Yao, Chua, and Lim
as seen in the testimonies of the witnesses and on the compromise agreement
executed by them in another civil case wherein Chua and Yao filed against
Lim to nullify commercial documents, reform their contracts, and to declare
them the owners of fishing boats.
9. Their compromise agreement showed that:
a. The three agreed to have 4 vessels, including the nets, sold and will
be applied as payment to a certain JL Holdings Corp.; and
b. That if the price of those properties are higher/lower than 5.75 M,
the excess/deficiency will be divided equally between them.
10. On appeal, the CA affirmed the RTC’s decision. It held that the evidence on
hand establishes that they had a partnership for a specific undertaking –
commercial fishing. There was clear showing of their intent to divide the
profits among themselves – the essence of a partnership.
ISSUE/s:
10. W/N their relationship is actually a partnership? YES
11. W/N the doctrine of corporation of estoppel applies? YES
12. W/N the writ of attachment is valid? YES
RULING: WHEREFORE, the Petition is DENIED and the assailed Decision
AFFIRMED. Costs against petitioner.
RATIO:
THE EVIDENCE SHOWS THAT THERE IS A PARTNERSHIP
1. Lim tries to argue that the CA erred in ruling that there is a partnership
because its sole basis is the compromise agreement between him, Yao, and
Chua.
2. He also argues that he did not even directly participate in the purchase of the
nets because only the other 2 negotiated and met the representatives of Phil
Fishing Gear.
3. Lastly, he argues that he’s a mere lessor (bigla lang lumabas ‘to) because he
 merely leased to the other 2 F/B Lourdes for 6 months, at a monthly rental
of Php 37,500 + 25% of the gross catch of the boat.
4. The Court held that all of Lim’s arguments must fail because the evidence
clearly shows that there was a partnership which existed among them.
5. Art. 1767 states, “By a contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profts among themselves.
6. The following pieces of evidence show exactly this (I put all kasi CLV/TVT
might ask for specific examples, but the bold ones are more relevant):
a. Lim requested Yao to join him in commercial fishing, while Chua
was already the latter’s partner;
b. The 3 of them verbally agreed to acquire 2 fishing boats – F/B
Lourdes and F/B Nelson for Php 3.35 M;
c. They borrowed Php 3.25 M from Jesus Lim, brother of Tong Lim
for the venture;
d. They bought the boats and the Deed of Sale over these boats were
executed in favor of Lim Tong only for the purposes of having a
security over the loan by Jesus Lim;
e. The 3 agreed that expenses for the boats were to be shouldered by
Chua and Yao;
f. Jesus Lim granted another loan of Php 1 M to the partnership, and
this led to Yao and Chua entrusting the ownership of 2 other boats
– FB Lady Anne, and FB Tracy – to Tong Lim;
g. That the 3 of them bought the nets from Philippine Fishing Gear
in behalf of Ocean Quest Fishing Corp.;
h. That there was another civil case between the 3 (refer to fact no. 8);
and
i. That they amicably settled this other case through a compromise
agreement (refer to fact no. 9).
7. Taking all of these into consideration, it is clear that the 3 of them had the
intention to engaged in fishing business which was financed by Jesus Lim,
Tong Lim’s brother.
8. The compromise agreement also shows that they showed their intention to
pay the loan with the proceeds of the boat, and that the excess/deficiency will
be equally divided among them.
9. Clearly, these boats, and the money involved were under a “common fund”
as defined in Art. 1767.
10. The contribution to such fund need not be cash/fixed assets, but can be
intangible like credit or industry.
11. This partnership involved not only the boats but also the nets and the floats
because these were obviously acquired in furtherance of the business.
12. It is also clear that the CA used other bases aside from the compromise
agreement. Moreover, this agreement was actually the embodiment of
their relationship with each other. In reviewing this agreement, the court
already looked even at their preexisting partnership, before the agreement
came to be.
13. Also, he’s not a mere lessor because in other words, what he’s arguing here
is that he only consented to the sale of his own boats to pay Chua and Yao’s
debt, but the proceeds to be divided among the three of them and that
doesn’t make sense (true hahaha).
14. The sale of the boats were not under the premise that they were under his sole
ownership, but they were sold as assets of the partnership.
15. It is not uncommon that the properties of a partnership acquired through a
loan are under the name of the person the lender (Jesus Lim) trusts.
CORPORATION BY ESTOPPEL APPLIES (THE ONE IN THE OUTLINE)
1. Lim argues this doctrine can only apply to Chua and Yao. The SC disagrees.
2. Sec. 21 of the Corporation Code states that:
a. All persons who assume to act as a corporation knowing it without
authority to do so shall be liable as general partners for all debts,
liabilities, and damages incurred as a result thereof.
b. However, that when any such ostensible (apparent) is sued on any
transaction entered by it as a corporation or any tort committed; it
shall not be allowed to use as defense its lack of corporate
personality.
c. One who assumes an obligation to an ostensible corporation as such,
cannot resist performance thereof on the ground that there was
in fact no corporation.
3. Therefore, even if an ostensible corporation is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence.
4. The reason behind it: an unincorporated association has no personality to
act for itself with the powers and attributes of a corporation as provided by
law.
5. This also means that it cannot create agents to act on its behalf, and therefore,
the ones who purport to be its agents do not have any authority and they
do so at their own risk.
6. It is well-settled that a person who acts without authority or without a
principal is himself regarded as the principal, along with its
corresponding liabilities.
7. Therefore, a person purporting to act on behalf of a corporation which as no
valid existence becomes personally liable for his own acts.
8. The doctrine of corporation by estoppel may apply to the alleged
corporation and to a 3rd party.
a. For the alleged corp: If it represented itself to be a corporation, then
it is sopped from denying such in a suit against a 3rd party who relied
on good faith (parang partnership talaga). It cannot allege its
inexistence to escape liability.
b. For a 3rd party: If such 3rd party knows that the corporation is
actually unincorporated, but still treats it as a valid corporation and
receives benefits from it, is barred from denying its corporate
existence. Therefore, all who benefitted from the transaction,
despite their knowledge, will be liable for the contracts they
 assented to/took advantage of.
9. Again, Tong Lim is alleging that since he didn’t take part in the transaction,
he shouldn’t be liable.
10. However, there is no doubt that he benefitted from the use of the nets in
F/B Lourdes, and this boat was again proven to be an asset of the partnership.
11. This benefit is even seen by him asking for the writ to be lifted because such
writ stopped him from using the fishing vessel.
12. Under the law on estoppel, those acting on behalf of a corporation and
those benefitted by it, knowing it to be without valid existence, are liable
as general partners.

WRIT OF ATTACHMENT IS VALID

1. The SC said that this is moot and academic.
2. It has already been proven that F/B Lourdes was an asset of the partnership,
and that it was only placed in the name of Tong Lim for security purposes.
3. The nets and floats they bought were specifically manufactured according to
their requests in relation to their fishing venture.
4. It was stipulated anyway that the ownership of these items were to remain
under the ownership of Phil Fishing Gear until they were fully paid for.

CONCURRING OPINION (1 paragraph only)

Vitug, J.
1. Just wanted to explain more on why their liabilities are that of general
partners (aka only review of what we learned last sem).
2. When a person represents himself as a partners in an existing partnership with
persons who are not actual partners, he is deemed an agent of the persons
who consent to this representation, as if he’s really a partner (I guess parang
ratification sa agency/partnership?).
3. Their association is actually a de facto partnership.
4. This means that they shall be liable pro rata beyond the partnership assets
(unlimited liability) for all contracts which they have entered into.
5. The Civil Code also provides that they are to be held solidarily liable if
a. There is any wrongful act/omission of any partner in the ordinary
course of business, and loss/injury is caused to any person
b. One partner acting within his authority receives money or property
of a 3rd person and misapplies it (this was a question during
midterms!!); or
c. Where the partnership in the course of its business receives money
or property of a 3rd person and this is misapplied by any partner
while in the custody of the partnership.
 012 PHILIPPINE TRUST COMPANY vs RIVERA (STA.MARIA)
January 29, 1923 | Street, J. | Trust Fund Doctrine
PLAINTIFF-APPELLEE: Philippine Trust Company, as assignee in
insolvency of “La Cooperative Naval Filipina”
DEFENDANT-APPELLANT: Marciano Rivera
SUMMARY: The Cooperative Naval Filipino was duly incorporated under the
laws of the Philippines, with a capital of P100,000 divided into one thousand
shares of a par value of P100 each. Among the incorporators of this company was
Mariano Rivera who subscribed for 450 shares. Later on, the company became
insolvent and went into the hands of the Philippine Trust Company, as assignee
in bankruptcy. The Philippine Trust company instituted this action to recover one-
half of the stock subscription of Rivera which admittedly has never been paid.
The reason for the failure to pay was that not long after the Cooperative Naval
Filipina had been incorporated, a meeting of its stockholders occurred, at which
a resolution was adopted to the effect that the capital should be reduced by 50%
and the subscribers released from the obligation to pay any unpaid balance of
their subscription in excess of 50% of the same. This resulted to the cancellation
of subscription of various shareholders and a fully paid subscription to those who
paid for only ½ of their shares. It does not appear that the formalities prescribed
in Section 17 of the Corporation Code relative to the reduction of capital stock
were observed and that any certificate was filed in the Bureau of Commerce and
Industry for such reduction. The CFI ruled that the resolution was without effect
and that Rivera was still liable for the unpaid balance of his subscription. The
issue is WON Rivera is still liable to pay for the unpaid balance of his
subscription? - YES. The SC ruled that the resolution releasing the shareholder
was an attempted withdrawal of so much capital from the fund upon which the
company’s creditors were entitled to rely on and having been effected without
compliance with the statutory requirements, was wholly ineffectual.
DOCTRINE: The subscription to the capital of a corporation constitute a fund
to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription
in order to realize assets for the payment of its debts.
FACTS: .
1. The Cooperative Naval Filipino was duly incorporated under the laws of the
Philippines, with a capital of P100,000 divided into one thousand shares of a
par value of P100 each.
2. Among the incorporators of this company was Mariano Rivera who subscribed
for 450 shares representing a value of P45,000 and the rest of the stock being
taken by other persons.
3. The articles of incorporation were duly registered in the Bureau of Commerce
and Industry.
4. Later on, the company became insolvent and went into the hands of the
Philippine Trust Company, as assignee in bankruptcy.
5. The Philippine Trust company instituted this action to recover one-half of the
stock subscription of Rivera which admittedly has never been paid.
6. The reason for the failure to pay by Rivera was that not long after the
Cooperative Naval Filipina had been incorporated, a meeting of its
stockholders occurred, at which a resolution was adopted to the effect that the
capital should be reduced by 50% and the subscribers released from the
obligation to pay any unpaid balance of their subscription in excess of 50 %
of the same.
7. As a result of this resolution, it seems to have been supposed that the
subscription of the various shareholders had been cancelled to the extent stated
and fully paid certificate were issued to each shareholders for one-half of his
subscription.
8. It does not appear that the formalities prescribed in section 17 of the
Corporation Law, as amended, relative to the reduction of capital stock in
corporations were observed, and it does not appear that any certificate was at
any time filed in the Bureau of Commerce and Industry, showing such
reduction.
9. The CFI ruled that the resolution relied upon Rivera was without effect and
that Rivera was still liable for the unpaid balance of his subscription.
ISSUE: WON Rivera is still liable to pay for the unpaid balance of his
subscription? – YES.
RULING: The judgment will be affirmed with cost, and it is so ordered.
RATIO:
1. It is established doctrine that the subscription to the capital of a
corporation constitute a fund to which creditors have a right to look for
satisfaction of their claims and that the assignee in insolvency can
maintain an action upon any unpaid stock subscription in order to
realize assets for the payment of its debts.
2. A corporation has no power to release an original subscriber to its capital
stock from the obligation of paying for his shares, without a valuable
consideration for such release; and as against creditors a reduction of the
capital stock can take place only in the manner and under the conditions
prescribed by the statute or the charter or the articles of incorporation.
Moreover, strict compliance with the statutory regulations is necessary
3. The resolution releasing the shareholders from their obligation to pay 50 per
centum of their respective subscriptions was an attempted withdrawal of
so much capital from the fund upon which the company's creditors were
entitled ultimately to rely and, having been effected without compliance
with the statutory requirements, was wholly ineffectual.
 013 Garcia v Lim Chu Sing (Soriano)
24 February 1934 | Villa-real, J. | Trust Fund Doctrine
PETITIONER: TIRSO GARCIA, in his capacity as receiver of the Mercantile
Bank of China (MBC)
RESPONDENTS: LIM CHU SING
SUMMARY: Respondent Lim Chu Sing is the surety of the debt of Lim Cuan Sy
with MBC. The debt was secured also with chattel mortgages. Lim Chu Sing had
an account with MBC in the form of trust receipts. (Technically Lim is a
stockholder). Lim Cuan Sy failed to comply with his obligation, the MBC required
Lim Chu Sing to sign a PN for the sum of P19,105.17. MBC foreclosed and sold
the chattels. Lim Chu Sing, subsequently failed to pay the installments of the
amount specified in the PN. The whole debt became due and demandable. Lim
Chu Sing filed a motion to include the original debtor, Lim Cuan Sy. CFI denied
the motion and ruled also that the compensation of the debt with the credit (value
if the trust receipts with MBC) amounting to P10k.
Issue: Whether it is proper to compensate Lim Chu Sing’s indebtedness of
P9,105.17 with the sum P10,000 representing the value of his shares of stock with
the MBC [No]
Shares of a banking corporation do not constitute an indebtedness of the
corporation to the stockholders and, therefore, the latter is not a creditor of the
former for such shares; the indebtedness of a shareholder to a banking corporation
cannot be compensated with the amount of his shares therein, there being no
relation of creditor and debtor with respect to such share
DOCTRINE: A share of stock or the certificate thereof is not an indebtedness to
the owner nor evidence of indebtedness and, therefore, it is not a credit.
Stockholders, as such, are not creditors of the corporation. The capital stocj of a
corporation is a trust fund to be used more particularly for the security of its
creditors.
FACTS:
1. The debt here in this case to be collected by MBC was not really an
indebtedness of Lim Chu Sing, but of Lim Cuan Sy guaranteed by the
respondent Lim Chu as surety and with Chattel mortgage securities. Lim Chu
Sing had an account with MBC in the form of trust receipts.
2. As Lim Cuan Sy failed to comply with his obligation, the MBC required Lim
Chu Sing to sign a PN for the sum of P19,105.17
3. MBC, without the knowledge and consent of Lim Chu foreclosed the chattel
mortgage and privately sold the property
4. On June 20, 1930, Lim Chu Sing executed and delivered to Mercantile Bank
of China (MBC) a promissory note for the sum of P19,505.17 with 6%
interest per annum payable monthly as follows: a) P1k on July 1, 1930; b)
P500 on Aug 1, 1930; and P500 on the 1st month there after until fully paid.
5. The Lim Chu Sing had been paying the corresponding installments until the
debt was reduced to the sum of P9,105.17 claimed in the complaint. The
defendant is the owner of shares of stock of the MBC amounting to P10,000.
MBC is now under liquidation
6. One of the conditions stipulated is that in case of Lim Chu’s default the entire
amount of the unpaid balance shall be due and payable on demand
7. Lim Chu defaulted, leaving an unpaid balance of P9,105.17.
8. Lim Chu Sing filed a motion praying for the inclusion of the principal debtor
Lim Cuan Sy as party defendant so that he could avail himself of the benefit
of the exhaustion of the property of said Lim Cuan Sy. Said motion was
denied.
9. The proceeds of the sale of the mortgage chattels together with othee
paymenrs made were applied to the amount of the PN, leaving the
aforementioned balance.
10. Respondent Lim Chu Sing alleged that the CFI erred in its decision:
a. In denying the motion to include Lim Cuan Sy, bein the principal
debtor, as a party to this suit
b. In holding as improper the compensation of Lim Chu (respondent)’s
debt (P9,106.17) with credit amounting to P10K with the MBC
c. In not ordering Garcia (receiver of MBC) liquidate the dividends of
Lim Chu’s shares
d. In sentencing Lim Chu to pay Garcia the amount stated earlier plus
interest
e. In denying the motion for new trial
11. Hence, this petition
ISSUE/s:
Whether it is proper to compensate Lim Chu Sing’s indebtedness of
P9,105.17 with the sum P10,000 representing the value of his shares of stock
with the MBC [No]
RULING: Wherefore, with the sole modification that the costs be eliminated from the
appealed judgment, the same is hereby affirmed, without special pronouncement as to
costs of this instance. So ordered.
RATIO:
According to the weight of authority, a share of stock or the certificate thereof is not
an indebtedness to the owner nor evidence of indebtedness and, therefore, it is not a
credit. Stockholders, as such, are not creditors of the corporation. It is the prevailing
doctrine of the American courts, repeatedly asserted in the broadest terms, that the
capital stock of a corporation is a trust fund to be used more particularly for the security
of creditors of the corporation, who presumably deal with it on the credit of its capital
stock. Lim Chu Sing not being a creditor of the Mercantile Bank of China, although
the latter is a creditor of the former, there is no sufficient ground to justify a
compensation.
In view of the foregoing, SC is of the opinion and so holds: (1) That failure to file an
exception to a ruling rendered in open court denying a motion for the inclusion of a
party as defendant deprives the petitioner, upon appeal, of the right to raise the
question whether such denial was proper or improper; (2) that the shares of a
banking corporation do not constitute an indebtedness of the corporation to the
stockholders and, therefore, the latter is not a creditor of the former for such
shares; (3) that the indebtedness of a shareholder to a banking corporation
cannot be compensated with the amount of his shares therein, there being no
relation of creditor and debtor with respect to such shares; and (4) that the
percentage stipulated in a contract, for costs and attorneys fees for the collection of an
indebtedness, includes judicial costs.
014 BOMAN ENVIRONMENTAL DEV. CORP. v. CA (SIAPNO)
Nov. 22, 1988 | Griño-Aquino, J. | Trust Fund Doctrine
PETITIONER: Boman Environmental Development Corporation
RESPONDENTS: Hon. Court of Appeals and Nilcar Fajilan
SUMMARY: Fajilan resigned from Boman Environmental Dev. Corp (BEDECO)
as President and member of the Board of Directors and asked the company to sell
his shares, rights, and interests therein for P300,000 and transfer to him of the
company's pick-up truck. BEDECO agreed and issued a promissory note to secure
this. However, BEDECO failed to pay and Fajilan filed a complaint with the RTC
for the collaction of the balance owed to him. RTC ruled in favor of BEDECO on
the ground that controversy arose out of intra-corporate relations, hence, the
SEC has original and exclusive jurisdiction to hear and decide it. However, CA
held that the case as a suit for collection of a sum of money as Fajilan "was merely
suing on the balance of the promissory note" which BEDECO failed and refused to
pay in full and therefore, RTC had jurisdiction. Issue here is WoN this case
involves intra-corporate relations and WoN SEC has jurisdiction over this case –
SC ruled that this case does involve intra-corporate relations and therefore is within
the jurisdiction of the SEC. Section 5(b) of P.D. No. 902-A states that SEC has
jurisdiction over controversies arising out of intra-corporate relations and in the
case at bar, the parties are a stockholder and the corporation. Hence, this case
involves an intra-corporate controversy. Fajilan would remain a stockholder until
his shares and interests were fully paid for, for one cannot be a director or
president of a corporation unless he is also a stockholder thereof. The requirement
of unrestricted retained earnings to cover the shares is based on the trust fund
doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate
creditors. There can be no distribution of assets among the stockholders
without first paying corporate creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and void.
DOCTRINE: There can be no distribution of assets among the stockholders
without first paying corporate creditors.
FACTS:
1. Respondent Nilcar Y. Fajilan resigned as President and Member of the Board of
Directors of petitioner, Boman Environmental Development Corporation
(BEDECO), and to sell to the company all his shares, rights, and interests
therein for P300,000 plus the transfer to him of the company's Isuzu pick-up truck
which he had been using.
2. At a meeting of the Board of Directors of BEDECO, Fajilan's resignation as
president was accepted and his offer to sell his shares back to the corporation was
approved, payment is to be on a staggered basis.
3. In order to assure the payment of the P300,000, the company executed a
promissory note. In addition to this, the Ford Courier Pick-up will belong to him
subject to his assumption of the outstanding obligation thereof with Fil-Invest. It
is understood that upon his full payment of the pick-up, arrangement will be made
and negotiated with Fil-Invest regarding the transfer of the ownership of the
vehicle in his name.
4. A promissory note, was signed by BEDECO'S new president, Alfredo Pangilinan,
in the presence of two directors, committing BEDECO to pay him P300,000 over
a six-month period.
5. However, BEDECO paid only P50,000 and another P50,000 and defaulted in
paying the balance of P200,000.
6. Fajilan filed a complaint in the RTC of Makati for collection of that balance
from BEDECO.
7. The trial court dismissed the complaint for lack of jurisdiction. It ruled that the
controversy arose out of intra-corporate relations, hence, the Securities and
Exchange Commission has original and exclusive jurisdiction to hear and decide
it.
8. His motion for reconsideration of that order having been denied, Fajilan filed a
"Petition for Certiorari, and mandamus with Preliminary Attachment" in the
Intermediate Appellate Court.
9. CA set aside RTC’s order of dismissal and directed the RTC Judge Paredes to
take cognizance of the case.
10. BEDECO's MR was denied. CA characterized the case as a suit for collection of
a sum of money as Fajilan "was merely suing on the balance of the promissory
note" which BEDECO failed and refused to pay in full.
11. CA held that while it is true that the circumstances which led to the execution of
the promissory note by the Board of Directors of respondent corporation was an
intra-corporate matter, there arose no controversy as to the sale of petitioner's
interests and rights as well as his shares as Member of the Board of Directors and
President of respondent corporation. The intra-corporate matter of the resignation
of petitioner as Member of the Board of Directors and President of respondent
corporation has long been settled without issue.
12. The Board of Directors of respondent corporation has likewise long settled the
 sale by petitioner of all his shares, rights and interests in favor of the corporation.
No controversy arose out of this transaction. The jurisdiction of the Securities and
Exchange Commission therefore need not be invoked on this matter.
ISSUE/s:
WoN this case involves an issue arising from intra-corporate relations – YES, it
deals with a stockholder and the corporation
WoN SEC has jurisdiction over this case – YES, because of Section 5(b) of P.D. No.
902-A
RULING:
RATIO:
1. Section 5(b) of P.D. No. 902-A, as amended, grants the SEC original and
exclusive jurisdiction to hear and decide cases involving—
b) Controversies arising out of intra-corporate or partnership relations,
between and among stockholders members, or associates; between any or all
of them and the corporation, partnership or association of which they are
stockholders, members or associates, respectively; ...
2. This case involves an intra-corporate controversy because the parties are a
stockholder and the corporation. As correctly observed by the trial court,
the perfection of the agreement to sell Fajilan's participation and interests in
BEDECO and the execution of the promissory note for payment of the price
of the sale did not remove the dispute from the coverage of Section 5(b) of
P.D. No. 902, as amended, for both the said agreement and the promissory
note arose from intra-corporate relations.
3. Indeed, all the signatories of both documents were stockholders of the
corporation at the time of signing the same. It was an intra-corporate
transaction, hence, this suit is an intra-corporate controversy.
4. Fajilan's offer to resign as president and director "effective as soon as my
shares and interests thereto are sold and fully paid" implied that he would
remain a stockholder until his shares and interests were fully paid for,
for one cannot be a director or president of a corporation unless he is
also a stockholder thereof.
5
SEC. 41. Power to acquire own shares.—A stock corporation shall have the power to purchase or
acquire its own shares for a legitimate corporate purpose or purposes, including but not limited to the
following cases: Provided, That the corporation has unrestricted retained earnings in its books to cover the
shares to be purchased or acquired;
1. To eliminate fractional shares arising out of stock dividends;
2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares sold during said sale; and
3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions
5. The fact that he was replaced as president of the corporation did not
necessaryily mean that he ceased to be a stockholder considering how the
corporation failed to complete payment of the consideration for the purchase
of his shares of stock and interests in the goodwill of the business. There has
been no actual transfer of his shares to the corporation.
6. The SEC has exclusive supervision, control and regulatory jurisdiction to
investigate whether the corporation has unrestricted retained earnings to
cover the payment for the shares, and whether the purchase is for a legitimate
corporate purpose as provided in Sections 415 and 1226 of the Corporation
Code.
7. These provisions of the Corporation Code should be deemed written into
the agreement between the corporation and the stockholders even if there is
no express reference to them in the promissory note.
8. The requirement of unrestricted retained earnings to cover the shares is based
on the trust fund doctrine which means that the capital stock, property and
other assets of a corporation are regarded as equity in trust for the payment
of corporate creditors.
9. Creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. There can be no distribution of assets
among the stockholders without first paying corporate creditors.
10. Hence, any disposition of corporate funds to the prejudice of creditors is null
and void. Creditors of a corporation have the right to assume that so long as
there are outstanding debts and liabilities, the board of directors will not use
the assets of the corporation to purchase its own stock
of this Code,
6
Sec. 122. Corporate liquidation. ...
xxx xxx xxx
Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute
any of its assets or property except upon lawful dissolution and after payment of all its debts and
liabilities, (77a, 89a, 16a).
 015 HALLEY v. PRINTWELL (See)
May 30, 2011 | Bersamin, J. | Trust fund doctrine
PETITIONER: Donnina C. Halley
RESPONDENTS: Printwell Inc.
SUMMARY: Halley was an incorporator and original director of BMPI. She
paid a partial amount of P87,500 for 35,000 shares which costs P350,000,
thereby leaving an unpaid amount of P262,500. BMPI commissioned Printwell,
Inc. (respondent) for the printing of the magazine Philippines, Inc., together with
wrappers and subscription cards, that BMPI published and sold. A credit
accommodation was opened in favor of BMPI. BMPI was only able to pay
P25,000 thereby leaving a balance of P291,342.76 so Printwell sued BMPI for
the balance. Printwell amended its complaint and impleaded the stockholders as
well. Halley denied liability claiming that she isn’t liable. The issue in this case
is WoN the trust fund doctrine applies. The SC ruled that it applies. Trust Fund
doctrine states that the property of a corporation is a trust fund for the payment
of creditors, but such property can be called a trust fund only by way of analogy
or metaphor. As between the corporation itself and its creditors it is a simple
debtor, and as between its creditors and stockholders its assets are in equity a
fund for the payment of its debts. Hence, the creditor can maintain an action
upon any unpaid subscriptions and thereby steps into the shoes of the
corporation for the satisfaction of its debt – and to establish a prima facie case, it
is necessary to establish only that the stockholders have not in good faith paid
the par value fo the stocks of the corporation. And, the liability of stockholders
for corporate debt is up to the extent of their unpaid subscription, not only to the
extent of what they had actually contributed.
DOCTRINE: We clarify that the trust fund doctrine is not limited to reaching the
stockholders’ unpaid subscriptions. The scope of the doctrine when the
corporation is insolvent encompasses not only the capital stock, but also other
property and assets generally regarded in equity as a trust fund for the payment of
corporate debts. All assets and property belonging to the corporation held in trust
for the benefit of creditors that were distributed or in the possession of the
stockholders, regardless of full payment of their subscriptions may be reached by
the creditors in satisfaction of its claim.
FACTS:
142. Donnina Halley was an incorporator and original director of Business Media
Philippines, Inc. (BMPI). She paid a partial amount of P87,500 for 35,000
shares which costs P350,000, thereby leaving an unpaid amount of P262,500.
143. BMPI commissioned Printwell, Inc. (respondent) for the printing of the
magazine Philippines, Inc., together with wrappers and subscription cards,
that BMPI published and sold.
144. Printwell then extended 30-day credit accommodations to BMPI which
amounted to P316,342.76. BMPI was only able to pay P25,000 thereby
leaving a balance of P291,342.76 so Printwell sued BMPI for the balance.
145. Printwell later amended the complaint and added the other original
stockholders, including Halley, to recover their unpaid subscriptions.
146. Hally denies liability to Printwell, and raises the following contentions:
a. RTC violated §14, Art. VIII of the Constitituion and §1 Rule 36 of
the Rules of Court when it copied, in verbatim, the memorandum of
Printwell; and
b. Lower courts erroneously pierced the veil of corporate fiction
despite absence of proof showing that Halley had any hand in
transacting with Printwell
ISSUE/s:
16. WoN the RTC violated the Constitution and the Rules of Court – NO because
Halley failed to substantiate her claim.
17. WoN the doctrine of piercing the veil of corporate fiction applies – YES
because to deny Printwell from recovering from Halley and her co-
stockholders would place Printwell in a limbo on where to assert its right to
collect from BMPI since the stockholders are availing the defense of
corporate fiction to evade payment from its obligations.
1. WoN the trust fund doctrine applies – YES because the property of a
corporation is a trust fund for the payment of creditors. As between the
corporation itself and its creditors it is a simple debtor, and as between its
creditors and stockholders its assets are in equity a fund for the payment of
its debts.
RULING: ACCORDINGLY, we deny the petition for review on certiorari; and
affirm with modification the decision promulgated on August 14, 2002by ordering
the petitionerto pay to Printwell, Inc. the sum of P262,500.00, plus interest of
12% per annum to be computed from February 8, 1990 until full payment.
RATIO:
RTC did not violate the Constitution and the Rules of Court
93. Halley claims that the RTC merely copied the memorandum of Printwell in
writing its decision and did not analyze the record on its own, thereby
manifesting a bias in favor of Printwell.
94. Halley failed to specify either the portions allegedly lifted verbatim from the
memorandum, or why she regards the decision as copied.
95. Such omission renders the petition for review insufficient to support her
contention, considering that the mere similarity in language or thought
between Printwell’s memorandum and the trial court’s decision did not
necessarily justify the conclusion that the RTC simply lifted verbatim or
copied from the memorandum.
Corporate personality cannot be used to foster injustice
1. Doctrine of piercing the veil of corporate fiction – the corporate personality
may be disregarded, and the individuals composing the corporation will be
 treated as individuals, if the corporate entity is being used as a cloak or cover (remember that checks are not considered legal tender until
for fraud or illegality; as a justification for a wrong; as an alter ego, an encashed)
adjunct, or a business conduit for the sole benefit of the stockholders. c. She also presented the ITR of BMPI but it is irrelevant as it does not
2. General rule: A corporation is looked upon as a legal enity. Exception: Unless by itself, prove payment of subscription.
and until sufficient reason to the contrary appears. d. Books and records of the corporation could have also been presented
3. Although nowehere was it in Printwell’s complaint or testimonies that Halley to support her claim but she failed to present these. The facts that
was instrumental in persuading BMPI to renege on its obliation to pay, her she did not explain why the stock and transfer books weren’t
personal liability remained because the CA found her and her co-stockholders presented warrants the inference that the book did not refeclt the
to be in charge of the operations of BMPI at the time the unpaid obligation actual payment of her subscription.
was transacted and incurred. e. She also did not present any certificate of stock issued by BMPI. It
4. To deny Printwell from recovering from Halley and her co-stockholders would’ve been reliable evidence since certificates of stock are not
would place Printwell in a limbo on where to assert its right to collect from issued until the subscription is fully paid.
BMPI since the stockholders are availing the defense of corporate fiction to
evade payment from its obligations. The liability of stockholders for corporate debt is up to the extent of their
unpaid subscription, not only to the extent of what they had actually
Trust Fund Doctrine applies; Unpaid creditor may satisfy its claim from unpaid contributed.
subscriptions; stockholders must prove full payment of their subscriptions 1. The RTC declared the stockholders pro rata liable for the debt (based on the
2. Trust Fund doctrine – the property of a corporation is a trust fund for the proportion to their shares in the capital stock of BMPI); and held Halley liable
payment of creditors, but such property can be called a trust fund only by way only in the amount of P149,955.65.
of analogy or metaphor. As between the corporation itself and its creditors it 2. This is erroneous. The RTC lacked the legal and factual support for its
is a simple debtor, and as between its creditors and stockholders its assets are prorating the liability. Hence, the need to modify the extent of Halley’s
in equity a fund for the payment of its debts. personal liability to Printwell. The prevailing rule is that a stockholder is
3. The doctrine is not limited to reaching the stockholders’ unpaid personally liable for the financial obligations of the corporation to the extent
subscriptions – the scope, when the corporation is insolvent, of his unpaid subscription. In view of Halley’s unpaid subscription being
encompasses not only the capital stock, but also other property and worth P262,500.00, she was liable up to that amount.
assets generally regarded in equity as a trust fund for the payment of
corporate debts.
4. Furhermore, a corporation has no legal capacity to release an original
subscriber to its capital stock from the obligation of paying for his shares, in
whole or in part, without a valuable consideration, or fraudulently, to the
prejudice of creditors.
5. Hence, the creditor is allowed to maintain an action upon any unpaid
subscriptions and thereby steps into the shoes of the corporation for the
satisfaction of its debt – and to establish a prima facie case, it is necessary to
establish only that the stockholders have not in good faith paid the par value
fo the stocks of the corporation.
a. In civil cases, the party who pleads payment has the burden of
proving it. Here, Halley had the burden of proving payment, rather
than Printwell proving nonpayment. Apparently, Halley failed to
discharge her burden. She claims that she paid via check and her OR
did indicate payment via check but checks are not legal tender and
so she still has to prove that the checks were encashed.
b. Halley’s mere submission of the receipt issued in exchange of the
check did not satisfactorily establish her allegation of full payment
of her subscription – she could not even identify her drawee bank.
 016 Ong Yong v. Tiu (Sarmiento)
April 8, 2003 | Cornoa, J. | Rescission of Pre-subscription agreemtn
PETITIONER: Ong Yong
RESPONDENTS: David Tiu
SUMMARY: Construction of the Masagana Citimall was to be stopped due to
financial difficulties of FLADC, owned by Tiu. Thus, what Tiu did was to enter
into a Pre-Subscription Agreement with the Ongs. Ongs subscribed to 1M shares;
Tius gave properties. However, they had a downfall when the Tius accused the
Ongs of refusing to credit to them the FLADC shares covering their real property
contributons. Then there was also an issue about the appointment of the Tius as
officers of the corportation. Thus, the Tius sought rescission of the Pres-
subscription agreement. SC ruled that the Tius cannot legally rescind the
agreement. When the Tius invited the Ongs to invest in FLADC as stockholders,
an increase of the authorized capital stock became necessary to give each group
equal (50-50) shareholdings as agreed upon in the Pre-Subscription Agreement.
The subject matter of the contract was the 1,000,000 unissued shares of FLADC
stock allocated to the Ongs. Though FLADC was represented by the Tius in the
subscription contract, FLADC had a separate juridical personality from the Tius.
The case before us does not warrant piercing the veil of corporate fiction since
there is no proof that the corporation is being used “as a cloak or cover for fraud
or illegality, or to work injustice.” However, although the Tius were adversely
affected by the Ongs’ unwillingness to let them assume their positions, rescission
due to breach of contract is definitely the wrong remedy for their personal
grievances. The Corporation Code, SEC rules and even the Rules of Court provide
for appropriate and adequate intra-corporate remedies, other than rescission, in
situations like this. Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject agreement based on
a less than substantial breach of subscription contract. Not only are they not parties
to the subscription contract between the Ongs and FLADC; they also have other
available and effective remedies under the law. It is also in violation of trust fund
doctrine which provides that subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right to look for the satisfaction of
their claims.
DOCTRINE: Violation of terms embodied in a Subscription Agreement, with are
personal commitments, do not constitute legal ground to rescind the such
agreement: “In the instant case, the rescission of the Pre-Subscription Agreement
will effectively result in the unauthorized distribution of the capital assets and
property of the corporation, thereby violating the Trust Fund Doctrine and the
Corporation Code, since the rescission of a subscription agreement is not one of
the instances when distribution of capital assets and property of the corporation is
allowed.” Distribution of corporate assets among the stockholders cannot even be
resorted to achieve “corporate peace.”
FACTS:
1. The construction of the Masagana Citimall in Pasay City was threatened with
stoppage and incompletion when its owner, the First Landlink Asia
Development Corporation (FLADC), which was owned by the Tius,
encountered dire financial difficulties.
a. It was heavily indebted to the (PNB) for P190 million.
b. To stave off foreclosure of the mortgage on the two lots where the
mall was being built, the Tius invited Ong Yong, Juanita Tan Ong,
Wilson T. Ong, Anna L. Ong, William T. Ong and Julia Ong Alonzo
(the Ongs), to invest in FLADC.
2. Under the Pre-Subscription Agreement they entered into, the Ongs and the
Tius agreed to maintain equal shareholdings in FLADC: the Ongs were to
subscribe to 1,000,000 shares while the Tius were to subscribe to an additional
549,800 shares in addition to their already existing subscription of 450,200
shares.
a. Furthermore, they agreed that the Tius were entitled to nominate the
Vice-President and the Treasurer plus five directors while the Ongs
were entitled to nominate the President, the Secretary and six
directors (including the chairman) to the board of directors of
FLADC.
b. Moreover, the Ongs were given the right to manage and operate the
mall.
3. Accordingly, the Ongs paid P100 million in cash for their subscription while
the Tius committed to contribute to FLADC a four-storey building and two
parcels of land respectively to cover their additional 549,800 stock
subscription therein.
a. The Ongs paid in another P70 million to FLADC and P20 million to
the Tius over and above their P100 million investment, the total sum
of which (P190 million) was used to settle the P190 million
mortgage indebtedness of FLADC to PNB.
4. The business harmony between the Ongs and the Tius in FLADC, however,
was shortlived because the Tius, on February 23, 1996, rescinded the Pre-
Subscription Agreement.
a. The Tius accused the Ongs of (1) refusing to credit to them the
FLADC shares covering their real property contributions; (2)
preventing David S. Tiu and Cely Y. Tiu from assuming the
positions of and performing their duties as Vice-President and
Treasurer, respectively, and (3) refusing to give them the office
spaces agreed upon.
5. According to the Tius, the agreement was the Tius to assume the positions and
perform the duties of Vice-President and Treasurer, respectively, but the Ongs
prevented them from doing so.
a. Furthermore, the Ongs refused to provide them the space for their
executive offices as Vice-President and Treasurer.
 b. The Ongs refused to give them the shares corresponding to their
property contributions of a four-story building,
c. Hence, they felt they were justified in setting aside their Pre-
Subscription Agreement with the Ongs who allegedly refused to
comply with their undertakings.
6. In their defense, the Ongs said that David S. Tiu and Cely Y. Tiu had in fact
assumed the positions of Vice-President and Treasurer of FLADC but that it
was they who refused to comply with the corporate duties assigned to them.
a. On the issue of office space, the Ongs pointed out that the Tius did
in fact already have existing executive offices in the mall since they
owned it 100% before the Ongs came in.
b. What the Tius really wanted were new offices which were anyway
subsequently provided to them.
7. On the most important issue of their alleged failure to credit the Tius with the
FLADC shares commensurate to the Tius’ property contributions, the Ongs
asserted that, although the Tius executed a deed of assignment for the 1,902.30
square-meter lot in favor of FLADC, they (the Tius) refused to pay P 570,690
for capital gains tax and documentary stamp tax.
a. Without the payment thereof, the SEC would not approve the
valuation of the Tius’ property contribution (as opposed to cash
contribution). This, in turn, would make it impossible to secure a
new Transfer Certificate of Title (TCT) over the property in
FLADC’s name.
8. The Tius initially claimed that they could not as yet surrender the TCT because
it was “still being reconstituted” by the Lichaucos from whom the Tius bought
it.
a. The Ongs later on discovered that FLADC had in reality owned the
property all along, even before their Pre-Subscription Agreement
was executed in 1994. This meant that the 151 square-meter
property was at that time already the corporate property of FLADC
for which the Tius were not entitled to the issuance of new shares of
stock.
9. The controversy finally came to a head when this case was commenced by the
Tius at the (SEC), seeking confirmation of their rescission of the Pre-
Subscription Agreement.
ISSUE: Whether or not the Tius can rescind the Pre-subscription agreement—
NO.
RULING:
WHEREFORE, the motion for reconsideration, dated March 15, 2002, of
petitioners Ong Yong, Juanita Tan Ong, Wilson Ong, Anna Ong, William Ong, Willie
Ong and Julie Ong Alonzo and the motion for partial reconsideration, dated March 15,
2002, of petitioner Willie Ong are hereby GRANTED. The Petition for Confirmation
of the Rescission of the Pre-Subscription Agreement docketed as SEC Case No. 02-
96-5269 is hereby DISMISSED for lack of merit. The unilateral rescission by the Tius
of the subject Pre-Subscription Agreement, dated August 15, 1994, is hereby declared
as null and void.
RATIO:
10. Their motions for reconsideration having been denied, both parties filed
separate petitions for review before this Court.
11. In their petition docketed as G.R. No. 144476, Ong et al. vs. Tiu et al.,
a. the Ongs argued that the Tius may not properly avail of rescission
under Article 1191 of the Civil Code considering that the Pre-
Subscription Agreement did not provide for reciprocity of
obligations;
b. that they did not commit a substantial and fundamental breach of
their agreement since they did not prevent the Tius from assuming
the positions of Vice-President and Treasurer of FLADC,
c. They also argued that the liquidation of FLADC may not legally be
ordered by the appellate court even for so called “practical
considerations” or even to prevent “further squabbles and numerous
litigations,” since the same are not valid grounds under the
Corporation Code.
12. In their petition docketed as G.R. No. 144629, Tiu et al. vs. Ong et al.,
a. the Tius, on the other hand, contended that the rescission should
have been limited to the restitution of the parties’ respective
investments and not the liquidation of FLADC based on the
erroneous perception by the court that:
i. the Masagana Citimall was threatened with incompletion
since FLADC was in financial distress;
ii. that, by rescinding the Pre-Subscription Agreement, they
wanted to wrestle away the management of the mall and
prevent the Ongs from enjoying the profits of their P190
million investment in FLADC.
13. This Court affirmed the fact that both the Ongs and the Tius violated their
respective obligations under the Pre-Subscription Agreement. The Ongs
prevented the Tius from assuming the positions of Vice-President and
Treasurer of the corporation. On the other hand, the Decision established that
the Tius failed to turn over FLADC funds to the Ongs and that the Tius
diverted rentals due to FLADC to their MATTERCO account.
a. Consequently, it held that rescission was not possible since both
parties were in pari delicto. However, this Court agreed with the
Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would
only lead to further “squabbles and numerous litigations” between
the parties.
14. Aside from their opposition to the Tius’ Motion for Issuance of Writ of
Execution, the Ongs filed their own “Motion for Reconsideration;
Alternatively, Motion for Modification, raising two main points:
a. that specific performance and not rescission was the proper remedy
under the premises; and
b. that, assuming rescission to be proper, the subject decision of this
Court should be modified to entitle movants to their proportionate
share in the mall.
15. On their first point (specific performance and not rescission was the proper
remedy), movants Ong argue that their alleged breach of the Pre-Subscription
Agreement was, at most, casual which did not justify the rescission of the
contract.
a. They stress that providing appropriate offices for David S. Tiu and
Cely Y. Tiu as Vice-President and Treasurer, respectively, had no
bearing on their obligations under the Pre-Subscription Agreement
since the said obligation (to provide executive offices) pertained to
FLADC itself.
b. Such obligation arose from the relations between the said officers
and the corporation and not any of the individual parties such as the
Ongs. Likewise, the alleged failure of the Ongs to credit shares of
stock in favor of the Tius for their property contributions also
pertained to the corporation and not to the Ongs.
c. Just the same, it could not be done in view of the Tius’ refusal to
pay the necessary transfer taxes which in turn resulted in the
inability to secure SEC approval for the property contributions and
the issuance of a new TCT in the name of FLADC.
16. Besides, according to the Ongs, the principal objective of both parties in
entering into the Pre-Subscription Agreement in 1994 was to raise the P190
million desperately needed for the payment of FLADC’s loan to PNB.
a. Hence, in this light, the alleged failure to provide office space for
the two corporate officers was no more than an inconsequential
infringement.
b. For rescission to be justified, the law requires that the breach of
contract should be so “substantial or fundamental” as to defeat the
primary objective of the parties in making the agreement.
c. At any rate, the Ongs claim that it was the Tius who were guilty of
fundamental violations in failing to remit funds due to FLADC and
diverting the same to their MATTERCO account.
17. The Ongs also allege that, in view of the findings of the Court that both parties
were guilty of violating the Pre-Subscription Agreement, neither of them
could resort to rescission under the principle of pari delicto. In addition, since
the cash and other contributions now sought to be returned already belong to
FLADC, an innocent third party, said remedy may no longer be availed of
under the law.
18. On their second point (assuming rescission to be proper, the Ongs should be
given their proportionate share of the mall), movants Ong vehemently take
exception to the second item in the dispositive portion of the questioned
Decision insofar as it decreed that whatever remains of the assets of FLADC
and the management thereof (after liquidation) shall be transferred to the Tius.
a. They point out that the mall itself, which would have been
foreclosed by PNB if not for their timely investment of P190 million
in 1994 and which is now worth about P1 billion mainly because of
their efforts, should be included in any partition and distribution.
b. They (the Ongs) should not merely be given interest on their capital
investments. The said portion of our Decision, according to them,
amounted to the unjust enrichment of the Tius and ran contrary to
our own pronouncement that the act of the Tius in unilaterally
rescinding the agreement was “the height of ingratitude” and an
attempt “to pull a fast one” as it would prevent the Ongs from
enjoying the fruits of their P190 million investment in FLADC.
c. It also contravenes this Court’s assurance in the questioned Decision
that the Ongs and Tius “will have a bountiful return of their
respective investments derived from the profits of the corporation.”
19. Willie Ong filed a separate “Motion for Partial Reconsideration” dated March
8, 2002, pointing out that there was no violation of the Pre-Subscription
Agreement on the part of the Ongs; that, after more than seven years since the
mall began its operations, rescission had become not only impractical but
would also adversely affect the rights of innocent parties; and that it would
be highly inequitable and unfair to simply return the P100 million investment
of the Ongs and give the remaining assets now amounting to about P1 billion
to the Tius.
20. We grant the Ongs’ motions for reconsideration.
21. This is not the first time that this Court has reversed itself on a motion for
reconsideration.
a. We resolve whether the Tius could legally rescind the Pre-
Subscription Agreement. We rule that they could not.
22. FLADC was originally incorporated with an authorized capital stock of
500,000 shares with the Tius owning 450,200 shares representing the paid-up
capital.
a. When the Tius invited the Ongs to invest in FLADC as stockholders,
an increase of the authorized capital stock became necessary to give
each group equal (50-50) shareholdings as agreed upon in the Pre-
Subscription Agreement.
b. The subject matter of the contract was the 1,000,000 unissued shares
of FLADC stock allocated to the Ongs.
23. Since these were unissued shares, the parties’ Pre-Subscription
Agreement was in fact a subscription contract as defined under Section
60, Title VII of the Corporation Code:
a. Any contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed shall be deemed a
subscription within the meaning of this Title, notwithstanding the
 fact that the parties refer to it as a purchase or some other
contract (Italics supplied).
b. A subscription contract necessarily involves the corporation as one
of the contracting parties since the subject matter of the transaction
is property owned by the corporation – its shares of stock.
24. Thus, the subscription contract (denominated by the parties as a Pre-
Subscription Agreement) whereby the Ongs invested P100 million for
1,000,000 shares of stock was, from the viewpoint of the law, one between the
Ongs and FLADC, not between the Ongs and the Tius.
a. Otherwise stated, the Tius did not contract in their personal
capacities with the Ongs since they were not selling any of their own
shares to them. It was FLADC that did.
25. Considering therefore that the real contracting parties to the subscription
agreement were FLADC and the Ongs alone, a civil case for rescission on
the ground of breach of contract filed by the Tius in their personal
capacities will not prosper.
a. Assuming it had valid reasons to do so, only FLADC (and certainly
not the Tius) had the legal personality to file suit rescinding the
subscription agreement with the Ongs inasmuch as it was the real
party in interest therein.
26. The Tius claim that there are two contracts embodied in the Pre-Subscription
Agreement: a shareholder’s agreement between the Tius and the Ongs
defining and governing their relationship and a subscription contract between
the Tius, the Ongs and FLADC regarding the subscription of the parties to the
corporation.
a. They point out that these two component parts form one whole
agreement and that their terms and conditions are intrinsically
related and dependent on each other.
b. Thus, the breach of the shareholders’ agreement, which was
allegedly the consideration for the subscription contract, was also a
breach of the latter.
27. Though FLADC was represented by the Tius in the subscription contract,
FLADC had a separate juridical personality from the Tius. The case before us
does not warrant piercing the veil of corporate fiction since there is no proof
that the corporation is being used “as a cloak or cover for fraud or illegality,
or to work injustice.”
28. The Tius also argue that, since the Ongs represent FLADC as its management,
breach by the Ongs is breach by FLADC. This must also fail because such an
argument disregards the separate juridical personality of FLADC.
a. The Tius allege that they were prevented from participating in the
management of the corporation.
b. There is evidence that the Ongs did prevent the rightfully elected
Treasurer, Cely Tiu, from exercising her function as such. The
records show that the President, Wilson Ong, supervised the
collection and receipt of rentals in the Masagana Citimall;[19] that he
ordered the same to be deposited in the bank;[20] and that he held on
to the cash and properties of the corporation.[21]
c. Section 25 of the Corporation Code prohibits the President from
acting concurrently as Treasurer of the corporation. The rationale
behind the provision is to ensure the effective monitoring of each
officer’s separate functions.
29. However, although the Tius were adversely affected by the Ongs’
unwillingness to let them assume their positions, rescission due to breach of
contract is definitely the wrong remedy for their personal grievances. The
Corporation Code, SEC rules and even the Rules of Court provide for
appropriate and adequate intra-corporate remedies, other than
rescission, in situations like this.
a. Rescission is certainly not one of them, specially if the party asking
for it has no legal personality to do so and the requirements of the
law therefor have not been met.
b. Hence, the Tius, in their personal capacities, cannot seek the
ultimate and extraordinary remedy of rescission of the subject
agreement based on a less than substantial breach of
subscription contract. Not only are they not parties to the
subscription contract between the Ongs and FLADC; they also
have other available and effective remedies under the law.
30. All this notwithstanding, that the Tius possess the legal standing to sue for
rescission based on breach of contract, said action will nevertheless still not
prosper since rescission will violate the Trust Fund Doctrine and the
procedures for the valid distribution of assets and property under the
Corporation Code.
a. The Trust Fund Doctrine, first enunciated by this Court in the 1923 case
of Philippine Trust Co. vs. Rivera, provides that subscriptions to the capital stock
of a corporation constitute a fund to which the creditors have a right to look for
the satisfaction of their claims.
b. This doctrine is the underlying principle in the procedure for the distribution of
capital assets, embodied in the Corporation Code, which allows the distribution
of corporate capital only in three instances: (1) amendment of the Articles of
Incorporation to reduce the authorized capital stock, (2) purchase of redeemable
shares by the corporation, regardless of the existence of unrestricted retained
earnings, and (3) dissolution and eventual liquidation of the corporation.
Furthermore, the doctrine is articulated in Section 41 on the power of a
corporation to acquire its own shares and in Section 122 on the prohibition
against the distribution of corporate assets and property unless the stringent
requirements therefor are complied with.
31. The distribution of corporate assets and property cannot be made to depend on
the whims of the stockholders, officers or directors unless the indispensable
conditions and procedures for the protection of corporate creditors are
followed.
a. In the instant case, the rescission of the Pre-Subscription Agreement
will effectively result in the unauthorized distribution of the capital
assets and property of the corporation, thereby violating the Trust
Fund Doctrine and the Corporation Code, since rescission of a
subscription agreement is not one of the instances when distribution
of capital assets and property of the corporation is allowed.
32. Contrary to the Tius’ allegation, rescission will, result in the premature
liquidation of the corporation without the benefit of prior dissolution in
accordance with Sections 117, 118, 119 and 120 of the Corporation Code.[28]
a. Section 122 of the law provides that “(e)xcept by decrease of capital
stock…, no corporation shall distribute any of its assets or property
except upon lawful dissolution and after payment of all its debts and
liabilities.”
33. The Tius’ case for rescission cannot validly be deemed a petition to decrease
capital stock because such action never complied with the formal requirements
for decrease of capital stock under Section 33 of the Corporation Code.
34. Furthermore, it is an improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance of
a certificate of decrease of stock. Decreasing a corporation’s authorized capital
stock is an amendment of the Articles of Incorporation.
a. It is a decision that only the stockholders and the directors can make,
considering that they are the contracting parties thereto.
b. In this case, the Tius are actually not just asking for a review of the
legality and fairness of a corporate decision. They want this Court
to make a corporate decision for FLADC.
c. We decline to intervene and order corporate structural changes not
voluntarily agreed upon by its stockholders and directors.
35. Truth to tell, a judicial order to decrease capital stock without the assent of
FLADC’s directors and stockholders is a violation of the “business judgment
rule”. Apparently, the Tius do not realize the illegal consequences of seeking
rescission and control of the corporation to the exclusion of the Ongs. Such an
act infringes on the law on reduction of capital stock.
 SECTION VII
001 Ching v. QC Sports Club (Santos)
07 November 2016 | Leonardo-De Castro, J. | By-Laws
PETITIONER: Catherine, Lorenzo, Laurence, and Christine Ching
RESPONDENTS: Quezon City Sports Club, Inc. (The Club); Members Of The
Board Of Directors (BoD), Namely: Antonio Chua, Margaret Mary Rodas,
Alejandro Yabut, Jr., Robert Gaw, Edgardo Ho, Romulo Sales, Bienvenido
Alano, Augusto Orosa, Finance Manager, Lourdes Ruth Lopez
SUMMARY: A judgment was rendered against the QC Sports Club, ordering it
to pay P.4.4m because of illegally dismissing 6 employees. Because the club was
not in a financial position to pay the monetary awards, the BoD approved a Board
Resolution (BR) seeking the financial assistance of its members by assessing each
member P2,500 payable in 5 monthly payments. Catherine, a member, believed
that the imposition of the special assessment was illegal but she took no action but
simply avoided paying the special assessment. Catherine’s membership was
suspended due to not paying the special assessment. She tried to avail of the
services by signing-up as a guest of her husband or daughter but she was refused
access to the club so the Chings filed a complaint for damages before the RTC,
based on Arts. 19-21, CC praying for the court to order the club to reinstate
Catherine’s membership and pay damages. The issue in this case is WoN CA erred
in ruling that suspension of Catherine in not paying the special assessment
pursuant to a BR can be made under Art. 33 of the by-laws of the club. The answer
is that the club MAY suspend members by virtue of Art. 33, HOWEVER, in this
case, the requisite of notification under Art. 35 of the by-laws was not satisfied so
Catherine’s right to due process was violated. The Court partly granted the petition
but clarifies that only the Club shall be liable for the nominal damages because in
the absence of malice and bad faith, officers of a corporation cannot be made
personally liable for the liabilities of the corporation which, by legal fiction, has a
personality separate and distinct from its officers, stockholders, and members.
DOCTRINE: The by-laws are the self-imposed rules resulting from the
agreement between the country club and its members to conduct the corporate
business in a particular way. In that sense, the by-laws are the private “statutes”
by which the country club is regulated, and will function. Until repealed, the by-
laws are the continuing rules for the government of the country club and its
officers, the proper function being to regulate the transaction of the incidental
business of the country club. The by-laws constitute a binding contract as between
the country club and its members, and as among the members themselves. The by-
laws are self-imposed private laws binding on all members, directors, and officers
of the country club. The prevailing rule is that the provisions of the articles of
incorporation and the by-laws must be strictly complied with and applied to the
letter. (Outline)
FACTS:
1. QC Sports Club is a registered domestic corporation providing recreational
activities, sports facilities, and services to its members.
2. Catherine became a member of the Club in 1989. Per policy, Catherine's
membership privileges were extended to her immediate family.
3. NLRC rendered a Decision in ordering the Club to pay backwages, 13th and
14th month pay, and allowances to 6 illegally dismissed employees. As a
result, a writ of execution was served on the for P4.4m.
4. Because the club was not in a financial position to pay the monetary awards,
the Board of Directors approved a BR, "Special Assessment for Club
Members in Relation to the Navarro, et al. v. QCSI, et al. Case," resolving to
"seek the assistance of its members by assessing each member P2,500
payable in 5 equal monthly payments.
5. Catherine was notified of the implementation of the special assessment
through a Letter from the club Treasurer. P500 was debited/charged to
Catherine's account each month from Sept ‘01 - Jan ‘02, as reflected in the
club’s Statements of Account.
6. The Statements of Account sent to Catherine included a general notice:
a. This statement is deemed correct if no discrepancy is reported w/in
10d from receipt.
b. Accounts past due for 60d and the amount is over P20k will be
automatically suspended
c. Accounts that are 75d in arrears will automatically be suspended
regardless of amount.
7. Catherine believed that the imposition of the special assessment was unjust/
illegal, but she took no action and simply avoided paying the special
assessment by settling the amounts due in her Statements of Account from
Sept ‘01 – Jan ‘02 short of P500
8. BoD passed another BR suspending privileges of the members of QC Sports
Club who hadn’t paid the special assessment
9. To fully enforce such and to be fair with other members who have already
paid, the BoD suspended the privileges of those members who would
continue not paying the special assessment despite receipt of demand.
10. Catherine continued availing herself of the services of the Club and regularly
paid the amounts due from Feb ‘02 - May ‘03, but always leaving behind a
balance. Catherine wasn’t personally informed of the 2nd BR nor advised
that she’s already deemed delinquent in the payment of any other Statements
of Account.
11. Catherine’s son, Laurence, went to QC Sports Club to avail of its services
using the account of Catherine but QC Sports Club refused to accommodate
Laurence because Catherine’s membership privileges was suspended.
12. Catherine noticed that her name was included and highlighted in Lopez's
Memorandum addressed to "All Outlets" with the subject matter of
"Suspended Members Due to Non-Payment of Special Assessment," copies
of which were posted at the workstations of the employees and in other
conspicuous places within the premises of the Club; so she sent the Club and
its BoD a letter demanding her reinstatement and an apology for besmirching
her good reputation.
13. The Club and its BoD replied in a letter pointing out that (1) the Club never
besmirched the reputation of any of its members; (2) Catherine herself
admitted that she didn’t pay the special assessment fee; and (3) the list of
 suspended members failing to pay the special assessment fee was never
posted but was given to the members.
14. So she can avail herself of the services of the Club, Catherine registered as a
guest of either her husband, Lorenzo, or her daughter, Noelle but Catherine
was refused access to the Club, even as a guest.
15. Catherine was paying more than double her customary fees to enjoy the
services of the Club.
16. The Chings filed a complaint for damages before the RTC, based on Arts. 19-
21, CC. The Chings prayed for the court to order the Club to (1) reinstate
Catherine’s membership, (2) refund the losses Catherine incurred as a
consequence of the illegal suspension of her membership; (3) pay moral
exemplary and damages, atty's fees and the costs of suit.
17. To lift suspension of her membership privileges, Catherine paid "under
protest" the special assessment of P2,500 but despite this, QC Sports Club
continued harassing her when she was at the Club
a. A guard would unusually monitor her activities.
b. Dacut, Catherine’s tennis trainer for 10y was enjoined by the
management from playing with the Chings.
18. BOD issued a 3rd BR expelling Catherine as a member of QC Sports Club
due to her filing of the civil suit. Catherine received a notice of her expulsion
which became the subject matter of another case before the RTC.
19. The RTC basing on the "Business Judgment Rule" and PH Stock Exchange,
Inc. v. CA, held that questions of policy and management are left to the
honest decision of the officers and directors of a corporation; and the
courts are without authority to substitute their judgment for that of the
BoD unless said judgment had been attended with bad faith.
20. The RTC found no evidence of bad faith on the part of the club and its BoD
in adopting the 1st BR re imposition of special assessment since it’s only
adopted because the club wasn’t in a financial capacity to pay.
21. The special assessment was reasonable and fair in order to save the club from
the execution of the alias writ of execution. According to the RTC, since
Catherine is aware of the issuance of the 1st BR and was silent and failed to
immediately challenge the validity of said BR could only be construed as
her assent/waiver of her right to question its propriety. The RTC though
ruled that respondents failed to comply with the By-Laws of the Club when
they suspended Catherine's privileges.
22. Sec. 35 of the By-laws: A member may be suspended or expelled if he or she
violates the By-laws, rules, regulations, resolution and orders duly
promulgated by the BoD or for an act, which in the opinion of the board, are
serious or prejudicial to the Club. A suspension or expulsion comes after
proper notice and hearing. This is why a BR requiring "receipt of a
demand" upon a member before his privileges are suspended was created.
23. The privileges of Chings were suspended without notice/demand having been
issued to Catherine to pay the special assessment and if she fails her privileges
and that of her dependents will be suspended.
24. The statement of account contains a reminder that an account which is more
than 75d deficient, regardless of the amount, will be suspended but the
Statements of Account, offered in evidence by the Club were for other
expenses incurred by the Chings for chits such as Sports and Recreation
(CHH), Charge Account Slip (CHC), Beauty Parlor (CBP), Reflexology
(RC), Restaurant (CHR), Monthly Dues (MD) and Locker Rental (LR), but
none containing a demand for payment of special assessment.
25. Statements of Account forming part of the the Club’s evidence do not prove
demand upon the Chings to pay for the Special Assessment before their
privileges can be suspended.
26. Catherine admitted during the Pre-trial Conference of her being aware of the
billings for the special assessment but this admission is vague as to the time
when she came to know of these billings partaking of a demand.
27. RTC Judgment: Club and its BoD acted in bad faith or with malice in
continuing to deprive Catherine her membership privileges even after
she had already paid the special assessment.
28. It was found that the evidence are strong enough to prove violation of the
Club's By-laws where the Chings were immediately suspended without
notice and hearing and for their continuous act of depriving them of their
privilege as members of theClub.
29. The Club and its BoD were directed to pay jointly and severally the Chings,
moral and exemplary damages, attys fees and the costs of the suit
30. The Club and BoD filed an MR which was denied.
31. They appealed to the CA which reversed the RTC decision, finding that the
respondents had no bad faith or intent to injure/humiliate, considering that:
a. Catherine’s suspension was in accordance with the By-Laws and
policy of the club;
b. Catherine's privileges were not actually suspended until Lopez
issued her a Memorandum
c. Billing clerks and attendants were furnished copies of respondent
Lopez's Memorandum dated May 22, 2003 for their guidance or
reference since it was their duty to check the status of a member's
account, and if they wrongfully accommodated a suspended
member, then the charges incurred by said member would be
automatically deducted from their salaries;
d. There was no proof that copies of said Memorandum were posted in
conspicuous places within the premises of the club; and
e. There was no evidence that the club instructed the billing clerks to
post copies of respondent Lopez's Memorandum dated May 22,
2003 in their cubicles and to highlight Catherine's name.
f. Dacut's testimony that they were instructed by the management of
the club to avoid petitioners was hearsay
g. The counterclaims for damages of respondents were denied since
they failed to establish that petitioners were moved by bad faith or
malice in impleading the BOD in the case a quo.
ISSUE: WoN CA erred in ruling that suspension of Catherine in not paying the special
assessment pursuant to a BR can be made under Art. 33 of the by-laws of the club –
Only after due notice and hearing prior suspension, according to Sec.35(a)
RULING: Instant Petition is partly GRANTED. CA Decision is REVERSED and
SET ASIDE. Quezon City Sports Club, Inc. is ORDERED to pay petitioners Lorenzo
Ching, Catherine Ching, Laurence Ching, and Christine Ching nominal damages in
the amount of P25,000.
RATIO:
96. The Court found the petition meritorious.
97. The Chings maintain that Catherine's nonpayment of the special assessment
of P2,500 was a violation of a resolution of the BoD, to which Sec 35(a) of
the By-Laws of the Club - requiring notice and hearing prior to the member's
suspension - should have applied:
Sec. 35. (a) For violating these By-Laws or rules and regulations of the Club, or resolution and orders duly
promulgated at Board or stockholders' meeting, or for any other causes and acts of a member which in the
opinion of the Board are serious or prejudicial to the Club such as acts or conduct of a member or the
immediate members of his family, his guest or visitors, which the Board may deem disorderly or injurious
to the interest or hostile to the objects of the Club, the offending member may be suspended, or expelled
by a two-thirds (2/33) vote of the Board of Directors upon proper notice and hearing.
98. The club invoke Sec. 33(a) of the By-Laws allowing suspension of a member
with unpaid bills after notice:
Sec. 33. (a) Billing of Members, Posting of Suspended Accounts As soon as possible after the end of
every month, a statement showing the account or bill of a member for said month will be prepared and
sent to them. If the bill of any regular member remains unpaid by the 20th of the month following that in
which the bill was incurred, the Treasurer shall notify him that if his bill is not paid in full by the end of
the same month, his name will be posted as suspended the following day at the Clubhouse Bulletin Board.
While posted, a regular member together with the immediate members of his family mal not use the
facilities or avail of the privileges of the Club.
99. Forest Hills Golf v. Gardpro.: articles of incorporation and by-laws of a
country club are the
a. fundamental documents governing the conduct of the corporate
affairs of said club;
b. establish the norms of procedure for exercising rights, and reflected
the purposes and intentions of the incorporators.
c. self-imposed rules resulting from the agreement between the
country club and its members to conduct the corporate business in a
particular way
d. private "statutes" by which the club is regulated, and will function.
e. the continuing rules for the government of the country club and its
officers, the proper function being to regulate the transaction of the
incidental business of the country club.
f. binding contract as between the country club and its members, and
as among the members themselves.
g. self-imposed private laws binding on all members, directors, and
officers of the country club.
h. must be strictly complied with and applied to the letter.
100. All stipulations of the contract are considered and the whole agreement is
rendered valid and enforceable, instead of treating some provisions as
superfluous, void, or inoperable.
101. Suspension of Catherine's privileges was due to the P2,500 special
assessment charged in her Statements of Account from Sept ’01 - Jan ‘02,
which remained unpaid for over 3 months by the time the BOD passed BR 3-
’02 on April 18, ‘02; and for 1y, 4m by the time Lopez issued her
Memorandum dated May 22, 2003. However, tracing back, the P2,500
special assessment was not an ordinary account/bill incurred by the Chings
in the Club, as contemplated in Sec 33(a).
102. Sec. 33(a) of the By-Laws refers to the regular dues and ordinary accounts or
bills incurred by members as they avail of the services at the club, and for
which the members are charged in their monthly Statement of Account.
The immediate payment or collection of the amount charged in the member's
monthly Statement of Account is essential so the club can carry-on its day-
to-day operations, which is why Sec. 33(a) allows for the automatic
suspension of a nonpaying member after a specified period and
notification.
103. The special assessment in the instant case arose from an extraordinary
circumstance, i.e., the necessity of raising payment for the monetary
judgment against the club in an illegal dismissal case. The special assessment
of P2,500 was imposed upon by the BOD through a BR; it only so happened
that said BR was implemented by directly charging the special assessment,
in P500 installments, in the members' Statements of Account for 5 months.
Thus, Catherine's nonpayment of the special assessment was, ultimately, a
violation of a BR, covered by Sec. 35(a) of the By-Laws. This much was
acknowledged by respondent BOD itself when it mentioned in BR 3-’02 that
"[t]o enforce BR 7-’01," it was suspending the members who did not pay the
special assessment.
104. Sec. 35(a) of the By-Laws requires notice and hearing prior to a member's
suspension. Here, Catherine did not receive notice specifically advising
her that she could be suspended for nonpayment of the special
assessment; affording her a hearing prior to her suspension through BR 3-
’02. The club merely relied on the general notice printed in Catherine's
Statements of Account warning of automatic suspension for accounts of over
P20,000 which are past due for 60 days, and accounts regardless of amount
which are 75 days in arrears. While said general notice in the Statements of
Account might have been sufficient for purposes of Sec. 33(a) of the By-
Laws, it fell short of the stricter requirement under Sec. 35(a) of the same By-
Laws. Catherine's right to due process was clearly violated.
105. However, only the Club shall be liable for the nominal damages because in
the absence of malice and bad faith, officers of a corporation cannot be made
personally liable for the liabilities of the corporation which, by legal fiction,
has a personality separate and distinct from its officers, stockholders, and
members.
002 BERNAS v. CINCO (Sabaupan)
July 1, 2015 | Perez, J. | By-laws cannot be contrary to law, public policy, or the
charter
PETITIONER: Jose A. Bernas, Cecile H. Cheng, Victor Africa, Jesus B.
Maramara, Jose T. Frondoso, Ignacio T. Macrochon, Jr., and Paulino T. Lim,
acting in their capacity as individual directors of Makati Sports Club, Inc., and on
behalf of the Board of Directors of Makati Sports Club
RESPONDENTS: Jovencio F. Cinco, Vicente R. Ayllon, Ricardo G. Librea,
Samuel L. Esguerra, Rolando P. dela Cuesta, Ruben L. Torres, Alex Y. Pardo, Ma.
Cristina Sim, Roger T. Aguiling, Jose B. Quimson, Celestino L. Ang, Eliseo V.
Villamor, Felipe L. Gozon, Claudio B. Altura, Rogelio G. Villarosa, Manuel R.
Santiago, Benjamin A. Carandang, Regina de Leon-Herlihy, Carlos Y. Ramos, Jr.,
Alejandro Z. Barlin, Efrenilo M. Cayanga and John Does
SUMMARY: The MSCOC of MSC called for a Special Stockholders’ Meeting
because they were alarmed with the rumored anomalies in handling the corporate
funds. They demanded that the Bernas group, who were then the incumbent
officers, to resign from their respective positions to pave the way for the election
of new set of officers. The said meeting proceeded, and the Cinco group was
elected in place of the Bernas group. Bernas group then filed an action before the
SCID of the SEC seeking the nullification of the Special Stockholders’ Meeting
on the ground that it was improperly called. The Cinco group argued that the
calling of the meeting was justified under the Corporation Code and the MSC by-
laws. Meanwhile, the newly elected directors found Bernas guilty of irregularities
and the Board resolved to expel him from the club by selling his shares at a public
auction. Prior to the resolution of the case filed by the Bernas group, 3 Annual
Stockholders’ Meeting was already conducted and in all these meetings, majority
of the stockholders resolved to ratify the calling of the Special Stockholders’
Meeting. The SCID ruled that the Special Stockholders’ Meeting was invalid. SEC
En Banc reversed this. CA ruled that the Special Stockholders’ Meeting was
invalid for being properly called but ruled that the subsequent annual meetings
were valid. The issue is whether the Special Stockholders’ Meeting was valid. The
Court held that it was void because the MSCOC was not authorized to exercise
corporate powers, such as the calling of a meeting. Based on its by-laws, only the
President or the Board of Directors are authorized to call for a special meeting.
The defect goes into the very authority of the persons who made the call for the
meeting. Since the Special Stockholders’ Meeting is void, it is not subject to
ratification.
DOCTRINE: Board of Directors should act in a manner and within the
formalities, if any, prescribed in its charter or by law. Thus, directors must act as
a body in a meeting called pursuant to the law or the corporation’s by-laws;
otherwise, any action taken therein may be questioned by the objecting director or
shareholder. Certainly, the rules set in the by-laws are mandatory for every
member of the corporation and its officers and members must comply.
FACTS:
147. Makati Sports Club (MSC) is a domestic corporation duly organized and
existing under Philippine laws for the primary purpose of establishing,
maintaining, and providing social, cultural, recreational, and athletic
activities among its members.
148. Alarmed with the rumored anomalies in handling the corporate funds, the
MSC Oversight Committee (MSCOC), composed of the past presidents of
the club, demanded from the Bernas Group (Members of the Board of
Directors and Officers of the corporation whose terms were to expire either
in 1998 or 1999), who were then incumbent officers of the corporation, to
resign from their respective positions to pave the way for the election of new
set of officers.
149. The MSCOC called a Special Stockholders’ Meeting and set out notices to
all stockholders and members stating therein the time, place and purpose of
the meeting. Bernas group failed to secure an injunction before the SEC, so
the meeting proceeded wherein members of the Bernas group were removed
from office and was replaced by members of the Cinco Group.
150. Bernas group then initiated an action (SEC case 1) before the Securities
Investigation and Clearing Department (SICD) of the SEC seeking for the
nullification of the Special Stockholders Meeting on the ground that it was
improperly called.
a. They cited Section 28 of the Corporation Code and argued that the
authority to call a meeting lies with the Corporate Secretary and not
with the MSCOC which functions merely as an oversight body and
is not vested with the power to call corporate meetings.
b. Since the meeting was called by persons not authorized to do so,
Bernas Group urged the SEC to declare the Special Stockholders’
Meeting, including the removal of the sitting officers and the
election of new ones, be nullified.
151. The Cinco group insisted that the meeting is sanctioned by the Corporation
Code and the MSC by-laws. They justified the calling of the meeting by
MSCOC by invoking Section 25 of the MSC by-laws.
a. Said by-law authorized the Corporate Secretary to issue notices of
meetings and nowhere does it state that such authority solely
belongs to him.
152. Meanwhile, the newly elected directors initiated an investigation on the
alleged anomalies in administering the corporate affairs and after finding
Bernas guilty of irregularities, the Board resolved to expel him from the club
by selling his shares at public auction.
153. Prior to the resolution of SEC Case 1, an Annual Stockholders’ Meeting was
held in April 1998. The meeting was attended by majority of the stockholders
and they resolved to approve, confirm, and ratify, among others, the calling
and holding of the Special Stockholders’ Meeting, the acts and resolutions
adopted therein including the removal of the Bernas Group from the Board
and the election of their replacements. The Special Stockholders’ Meeting
was also ratified in the annual meeting in 1999 and 2000.
 154. The SCID rendered a Decision finding that the Special Stockholders’
Meeting and the Annual Stockholders’ Meeting conducted in 1998 and 1999
are invalid. The SICD likewise nullified the expulsion of Bernas from the
corporation and the sale of his share at the public auction.
155. On appeal, the SEC En Banc reversed the findings of the SCID and validated
the Special Stockholders’ Meeting and the 1999 and 2000 Annual
Stockholders’ Meeting.
156. CA rendered a Decision declaring that the Special Stockholders’ Meeting
invalid for being improperly called but affirmed the actions taken during the
Annual Stockholders’ Meeting in 1998, 1999, and 2000.
157. Both parties elevated the case before the SC.
a. While the Bernas Group agrees with the disquisition of the appellate
court that the Special Stockholders' Meeting is invalid for being
called by the persons not authorized to do so, they urge the Court to
likewise invalidate the holding of the subsequent Annual
Stockholders' Meetings invoking the application of the holdover
principle.
b. The Cinco Group, for its part, insists that the holding of Special
Stockholders' Meeting is valid and binding underscoring the
overwhelming ratification made by the stockholders during the
subsequent annual stockholders' meetings and the previous refusal
of the Corporate Secretary to call a special stockholders' meeting
despite demand.
ISSUE/s:
18. Whether the Special Stockholders’ Meeting is valid. NO since the body that
called the meeting had no authority to do so.
19. Whether the sale of Bernas’ share in a public auction is valid. NO because a
void meeting cannot have any legal effect.
RULING: Both the petition of the Bernas Group and the Cinco Group are DENIED.
The decision of the CA is AFFIRMED.
7 to propose such removal, must be given by publication or by written notice prescribed in this Code.
Sec. 28. Removal of directors or trustees. — Any director or trustee of a corporation may be removed
from office by a vote of the stockholders holding or representing at least two-thirds (2/3) of the
outstanding capital stock, or if the corporation be a non-stock corporation, by a vote of at least two-thirds
(2/3) of the members entitled to vote: Provided, That such removal shall take place either at a regular
meeting of the corporation or at a special meeting called for the purpose, and in either case, after previous
notice to stockholders or members of the corporation of the intention to propose such removal at the
meeting. A special meeting of the stockholders or members of a corporation for the purpose of
removal of directors or trustees, or any of them, must be called by the secretary on order of the
president or on the written demand of the stockholders representing or holding at least a majority
of the outstanding capital stock, or, if it be a non-stock corporation, on the written demand of a
majority of the members entitled to vote. Should the secretary fail or refuse to call the special meeting
upon such demand or fail or refuse to give the notice, or if there is no secretary, the call for the meeting
may be addressed directly to the stockholders or members by any stockholder or member of the
corporation signing the demand. Notice of the time and place of such meeting, as well as of the intention
RATIO:
106. The Corporation Code laid down the rules on the removal of the Directors of
the corporation, by providing, among others, the persons authorized to call
the meeting and the number of votes required for the purpose of removal.7
107. Textually, only the President and the Board of Directors are authorized by
the by-laws to call a special meeting. In cases where the person authorized
8
to call a meeting refuses, fails or neglects to call a meeting, then the
stockholders representing at least 100 shares, upon written request, may file
a petition to call a special stockholder's meeting.
108. In the instant case, there is no dispute that the Special Stockholders' Meeting
was called neither by the President nor by the Board of Directors but by the
MSCOC. While the MSCOC, as its name suggests, is created for the purpose
of overseeing the affairs of the corporation, nowhere in the by-laws does it
state that it is authorized to exercise corporate powers, such as the power to
call a special meeting, solely vested by law and the MSC by-laws on the
President or the Board of Directors.
109. A corporation's board of directors is understood to be that body which:
a. Exercises all powers provided for under the Corporation Code
b. Conducts all business of the corporation
c. Controls and holds all the property of the corporation.
Its members have been characterized as trustees or directors clothed with
fiduciary character.
110. The ordinary trust relationship of directors of a corporation and stockholders
is not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and
hence of the property interests of the stockholders.
111. Equity recognizes that stockholders are the proprietors of the corporate
interests and are ultimately the only beneficiaries thereof. Should the board
fail to perform its fiduciary duty to safeguard the interest of the stockholders
or commit acts prejudicial to their interest, the law and the by-laws provide
mechanisms to remove and replace the erring director.
112. Relative to the powers of the Board of Directors, nowhere in the
Corporation Code or in the MSC by-laws can it be gathered that the
Removal may be with or without cause: Provided, That removal without cause may not be used to deprive
minority stockholders or members of the right of representation to which they may be entitled under
Section 24 of this Code.
8
SEC. 8. Annual Meetings. — The annual meeting of stockholders shall be held at the Clubhouse on the
third Monday of April of every year unless such day be a holiday in which case the annual meeting shall
be
held on the next succeeding business day. At such meeting, the President shall render a report to the
stockholders of the clubs.
SEC. 10. Special Meetings. — Special meetings of stockholders shall be held at the Clubhouse when
called by the President or by the Board of Directors or upon written request of the stockholders
representing not less than one hundred (100) shares. Only matters specified in the notice and call will be
taken up at special meetings.
 Oversight Committee is authorized to step in wherever there is breach
of fiduciary duty and call a special meeting for the purpose of removing
the existing officers and electing their replacements even if such call was
made upon the request of shareholders. The MSCOC is neither
empowered by law nor the MSC by-laws to call a meeting and the subsequent
ratification made by the stockholders did not cure the substantive infirmity,
the defect having set in at the time the void act was done.
113. The defect goes into the very authority of the persons who made the call for
the meeting. It is apt to recall that illegal acts of a corporation which
contemplate the doing of an act which is contrary to law, morals or
public order, or contravenes some rules of public policy or public duty,
are, like similar transactions between individuals, void. They cannot serve
as basis for a court action, nor acquire validity by performance, ratification
or estoppel. The same principle can apply in the present case. The void
election conducted during the Special Stockholders’ Meeting cannot be
ratified by the subsequent Annual Stockholders’ Meeting.
114. A distinction should be made between corporate acts or contracts which are
illegal and those which are merely ultra vires:
a. Illegal corporate acts contemplate the doing of an act which are
contrary to law, morals, or public policy, or public duty, and are
void. They cannot serve as basis of a court action nor acquire
validity by performance, ratification or estoppel.
b. Mere ultra vires acts, on the other hand, or those which are not illegal
or void ab initio, but are not merely within the scope of the articles
of incorporation, are merely voidable and may become binding and
enforceable when ratified by the stockholders.
115. The Special Stockholders’ Meeting belongs to the category of the latter, that
is, it is void ab initio and cannot be validated.
116. Consequently, such Special Stockholders' Meeting called by the Oversight
Committee cannot have any legal effect. The removal of the Bernas Group,
as well as the election of the Cinco Group, effected by the assembly in that
improperly called meeting is void, and since the Cinco Group has no legal
right to sit in the board, their subsequent acts of expelling Bernas from the
club and the selling of his shares at the public auction, are likewise invalid.
117. If it be true that the Corporate Secretary refused to call a meeting despite
fervent demand from the MSCOC, the remedy of the stockholders would
have been to file a petition to the SEC to direct him to call a meeting by giving
proper notice required under the Code. To rule otherwise would open the
floodgates to abuse where any stockholder, who consider himself aggrieved
by certain corporate actions, could call a special stockholders' meeting for the
purpose of removing the sitting officers in direct violation of the rules
pertaining to the call of meeting laid down in the by-laws.
118. Every corporation has the inherent power to adopt by-laws for its
internal government, and to regulate the conduct and prescribe the
rights and duties of its members towards itself and among themselves in
reference to the management of its affairs. The by-laws of a corporation
are its own private laws which substantially have the same effect as the
laws of the corporation.
119. In this sense they become part of the fundamental law of the corporation with
which the corporation and its directors and officers must comply. The general
rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed in its charter or by the
general law. Thus, directors must act as a body in a meeting called pursuant
to the law or the corporation’s by-laws, otherwise, any action take therein
may be questioned by the objecting director or shareholder.
120. Certainly, the rules set in the by-laws are mandatory for every member
of the corporation to respect. They are the fundamental law of the
corporation with which the corporation and its officers and members
must comply. It on this score that the Court cannot sustain the Bernas
Group’s stance that the subsequent annual stockholders’ meetings were
invalid. The said meetings were conducted in accordance with their by-laws
and the Corporation Code.
121. Considering that a new set of officers were already duly elected in 1998 and
1999 Annual Stockholders Meetings, the Bernas Group cannot be permitted
to use the holdover principle as a shield to perpetuate in office. Members of
the group had no right to continue as directors of the corporation unless
reelected by the stockholders in a meeting called for that purpose every year.
They had no right to hold-over brought about by the failure to perform the
duty incumbent upon them.
SEPARATE OPINION:
Perlas-Bernabe, concurring
1. Following the doctrine that specific provisions must prevail over general
ones, the procedure, as prescribed in Section 28 of the Corporation Code,
should have therefore governed the conduct of the Special Stockholders’
Meeting which was particularly intended for the removal of the Bernas Group
from the MSC's Board of Directors, viz.:
a. The special meeting must have been called by the secretary
b. The same should have been made upon the order of the president or
on written demand of the stockholders representing at least a
majority of the outstanding capital stock
c. In case the secretary failed or refused to give such notice, or if there
was no secretary, the call may have been be made directly by any
stockholder signing the demand.
2. In these cases, the procedure outlined in Section 28 of the Corporation Code
was not complied with.
3. I differ in that the removal of the Bernas Group and election of the Cinco
Group — which are mere incidents resulting from the void Special
Stockholders’ Meeting — could not have been ratified, notwithstanding the
fact that the latter April 19, 1999 Meeting was held under the supervision of
the SEC. The SEC, being a mere regulatory body, cannot lend validity to
otherwise invalid acts. Further, the presumption of regularity cannot apply
for the purpose of validating an internal action of a private corporation.

003 PENA v. CA (Rosales)
Feruary 7, 1991 | Gancayco, J. | By-laws
PETITIONER: Rosita Pena (CLV lawyer niya lol)
RESPONDENTS: Court of Appeals, Spouses Rising T. Yap and Catalina Yap,
Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez, and Edgardo A. Zabat
SUMMARY: In 1962, the Pampanga Bus Company (PAMBUSCO) took out a
loan from the Development Bank of the Philippines (DBP). PAMBUSCO used
the parcels of land it owns to secure the loan. In October 1974, due to
PAMBUSCO’s nonpayment, DBP foreclosed the parcels of land. Rosita Peña was
the highest bidder. Meanwhile, in November 1974, the Board of Directors of
PAMBUSCO had a meeting. The meeting was attended by only 3 out of the 5
Directors. In the said meeting, the Board, through a resolution, authorized one of
the directors, Atty. Joaquin Briones, to assign the properties of PAMBUSCO.
Pursuant to the resolution, Briones assigned PAMBUSCO’s assets to Marcelino
Enriquez. Enriquez, knowing that the properties were previously mortgaged and
foreclosed, exercised PAMBUSCO’s right to redeem. So in August 1975, he
redeemed the said properties and thereafter he sold them to Rising Yap. Yap then
registered the properties under his name. He then demanded Peña to vacate the
properties. Peña refused to do hence Yap filed a complaint. In her defense, Peña
averred that Yap acquired no legal title over the property because the board
resolution issued by PAMBUSCO in November 1974 is void; that it is void
because the resolution was issued without a quorum; that there was no quorum
because under the by-laws of PAMBUSCO, a quorum constitutes the presence of
4 out of 5 directors yet the meeting was only attended by three directors. As such,
the authority granted to Briones to assign the properties is void; that the
subsequent assignment by Briones to Enriquez is void; that Enriquez acquired no
title hence, likewise, Yap acquired no title. Yap insists that Peña has no legal
standing to question the board resolution because she is not a stockholder. ISSUE:
Whether or not the board resolution is valid. SC held that no because it is void.
The by-laws are the laws of the corporation. PAMBUSCO’s by-laws provides that
a quorum consists of at least four directors. Hence, the meeting attended by only
three directors did not comply with the required quorum. As such, the three
directors were not able to come up with a valid resolution which could bind the
corporation. Also, the sale of the properties of PAMBUSCO did not comply with
the procedure laid down by the Corporation Law. Under the law, the sale or
disposition of an and/or substantially all properties of the corporation requires, in
addition to a proper board resolution, the affirmative votes of the stockholders
holding at least two-thirds (2/3) of the voting power in the corporation in a meeting
duly called for that purpose. No doubt, the questioned resolution was not
confirmed at a subsequent stockholders meeting duly called for the purpose by the
affirmative votes of the stockholders holding at least two-thirds (2/3) of the voting
power in the corporation.
DOCTRINE: The by-laws of a corporation are its own private laws which
substantially have the same effect as the laws of the corporation. They are in
effect, written, into the charter. In this sense they become part of the
fundamental law of the corporation with which the corporation and its directors
and officers must comply.
By-law provisions on the required quorum for special meetings of the Board have
the force of law and are binding even on third-parties who deal with the properties
of the corporation. (syllabus)
FACTS:
1. Pampanga Bus Co (PAMBUSCO), original owners of the lots in question
under TCT Nos. 4314, 4315 and 4316 (Lots A, B, C), mortgaged the same to
the Development Bank of the Philippines in consideration of the amount of
P935,000. This mortgage was foreclosed. In the foreclosure sale under Act
No. 3135, the said properties were awarded to Rosita Peña as highest bidder.
A certificate of sale was issued in her favor by the Senior Deputy Sheriff of
Pampanga, Edgardo A. Zabat, upon payment of the sum of P128,000 to the
Office of the Provincial Sheriff. The certificate of sale was registered.
2. The board of directors of PAMBUSCO, through 3 out of its 5 directors,
resolved to assign its right of redemption over the aforesaid lots and
authorized one of its members, Atty. Joaquin Briones to execute and sign a
Deed of Assignment for and in behalf of PAMBUSCO in favor of any
interested party.
3. Briones executed a Deed of Assignment of PAMBUSCO's redemption right
over the subject lots in favor of Marcelino Enriquez. Marcelino Enriquez then
redeemed the said properties and a certificate of redemption was issued in his
favor by Sheriff Zabat upon payment of the sum of P140,474 to the Office of
the Provincial Sheriff of Pampanga.
4. A day after the aforesaid certificate was issued, Enriquez executed a deed of
absolute sale of the subject properties in favor of spouses Rising T. Yap and
Catalina Lugue, for the sum of P140,000.
5. A levy on attachment in favor of Capitol Allied Trading was entered as an
additional encumbrance on Lots A, B, C and a Notice of a pending consulta
was also annotated on the same titles concerning the Allied Trading case
entitled Dante Gutierrez, et al. vs. PAMBUSCO in which the registrability of
the aforesaid lots in the name of the spouses Yap was sought to be resolved.
6. The certificate of sale issued by the Sheriff in favor of Peña, the resolution of
the PAMBUSCO's board of directors assigning its redemption rights to any
interested party, the deed of assignment PAMBUSCO executed in favor of
Marcelino B. Enriquez, the certificate of redemption issued by the Sheriff in
favor of Enriquez as well as the deed of absolute sale of the subject lots
executed by Enriquez in favor of the Spouses Yap were all annotated on the
same certificates of title, Also, the Office of the Provincial Sheriff of San
 Fernando, Pampanga informed Spouses Yap by registered mail that the
properties under Lots A, B, C were all redeemed by Mr. Marcelino B.
Enriquez and that she may now get her money at the Sheriff’s Office.
7. Peña wrote the Sheriff notifying him that the redemption was not valid as it
was made under a void deed of assignment. She then requested the recall of
the said redemption and a restraint on any registration or transaction
regarding the lots in question.
8. The CFI Branch III, Pampanga in the Civil Case No. 4310, entitled Dante
Gutierrez, et al. vs. PAMBUSCO, et al., ordered the Register of Deeds of
Pampanga to desist from registering or noting in his registry of property.
9. The Land Registration Commission opined under LRC Resolution No. 1029
that "the levy on attachment in favor of Capitol Allied Trading (represented
by Dante Gutierrez) should be carried over on the new title that would be
issued in the name of Rising Yap in the event that he is able to present the
owner's duplicates of the certificates of title herein involved.
10. Meanwhile, Pena, through counsel, wrote the Sheriff asking for the execution
of a deed of final sale in her favor on the ground that the one year period of
redemption has elapsed without any valid redemption having been exercised;
hence, she will now refuse to receive the redemption money.
11. Yap wrote Pena asking payment of back rentals in the amount of P42,750 for
the use and occupancy of the land and house located at Sta. Lucia, San
Fernando, Pampanga and informing her of an increase in monthly rental to
P2,000; otherwise, to vacate the premises or face an eviction.
12. In the meantime, the subject lots, formerly under Lots A, B, C, were
registered in the name of spouses Yap under TCT Nos. 148983-R, 148984-R
and 148985-R (Lots D, E, F), with an annotation of a levy on attachment in
favor of Capitol Allied Trading. The LRC Resolution No. 1029 allowing the
conditioned registration of the subject lots in the name of the spouses Yap
was also annotated and the notice of a pending consulta noted was cancelled.
13. Despite the foregoing, Pena remained in possession of the lots in question
hence, the spouses Yap were prompted to file the instant case below.
14. Spouses Rising T. Yap and Catalina Lugue are the registered owners of the
lots in question Lots D, E, and F. In the complaint filed, Spouses Yap sought
to recover possession over the subject lands from Rosita Pena and
Washington Distillery on the ground that being registered owners, they have
to enforce their right to possession against Pena and Washington Distillery
who have been allegedly in unlawful possession since October 1974 when
the previous owners assigned their right to collect rentals in favor of Spouses
Yap.
15. Rosita Peña and Washington Distillery denied the material allegations of the
complaint and asserted that Peña is now the legitimate owner of the subject
lands for having purchased the same in a foreclosure proceeding instituted by
the DBP against PAMBUSCO and no valid redemption having been effected
within the period provided by law.
a. It was contended that Spouses Yap could not have acquired
ownership over the subject properties under a deed of absolute sale
executed in their favor by one Marcelino B. Enriquez who likewise
could not have become owner of the properties in question by
redeeming the same under an allegedly void deed of assignment
executed in his favor by the original owners of the land in question,
the PAMBUSCO.
16. The defense was that since the deed of assignment executed by PAMBUSCO
in favor of Enriquez was void ab initio for being an ultra vires act of its board
of directors and, for being without any valuable consideration, it could not
have had any legal effect; hence, all the acts which flowed from it and all the
rights and obligations which derived from the aforesaid void deed are
likewise void and without any legal effect.
17. It was also alleged the Spouses Yap are buyers in bad faith because they have
caused the titles of the subject properties with the Register of Deeds to be
issued in their names despite an order from the then CFI, Br. III, Pampanga
in Civil Case No. 4310, entitled Dante Gutierrez, et al. vs. Pampanga Bus
Company, Inc., et al., to desist from registering or noting in his registry of
property any of the documents under contest. Washington Distillery stated
that it has never occupied the subject lots hence they should not have been
impleaded in the complaint.
18. The RTC ruled in favor of Pena and Washington Distillery. The CA then
reversed its decision.
ISSUE/s:
1. WoN CA erred in holding that trial court had no jurisdiction to rule on the
validity of the questioned resolution and transfer – YES, because Pena’s
rights are adversely affected.
2. WoN CA erred in holding that the resolution of PAMBUSCO, adopted on
November 19, 1974, assigning its right of redemption is not void – YES,
because it did not comply with the requirements stated by law.
RULING: WHEREFORE, the petition is GRANTED. The questioned decision of the
respondent Court of Appeals dated June 20, 1989 and its resolution dated December
27, 1989 are hereby REVERSED AND SET ASIDE and another judgment is hereby
rendered AFFIRMING in toto the decision of the trial court.
RATIO:
1. Issue 1: It is the fact of relationship between the parties that determines the
proper and exclusive jurisdiction of the SEC to hear and decide intra-
corporate disputes; that unless the controversy has arisen between and among
stockholders of the corporation, or between the stockholders and the officers
of the corporation, then the case is not within the jurisdiction of the SEC.
Where the issue involves a party who is neither a stockholder or officer of the
corporation, the same is not within the jurisdiction of the SEC.
2. This court defined the relationships which are covered within “intra-
corporate disputes” under PD 902-A as follows:
 a. In order that the SEC can take cognizance of a case, the controversy
must pertain to any of the following relationships (a) between the
corporation, partnership or association and the public; (b) between
the corporation, partnership or association and its stockholders,
partners, members, or officers; (c) between the corporation,
partnership or association and the state in so far as its franchise,
permit or license to operate is concerned; and (d) among the
stockholders, partners or associates themselves.
3. In this case, neither of the parties are stockholders or officers of
PAMBUSCO. Consequently, the issue of validity of the series of transactions
resulting in the subject properties being registered in the names of Spouses
Yap may be resolved only by the regular courts.
4. This Court has held that a person who is not a party obliged principally or
subsidiarily in a contract may exercise an action for nullity of the contract if
he is prejudiced in his rights with respect to one of the contracting parties and
can show the detriment which would positively result to him from the
contract in which he had no intervention.
5. There can be no question in this case that the questioned resolution and series
of transactions resulting in the registration of the properties in the name of
Spouses Yap adversely affected the rights of petitioner to the said properties.
6. Issue 2: As to the question of validity of the board resolution of Spouses Yap,
PAMBUSCO adopted on November 19, 1974, Section 4, Article III of the
amended by-laws of PAMBUSCO, provides as follows:
a. Sec. 4. Notices of regular and special meetings of the Board of
Directors shall be mailed to each Director not less than five days
before any such meeting, and notices of special meeting shall state
the purpose or purposes thereof Notices of regular meetings shall be
sent by the Secretary and notices of special meetings by the
President or Directors issuing the call. No failure or irregularity of
notice of meeting shall invalidate any regular meeting or proceeding
thereat; Provided a quorum of the Board is present, nor of any
special meeting; Provided at least four Directors are present.
7. The by-laws of a corporation are its own private laws which substantially
have the same effect as the laws of the corporation. They are in effect,
written, into the charter. In this sense they become part of the
fundamental law of the corporation with which the corporation and its
directors and officers must comply.
8. Apparently, only three out of five members of the board of directors of
PAMBUSCO convened on November 19, 1974 by virtue of a prior notice of
a special meeting. There was no quorum to validly transact business since,
under Section 4 of the amended by-laws hereinabove reproduced, at least
four members must be present to constitute a quorum in a special
meeting of the board of directors of respondent PAMBUSCO.
9. Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the
majority of the number of board members to constitute the quorum necessary
for the valid transaction of business. Any number less than the number
provided in the articles or by-laws therein cannot constitute a quorum and
any act therein would not bind the corporation; all that the attending directors
could do is to adjourn.
10. The records also show that PAMBUSCO ceased to operate as of November
15, 1949 as evidenced by a letter of the SEC to said corporation dated April
17, 1980. Being a dormant corporation for several years, it was highly
irregular, if not anomalous, for a group of three individuals representing
themselves to be the directors of PAMBUSCO to pass a resolution disposing
of the only remaining asset of the corporation in favor of a former corporate
officer.
11. As a matter of fact, the three alleged directors who attended the special
meeting on November 19, 1974 were not listed as directors of PAMBUSCO
in the latest general information sheet of PAMBUSCO filed with the SEC
dated 18 March 1951. Similarly, the latest list of stockholders of respondent
PAMBUSCO on file with the SEC does not show that the said alleged
directors were among the stockholders of PAMBUSCO.
12. Under Section 30 of the then applicable Corporation Law, only persons who
own at least one share in their own right may qualify to be directors of a
corporation. Also, under Section 28 of the said law, the sale or disposition of
an and/or substantially all properties of the corporation requires, in addition
to a proper board resolution, the affirmative votes of the stockholders holding
at least two-thirds (2/3) of the voting power in the corporation in a meeting
duly called for that purpose.
13. The questioned resolution was not confirmed at a subsequent stockholders
meeting duly called for the purpose by the affirmative votes of the
stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. The same requirement is found in Section 40 of the present
Corporation Code.
14. At the time of the passage of the questioned resolution, PAMBUSCO was
insolvent and its only remaining asset was its right of redemption over the
subject properties. Since the disposition of said redemption right of
PAMBUSCO by virtue of the questioned resolution was not approved by the
required number of stockholders under the law, the said resolution, as well as
the subsequent assignment executed on March 8, 1975 assigning to Enriquez
the said right of redemption, should be struck down as null and void.
15. The CA, in upholding the questioned deed of assignment, which appears to
be without any consideration at all, held that the consideration thereof is the
liberality of the PAMBUSCO in favor of its former corporate officer,
Enriquez, for services rendered. Assuming this to be so, then as correctly
argued by Pena, it is not just an ordinary deed of assignment, but is in fact a
donation.
16. Under Article 725 of the Civil Code, in order to be valid, such a donation
must be made in a public document and the acceptance must be made in the
same or in a separate instrument. In the latter case, the donor shall be notified
 of the acceptance in an authentic form and such step must be noted in both
instruments.
17. Non-compliance with this requirement renders the donation null and void.
Since undeniably the deed of assignment dated March 8, 1975 in question,
shows that there was no acceptance of the donation in the same and in a
separate document, the said deed of assignment is thus void ab initio and of
no force and effect.
 004 China Banking Corporation v. CA (Cristelle)
March 26, 1997 | Kapunan, J. |By-Laws not binding on 3rd parties
PETITIONER: CHINA BANKING CORPORATION
RESPONDENTS: COURT OF APPEALS, and VALLEY GOLF and
COUNTRY CLUB, INC.
SUMMARY: Calapatia, a stockholder of private respondent Valley
Golf & Country Club, Inc. (VGCCI), pledged his Stock Certificate No.
1219 to petitioner China Banking Corporation (CBC). CBC wrote
VGCCI requesting that the aforementioned pledge agreement be
recorded in its books. VGCCI replied that the deed of pledge executed
by Calapatia in petitioner's favor was duly noted in its corporate books.
Afterwards, Calapatia obtained a loan of P20,000.00 from China Bank,
payment of which was secured by the aforestated pledge agreement.
Due to Calapatia's failure to pay his obligation, petitioner China bank,
filed a petition for extrajudicial foreclosure and moved to conduct a
public auction sale of the pledged stock. China bank informed VGCCI
of the above-mentioned foreclosure proceedings and requested that the
pledged stock be transferred to CBC’s name and the same be recorded
in the corporate books. However, VGCCI wrote petitioner expressing
its inability to accede to petitioner's request in view of Calapatia's
unsettled accounts with the club. Petitioner emerged as highest bidder
at the public auction and was issued the corresponding certificate of
sale. VGCCI demanded from Calapatia full payment of his overdue
account but the latter failed to pay. VGCCI then sold Calapatia’s share
as payment. Petitioner protested the sale by VGCCI of the subject share
of stock.
Issue: Whether or not the by-laws are controlling over the pledge?
NO. 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. Herein, at the time the pledge agreement was executed. VGCCI
could have easily informed CBC of its by-laws when it sent notice
formally recognizing CBC as pledgee of one of its shares registered in
Calapatia's name. CBC's belated notice of said by-laws at the time of
foreclosure will not suffice. 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. 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. 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. For the exception to the general accepted rule that third
persons are not bound by by-laws to be applicable and binding upon the
pledgee, knowledge of the provisions of the VGCCI 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.
Article 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. Further, VGCCI's contention that CBC is duty-
bound to know its by-laws because of Article 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. CBC
was never informed of Calapatia's unpaid accounts and the restrictive
provisions in VGCCI's by-laws. Furthermore, Section 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." Herein, the subscription for the share in question has been
fully paid as evidenced by the issuance of Membership Certificate
1219. What Calapatia owed the corporation were merely the monthly
dues. Hence, Section 63 does not apply.
DOCTRINE: The nature of by-laws being intramural instruments
would mean that they are not binding on third-parties, except those
who have actual knowledge of their contents [at the time the transaction
between the third party & the shareholders was entered into].
FACTS:
1. 21 August 1974 - Calapatia, a stockholder of private respondent
Valley Golf & Country Club, Inc. (VGCCI), pledged his Stock
Certificate No. 1219 to petitioner China Banking Corporation
(CBC).
2. Petitioner CBC wrote VGCCI requesting that the aforementioned
pledge agreement be recorded in its books.
3. VGCCI replied that the deed of pledge executed by Calapatia in
CBC’s favor was duly noted in its corporate books.
4. Calapatia obtained a loan of P20,000.00 from CBC, payment of which
was secured by the aforestated pledge agreement still existing between
Calapatia and CBC.
5. Due to Calapatia's failure to pay his obligation, CBC 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.
6. CBC informed VGCCI of the above-mentioned foreclosure
proceedings and requested that the pledged stock be transferred to
(CBC's) name and the same be recorded in the corporate books.
7. However, VGCCI wrote petitioner expressing its inability to accede
to CBC's request in view of Calapatia's unsettled accounts with the
club.
8. Despite this, Notary Public de Vera held a public auction on 17
September 1985 and CBC emerged as the highest bidder at P20,000.00
for the pledged stock and was issued the corresponding certificate of
sale.
9. 21 November 1985 - VGCCI sent Calapatia a notice demanding full
payment of his overdue account in the amount of P18,783.24. It was
followed by a demand letter dated 12 December 1985 for the same
amount and another notice dated 22 November 1986 for P23,483.24.
10. 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.
11. Through a letter dated 15 December 1986, VGCCI informed Calapatia
of the termination of his membership due to the sale of his share of
stock in the 10 December 1986 auction.
12. 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.
13. VGCCI replied that "for reason of delinquency" Calapatia's stock was
sold at the public auction held on 10 December 1986 for P25,000.00.
14. Petitioner CBC protested the sale by VGCCI of the subject share of
stock and thereafter filed a case with the Regional Trial Court of
Makati for the nullification of the 10 December 1986 auction and for
the issuance of a new stock certificate in its name.
15. RTC of Makati dismissed the complaint for lack of jurisdiction over
the subject matter on the theory that it involves an intra-corporate
dispute and denied petitioner's motion for reconsideration.
16. CBC filed a complaint with SEC for the nullification of the sale of
Calapatia's stock by VGCCI; the cancellation of any new stock
certificate issued pursuant thereto; for the issuance of a new certificate
in petitioner's name; and for damages, attorney's fees and costs of
litigation.
17. Case was dismissed by SEC Hearing Officer Manuel P. Perea and
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.
18. Hearing Officer Perea denied petitioner's motion for reconsideration.
19. Petitioner CBC appealed to SEC en banc and the Commission issued
an order reversing the decision of its hearing officer.
20. VGCCI sought reconsideration of the abovecited order. However, the
SEC denied the same in its resolution dated 7 December 1993.
21. VGCCI seek redress from the CA. CA 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.
22. CA declared that the controversy between CBC and VGCCI is not
intra-corporate. It ruled as follows: 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.
23. Petitioner CBC moved for reconsideration but the same was denied by
the CA in its resolution dated 5 October 1994. Hence, this petition.
ISSUES:
1. W/N regular courts or SEC has jurisdiction over the controversy? Yes,
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.
2. W/N petitioner is a stockholder of VGCCI? Yes, CBC is a stockholder
of VGCCI through 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.
3. W/N the BY-LAWS are controlling over the pledge? No, due to
the belated notice given by Valley golf to China bank.
RULING: 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.
RATIO:
Issue 1: SEC has jurisdiction over the case:
1. SECTION 3. The Commission shall have absolute jurisdiction,
supervision and control over all corporations, partnerships or
associations, who are the grantees of primary franchises and/or a
license or permit issued by the government to operate in the
Philippines, and in the exercise of its authority, it shall have the power
to enlist the aid and support of and to deputize any and all enforcement
agencies of the government, civil or military as well as any private
institution, corporation, firm, association or person.
2. In the same proceedings before the RTC of Makati, VGCCI
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.
3. 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.
Issue 2: CBC is a stockholder of VGCCI
1. 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.
2. VGCCI did not assail the transfer directly and has in fact, in its letter
of 27 September 1974, expressly recognized the pledge agreement
executed by the original owner, Calapatia, in favor of petitioner and
has even noted said agreement in its corporate books. In addition,
Calapatia, the original owner of the subject share, has not contested
the said transfer.
3. By virtue of the afore-mentioned sale, petitioner CBC 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.
Issue 3: BY-LAWS are controlling over the pledge (IMPORTANT)
1. VGCCI's contention is unmeritorious: that the pledge was null and void for
lack of consideration because it was entered into on Aug. 21, 1974 but the loan or
promissory note which it secured was obtained by Calapatia much later or only on 3
August 1983. The pledge agreement reveals 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.
2. The validity of the pledge agreement between petitioner and Calapatia cannot thus
be held suspect by VGCCI. As candidly explained by petitioner CBC, 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.
3. VGCCI insist that Calapatia's failure to settle his delinquent accounts, gave VGCCI
the right to sell the share in question in accordance with the express provision found
in its by-laws. VGCCI insistence comes to naught, 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.
4. CBC 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.
5. The general rule is that the by-laws are an intramural document which cannot affect
third parties, as the by-laws only affect intra-corporate affairs. The exception, which
allows the bylaws to have an effect on third persons, is when said third persons have
been given notice. Valley Golf claimed that China Bank actually fell in the exception,
since China Bank had actually quoted a portion of the by-law provision in a letter it
sent to Valley Golf at the time the shares were to be foreclosed. The Court, however,
stated that Valley Golf MISUNDERSTOOD the application of that rule, which had
been derived from previous jurisprudence.
6. 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.
7. 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
CBC’s belated notice of said by-laws at the time of foreclosure will not suffice.
8. The ruling of the SEC en banc: 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. 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. 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.
10. Appellant-petitioner China bank as a third party cannot be bound by
appellee-respondent's (VGCCI) 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 (Calaptia) became delinquent only
in 1975. Thus, appellant-petitioner was in good faith when the pledge agreement
was contracted.
11. Similarly, VGCCI's contention that petitioner CBC 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.
12. Sec. 63 of the Corporation Code which provides that "no shares of stock
against which the corporation holds any unpaid claim shall be transferable in the
books of the corporation" cannot be utilized by VGCCI. The term "unpaid claim"
refers to "any unpaid claim arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may owe the corporation arising from
any other transaction." In the case at bar, the subscription for the share in question has
been fully paid as evidenced by the issuance of Membership Certificate No. 1219.
What Calapatia owed the corporation were merely the monthly dues. Hence, the
aforequoted provision does not apply.
 SECTION VIII
001 De la Rama v. Ma-ao Sugar Central Co. (Punsalan)
Feb. 28, 1969 | Capistrano, J. | Invest Corp Funds for Non-Primary Purpose
Endeavor
PETITIONER: RAMON DE LA RAMA, FRANCISCO RODRIGUEZ,
HORTENCIA SALAS, PAZ SALAS and PATRIA SALAS (heirs of Magdalena
Salas) who represent the stockholders
RESPONDENTS: MA-AO SUGAR CENTRAL CO., INC., J. AMADO
ARANETA, MRS. RAMON S. ARANETA, ROMUALDO M. ARANETA, and
RAMON A. YULO
SUMMARY: A suit was filed by the stockholders of the Ma-ao Sugar Central
Co., Inc. against the corp. itself for allegedly investing in other companies not
related to the sugar central business. In addition, such investments were made
without the approval of the stockholders who are entitled to vote (initially wala
rin approval ng board of directors pero late sila nagsubmit ng resolution to approve
it, when payments were already made but still without the approval of its
stockholders). It is argued that such act is contrary to Sec. 17 ½ of the Corporation
Law in that investing funds of a corporation cannot be done unless with the
approval of the board of directors and its stockholders who are entitled to vote.
Ma-ao argues Sec. 13 of the Corp. Law to justify that the investments they made,
although not directly connected to the main purpose, were still pursuant to the
purpose of the corporation – sugar central business.
Issue: WoN the board of directors were correct in investing corporate funds in
various corporations that do not have a direct connection with its main purpose,
and done so without the authority of the stockholders of the corp – YES
The SC agreed with the trial court that the corporations which Ma-ao Sugar
invested on were necessary to accomplish its purpose stated in the articles of
incorporation (Ex. Philippine Fiber: they manufacture sugar bags which is still
within the context of the sugar business). Such investments still fall within the
corporation’s primary purpose which means ratification by the stockholders are
not necessary in order for a corporation to exercise this action.
DOCTRINE: A private corporation has the power to invest its corporate funds in
any other corporation or business, or for any purpose other than the main purpose
for which it was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding shares
in the corporation entitling them to exercise at least two-thirds of the voting power
on such a proposal at a stockholders' meeting called for that purpose,' and provided
further, that no agricultural or mining corporation shall in anywise be interested
in any other agricultural or mining corporation. When the investment is necessary
to accomplish its purpose or purposes as stated in it articles of incorporation, the
approval of the stockholders is not necessary.
FACTS:
158. This was a representative or derivative suit commenced in the CFI Manila by
4 minority stockholders against the Ma-ao Sugar Central Co., Inc. (Ma-ao)
and J. Amado Araneta and 3 other directors of the corporation.
159. The complaint stated five causes of action
a. For alleged illegal and ultra-vires acts consisting of self-dealing
irregular loans, and unauthorized investments
b. for alleged gross mismanagement
c. for alleged forfeiture of corporate rights warranting dissolution
d. for alleged damages and attorney's fees; and
e. for receivership
160. (Medyo magulo yung facts ng origs but here’s how I understood it)
a. Apparently stockholders’ meetings in Ma-ao Sugar weren’t
conducted regularly in the corp.
b. There were irregularities in the keeping of the books. Untrue entries
were made in the book which could not be considered as innocent
errors
c. There were illegal investments made in different companies
(Mabuhay Printing and Acoje Mining) which were not pursuant to
the corporate purpose of Ma-ao and without the requisite
authority of its stockholders.
d. There are also other corp funds distributed to other affiliated
companies (J. Amado Araneta & Co., Luzon Industrial Corp,
Associated Sugar, etc.) without the approval of the Ma-ao Board
of Directors, in violation of Sec III, Art. 6-A of the by-laws.
e. It is argued that investing funds in the Philippine Fiber
Processing Co., Inc. was not a violation of Sec 17 ½ of the
Corporation Law since defendants admit having invested P655k in
shares of stock but that this was ratified by the Board of Directors in
2 resolutions; more than that, the company (Philippine Fiber) was
engaged in the manufacture of sugar bags so it was perfectly
legitimate for Ma-ao Sugar to invest in said corporation. (The trial
court agreed with this)
161. The CFI rendered its decision (later supplemented by an Order resolving
defendants’ MR) dismissing the petition for dissolution but condemns J.
Amado Araneta to pay Ma-ao Sugar Central Co., Inc. P46,270.00 with 8%
interest from the date of the filing of this complaint, plus the costs
a. (IMPT; i.r. to Fact#3(e)) the lower court is convinced that that law
should be understood to mean that it is prohibited to the
Corporation to invest in shares of another corporation unless such
an investment is authorized by two-thirds of the voting power of
the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing
corporation because surely there is more logic in the stand that if the
investment is made in a corporation whose business is important to
 the investing corporation and would aid it in its purpose, to require
authority of the stockholders would be to unduly curtail the Power
of the Board of Directors; the only trouble here is that the
investment was made without any previous authority of the
Board of Directors but was only ratified afterwards; this of
course would have the effect of legalizing the unauthorized act
but it is an indication of the manner in which corporate business is
transacted by the Ma-ao Sugar administration, the fact that off and
on, there would be passed by the Board of Directors, resolutions
ratifying all acts previously done by the management
b. It also reiterates the preliminary injunction restraining the Ma-ao
Sugar Central Co., Inc. management to give any loans or advances
to its officers and orders that this injunction be as it is hereby made,
permanent;
c. Contention that Ma-ao Sugar is on the verge of bankruptcy has not
been clearly shown
d. (ALSO RELATED TO THE TOPIC) orders it to refrain from
making investments in Acoje Mining, Mabuhay Printing, and any
other company whose purpose is not connected with the Sugar
Central business; costs of plaintiffs to be borne by the Corporation
and J. Amado Araneta.
162. Both parties appealed directly to the SC.
ISSUE/s:
20. WoN the board of directors of Ma-ao Sugar Central Co, Inc. were correct in
investing corporate funds in various corporations that do not have a direct
connection with its main purpose, and done so without the authority of the
stockholders of the corp – YES, because the resolution of conflicting
provisions (Sec 17 ½ and Sec 13) point out that investing in corporations not
directly related to the purpose yet still pursuant to it can be done without need
for the ratification by the stockholders.
RULING: Part of the judgment which orders the Ma-ao Sugar Central Co., Inc. “to
refrain from making investments in Acoje Mining, Mabuhay Printing, and any other:
company whose purpose is not connectd with the sugar central business,” is reversed.
Other parts of the judgment are affirmed.
RATIO:
122. Sec. 17-1/2 of the Corporation Law provides that:
a. No corporation organized under this act shall invest its funds in
any other corporation or business or for any purpose other than
the main purpose for which it was organized unless its board of
directors has been so authorized in a resolution by the
affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power
on such proposal at the stockholders' meeting called for the purpose.
123. It was contended by De la Rama, et al. that the investment of corporate funds
by the Ma-ao Sugar Co., Inc., in Philippine Fiber constitutes a violation of
Sec. 17-½ of the Corporation Law and the Court mentions it deserves
consideration
a. Ma-ao Sugar, through its President Araneta, subscribed for P300k
worth of capital stock of the Philippine Fiber, that such payments on
the subscription were made on from 1950-1952; that at the time the
first two payments were made there was no board resolution
authorizing the investment; and that it was only on November 26,
1951, that the President of Ma-ao Sugar Central Co., Inc., was
so authorized by the Board of Directors.
b. In addition, 355k shares of stock of the same Philippine Fiber,
which are owned by Luzon Industrial, were transferred in 1952,
to Ma-ao Sugar which "investment" was made without prior
board resolution, the authorizing resolution having been
subsequentIy approved only later on during 1952
124. On the other hand, Ma-ao Sugar, Araneta, etc. invoked Sec. 13, par. 10 of the
Corp. Law which states that “Every corporation has the power
a. To enter into any obligation or contract essential to the proper
administration of its corporate affairs or necessary for the proper
transaction of the business or accomplishment of the purpose for
which the corporation was organized
b. Except as in this section otherwise provided, and in order to
accomplish its purpose as stated in the articles of incorporation, to
acquire, hold, mortgage, pledge or dispose of shares, bonds,
securities and other evidences of indebtedness of any domestic or
foreign corporation.”
125. The Court cited the commentary of Prof. Sulpicio Guevara of the UP College
of Law, who is a well known authority in commercial law, and who also
reconciled these conflicting legal provisions (Sec 13 and Sec 17 ½)
a. Power to acquire or dispose of shares or securities. — A private
corporation, in order to accomplish its purpose as stated in its
articles of incorporation, and subject to the limitations imposed by
the Corporation Law, has the power to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities, and other evidences
of indebtedness of any domestic or foreign corporation. Such an act,
if done in pursuance of the corporate purpose, does not need the
approval of the stockholders; but when the purchase of shares of
another corporation is done solely for investment and not to
accomplish the purpose of its incorporation, the vote of approval
of the stockholders is necessary. In any case, the purchase of such
shares or securities must be subject to the limitations established by
the Corporation Law; namely, (a) that no agricultural or mining
corporation shall in anywise be interested in any other agricultural
 or mining corporation; or (b) that a non-agricultural or non-mining
corporation shall be restricted to own not more than 15% of the
voting stock of any agricultural or mining corporation; and (c) that
such holdings shall be solely for investment and not for the purpose
of bringing about a monopoly in any line of commerce or
combination in restraint of trade.
b. Power to invest corporate funds. — A private corporation has the
power to invest its corporate funds in any other corporation or
business, or for any purpose other than the main purpose for which
it was organized, provided that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders
holding shares in the corporation entitling them to exercise at least
two-thirds of the voting power on such a proposal at a stockholders'
meeting called for that purpose,' and provided further, that no
agricultural or mining corporation shall in anywise be interested in
any other agricultural or mining corporation. When the investment is
necessary to accomplish its purpose or purposes as stated in it
articles of incorporation, the approval of the stockholders is not
necessary.
126. Thus, the SC agrees with the trial court that the investment does not fall under
the purview of Sec. 17 ½ of the Corp. Law.
127. However, the judgment of the lower court ordering Ma-ao Sugar to refrain
from making investments in Acoje Mining, Mabuhay Printing, etc. whose
purpose is not connected with the sugar central business should be reversed
because Sec. 17 ½ allows a corporation to invest its fund in any other
corporation or business, or for any purpose other than the main purpose for
which it was organized, provided that its Board has been so authorized by the
affirmative vote of the stockholders holding shares entitling them to at least
two-thirds of the voting power.
 002 TUASON v. BOLAÑOS (Pleyto)
May 28, 1954 | Reyes, J. | Specific Topic in Syllabus
PLAINTIFF-APPELLEE: J.M. Tuason & Co., Inc., represented by its Managing
Partner, Gregorio Araneta, Inc.
DEFENDANT-APPELLANT: Quirino Bolaños
SUMMARY: Plaintiff (J.M. Tuason & Co., Inc., represented by its Managing
Partner, Gregorio Araneta, Inc.) filed a complaint in the CFI of Rizal to recover
possession of a registered land situated in Barrio Tatalon, QC. The complaint was
amended thrice. In his Answer, Bolaños sets up two things: (a) prescription and
(b) OCEPN possession adverse to the whole world since time immemorial. He
also alleged that registration of the land was obtained by plaintiff or its
predecessors in interest thru “fraud or error and without knowledge (of) or notice
either personal or thru publication to defendant and/or predecessors in interest.”
Lower Court ruled in favor of the plaintiff and ordered Bolaños to restore the
possession back to the plaintiff. The issue here is whether or not the case should
be dismissed on the ground that the not brought by a real party in interest. No.
Corporations cannot enter into a partnership agreement but corporations can enter
a JV.
DOCTRINE: A corporation may validly enter into a joint venture agreement,
where the nature of that venture is in line with the business authorized by its
charter.
FROM JV LAST SEM (since mahilig siya magbring up ng past lesson): CLV’s
interpretation: Tuason does not elaborate on why a corporation may become a co-
venturer or partner in a joint venture arrangement but it would seem that the policy
behind the prohibition on why a corporation cannot be made a partner does not
apply in a joint venture arrangement. Being only a particular project or
undertaking, when the Board of Directors of a corporation evaluate the risks and
responsibilities involved, they can more or less exercise their own business
judgment is determining the extent by which the corporation would be involved
in the project and the likely liabilities to be incurred. The situation therefore in a
joint venture arrangement, unlike in an ordinarily partnership arrangement which
may expose the corporation to any and various liabilities and risks which cannot
be evaluated and anticipated by the board, allows the board to fully bind the
corporation to matters essentially within the boards business appreciation and
anticipation. (And last sem, this case was also in his book, Tuason is an old case
which says that corporations cannot enter into partnership agreements but it can
enter JVs. So, JV was not yet seen as a kind of partnership pa this time, I think)
-Correct me if I’m wrong
FACTS:
163. This is an action originally brought in the CFI of Rizal to recover possession
of registered land situated in barrio Tatalon, QC
164. Plaintiff (J.M. Tuason & Co., Inc., represented by its Managing Partner,
Gregorio Araneta, Inc.) here amended its complaint three times with respect
to the extent and description of the land sought to be recovered.
a. Original complaint: the land was described as a portion of a lot
registered in plaintiff’s name under a TCT recorded in Rizal
Province. It also contained an area of 13 hectares, more or less.
b. Amended: area is reduced to 6 hectares, more or less (after
defendant had indicated the plaintiff’s surveyors the portion of land
claimed and occupied by him)
c. Amendment #2: necessary and was allowed following the testimony
of plaintiff’s surveyors that a ortion of the area was embraced in
another certificate of title (different TCT)
d. Amendment #3: during the course of trial, after defendant’s
surveyor and witness, Quirino Feria, had testified that the area
occupied and claimed by defendant was about 13 hectares (so
plaintiff amended its complaint again to make its allegations
conform to the evidence)
165. In his Answer, Bolaños sets up (1) prescription and (1) title in himself thru
“open, continuous, exclusive and public and notorious possession (of the land
in dispute) under claim of ownership, adverse to the entire world by
defendant and his predecessors in interest” from time immemorial
a. It further alleged that registration of the land was obtained by
plaintiff or its predecessors in interest thru “fraud or error and
without knowledge (of) or notice either personal or thru publication
to defendant and/or predecessors in interest”
b. Prayer: complaint be dismissed with costs and plaintiff required to
reconvey the land to Bolaños or pay its value
166. Lower Court: ruled in favor of the plaintiff. Bolaños was ordered to restore
possession to plaintiff and to pay the latter a monthly rent of P132.62 from
Jan. 1940 until he vacates the land
167. Bolaños directly went to the SC because of the value of the property involved.
ISSUE/s: (okay, si Kuya Bolaños madaming dinala sa SC pero yung first lang
relevant)
21. WoN the trial court erred in not dismissing the case on the ground that
the case was not brought by the real party in interest (RELEVANT:
Actually more of: WoN Gregorio Araneta, Inc. could not enter into a
partnership with JM Tuason and Co, Inc., it being another corporation)
– No. Corporations cannot enter into a partnership agreement but
corporations can enter a JV (not the rule na)
22. WoN the trial court erred in admitting the third amended complaint
23. WoN the tiral court erred in denying defendant’s motion to strike
24. WoN the trial court erred in including in its decision land not involved in the
litigation – (For 2, 3 and 4: without merit because amendment is not even
necessary)
25. WoN the trial court erred in holding that the land in dispute is covered by the
TCTs
 26. WoN the trial court erred in not finding that Bolaños is the true and lawful
owner of the land (For 5 and 6: Plaintiff has a torrens title, which is
indefeasible)
27. WoN the trial court erred in finding that Bolaños is liable to pay rent
28. WoN the trial court erred in not ordering the Plantiff to reconvey the land in
litigation to the defendant
RULING: Judgment appealed from is affirmed.
RATIO:
WoN the trial court erred in not dismissing the case on the ground that the case was
not brought by the real party in interest
1. There is nothing to the contention that the present action is not brought by the
real party in interest, that is, by J.M. Tuason & Co., Inc.
2. Section 2, Rule 2 of the Rules of Court require is that an action be brought in
the name of, but not necessarily by, the real party in interest.
3. In fact, the practice is for an attorney-at-law to bring the action, that is to file
the complaint, in the name of the plaintiff, which is the case here.
4. The complaint was signed by the law firm of Araneta & Araneta, “counsel
for plaintiff” and commences with the statement “comes now plaintiff,
through its undersigned counsel”
5. The complaint also states that the plaintiff is “represented herein by its
Managing Partner Gregorio Araneta, Inc.”, another corporation
a. But there is nothing against one corporation being represented by
another person, natural or juridical, in a suit in court
6. Bolaños contented that Gregorio Araneta, Inc. cannot act as managing
partner for plaintiff on the theory that it is illegal for two corporations
to enter into a partnership is without merit,
a. for the true rule is that “though a corporation has no power to
enter into a partnership, it may nevertheless enter into a JV with
another where the nature of that venture is in line with the
business authorized by its charter”
7. It was not contented that Gregorio Araneta Inc., as a managing partner is not
in line with the corporate business of either of them
8. Section 4 of Rule 17, Rules of Court, answers Errors 2, 3 and 4:
9 ownership for the period fixed by law is ineffective against a Torrens
a. Under this provision, amendment is not even necessary for the
purpose of rendering judgment on issues proved though not alleged
b. Comment of C.J. Moran in his Rules of Court: American courts
have, under the New Federal Rules of Civil Procedure, ruled that
where facts entitle plaintiff other than asked for, no amendment to
the complaint is necessary, especially where defendant has himself
raised the point on which recovery is based, and that the appellate
court treat the pleadings as amended to conform to the evidence,
although the pleadings were not actually amended
9. For errors 5 and 6:
a. Bolaños admitted, through his attorney, at the early stage of the trial,
that the land in dispute "is that described or represented in Exhibit
A and in Exhibit B enclosed in red pencil with the name Quirino
Bolaños"
b. He later changed his lawyer and his theory and tried to prove that
the land in dispute was not covered by plaintiff's certificate of title.
c. The evidence, however, clearly establishes that plaintiff is the
registered owner of lot No. 4-B-3-C, situated in barrio Tatalon,
Quezon City, covered by a TCT of the land records of Rizal
province, and of lot No. 4-B-4, situated in the same barrio, covered
by another TCT, both lots having been originally registered on July
8, 1914 under original certificate of title No. 735.
d. The identity of the lots was established by the testimony of Antonio
Manahan and Magno Faustino, witnesses for plaintiff, and the
identity of the portion thereof claimed by Bolaños was established
by the testimony of his own witness, Quirico Feria.
e. The combined testimony of these three witnesses clearly shows that
the portion claimed by defendant is made up of a part of lot 4 B- 3-
C and major on portion of lot 4-B-4, and is well within the area
covered by the two TCTs
f. As the land in dispute is covered by plaintiff's TCT and was
registered in 1914, the decree of registration can no longer be
impugned on the ground of fraud, error or lack of notice to
defendant, as more than one year has already elapsed from the
issuance and entry of the decree.
g. Neither could it be collaterally attacked by any person claiming title
to, or interest in, the land prior to the registration proceedings.
h. Nor could title to that land in derogation of that of the registered
owner, be acquired by prescription or adverse possession.
i. Adverse, notorious and continuous possession under claim of
title.
j. And it is likewise settled that the right to secure possession under a
decree of registration does not prescribe.
10. Error 7:
a. The reasonable compensation for the use and occupation of the
premises, as stipulated at the hearing was P10/month for each

9 trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings
SEC. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by
to be amended and shall be so freely when the presentation of the merits of the action will be subserved
express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in
thereby and the objecting party fails to satisfy the court that the admission of such evidence would
the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the
prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to
evidence and to raise these issues may be made upon motion of any party at my time, even after judgment;
enable the objecting party to meet such evidence."
but failure so to amend does not affect the result of the trial of these issues. If evidence is objected to at the
 hectare and that the are was 13.2619 hectares
b. Thus, total rent should be P132.62/month
c. Also, based on the testimony of J.A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment
d. It cannot be supposed that he has been paying rents because he
claimed ownership since time immemorial
11. Error 8: only a consequence of the other errors alleged and needs for further
consideration
12. Bolaños filed a motion to dismiss alleging that there is a pending case before
the CFI of Rice between the same parties and for the same cause of action
a. But the other case is one for recovery of ownership, while the
present one is for recovery of possession
13. This is also not a class suit: action seeks relief for individual plaintiff and not
relief for and on behalf of others
 003 Pirovano v. De la Rama Steamship (PERRAL)
Dec, 29, 1954 | Bautista Angelo, J. | Ratification of Ultra vires acts
PETITIONER: Maria Carla Pirovano, et al.
RESPONDENTS: The De la Rama Steamship Co, et al.
SUMMARY:
Under the presidency of Enrico Pirovano, the defendant corporation flourished and
became a multi-million corporation until the execution of Enrico by the Japanese.
The plaintiffs here are the minor children of the late Enrico, represented by their
mother Estefania. The case is hinged on certain resolutions by the Board of
Directors and stockholders of defendant company giving to said minor children the
proceeds of the life insurance policies taken on the life of the late Enrico. The fist
resolution granted the plaintiffs the proceeds from insurance policies taken on
Enrico’s life, it was agreed by a majority of the stockholders that the children were
to be given 1000 shares each. However when the company discovered that it
donated more than it actually intended it adopted another resolution was adopted
renouncing in favor of the heirs of its rights as beneficiary with the condition that
the proceeds are to be retained by the company until it settles its debts with
National Development Corporation. A house in New York was even purchased by
Estefania, paid out of the proceeds of the donation. Later on, however the SEC
gave an opinion stating that the donation by the defendant was an ultra vires act as
it did not have the capacity to dispose of its assets by way of gift, hence they went
beyond the scope of their corporate powers. In line with such opinion, the
defendant company sought to revoke the donation. Issue in this case is: W/N
defendant corporation give by way of donation the proceeds of said insurance
policies to the minor children of the late Enrico Pirovano under the law or its
articles of corporation, or is that donation an ultra vires act? SC held Yes,
defendant may make such donation. An examination of their articles of
incorporation would reveal that the company is empowered to deal with money not
immediately required and aid any person in which the company may have a lawful
interest. These two powers are broad enough to include the act of donation to the
heirs of a former president. On the issue of the donation being ultra vires, it was
held by the court that it cannot be invalidated on that ground alone as the board of
directors and even the stockholders, even the National Development Corporation
have expressed their approval of the donation, as evidenced by the ratified
resolutions. Furthermore inasmuch as the stockholders in reality constitute the
corporation, it should , it would seem, be estopped to allege ultra vires, and it is
generally so held where there are no creditors, or the creditors are not injured
thereby, and where the rights of the state or the public are not involved, unless the
act is not only ultra vires but in addition illegal and void. of course, such consent
of all the stockholders cannot adversely affect creditors of the corporation nor
preclude a proper attack by the state because of such ultra vires act.
DOCTRINE: Acts done by the Board of Directors which are ultra vires cannot be
set-aside if the acts have been ratified by the stockholders.
FACTS: (sorry guys, super long ng facts ng case)
1. Defendant De la Rama Steamship is a corporation duly organized in
accordance with the law with an authorized capital of P500K, divided into
5K shares, with par value of P100 each. The stockholders were: Esteban de
la Rama (1,800K shares), Leonor de la Rama (100 shares), Estifania De la
Rama (100 shares, and Eliseo Hervas, Concepcion, Juanco, and Volaste ( 5
shares each).
2. Leonor and Estefania are daughters of Don Esteban De la Rama, while the
rest is his employees. Estefania was married to the late Enrico Pirovano
(Enrico) and to them 4 children were born who are the plaintiffs in this case.
3. Enrico became the president of the defendant company and under his
management the company grew and progressed until it became a multi-
million corporation by the time Enrico was executed by the Japanes during
the occupation.
4. The capital stock of the corporation consistently grew through the years.
Under Enrico’s management, the assets of the company grew and increased
from an original paid up capital of around P240K to P15,538,024 by Sept
30,1941.
5. Meantime, Don Esteban de la Rama, who practically owned and controlled
the stock of the defendant corporation, distributed his shareholding among
his 5 daughters (Leonor, Estefania, Lourdes, Lolita, Conchita) and his wife
(Natividad). With this the stockholding of the corporation stood as follows:
Esteban-889 shares; Leonor and Conchita- 3,376 shares each; Estefania,
Lourdes, Lolita- 3,368 shares; Natividad- 2,136 shares. Other stockholders
who were merely employees of Esteban got 40 shares each. While cartain
persons named Pedrosa and Lichauco only 1 share each because they merely
represented the National Development Cmpany (NDC) which was give
representation in the Board of the corporation because at that time the latter
had an outstanding bonded indebtedness (amounted to P7,500) to the NDC.
6. This bond held by NDC was redeemable within a period of 20 years from
March 1, 1940, bearing interes at the rate of 5% per annum. To secure this
bonded indebtedness, all the assets of the De la Rama Steamship and
properties of Don Esteban, as well as those of the Hijos de I. de la Rama &
Co., a sister corporation owned by Don Esteban and his family, mortgaged to
the NDC. During the management of Pirovan this indebtedness was reduced
to P3,260,855.
7. Upon arrangement made with the NDC, the outstanding bonded indebtedness
was converted in to non-voting preferred shares of stock of the De la Rama
company under the express condition that they would bear a fixed cumulative
dividend of 6% per annum and would be reddemable within 15 years. This
conversion was carried out when the NDC executed a Deed of Termination
of Trust and Release of Mortgage in favor of De la Rama company.
8. The result of this conversion was the released from the incumbrance of all
the properties of Don Esteban and of Hijos company which was apparently
favorable to the interest of De la Rama Compant, but, on the other hand, it
 resulted in the inconvenience that, as holder of the preferred stock, the NDC
Company, was given the right of 40% of the me,mbership of the BoD of the
De la Rama company, which meant an increase in the representation of the
NDC from 2 to 4 of the 9 members of the said Board.
9. The First resolution of granting to the Pivorano children the proceeds of
theinsurance policies taken on his life by the defendant company was adopted
by the BoD at the meeting on July 10, 1946. This grant was called in the
resolution as "Special Payment to Minor Heirs of the late Enrico Pirovano".
(see end of digest for the full document). This resolution, which was adopted
on July 10, 1946, was submitted to the stockholders of the De la Rama
company at a meeting properly convened , and on that same day was duly
approved.
10. It appeats that, although Don Esteban and the members of his family were
agreeable to giving to the Pirovano children the amount of P400K out of the
proceeds of the insurance policies taken on the life of Enrico, the did not
realize that when they provided in the above referred 2 resolutions that said
amount should be paid in the form of shares of stock, they would actually be
giving more than what they intended to give.
11. It was explained by Lourdes’ husband ( Sergio Osmeña jr.) that because the
value of the shares of stock was actually 3.6 times theor par value, the
donation, although purporting to be only 400K would actually amount to
P1,440K. And that if the Pivorano children would be given shares of stock in
lieu of the amount to be donated, the voting strength of the 5 daughters of
Don Estaban in the company would be adversely affected in the sense that
Mrs. Pivorano ( Estafania) woulf have a voting power twice as much as that
of her sisters.
12. This caused Lourdes to write to the secretary of the corporation, Atty.
Lichauco, asking him to cancel the waiver she supposedly gave of her
pre0emptive rights. Osmeña, for the meantime, took the matter with Don
Esteban and, as consequences, the latter, addressed to Lichauco a letter staing
that, “in view of the total lack of understanding by me and my daughters of
the 2 resolutions abovementioned, namey, Directors’ and Stockholders’
dated July 10,1946, as finally resolved by the majority of the Stockholders
and Directors present yesterday, that you consider the resolutions nullified.”
13. Pursuant of the change of attitude of Don Esteban, BoD adopted a resolution
changing the form of donation to the Pivorano children of all the company's
"right, title, and interest as beneficiary in and to the proceeds of the
abovementioned life insurance policies", subject to the express condition that
said proceeds should be retained by the company as a loan drawing interest
at the rate of 5 per cent per annum and payable to the Pirovano children after
the company "shall have first settled in full the balance of its present
remaining bonded indebtedness in the sum of approximately P5,000,000"
This resolution was concurred in by the representatives of the NDC.
14. This latter resolution was carried out by the company and Mrs. Estfania, the
latter acting as guardian of her children, by executing a MOA stating that the
De la RamaSteamship shall enter in its books as a loan the proceeds of the
life insurance policies taken on the life of Pivorano totalling $321,500, which
loan would earn interest at the rate of 5 per cen per annum. Mrs. Pirovano, in
executing the agreement, acted with the express authority granted to her by
the court in an order dated March 26, 1947.
15. The BoD approved a resolution providing therein that instead of the interest
on the loan being payable, together with the principal, only after the company
shall have the first settled in full its bonded indebtedness, said interest may
be paid to the Pivorano children whenever the company is in a position to
meet the obligation and on Feb 26,1948, Mrs Estefania executed a public
document in which she formally accepted the donation. The De la Rama
company took "official notice" of this formal acceptance at a meeting held by
its Board of Directors
16. In connection with the negotitations, the BoD, took up at its meeting, the
proposition of Mrs. Estefania to buy the house at New York owned by
Demwood Realty, a subsidiary of the De la Rama company at its origina cost
of $75K which would be paid from the finds held in trust belonging to her
minor children. The proposition was approved in resolution adopted on the
same day.
17. The formal transfer was made in an agreement signed by Mrs. Estefania as
guargian of her children, and by De la Rama Company, represented by its
new Gen mangage Osmeña. The transfer of this porpert was approved by the
court.
18. 2 years and 3 months after the donation had been approved in the various
resolutions, the stockholders of the De la Rama company formally ratified
the dination with certain clarigying modificatios, including the resolution
approving the transfer of the Demwood property to the Pivorano children.
19. Sometime in March 1950, the new President of the corporation, Osmeña
addressed an inquiry to the Securities and Exchange Commission asking for
opinion regarding the validity of the donation of the proceedins of the
insurance policies to the Pivorano children
1. SEC rendered its opinion stating that the donation was void because the
corporation could not dispose of its assets by gift and therefore the
corporation acted beyond the scope of its corporate powers.
2. This opinion was presented to the BoD, in which occasion the president
recommended that other legal ways be studied whereby the donation could
be carried out.
20. Another meeting was held to discuss this matter. At this meeting the president
expressed the view that, since the corporation was not authorized by its
charter to make the donation to the Pirovano children and the majority of the
stockholders was in favor of making provision for said children, the manner
he believed this could be done would be to declare a cash dividend in favor
of the stockholders in the exact amount of the insurance proceeds and
thereafter have the stockholders make the donation to the children in their
individual capacity. Notwithstanding this proposal of the president, the board
took no action on the matter, and on March 8, 1951, at a stockholders' meeting
 convened on that date, the majority of the stockholders voted to revoke the
resolution approving the donation to the Pirovano children.
21. In view of the resolution decalring that the corporation failed to comply with
the condition set for the effectivity of the donation and revoking at the same
time the approval given to it by the corporation, and considering that the
corporation can no longer set aside said donation because it had long been
perfected and consummated, the minor children of the late Enrico Pirovano,
represented by their mother and guardian, Estefania R. de Pirovano,
demanded the payment of the credit due them as of December 31, 1951,
amounting to P564,980.89, and this payment having been refused, they
instituted the present action in the Court of First Instance of Rizal wherein
they prayed that they be granted an alternative relief of the following tenor:
a. (1) sentencing defendant to pay to the plaintiff the sum of
P564,980.89 as of December 31, 1951, with the corresponding
interest thereon;
b. (2) as an alternative relief, sentencing defendant to pay to the
plaintiffs the interests on said sum of P564,980.89 at the rate of 5
per cent per annum, and the sum of P564,980.89 after the
redemption of the preferred shares of the corporation held by the
National Development Company; and
c. (3) in any event, sentencing defendant to pay the plaintiffs damages
in the amount of not less than 20 per cent of the sum that may be
adjudged to the plaintiffs, and the costs of action.
ISSUE/s:
15. WoN the grant of the proceeds of the insurance policies taken on the life of
the late Enrico Pirovano as embodied in the resolution of BoD adopted on
Jan 6, 1947 and June 24l1947 a remunerative donation as found by the lower
court - YES. It is found that the donation is made taking into consideration
the service rendered by Enrico and being the spirit which moved the company
to heights in making it a multi-milliton corp.
16. WoN the donation been perfected before its rescission or nullification by the
stockholders of the corporation on March 8, 1951.-Yes. Donation has been
perfected. Considering that the same has not only been granted in several
resolutions duly adopted by the BoD but it has been formally ratified by the
stockholders of the defendant De la Rama Steamship and in all these
corporate acts the concurrence of the representatives of the National
Development Company, the only creditor whose interest may be affected by
the donation, has been expressly given.
17. (RELATED TO OUR TOPIC) WoN De la Rama Steamship can give by
way of donation the proceeds of said insurance policies to the minor
children of the late Enrico Pivorano under the law or its articles of
10
Civil Code Art 619 (old CC): That made to a person in consideration
onsideration of his merits or for services rendered to the donor,
provided they do not constitute recoverable debts, or that in which a
incorporation, or is that donation an ultra vires act – Yes. Defendant may
make such donation. An examination of their articles of incorporation
would reveal that the company is empowered to deal with money not
immediately required and aid any person in which the company may
have a lawful interest. These two powers are broad enough to include the
act of donation to the heirs of a former president.
18. WoN De la Rama Steamship has, by the acts it performed subsequent to the
granting of the donation, deliberately prevented the fulfillment of the
condition precedent to the payment of said donation such that it can be said
it has forfeited its right to demand its fulfillment and has made the donation
entirely due and demandable - NO. It cannot be said that the fulfillment of
the condition for the payment of the donation is one that wholly depends on
the exclusive will of the donor, simply because it failed to meet the
redemption of said shares in the manner desired by the donees.
RULING: SC affirmed the lower courts decision. Pwede rin wherefore.
RATIO:
98. 1st issue.
1. SC in deciding this matter looked into the very reason on giving
donation to the Pirovano children by going through the pertinent
provisions of the resolution originally adopted on July 10, 1946.
2. From this resolution, it clearly appears that the corporation thought of
giving thedonation to the children of the late Enrico Pirovano because
he was to a large extent responsible for the rapid and very successful
development and expansion of theactivitites of this company; and alos
because he left practically nothing to his heirs and it is but fit and proper
that this company which owes so much to the deceased should make
some provision to his children", and so the donation was given "out of
gratitude to the late Enrico Pirovano." We do not need to stretch our
imagination to see that a grant or donation given under these
circumstances is remunerative10 in nature in contemplation of law.
3. Citing Cinco Capistrano case: “ In donation made to a person for
services rendered to the donor, the donor’s will is moved by acts which
directly benefit him. The motivating cause is gratitude,
acknowledgement of a favor, a desire to compensate. A donation made
to one who saved the donor's life, or a lawyer who renounced his fees
for services rendered to the donor, would fall under this class of
donations. These donations are called remunerative donations."
99. 2nd issue.
burden less than the value of the thing given is imposed upon the
donee, is also a donation
 1. SC held that Donation has been perfected. Considering that the same
has not only been granted in several resolutions duly adopted by the
BoD but it has been formally ratified by the stockholders of the
defendant De la Rama Steamship and in all these corporate acts the
concurrence of the representatives of the National Development
Company, the only creditor whose interest may be affected by the
donation, has been expressly given.
2. The defendant corporation De la Rama Steamship has even gone
further. It actually transferred the ownership of the credit subject of
donation to the Pivorano children with the express understanding that
the money would be retained by the corporation subject to the condition
that the latter would pay interest thereon at the rate of 5% per annum
payable whenever said corporation may be in a financial position to do
so.
3. Based on the circumstances and acts of the said corporation as stated
in the facts, there can be no doubt that the donation was a corporate act
carried out by the corporation not only with sanction of its BoD but
also of its stockholders.
4. It is evident that the donation has reached the stage of perfection which
is valid and binding upon the corporation and as such cannot be
rescinded unless there exist legal grounds for doing so. In this case,
there Is none.
5. The 2 reasons given for the rescission of said donation in the resolution
of the corporation adopted on March 8, 1951, to wit: Corporation failed
to comply with the conditions to which the above donation was made
subject, and that in the opinion of the SEC said donation is ultra vires,
are not, our opinion, valid and legal as to justify the rescission of a
perfect donation.
1. These reasons cannot be invoked by the corporation to
rescind or set at naught the dination has not been validly
executed, or is illegal or ultra vires, and such is not the case.
2. Court, therefore, declare that the resolution apprived by the
stockholders of the defendant corporation on March 8, 1951
did not and cannot have the effect of nullifying the donation
in question.
100. 3rd Issue. (Most Related Topic)
1. The court looked into the articles of incorporation of Dela Rama
Steamship to decide whether the act or donation is outside of their
scope.
2. The court found that the corporation was given nroad and almost
unlimited powers to carry out the purposes for which it was organized
among them:
1. To invest and deal with the moneys of the company not
immediately required, in such manner as from time to time
may be determined
2. To aid in any other manner any person, association, or
corporation of which any obligation of in which iany interest
is held by this corporation or in the affairs or prosperity of
which this corporation has a lawful interest
3. The word “deal” is broad enough to include any manner of disposition,
and refers to moneys not immediately required by the corporation, and
such disposition may be made in such manner as from time to time may
be determined by the corporations.
1. The donation in question undoubtedly comes within the scope of
this broad power for it is a fact appearing in the evidence that the
insurance proceeds were not immediately required when they
were given away.
2. In fact, the evidence shows that the corporation decalred a 100%
cash dividend, or P2M and later on another 30% case dividend. This
is clear proof of the solvency of the corporation.
3. It may be that, as insinuated, Don Esteban wanted to make use of
the insurance money to rehabilitate the central owned by a sister
corporation, known as Hijos, but this, far from reflecting against the
solvency of the Dela Rama company, only shows that the funds were
not needed by the corporation.
4. Under the 2nd broad power stated above, that is, to aid in any other
manner any person in the affairs and prosperity of whom the
corporation has a lawful interest, the record of this case is replete with
instances which clearly show that the corporation knew well its scope
and meaning so much so that, with the exception of the instant case, no
one has lifted a finger to dispute their validity.
4. Some instances: Thus, under this broad grant of power, this
corporation paid to the heirs of one Nonato, an engineer on 1 of its
ships, to Ramons Pons, a captiain of 1 of its ships, and even
contributed to the fund raised by Associated Steamship for the
widow of a certain Gispert, secretary of said Association, of which
the Dela Rama Steamship was a member along with 30 other
steamship companies. In this instance, Gispert was not even an
employee of the corporation.
5. All these acts executed before and after the donation in question
have never been questioned and were willingly and actually carried
out.
5. Court do not see much distinction between these acts of generosity
or of benevolence extended to some employees of the corporation,
and even to some in whom the corporation was merely interested
because of certain moral or political considerations, and the
donation which the corporation has seen fit to give to the children
of the late Enrico Pirovano form the point of view of the power of
the corporation as expressed in its articles of incorporation.
 6. If the former had been sanctioned and had been considered valid and
intra vires, we see no plausible reason why the latter should now be
deemed ultra vires.
6. Moreover, the gratuity here given was not merely motivated by pure
liberality or act of generosity, but by a deeps sense of recognition of
the valuable services rendered by the late Pirovano which had
immensely contributed to the growth of the corporation- turned It into
a multi-million corp.
1. Was not only given because the company was so indebted to
him but it did so out of a sense of gratitude.
2. Also, one factor to consider is the fact that late Enrico
Pirovano was not only a high official of the company but was
at the same time member of the Dela Rama family, and the
recipient of the donation are the grandchildren of Don
Esteban.
7. Moreover, as stated earlier, this donation was somehow considered as
remunerative donation contemplated in the Civil Code. In essence they
are the same. Such being the case, itm ay be said that this donation is
gratuity in a large sense for it was given for valuable services rendered,
and in this sense the same cannot be considered an ultra vires
(jurisprudence provides that: Business corporation are not forbidden
from recognizing moral obligations of which strict law takes no
cognizance…)
8. And even granting arguendo, that donation given to the Pivorano
children is outside the scope of the powers of the defendant
corporation, or the scope of the powers that it may be said that the same
cannot be invalidated, or declared legally ineffective for that
reason alone, it appearing that the donation represents not only the
act of the Board of Directors but of the stockholders themselves as
shown by the fact that the same has been expressly ratified in a
resolution duly approved by the latter.
1. Mere ultra vires acts, on the other hand, or those which are
not illegal and void ab initio, but are not merely within the
scope of the areticles of incorporation, are merely voidable
and me become binding and enforceable when ratified by
the stockholders.
9. With these, the defendant corporation is estopped form contesting the
validity of the donation. This is specially so in this case when the very
directors who conceived the idea of granting said donation are
practically the stockholders themselves.
1. To allow the corporation to undo what it has done would
not only be most unfair but would contravene the well
settled doctrine that the defense of ultra vires cannot be set
up or availed of in completed transactions.
101. 4th issue.
1. It cannot be said that the fulfillment of the condition for the payment
of the donation is one that wholly depends on the exclusive will of the
donor, simply because it failed to meet the redemption of said shares
in the manner desired by the donees.
2. While it may be admitted that because of the disposition of the assets
of the corporation upon the suggestion of its general manager more
than enough funds had been raised to effect the immediate redemption
of the above shares it is not correct ot say that the management has
completely failed in its duty to pay its obligation for, according to the
evidence, a substantial portion of the indetedness has been paid, only a
balance of about P1,805,169 was outstanding when the stockholders of
the corporation decided to revoke or cancel the donation.
3. There are also other good reasons why all the available funds have not
been actually applied to the redemption of the preferred shares: (1)
desire of the president of the corporation to preserve and continue the
government participation in the company; (2) the redemption of shares
does not depend on the will of the corporation alone but to a great
extent on the will of a 3rd party, the NDC. ( Thus company had pledged
these shares to the PNB and the Rehabilitation Finance Corporation as
a security to obtain certain loans to finance the purchase of certain ships
to contract entered into between the corporation and the NDC, and this
was what prevented the corporation form carrying out its offer to pay
the sum P1,956,513.
4. With this, Sc is of the opinion that the finding of the lower court that
the failure of the defendant corporation to comply with the condition
of the donation is merely due to its desistance from obeying the
mandate of the majority of the stockholders and not to lack of funds, or
to lack of authority, has no foundation in law or in fact. This ruling
must be reversed.
 004 UNIVERSITY OF MINDANAO v. BSP (Peliño)
January 11, 2016 | Leonen, J. | Ultra Vires of the 2nd Type: Doctrine of Centralized
Management
PETITIONER: University of Mindanao
RESPONDENT: Bangko Sentral ng Pilipinas, et. al.
SUMMARY: University of Mindanao is an educational institution wherein the
president is Guillermo Torres. Guillermo requested from BSP several loans and
emergency credits to finance the thrift banks that they likewise have. The VP of
the university, Petalcorin, executed a deed of real estate mortgage over several
properties of the university (1 in Cagayan, 2 in Iligan). The banks weren’t able to
recover from the losses, so when BSP wanted to recover the money, they weren’t
able to pay, so they sent a letter to the university, saying that they would foreclose
the properties subject of the real estate mortgage. But the university was claiming
that they never mortgaged anything, that they never loaned from BSP, and as an
educational institution, it is not allowed to mortgage its properties to secure
another person’s debt. RTC ruled in favor of the university, finding that the VP
which executed the real estate mortgage was not authorized to do so and that there
was no board reso authorizing Petalcorin. On appeal, CA reversed the decision of
the RTCs. Hence, this petition. The issue in this case is whether or not the
university is bound by the real estate mortgage contracts executed by Petalcorin.
The SC held in the negative. This is because the execution of mortgage contract
was ultra vires because since university is an educational institution, it may not
secure the loans of third persons. Corporations are artificial entities granted legal
personalities upon their creation by their incorporators in accordance with law.
They have no inherent powers; 3rd persons dealing with corporations cannot
assume that corporations have powers. Ultra vires acts are corporate acts that are
outside those express definitions under the law or articles of incorporation or those
committed outside the object for which a corporation is created. The only
exception to this rule is when the acts are necessary and incidental to carry out a
corporation’s pruposes, and to the exercise of powers conferred by the corporation
code and under a corporation’s articles of incorporation. University of Mindanao
doesn’t have the power to mortgage its properties in order to secure loans of other
persons. As an educational institution, it is limited to developing human capital
through formal instruction. It isn’t a corporation engaged in the business of
securing loans of others. Securing loans is not an adjunct of the educational
institution’s conduct business.
DOCTRINE: Corporations are artificial entities granted legal personalities upon
their creation by their incorporators in accordance with law. They have no inherent
powers; 3rd persons dealing with corporations cannot assume that corporations
have powers. Ultra vires acts are corporate acts that are outside those express
definitions under the law or articles of incorporation or those committed outside
the object for which a corporation is created. The only exception to this rule is
when the acts are necessary and incidental to carry out a corporation’s pruposes,
and to the exercise of powers conferred by the corporation code and under a
corporation’s articles of incorporation. University of Mindanao doesn’t have the
power to mortgage its properties in order to secure loans of other persons. As an
educational institution, it is limited to developing human capital through formal
instruction. It isn’t a corporation engaged in the business of securing loans of
others. Securing loans is not an adjunct of the educational institution’s conduct
business.
FACTS:
168. University of Mindanao is an educational institution and the board of trustees
was chaired by Guillermo Torres and his wife Dolores was the Assistant
Treasurer.
169. Prior to 1982, Guillermo and Dolores incorporated and operated 2 thrift banks
FISLAI and DSLAI; Guillermo was the president in FISLAI while his wife
was the treasurer, while in DSLAI, his wife was the president.
170. Guillermo requested from the BSP a 1.9 million standby emergency credit to
FISLAI, evidenced by 3 PN: 500k, 600k, 800k; all the notes were signed by
either him or his wife.
171. The VP of University of Mindanao, Saturnino Petalcorin, executed deed of
real estate mortgage; this was used as a security for the loan.
172. Mortgage was annotated in the TCT.
173. BSP granted FISLAI an additional loan of 620k and Guillermo and Ramos
executed a PN.
174. Petalcorin executed another deed of real estate mortgage, allegedly on behalf
of University of Mindanao and this served as additional security.
a. REM on a property in Cagayan and 2 lands in Iligan.
175. BSP also granted emergency advances to DSLAI.
176. FISLAI, DSLAI, and Land Bank entered into a MOA intended to rehabilitate
the thrift banks, which had been suffering from their depositors’ heavy
withdrawals.
a. One of the terms was the merger of FISLAI and DSLAI and DSLAI later
became Mindanao Savings and Loan Association (MSLAI).
177. Guillermo died.
178. MSLAI failed to recover from its losses and was liquidated on May 24, 1991.
BSP wanted to foreclose since MSLAI wasn’t able to pay.
179. University of Mindanao sent a letter to BSP, denying that their properties
were mortgaged and they also denied receiving any loan proceeds.
180. University of Mindanao filed 2 complaints for nullification and cancellation
of mortgage.
a. They were claiming that they didn’t obtain any loan from BSP and that
they didn’t receive any loan proceeds.
b. They also claimed that Aurora De Leon’s certification was anomalous
and that they never authorized Petalcorin to execute real estate mortgage
contracts involving its properties to secure FISLAI’s debts and that they
never ratified the execution of the mortgage contracts.
 c. As an educational institution, it cannot mortgage its properties to secure
another person’s debt.
181. RTC ruled in favor of University of Mindanao.
a. De Leon’s testimony was that she signed the Secretary’s Certificate only
upon Guillermo’s orders.
b. But Petalcorin testified that he had no authority to execute the mortgage
contract on University of Mindanao’s behalf but he merely executed the
contract because of Guillermo’s request.
c. BSP’s witness admitted that there was no board reso authorizing
Petalcorin to execute mortgage contracts.
d. Since some of the properties were situated in Iligan and some in
Cagayan, there were 2 RTCs which were actually involved, but both
those RTCs ruled in favor of University of Mindanao, finding that
Petalcorin had no authority to execute the mortgage contracts.
182. BSP appealed the decisions.
183. CA ruled that by virtue of De Leon’s Secretary Certificate, it clothed
Petalcorin with authority and BSP relied on that, so University of Mindanao
is estopped from denying Petalcorin’s authority.
a. In addition, the Secretary Certificate was also notarized, so it enjoyed a
presumption of regularity.
b. University of Mindanao’s officers (Guillermo and Dolores) signed the
PNs, so they are presumed to have knowledge of the transaction.
c. The annotations on the TCTs also operate as constructive notice to it that
its properties were mortgaged.
184. Hence, this petition.
ISSUE/s:
29. WON University of Mindanao is bound by the real estate mortgage contracts
executed by Petalcorin – NO, University of Mindanao is not bound since the
execution of the mortgage contract was ultra vires.
RULING: WHEREFORE, the petition is GRANTED. The CA’s decision is
REVERSED and SET ASIDE. The RTC’s decisions are REINSTATED.
RATIO:
On whether the execution of the mortgage contract was ultra vires
1. University of Mindanao: Execution of mortgage contract was ultra vires
because since it is an educational institution, it may not secure the loans
of thir persons.
a. SC: The claim of university is correct. Corporations are artificial
entities granted legal personalities upon their creation by their
incorporators in accordance with law.
b. They have no inherent powers; 3rd persons dealing with corporations
cannot assume that corporations have powers.
c. Ultra vires – corporate acts that are outside those express definitions
under the law or articles of incorporation or those committed outside
the object for which a corporation is created.
i. The only exception to this rule is when the acts are necessary
and incidental to carry out a corporation’s pruposes, and to the
exercise of powers conferred by the corporation code and under
a corporation’s articles of incorporation.
2. SC held that University of Mindanao doesn’t have the power to mortgage
its properties in order to secure loans of other persons.
a. As an educational institution, it is limited to developing human
capital through formal instruction. It isn’t a corporation engaged in
the business of securing loans of others.
b. Securing loans is not an adjunct of the educational institution’s
conduct business.
c. SC upheld the validity of corporate acts when those acts were shown
to be clearly within the corporation’s powers or were connected to
the corporation’s purposes.
d. Corporate acts are valid if on their face, the acts were within the
corporation’s powers or purposes.
e. A contract executed by a corporation shall be presumed valid if on
its face its execution was not beyond the powers of the corporation
to do.
3. University of Mindanao claims that they did not authorize Petalcorin to
mortgage its properties on its behalf. There was no board reso.
a. The mortgage contracts executed in favor of BSP do not bind University
of Mindanao.
b. Being a juridical person, Unviersity of Mindanao cannot conduct its
business, make deisions, or act in any manner without action from its
Board of Trustees – they must act as a body in order to exercise corporate
powers.
c. Corporation may delegate through a board reso its corporate powers or
functions to a representative, subject to limitations.
d. Contracts entered into in the name of another without authority or valid
legal representation are generally unenforceable.
e. In this case, BSP wasn’t able to prove that there was actually a board reso
that was passed authorizing Petalcorin to mortgage the subject real
properties.
 005 HARDEN v. BENGUET CONSOLIDATED (MERILLES)
MARCH 18, 1933 | Street, J. | Ultra Vires of the Third Type
PETITIONER: Fred M. Harden, JD Highsmith, and John Hart, in their own
behalf and in that all other stockholders of the Baltic Mining company
RESPONDENTS: Benguet Consolidated Mining Company, Balatoc Mining
Company, HE Renzo, John W. Jaussermann and AW Beam
SUMMARY: Benguet Consolidates was registered as a sociedad anonima under
the Spanish Law. Benguet Mining agreed to invest and build capital equipments
in favor of Balatoc Mining, a corporation registered under the Corproratio Law.
Balatoc was to give Benguet Mining 600,000 shares of its capital stock.
Fred Harden, a stockholder of Balatoc who owns thousands of shares, sued
Benguet Mining on the ground that under the Corporation Law a corporation like
Benguet Mining which is engaged in the mining industry is prohibited form being
interested int eh other corporations which are also engaged int he mining industry
like Balatoc Mining.
The Court before ruling on the authority of Benguet Mining to own shares in
Balatoc had to first decide whether Harden has a cause of action. The SC held
that Harden in this case have no right of action against the Benguet Company.
It must be the Government through the OSG who initiates the case.
DOCTRINE: (under syllabus but not in case) Although arrangements between
the two mining companies was prohibited under the terms of the Corporation
Law, the Supreme Court did not declare the nullity of the agreements on the
ground that only private rights and interests, not public interests, were involved
in the case.
FACTS:
1. The Benguet Consolidated Mining Co. was organized in June, 1903, as
a sociedad anonima in conformity with the provisions of Spanish law; while
the Balatoc Mining Co. was organized in December 1925, as a corporation,
in conformity with the provisions of the Corporation Law (Act No. 1459).
2. Both entities were organized for the purpose of engaging in the mining of
gold in the Philippine Islands, and their respective properties are located only
a few miles apart in the subprovince of Benguet.
3. The capital stock of the Balatoc Mining Co. consists of one million shares of
the par value of one peso (P1) each.
4. When the Balatoc Mining Co. was first organized the properties acquired by
it were largely undeveloped; and the original stockholders were unable to
supply the means needed for profitable operation.
5. For this reason, the board of directors of the corporation ordered a suspension
of all work, effective July 31, 1926.
6. In November of the same year a general meeting of the company's
stockholders appointed a committee for the purpose of interesting outside
capital in the mine.
7. Under the authority of this resolution the committee approached A. W. Beam,
then president and general manager of the Benguet Company, to secure the
capital necessary to the development of the Balatoc property.
8. A contractwas executed on March 9, 1927, the principal features of which
were that the Benguet Company was to proceed with the development and
construct a milling plant for the Balatoc mine.
a. The Benguet Company also agreed to erect an appropriate power
plant, with the aerial tramlines and such other surface buildings as
might be needed to operate the mine.
b. In return for this it was agreed that the Benguet Company should
receive from the treasurer of the Balatoc Company shares of a par
value of P600,000, in payment for the first P600,000 be thus
advanced to it by the Benguet Company.
9. The legal point upon which the action is planted is that it is unlawful for the
Benguet Company to hold any interest in a mining corporation and that
the contract by which the interest here in question was acquired must be
annulled.
10. During the occupation of the United States, the Congress of the United States
inserted certain provisions, under the head of Franchises, which were
intended to control the lawmaking power in the Philippine Islands in the
matter of granting of franchises, privileges and concessions.One of which
provides that:
a. ... it shall be unlawful for any member of a corporation engaged in
agriculture or mining and for any corporation organized for any
purpose except irrigation to be in any wise interested in any other
corporation engaged in agriculture or in mining.
11. The Corporation law was enacted. The purpose of such was to introduce the
American corporation into the Philippine Islands as the standard commercial
entity and to hasten the day when the sociedad anonima of the Spanish law
would be obsolete.
12. The provision which prohibiting corporations engaged in mining and
members of such from being interested in any other corporation engaged in
mining, was amended.
13. The change in the law effected by this amendment was in the direction of
liberalization.
14. Thus, the inhibition contained in the original provision against members of
a corporation engaged in agriculture or mining from being interested in
other corporations engaged in agriculture or in mining was so modified
as merely to prohibit any such member from holding more than fifteen
per centum of the outstanding capital stock of another such corporation.
15. (di ko alam ano nangyari pero bigla nalang sila nag proceed sa issue) The
trial court denied the petition for annulment of Harden. Hence this petition)
ISSUE/s:
1. Whether Harden, et al. can maintain an action based upon the violation of law
supposedly committed by the Benguet Company in this case - NO, the case
must be initiated by the OSG
2. Whether, assuming the first question to be answered in the affirmative, the
Benguet Company, which was organized as a sociedad anonima, is a
corporation within the meaning of the language used by the Congress of the
United States, and later by the Philippine Legislature, prohibiting a mining
corporation from becoming interested in another mining corporation -
COURT DID NOT RULE ON THE MATTER. (Ratio 6)

RULING: SC affirmed the lower courts decision. Pwede rin wherefore.

RATIO:
1. FIRST ISSUE: It is at once obvious that the provision referred to was adopted
by the lawmakers with a sole view to the public policy that should control in
the granting of mining rights.
2. Furthermore, the penalties imposed in what is now section 190 (A) of the
Corporation Law for the violation of the prohibition in question are of such
nature that they can be enforced only by a criminal prosecution or by an
action of quo warranto.
3. But these proceedings can be maintained only by the Attorney-General
in representation of the Government.
4. The defendant Benguet Company has committed no civil wrong against the
plaintiffs Harden, and if a public wrong has been committed, the directors
of the Balatoc Company, and the plaintiff Harden himself, were the active
inducers of the commission of that wrong.
5. The contract, supposing it to have been unlawful in fact, has been performed
on both sides, by the building of the Balatoc plant by the Benguet Company
and the delivery to the latter of the certificate of 600,000 shares of the Balatoc
Company. There is no possibility of really undoing what has been done.
6. Having shown that the plaintiffs Harden in this case have no right of action
against the Benguet Company for the infraction of law supposed to have
been committed, we forego any discussion of the further question whether
a sociedad anonima created under Spanish law, such as the Benguet
Company, is a corporation within the meaning of the prohibitory provision
already so many times mentioned.
7. That important question should, in our opinion, be left until it is raised in an
action brought by the Government.
 SECTION IX
001 PSE v. Litonjua (Valle)
05 December 2016| Perez, J. | Consent of the corporation
PETITIONER: Philippine Stock Exchange Inc
RESPONDENTS: Antonio K. Litonjua and Aurelio K. Litonjua, Jr.
SUMMARY:
Trendline is one of the members which composes PSE. Trendline violated some
of PSE’s rules in trading and failed to pay its cash settlement. So PSE was forced
to assume the obligations and suspend Trendline’s trading privileges. A letter
agreement was later made which provided for the terms of acquisition of
Litonjua’s group. Basically, Litonjua wants to own 85% of Trendline’s seat in
PSE. But they failed to secure the consent of PSE for approval of this agreement.
In an attempt for Litonjua to secure the 85%, it paid PSE 3 checks worth 19M as
the full settlement for the obligation. But in the checks, it was indicated that the
payor was Trendline and not Litonjua. Litonjua later asked for reimbursement
from PSE for the 19M it paid since Litonjua believes that it won’t be transferred
the seat it wants.
PSE as a defense, said that it is not a privy to the agreement which means he
shouldn’t be held liable. The TC held PSE liable because of solutio indebiti. The
TC held that PSE’s defense only bolstered the fact that it was a solutio indebiti
case and that PSE reimburse Litonjua. The CA affirmed but said that it was more
of an issue of constructive trust.
The issue is WON PSE is a party to the agreement.
The SC held that it is not. For one to be a party to a contract, it is necessary that
that person give his consent. In corporations, the consent is manifested through a
board resolution by its Board of Directors. Since it is a juridical person and must
act through its Board. As a general rule, in the absence of authority from the Baord,
no person, not even its officers, can validly bind a corporation.
in this case, there was no board resolution at all which authorized PSE to enter
into the agreement. This was proven by the testimony of Atty. Encarnacion, its
Corporate Secretary, and by Antonio Litonjua himself when he admitted that he
failed to ask PSE for any board resolution to authorize PSE.
However, the court held PSE still laible to refund based on estoppel and unjust
enrichment.
11
1. The feautures of the agreement that are important:
a. The sale of majority equity Membership/Seat equivalent to eighty-five percent (85%) of the value, to Antonio and
Aurelio K. Litonjua, Jr., and/or assignees and immediate members of their family (Litonjua Group). The balance of the fifteen
percent (15%) equity to be retained by you and/or immediate members of your family
b. The aggregate price for the Membership/Seat is Twenty-three million Pesos (P23,000,000.00) broken down as
follows:
i. Litonjua Group – 85% equity – Php 19, 555 000
ii. Zapanta – 15% equity – Php 3, 445, 000
iii. Total equity: 23, 000, 000
c. Terms of payment:
i. On account of the outstanding claims of the Philippine Stock Exchange (PSE), the Litonjua Group is willing to pay
in advance direct to PSE the present claims of P18,547,643.81 with the following conditions:
DOCTRINE: Doctrine as found in the outline
The consent of the corporation as a juridical person is manifested through a board
resolution since powers are exercised through its Board of Directors. The mandate
of Section 23 of the Corporation Code is clear that unless otherwise provided in
the Code, “the corporate powers of all corporations shall be exercised, all business
conducted and all property of such corporations controlled and held by the board
of directors or trustees ...” Further, as a juridical entity, a corporation may act
through its Board, which exercises almost all corporate powers, lays down all
corporate business policies and is responsible for the efficiency of management.
As a general rule, in the absence of authority from the Board, no person, not even
its officers, can validly bind a corporation.
FACTS:
185. PSE (Philippine Stock Exchange) is a domestic stock corporation licensed by
the Securities and Exchange Commission (SEC) to engage in the business of
operating a market for the buying and selling of securities.
186. PSE was organized as a non-stock corporation with 200 members, one of
which was Trendline. Trendline, as a member, owned a trading seat with a
right to conduct trading activities in PSE.
187. Trendline violated some PSE rules in trading and failed to pay its cash
settlement payables with the Securties Clearing Corporation of the Phil which
amounted to Php 113.7 Million. So PSE was forced to assume Trendline’s
obligation and suspend Trendline’s trading privileges.
188. Zapanta, the President of Trendline, negotiated for an extension of period.
But was advised that it has until March 31 1999 to settle. Prior to this date,
Trendline and Litonjua Group were already negotiating for the purchase of
Trendline’s membership/seat. A letter agreement11 (See footnote to see
Litonjua group’s equity) was issued by the Group provding for the terms of
acquisition but they did NOT secure the consent of PSE for approval. This
agreement was leter confirmed by Trendline.
189. PSE, through Atty Almadro (VP for Compliance & surveillance Department)
sent Trendline a letter advising it that the Business Conduct and Ethcis
Committee (BCEC) of PSE resolved to accept the amount pf Php 19M as full
& final settlement.
190. PSE received 3 checks amounting to Php 19M for the full settkement of
1. That the amount of P18,547,643.81 is the entire obligation of Trendline Securities Inc., i.e. as full settlement of all
claims and outstanding obligations including interest
2. Upon acceptance of payment and approval of PSE board, PSE will lift the suspension and allow the Litonjua Group
to resume the normal trading operation of the Membership/Seat
3. That PSE will agree and accept nominations of our assignee for the Membership/Seat subject to PSE rules,
regulations and criteria for accepting a new member or nominee
4. That should the new membership be organized, PSE will approve and register the new member subject to rules,
regulations and criteria for accepting a new member corporations.
The balance of P1,007,356.19 will be paid after incorporation of the new company to which the membership/seat will be
transferred.
 Trendline’s obligation. Trendline was the one indicated as the payor of
the obligation.
191. PSE’s compliance and surveliance group (CSG) discovered after an audit
that Trendline had a considerable amount of shortfalls and outsnaidng
obkigations in addition to its unsettled and unliquidated accounts. Zapanta
requested that the PSE’s CSG for an aduit of accounts preparatory to the
issuance of clearance to transcer their corporate membership to Lituanjua
Group.
192. CSG conducted a special audit where it confirmed that Trendline was NOT
financially liquid to settle all its outsanidng obligations.
193. Atty. Antonio sent a letter to PSE, informing PSE that Trendline has filed a
petition for corporate rehabilition and that he was the one appointed by the
court as the rehabilitation receiver.
194. PSE informed Atty Atonio that 85% of Trendline’s membership is being
claimed by Litonjua Group. PSE also enumerated the names of the ones
who have pending claims against Trendline.
195. Then PSE received a demand letter from Trendline for the Php 19M it had
paid. PSE in its answer Ad Cautelam raised primarily that it received the
amount NOT from Litonjua but from Trendline.
196. PSE refused to refund. So Litonjua group filed a complaint for collection of
sum of money with Damages against PSE.
197. TC:
a. Granted that Litonjua Group is entitled to refund. It based its
decision on the principle of solitio indebiti.
b. Litonjua’s cause of action is Not founded on the letter-agreement
but on the mistake on the part of the group when it delivered the
Php 19M on the notion that the amount was for the consideration
of the trading seat of Trendline.
c. PSE’s argument that it was not a privy to the agreement
bolsters this.
198. PSE filed an appeal to the CA saying that the Trial court erred in saying that
it was a quasi contract and not finding that Trendline was liable for the
refund pursuant to Article 1236 of the NCC. The CA affirmed the decision.
The CA relied on the principle of constructive trust instead of solutio
indebiti. As for the second contention, the CA said that 1236 is not
applicable.
a. As the money involved here - which amounts to millions - was
actually acquired under the circumstance where the beneficial
interest cannot be retained in good conscience, the equity
converts PSE into a trustee.
b. As for 1236, the provision must be read in relation to the provision
on novation of contract provided by Article 1293 which states that,
novation which consists in substituting a new debtor in the place of
the original one, may be made even without the knowledge or
against the will of the latter, but not without the consent of the
creditor. Payment of the new debtor gives him the rights
mentioned in Art. 1236 and 1237.
ISSUE/s:
30. WoN PSE has consented to the letter agreement – NO, it hasn’t. A
corporation gives its consent through the Board of Directors. In this case,
there was no board resolution to authorize PSE to enter into the
agreement.
31. WoN Litonjua can seek reimbursement from Trendline – NO. Litonjua group
will have to settle it on its own since they have had an understanding that it
should do so.
32. WoN PSE is liable to refund the amount – Yes. Because of Estoppel and
unjust enrichment.
RULING: Wherefore, the petition is DENIED. Accordingly, the Decision and
Resolution of the Court of Appeals dated 23 May 2012 and 17 October 2012
respectively, upholding the 22 February 2010 Decision of the Regional Trial Court
of Pasig City are hereby AFFIRMED WITH MODIFICATION. Philippine Stock
Exchange is hereby ordered to pay the Litonjua Group the following amounts:
1. as to the imposition of legal interest to be imposed to the P19,000,000.00 from
12% to 6% per annum reckoned from the date of demand on 30 July 2006;
2. Exemplary damages in the amount of P1,000,000.00;
3. Attorney's fees in the amount of P100,000.00; and
4. Cost of suit.
RATIO:
As to PSE’s part in the letter agreement (Issue related)
1. PSE avers that no consent was given by it to be bound in the terms. The SC
agrees with this.
2. According to Article 1305 of the Civil Code, "a contract is a meeting of minds
between two persons whereby one binds himself, with respect to the other, to
give something or render some service." For a contract to be binding: there
must be consent of the contracting parties; the subject matter of the contract
must be certain; and the cause of the obligation must be established. Consent,
as a requisite to have a valid contract, is manifested by the meeting of the
offer and the acceptance upon the thing and the cause which are to constitute
the contract. The offer must be certain and acceptance absolute. A qualified
acceptance constitutes a counter offer.
3. In corporations, consent is manifested through a board resolution since
powers are exercised through its board of directors. The mandate of
 Section 23 of the Corporation Code is clear that unless otherwise provided in
the Code, "the corporate powers of all corporations shall be exercised, all
business conducted and all property of such corporations controlled and
held by the board of directors or trustees..."
4. As a juridical entity, a corporation may act through its board of directors,
which exercises almost all corporate powers, lays down all corporate
business policies and is responsible for the efficiency of management. As
a general rule, in the absence of authority from the board of directors, no
person, not even its officers, can validly bind a corporation.
5. This is so because a corporation is a juridical person, separate and distinct
from its stockholders and members, having powers, attributes and properties
expressly authorized by law or incident to its existence.
6. In this case, no board resolution was issued to authorize PSE to become
a party to the letter agreement. This was confirmed by PSE’s corporate
secretary Atty. Encarnacion. There was no record of any board resolution to
authorize PSE. Hence, PSE was never bound by the obligations. This was
also confirmed by Antonio Litonjua himself when he admitted that he failed
to ask PSE for any board resolution authorizing itself to enter into the letter-
agreement.
As to whom Litonjua should seek reimbursement (Not related to topic)
128. PSE maintains that the proper recourse of Litonjua is to demand
reimbursement from Trendline. The court does not agree.
129. The SC finds inapplicable Art 1236 allowing the demand by the payor from
the debtor of what was paid. It is correct that PSE is not bound to accept
the payment of a third person who has no interest in the fulfillment of the
obligation. However, the Litonjua Group is not a disinterested party.
130. Since the inception of the initial meeting between the Litonjua Group, PSE
and Trendline, there was already a clear understanding that the Litonjua
Group has the intention to settle the outstanding obligation of Trendline
in consideration of its acquisition of 85% seat ownership and PSE's lifting of
suspension of trading seat.
As to PSE’s liability to return the payment it received
1. PSE can be held liable for the money it received. This is because of the
principle of unjust enrichment and estoppel.
2. Applying this, the principle of unjust enrichment requires PSE to return the
money it had received at the expense of the Litonjua Group since it benefited
from the use of it without any valid justification.
3. As for estoppel, Litonjua group was led to believe that the payment will be
the full settlement of all the obligations. Trendline was also advised that
failure to pay will result in collection in full of imposable fines and penalties.
By accepting Litonjua;s payment, PSE is now estopped from claims that
Trendline still has a penalty obligation that must be settled.
 002 FILIPINAS PORT SERVICES v. GO (ARMAND)
March 16, 2007 | Garcia, J. | Centralized Management
PETITIONER: Filipinas Port Services
RESPONDENTS: Victoriano S. Go, et al
SUMMARY: Eliodoro Cruz, former president of Filipinas Port (Filport)
questioned the creation by the Board of Filport of certain positions such as
Assistant VPs for Operations, Finance, and Administration, as well as Assistants to
the Chairman & President as well as the payment of compensation to such officers
– considering that Filport is not a big corporation. He also questions the increase in
the salaries of such officers and demands that the members of the Board be held
solidarily liable therefor. The case hibernated in the SEC until it reached the courts
through a derivative suit. Cruz’s contentions are untenable. The governing body
of a corporation is the Board of Directors – w/c has sole authority to determine
policies and enter into contracts, and conduct the business of the corporation
in accord w/ its charter and by-laws. Concentration of powers in the Board is
necessary considering that stockholders are too many and scattered and are
mostly unfamiliar w/ the business. In this case, the creation of the positions
was in accordance w/ the regular business of the corporation and is even
authorized by its by-laws. Similarly, the fixing of compensation is provided in
Filport’s by-laws. The determination of the necessity to create additional
positions is a “management prerogative” vested in the Board. The power to
create an “executive committee,” however, must be provided in the by-laws.
Nonetheless, the “executive committee” contemplated by the Corporation Code
pertains to one as powerful as the Board, as distinguished from one merely subject
to its control. There was also no mismanagement, but even assuming that there
was, in order to hold the directors liable therefor, there must be bad faith. If
the losses are caused by simple errors of judgment, the directors cannot be
held liable. Neither is there evidence to support the allegation that the positions are
created for mere accommodation.
DOCTRINE: The raison d’etre behind conferment of corporate powers on the
Board of Directors is not lost on the Court – indeed, the concentration in the Board
of the powers of control of corporate business and appointment of corporate
officers and managers is necessary for efficiency in any large organization.
Stockholders are too numerous, scattered and unfamiliar with the business of a
corporation to conduct its business directly. And so the plan of corporate
organization is for the stockholders to choose the directors who shall control and
supervise the conduct of corporate business.
FACTS:
59. The case is actually an intra-corporate dispute involving Filport, a domestic
corporation engaged in stevedoring services with principal office
in Davao City. It was initially instituted with the Securities and Exchange
Commission (SEC) where the case hibernated and remained unresolved for
several years until it was overtaken by the enactment into law, on 19 July
2000, of Republic Act (R.A.) No. 8799, otherwise known as the Securities
Regulation Code.
60. On September 1992, petitioner Eliodoro C. Cruz, Filports president from
1968 until he lost his bid for reelection as Filports president during the
general stockholders meeting in 1991, wrote a letter to the corporations
Board of Directors questioning the boards creation of the following
positions with a monthly remuneration of P13,050.00 each, and the election
thereto of certain members of the board
61. In his aforesaid letter, Cruz requested the board to take necessary
action/actions to recover from those elected to the aforementioned positions
the salaries they have received.
62. On 15 September 1992, the board met and took up Cruzs letter. The records
do not show what specific action/actions the board had taken on the letter.
Evidently, whatever action/actions the board took did not sit well with Cruz.
63. On 14 June 1993, Cruz, purportedly in representation of Filport and its
stockholders, among which is herein co-petitioner Mindanao Terminal and
Brokerage Services, Inc. (Minterbro), filed with the SEC a petition which
he describes as a derivative suit against the herein respondents who were
then the incumbent members of Filports Board of Directors, for alleged acts
of mismanagement detrimental to the interest of the corporation and its
shareholders at large
64. Cruz alleged that despite demands made upon the respondent members of
the board of directors to desist from creating the positions in question and to
account for the amounts incurred in creating the same, the demands were
unheeded. Cruz thus prayed that the respondent members of the board of
directors be made to pay Filport, jointly and severally, the sums of money
variedly representing the damages incurred as a result of the creation of the
offices/positions complained of and the aggregate amount of the questioned
increased salaries.
65. In their common Answer with Counterclaim, the respondents denied the
allegations of mismanagement:
1. the creation of the executive committee and the grant of per diems for the
attendance of each member are allowed under the by-laws of the corporation;
2. the increases in the salaries/emoluments of the Chairman, Vice-President, Treasurer
and Assistant General Manager were well within the financial capacity of the
corporation and well-deserved by the officers elected thereto; and
3. the positions of AVPs for Corporate Planning, Operations, Finance and
Administration were already in existence during the tenure of Cruz as president of
the corporation, and were merely recreated by the Board, adding that all those
appointed to said positions of Assistant Vice Presidents, as well as the additional
position of Special Assistants to the Chairman and the President, rendered services
to deserve their compensation.
66. In the same Answer, respondents further averred that Cruz and his co-
petitioner Minterbro, while admittedly stockholders of Filport, have no
authority nor standing to bring the so-called derivative suit for and in behalf
of the corporation; that respondent Mary Jean D. Co has already ceased to
be a corporate director and so with Fortunato V. de Castro, one of those
 holding an assailed position; and that no demand to cease and desist from
further committing the acts complained of was made upon the board.
67. Respondent’s affirmative defenses asserted that:
(1) the petition is not duly verified by petitioner Filport which is the real
party-in-interest; (2) Filport, as represented by Cruz and Minterbro, failed to
exhaust remedies for redress within the corporation before bringing the suit;
and (3) the petition does not show that the stockholders bringing the suit are
joined as nominal parties. In support of their counterclaim, respondents
averred that Cruz filed the alleged derivative suit in bad faith and purely for
harassment purposes on account of his non-reelection to the board in the
1991 general stockholders meeting.
68. The derivative suit (SEC Case No. 06-93-4491) hibernated with the SEC for
a long period of time. With the enactment of R.A. No. 8799, the case was
first turned over to the RTC of Manila, Branch 14, sitting as a corporate
court. Thereafter, on respondents motion, it was eventually transferred to
the RTC of Davao City
69. RTC rendered judgement against the respondents by ordering the the
directors holding the positions of Assistance vice president for corporate
planning, special assistant to the president and special assistant to the board
chairman to refund to the corporation the salaries they hav received as such
officers holding that Filipinas Port Services is not a big corporation
requiring mulitiple executive positions and the said positions were just
created for accommodation. The counterclaim was dismissed.
70. CA reversed and set aside RTC decision and dismissed the derivative suit.
ISSUE/s:
19. Whether the CA erred in holding that Filports Board of Directors acted within
its powers in creating the executive committee and the aforementioned
positions and in increasing the salaries of the positions of Board Chairman,
Vice-President, Treasurer and Assistant General Manager - NO
20. Whether the CA erred in finding that no evidence exists to prove that (a) the
positions of AVP for Corporate Planning, Special Assistant to the President
and Special Assistant to the Board Chairman were created merely for
accommodation, and (b) the salaries/emoluments corresponding to said
positions were actually paid to and received by the directors appointed thereto
- NO
RULING: WHEREFORE, the petition is DENIED and the challenged decision of
the CA is AFFIRMED in all respects.
RATIO:
102. The governing body of a corporation is its board of directors. Section 23 of
the Corporation Code explicitly provides that unless otherwise provided
therein, the corporate powers of all corporations formed under the Code shall
be exercised, all business conducted and all property of the corporation shall
be controlled and held by a board of directors. Thus, with the exception only
of some powers expressly granted by law to stockholders (or members, in
case of non-stock corporations), the board of directors (or trustees, in case of
non-stock corporations) has the sole authority to determine policies, enter
into contracts, and conduct the ordinary business of the corporation within
the scope of its charter, i.e., its articles of incorporation, by-laws and relevant
provisions of law. Verily, the authority of the board of directors is restricted
to the management of the regular business affairs of the corporation, unless
more extensive power is expressly conferred.
103. The raison detre behind the conferment of corporate powers on the board
of directors is not lost on the Court. Indeed, the concentration in the
board of the powers of control of corporate business and of
appointment of corporate officers and managers is necessary for
efficiency in any large organization. Stockholders are too numerous,
scattered and unfamiliar with the business of a corporation to conduct
its business directly. And so the plan of corporate organization is for the
stockholders to choose the directors who shall control and supervise the
conduct of corporate business.
104. In the present case, the boards creation of the positions of Assistant Vice
Presidents for Corporate Planning, Operations, Finance and Administration,
and those of the Special Assistants to the President and the Board Chairman,
was in accordance with the regular business operations of Filport as it is
authorized to do so by the corporations by-laws, pursuant to the Corporation
Code.
105. The election of officers of a corporation is provided for under Section 25 of
the Code:
Sec. 25. Corporate officers, quorum. Immediately after their election, the directors
of a corporation must formally organize by the election of a president, who shall be a director,
a treasurer who may or may not be a director, a secretary who shall be a resident and citizen of
the Philippines, and such other officers as may be provided for in the by-laws.
106. The Bylaws of Filport provides:
Officers of the corporation, as provided for by the by-laws, shall be elected by
the board of directors at their first meeting after the election of Directors. Xxx
The officers of the corporation shall be a Chairman of the Board, President, a Vice-
President, a Secretary, a Treasurer, a General Manager and such other officers as
the Board of Directors may from time to time provide, and these officers shall
be elected to hold office until their successors are elected and qualified.
xxx The Board of Directors shall fix the compensation of the officers and agents
of the corporation.
107. Unfortunately, the bylaws of the corporation are silent as to the creation by
its board of directors of an executive committee. Under Section 35 of the
Corporation Code, the creation of an executive committee must be provided
for in the bylaws of the corporation
108. Notwithstanding the silence of Filports bylaws on the matter, we cannot rule
that the creation of the executive committee by the board of directors is illegal
or unlawful. One reason is the absence of a showing as to the true nature and
functions of said executive committee considering that the executive
committee, referred to in Section 35 of the Corporation Code which is as
powerful as the board of directors and in effect acting for the board itself,
should be distinguished from other committees which are within the
 competency of the board to create at anytime and whose actions require
ratification and confirmation by the board.
109. As testified to and admitted by petitioner Cruz himself, it was during his
incumbency as Filport president that the executive committee in question was
created, and that he was even the one who moved for the creation of the
positions of the AVPs for Operations, Finance and Administration. By his
acquiescence and/or ratification of the creation of the aforesaid offices, Cruz
is virtually precluded from suing to declare such acts of the board as invalid
or illegal.
110. Cruz testimony on the matter of mismanagement is bereft of any foundation.
As it were, his testimony consists merely of insinuations of alleged
wrongdoings on the part of the board. But even assuming, in gratia
argumenti, that there was mismanagement resulting to corporate damages
and/or business losses, still the respondents may not be held liable in the
absence, as here, of a showing of bad faith in doing the acts complained of.
If the cause of the losses is merely error in business judgment, not amounting
to bad faith or negligence, directors and/or officers are not liable.
111. As regards the allegation of Cruz in saying that the creation of the positions
was for accommodation purposes, the Court held that aside from Cruzs bare
and self-serving testimony, no other evidence was presented to show the fact
of accommodation. By itself, the testimony of Cruz is not enough to support
his claim that accommodation was the underlying factor behind the creation
of the aforementioned three (3) positions. It is elementary in procedural law
that bare allegations do not constitute evidence adequate to support a
conclusion.
112. The determination of the necessity for additional offices and/or positions in
a corporation is a management prerogative which courts are not wont to
review in the absence of any proof that such prerogative was exercised in bad
faith or with malice.
113. As regards the derivative suit, the Court held that under the Corporation
Code, where a corporation is an injured party, its power to sue is lodged
with its board of directors or trustees. But an individual stockholder may be
permitted to institute a derivative suit in behalf of the corporation in order to
protect or vindicate corporate rights whenever the officials of the
corporation refuse to sue, or when a demand upon them to file the necessary
action would be futile because they are the ones to be sued, or because they
hold control of the corporation. In such actions, the corporation is the real
party-in-interest while the suing stockholder, in behalf of the corporation, is
only a nominal party. However, since the ones to be sued are the
directors/officers of the corporation itself, a stockholder, like petitioner
Cruz, may validly institute a derivative suit to vindicate the alleged
corporate injury, in which case Cruz is only a nominal party while Filport is
the real party-in-interest. The petition filed with the SEC at the instance of
Cruz, which ultimately found its way to the RTC of Davao City is a
derivative suit of which Cruz has the necessary legal standing to institute.
 003 TOMS v. RODRIGUEZ (MATSUMURA)
July 6, 2015 and July 13, 2016 | Perlas-Bernabe, J. | Doctrine of Directly-Vested
Power
PETITIONER: Richard K. Tom
RESPONDENTS: Samuel N. Rodriguez
SUMMARY: Fidel Cu sold 17,237 of his shares of stock in Golden Dragon to Ramos
and Basalo via a deed of conditional sale. Cu also sold 15,233 of the same shares of
stock to Lim, Ong, and Guannacao via a deed of sale. All of them failed to pay. Despite
this, all the buyers except Ramos were elected as offices of the Golden Dragon. Ramos
and Tom, along with other individuals, forcibly took over the Golden Dragon offices, so
a case for injunction was filed against them by the Board. Pending the case, Cu resold all
his shares of stock to Basalo (remaining shares + shares he previously sold). Cu also
intervened in the injunction case claiming that he was the legal owner of the shares since
he was still unpaid by his buyers. The RTC ruled in favour of Cu and ordered Lim, Ong,
Guannacao, and Ramos to desist from performing any act of management and control
over Golden Dragon. Thereafter, Cu executed a SPA in favour of Mancao making him
an authorised representative with powers to perform acts of management and control
over Golden Dragon. Meanwhile, Cu entered into an Agreement with Basalo to set the
terms of payment. In 2011 Cu wrote a letter revoking the authority he granted to Mancao
and Basalo, and reinstated the control and management of Golden Dragon to himself.
Thus, Mancao and Basalo filed a complaint for Specific Performance. Rodriguez filed a
complaint in-intervention alleging that in a MOA between him and Basalo, the latter
gave him authority to manage and control the Luzon area of Golden Dragon which
revokes any authority that Basalo gave to Mancao. Rodriguez also prays that Basalo
follow the stipulations of their MOA (Fact 16). The RTC ruled in favour of Rodriguez
and ordered Basalo to comply with their MOA. Tom was the only one to elevated the
case until the SC.
The SC ruled that since a corporation exercises its powers through its board of directors
and/or its duly authorized officers and agents, the RTC and CA erred in placing the
management and control of Golden Dragon to Rodriguez, a mere intervenor, on the basis
of a MOA between the latter and Basalo, in violation of the Sec. 23 of the Corporation
Code. In the 2016 MR, the SC re-affirmed this decision and reiterated Sect. 23 of the
Corporation Code
DOCTRINE: The powers granted to the Board of Directors are directly vested to them
by law, thus: Under Section 23 “it cannot be doubted that the management and control of
Golden Dragon International Terminals, Inc, being a stock corporation, are vested in its
duly elected Board of Directors, the body that: (1) exercises all powers provided for
under the Corporation Code (2) conducts all business of the corporation; and (3) controls
and holds all property of the corporation. Its members have been characterized as
trustees or directors clothed with a fiduciary character.”
Consequently, the MOA executed among the feuding stockholders that arranges that the
affairs of the corporation shall be in the hands of one set of stockholders would be void
and cannot serve to oust the duly elected Board of Directors from the exercise of
corporate powers.
FACTS:
1. Golden Dragon International Terminals, inc. (Golden Dragon) is the
exclusive Shore Reception Facility Service Provider of the Philippine Ports
Authority (PPA) tasks to collect, treat, and dispose of all ship-generated oil
wastes in all bases and private ports under the PPA’s jurisdiction.
2. In December 2008, Fidel Cu (Cu) sold his 17,237 shares of Stock in Golden
Dragon to Virgilio Ramos and Cirilo Basalo, Jr through a Deed of
Conditional Sale.
3. When the buyers failed to pay the purchase price, Cu sold 15,233 of the same
shares to Edgar Lim, Eddie Ong, and Arnold Guannacao through a Deed of
Sale. These buyers also did not pay.
4. In September 11, 2009, the following were elected as officers of Golden
Dragon: Lim (President and Chairman of the Board), Basalo (VP for Visayas
and Mindanao), Ong (Treasurer and VP for Luzon), and Gunnacao
(Director).
5. A group of individuals who were not elected as office including Tom, as led
by Ramos forcibly took over the Golden Dragon offices and performed the
functions of its officers.
6. This prompted Golden Dragon through its duly-elected Chairman and
President, Lim, to file an action for injunction and damages against Ramos,
et al., before the RTC of Manila.
7. Pending the case, Cu resold his shares of stock in golden Dragon to Basalo
for 60 million on April 30, 2010. Under this agreement, Cu sold not only his
remaining 1,977 shares of the stock, but also the shares of stock subject of
the previously-executed Deed of Conditional sale over Ramos, and Deed of
Sale in favour of Lim, Ong, and Gunnacao.
8. Cu intervened in the injunction case claiming that, as an unpaid seller, he was
still the legal owner of the shares of stock subject of the previous contracts
he entered into with Ramos, Lim, Ong, and Gunnacao.
9. The RTC granted Cu’s application for injunction and ordered Lim, Ong,
Guannacao, and Ramos to cases and desist from performing or causing the
performance or any and all acts of management and control over Golden
Dragon. Cu was also given the opportunity to put in order Golden Dragon’s
business operations.
10. Cu then executed a SPA in favour of Cezar Mancao constituting the latter as
his daily authorised representative to exercise the powers granted to him in
the October 11, 2010 Order, and to perform all acts of management and
control over Golden Dragon.
11. Thereafter, Cu and Basalo entered into an Addendum to Agreement setting
the terms of payment for the sale of the shares of stock.
12. However, in September 2011, Cu wrote a letter expressly revoking the
authority he had previously granted to Mancao and Basalo under the SPA and
other relating documents. Moreover, that he reinstates the power to control
and manage the affairs of Golden Dragon unto himself. This letter was
addressed to Mancao, Basalo, and the Board of Directors of Golden Dragon.
13. Thus, Mancao and Basalo filed a complaint for Specific Performance with a
prayer for the issuance of a TRO and Injunction against Cu, Tom, and several
John and Jane Does before RTC Nabunturan.
a. The complaint impleaded Tom on the allegation that Cu had
authorised him to exercise control and management over the Golden
Dragon and, on the strength thereof, had made representations
before the PPA that enabled him to enter the ports in certain regions,
to the exclusion of the other agents of the Golden Dragon.
b. The complaint prayed that:
i. A TRO be issued to enjoin Cu, Tom, and all persons acting
for and under Cu’s authority from exercising control and
management over Golden Dragon and/or interfering with
mancao’s and Basalo’s affairs
ii. Preliminary injunction
iii. Cu be ordered to comply with his obligation under the
agreements he executed with them.
14. Thereafter, Samuel Rodriguez filed a Complaint-in-Intervention alleging that
in a MOA dated May 2, 2012, Basalo authorised him to take over, manage,
and control the operations of Golden Dragon in the Luzon area, and in such
regard, effectively revoked whatever powers Basalo had previously given to
Mancao. [I’m guessing Basalo also gave an SPA or something to Mancao but
the case never explicitly mentioned]
15. In the MOA Basalo and Rodriguez agreed to divide the monthly net profit of
Golden Dragon equally. However, Basalo refused to honour the terms of their
MOA despite demand. Thus, Rodriguez sought to intervene in the specific
performance case to compel Basalo to comply with his undertaking.
16. Rodriguez also prays that Basalo, his agents, deputies, and successors, and
all other persons acting for and on his behalf, to honor his obligations under
the MOA by:
a. Giving the management and control of Golden Dragon in the Luzon
area to Rodriguez;
b. Allocating the power to administer and manage the Visayas and
Mindanao regions of Golden Dragon to Rodriguez in the concept of
a partner;
c. Granting to Rodriguez the right to provide the manpower services
for the operations of Golden Dragon and
d. Giving to Rodriguez his share in the net proceeds of Golden Dragon.
e. Finally, he prayed that after trial, such injunction be made
permanent
17. Basalo failed to present evidence to contradict Rodriguez’ allegations, despite
having the opportunity to do so.
18. The RTC-Nabunturan granted Rodriguez’ application for injunction. The
court also ordered Basalo to
a. Place management and control of the Golden Dragon in Luzon to
Rodriguez as representative of Basalo
b. Allocate the power to administer and manage the Visayas and
Mindanao regions of Golden Dragon to Rodriguez in the concept of
a partner of Basalo;
c. Allow Rodriguez to provide the manpower services for the
operations of Golden Dragon; and
d. Give to Rodriguez his share in the monthly net proceeds from
Golden Dragon’s operations, subject to the rules of the corporation
on fees relative to the management contracts
19. Basalo and Mancao (original plaintiff), and Tom (original defendant)
separately filed MRs which were denied.
20. Tom elevated the matter before the CA via certiorari with prayer for issuance
of TRO and/or preliminary injunction.
21. The CA denied Tom’s petition, as well as his MR.
22. Hence, this review on certiorari of the resolution of the CA
ISSUE/s:
1. WoN Rodriguez can be placed by the court to manage and control Golden
Dragon based on the MOA agreement between the latter and Basalo —NO.
This would violate Section 23 of the Corporation Code which states that these
powers are held by the Board of Directors.
RULING:
2015: WHEREFORE, the petition is GRANTED.
2016: WHEREFORE, the Court resolves to DENY WITH FINALITY the Motion
for Reconsideration with Motion to Dissolve the Injunctive Writ filed by respondent
Samuel N. Rodriguez.
RATIO:
2015 RULING
1. PROCEDURAL ISSUE: At the outset, it is observed that Tom has
erroneously invoked the Court’s appellate jurisdiction under Rule 45 of the
 Rules of Court in assailing the CA’s Resolutions denying his prayer for
injunctive relief. Considering that the assailed CA Resolutions merely
disposed of Tom’s prayer for the issuance of a TRO and/or writ of
preliminary injunction — hence, interlocutory orders — the proper remedy
should have been to file a petition for certiorari, not a petition for review
before this Court. On this score, therefore, the instant petition would have
been dismissible outright. However, in accordance with the liberal spirit in
pervading in the Rules of Court, and in the interest of substantial justice, the
SC still deemed it proper to examine the petition.
2. SUBSTANTIVE ISSUE: As the existence of grave abuse of discretion in
this case relates to the propriety of issuing a TRO and/or writ of preliminary
injunction, which, by nature, are injunctive reliefs and preservative remedies
for the protection of substantive rights and interests, it is important to lay
down the issuance’s requisites, namely:
a. there exists a clear and unmistakable right to be protected;
b. this right is directly threatened by an act sought to be enjoined; (
c. the invasion of the right is material and substantial; and
d. there is an urgent and paramount necessity for the writ to prevent
serious and irreparable damage.
3. Case law holds that the issuance of an injunctive writ rests upon the sound
discretion of the court that took cognizance of the case; as such, the exercise
of judicial discretion by a court in injunctive matters must not be interfered
with, except when there is grave abuse of discretion
4. In this case, the SC found that the CA committed grave abuse of discretion
in denying Tom’s prayer for the issuance of a TRO and/or writ of preliminary
injunction.
5. A corporation exercises its powers through its board of directors and/or
its duly authorized officers and agents, except in instances where the
Corporation Code requires stockholders’ approval for certain specific
acts.
6. According to Section 23 of the Corporation Code,
Unless otherwise provided in this Code, the corporate powers of all
corporations formed under this Code shall be exercised, all business
conducted and all property of such corporations controlled and held by
the board of directors or trustees to be elected from among the holders
of stocks, or where there is no stock, from among the members of the
corporation, who shall hold office for one (1) year until their successors are
elected and qualified.
7. Hence, the management and control of Golden Dragon, being a stock
corporation, are vested in its duly elected Board of Directors, the body
that: (1) exercises all powers provided for under the Corporation Code; (2)
conducts all business of the corporation; and (3) controls and holds all
property of the corporation. Its members have been characterized as trustees
or directors clothed with a fiduciary character
8. Thus, by denying Tom’s prayer for the issuance of a TRO and/or writ of
preliminary injunction, the CA effectively affirmed the RTC’s Order
placing the management and control of Golden Dragon to Rodriguez, a
mere intervenor, on the basis of a MOA between the latter and Basalo, in
violation of the foregoing provision of the Corporation Code. In so doing,
the CA committed grave abuse of discretion amounting to lack or excess of
jurisdiction, which is correctible by certiorari.
2016 RULING
1. In a Motion for Reconsideration with Motion to Dissolve the Injunctive Writ,
Rodriguez asserts that the Court’s July 6, 2015 Decision has been
rendered moot and academic with the execution of the MOA dated May
25, 2015 signed by himself, Tom, and Mancao.
2. Pursuant to the MOA, Rodriguez, Tom, and Mancao have come to an
agreement with respect to the operation, control, and management of the ports
operated by Golden Dragon in that:
a. the port of General Santos City shall be managed by Rodriguez
and/or his authorized representative;
b. the ports of Davao City and Panabo City shall be managed by Tom
and/or his authorized representative; and
c. the ports of Manila, Batangas, and Bataan shall be managed by
Mancao and/or his authorized representative
3. The SC reiterated that it granted the writ of preliminary injunction on the
ground that a corporation can only exercise its powers and transact its
business through its board of directors and through its officers and
agents when authorized by a board resolution or its bylaws.
4. As the provisions of the MOA are in direct contravention of the foregoing
law, which the Court had earlier espoused in the July 6, 2015 Decision, its
execution cannot in any way affect, change, or render the Court’s previous
disquisitions moot and academic. In fact, the MOA is, clearly and in all
respects, contrary to law. Therefore, the writ of preliminary injunction must
stand.
004 ANGELES v. SANTOS (Marcos)
Aug. 31, 1937 | Laurel, J. | Delegated Powers Coming from the Stockholders
 PLAINTIFFS-APPELLEES: Higinio Angeles, Jose De Lara and Aguedo
Bernabe, as stockholders for and in behalf and for the benefit of the corporation,
Parañaque Rice Mill, Inc., and the other stockholders who may desire to join
DEFENDANTS-APPELLANTS: Teodorico B. Santos, Estanislao Mayuga,
Apolonio Pascual, and Basilisa Rodriguez
SUMMARY: The parties of the case are all stockholders and members of the
board of directors of Parañaque Rice Mill. Angeles et. al., who constitute the
minority of the board of directors, filed a complaint against Santos et. al., who are
part of the majority of the board of directors. They allege that there was a
mismanagement in the corporation as Santos appropriated to his own benefir the
funds and income of the corporation, refused to hold ordinary monthly meetings,
and they disposed of the properties of the corporation without authority from the
board. Angeles et. al. therefore prays and asks for the members of the board to be
removed and an extraordinary meeting be held among the stockholders for the
purpose of electing a new board. The trial court ruled in favor of Angeles et. al.
The issue now before the SC is WoN the lower courts erred in ordering the
destitution of the defendants from their office as members of the board of directors
of the corporation, until the new election of the stockholders which shall be held
once the decision had become final. The Court held that There is ample evidence
in the present case to show that Santos et. al. have been guilty of breach of trust
as directors of the corporation and the lower court so found. The board of directors
of a corporation is a creation of the stockholders and controls and directs the affairs
of the corporation by delegation of the stockholders. But the board of directors, or
the majority thereof, in drawing to themselves the powers of the corporation,
occupies a position of trusteeship in relation to the minority of the stock in
the sense that the board should exercise good faith, care and diligence in the
administration of the affairs of the corporation and should protect not only
the interests of the majority but also those of the minority of the stock.
DOCTRINE: The board of directors of a corporation is a creation of the
stockholders and controls and directs the affairs of the corporation by delegation
of the stockholders. By drawing themselves the powers of the corporation, they
occupy positions of trusteeship in relation to the stockholders.
FACTS:
1. The parties of the case are all stockholders and members of the board of
directors of the Parañaque Rice Mill, Inc., a corporation organized for the
purpose of operating a rice mill in the municipality of Parañaque.
2. Angeles et. al filed a complaint with the Court of First Instance of Rizal.
3. The complaint avers the following:
a. Angeles et. al. (plaintiffs) are stockholders who constitute the
minority of the board of directors while Santos et. al. (defendants),
constitute the majority of the board of directors.
b. An investigation committee, in which some of the plaintiffs were
part, was formed to investigate and determine the properties,
operations, and losses of the corporation. Santos et. al., however
denied access to the properties, books and records of the
corporation.
c. Santos (siya lang, not the other defendants), in violation of the by-
laws, took possession of the books, vouchers, and corporate records
as well as the funds and income of Parañaque, all of which should
be under the control and possession of the secretary-treasurer.
d. Santos appropriated to his own benefit the properties, funds, and
income of the corporation.
e. He further refused to sign and issue a corresponding certificate of
stock for the 600 fully paid-up shares of plaintiff Angeles.
f. He refused to call a meeting of the board of directors and
stockholders,
g. Santos et. al, the majority, refused to hold ordinary monthly
meetings of the board.
h. Santos, as president and in connivance with his co-defendants, was
disposing of the properties and records of the corporation without
authority from the board or the stockholders,
i. To prevent interference of his arbitrary acts, he suspended plaintiff
de Lara.
j. Because of the illegal and arbitrary acts of Santos et.al., not only the
funds but also the books and records of the corporation are in danger
of disappearing.
4. Angeles et. al therefore prays that Melchor de Lara be appointed as receiver
and that Santos be ordered to render a detailed accounting of the properties,
funds, and income of the corporation, and be required to pay damages. He
further asks for the members of the board be removed and an
extraordinary meeting of the stockholders be called for the purpose of
electing a new board of directors.
5. Santos et. al did not agree on the appointment of receiver so upon agreement,
the trial court appointed Benigno Agco.
6. Santos et. al. filed their Answer by way of general and specific denial, and
further contended that the corporation suffered damages because of the illegal
and malicious procurement of ex parte order of receivership. Further damages
were alleged because Angeles et. al did not present their grievances to the
board before going to court.
7. The trial court ruled in favor of Angeles et. al, and ordered Santos to render
a detailed account on the properties, and dismissing Santos et. al., of their
positions as directors of the corporation, until a new election by the
shareholders will be convened. (this was in Spanish, google translated it
lang)
8. Santos et.al., filed a motion for reconsideration, and new trial on the ground
that the evidence presented was insufficient to justify the decision and that
said decision was contrary to law.
9. Such was denied by the lower courts and the case was finally elevated to the
 SC by bill of exceptions.
ISSUE/s:
1. WoN the lower courts erred in ordering the destitution of the defendants from
their office as members of the board of directors of the corporation, until the
new election of the stockholders which shall be held once the decision had
become final. – NO, because there is ample evidence in the present case to
show that Santos et. al. have been guilty of breach of trust as directors of the
corporation.
RULING: In view of the foregoing, we hold:
(1) That the action in the present case was properly instituted by the plaintiffs as
stockholders for and in behalf of the corporation Parañaque Rice Mill, Inc., and other
stockholders of the said corporation;
(2) That the lower court committed no reviewable error in appointing a receiver
of the corporation pendente lite;
(3) That the lower court committed no error in ordering an election of the new
board of directors, which election shall be held within thirty days from the date this
decision becomes final;
(4) That Teodorico B. Santos shall render an accounting of all the properties,
funds and income of the corporation which may have come into his possession to
the new board of directors;
(5) That the receiver, Emilio Figueroa, shall continue in office until the election and
qualification of the members of the new board of directors;
(6) That upon the constitution of the new board of directors, the said receiver shall turn
over all the properties of the corporation in his possession to the corporation, or such
person or persons as may be duly authorized by it; and
(7) That Higinio Angeles, or his successor in interest, is entitled to 600 shares of stock
at the par value of P15,000 and the lower court committed no error in ordering the
issuance of the corresponding certificate of stock.
the corporation or fraudulently disposes of its properties, or performs ultra
vires acts, the court, in the exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is unavailing, will entertain a suit led by
the minority members of the board of directors, for and in behalf of the
corporation, to prevent waste and dissipation and the commission of illegal
acts and otherwise redress the injuries of the minority stockholders against
the wrongdoing of the majority.
5. The action in such a case is said to be brought derivatively in behalf of the
corporation to protect the rights of the minority stockholders thereof
6. Were corporate directors are guilty of a breach of trust — not of mere error
of judgment or abuse of discretion — and intracorporate remedy is futile or
useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the bene t of the corporation, to bring about a redress of
the wrong in icted directly upon the corporation and indirectly upon the
stockholders.
7. The Corporation Law, as amended, in sections 29 to 34, provide for the
election and removal of the directors of a corporation. Our Corporation
Law (Act No. 1459, as amended), does not confer expressly upon the
courts the power to remove a director of a corporation.
8. There are abundant authorities, however, which hold that if the court
has acquired jurisdiction to appoint a receiver because of the
mismanagement of directors these may thereafter be removed and
others appointed in their place by the court in the exercise of its equity
jurisdiction.

RATIO:
1. There is ample evidence in the present case to show that Santos et. al. have
been guilty of breach of trust as directors of the corporation and the lower
court so found.
2. The board of directors of a corporation is a creation of the stockholders and
controls and directs the affairs of the corporation by delegation of the
stockholders.
3. But the board of directors, or the majority thereof, in drawing to themselves
the powers of the corporation, occupies a position of trusteeship in relation
to the minority of the stock in the sense that the board should exercise
good faith, care and diligence in the administration of the affairs of the
corporation and should protect not only the interests of the majority but
also those of the minority of the stock.
4. Where a majority of the board of directors wastes or dissipates the funds of
 005 Board of Liquidators v. Heirs of Kalaw (LOYOLA)
August 14, 1967 | Sanchez, J. | Formula for just compensation FACTS:
1. The National Coconut Corporation (NACOCO) was a government organization
given the power "to buy, sell, barter, export, and in any other manner deal in,
PETITIONER: The Board of Liquidators representing the Government of the
coconut, copra, and dessicated coconut, as well as their by-products, and to act as
Republic of the Philippines
agent, broker or commission merchant of the producers, dealers or merchants"
RESPONDENTS: Heirs of Maximo M. Kalaw, Juan Bocar, Estate of the Deceased
thereof. NACOCO’s purpose was to stabilize copra prices, to serve coconut
Casimiro Garcia and Leonor Moll
producers by securing advantageous prices for them, to cut down to a minimum, if
not altogether eliminate, the margin of middlemen, mostly aliens.
SUMMARY: National Coconut Corporation (NACOCO), a non-profit
2. NACOCO’s General Manager (GM) and Board Chairman was respondent
governmental organization, was in charge of all transactions involving coconut and
Maximo Kalaw, while his co-respondents Bocar, Garcia, and Moll were members
its by-products. Maximo Kalaw sat as its General Manager and board chairman.
of the Board of Directors.
Because of 4 typhoons that hit the country in, NACOCO was unable to fulfill its
3. While NACOCO’s by-laws made prior board approval necessary for contracts
obligations under the numerous contracts it entered into with several buyers. The
entered into by the GM, the nature of copra trading (where contracts were
aggrieved buyers threatened to bring damage suits but most of these were settled,
sometimes concluded in 24 hours) made it difficult for the Board to meet. Thus,
except for one who actually pushed through with the suit (Louis Dreyfus ltd.).
NACOCO entered into copra trading activities through contracts executed by
Subsequently, NACOCO was abolished by EO 372, giving the Board of
Kalaw without prior board approval.
Liquidators the function of settling and closing its affairs. All the settlements sum
4. Because of 4 typhoons which hit the Philippines in the last quarter of 1947,
up to P1,343,274.52. It is this sum that NACOCO, through the Board of
NACOCO was unable to fulfill several contracts to deliver copra. Kalaw informed
Liquidators, now seeks to recover from General Manager Kalaw and the other two
the Board of the impending losses due to the calamities, but they nonetheless
directors, charging the latter with negligence and bad faith/breach of trust for
unanimously ratified the contracts concerned.
having approved entered into the aforementioned unprofitable contracts. It is
5. The buyers of the copra threatened damage suits but these were mostly settled out
alleged that while the by-laws required prior approval of the board, Kalaw entered
of court. Even the lone buyer who sued eventually settled, and the total settlements
into the contracts alone as general manager and without the board’s prior approval.
paid out by NACOCO over the ill-fated contracts totaled P1.3M.
Sometime after, Kalaw died and the suit was brought against his estate. The issue in
6. NACOCO (substituted by the Board of Liquidators after NACOCO was
this case is WoN Kalaw and the rest of the board were guilty negligence and bad
abolished) now seeks to recover the settlement amounts from Kalaw and the other
faith and/or breach of trust for having entered into the unprofitable contracts. The
directors. NACOCO charges Kalaw with negligence under Article 1902 of the old
SC held NO, the contracts were valid corporate acts thus, Kalaw et. al not liable.
Civil Code (now Article 2176, new Civil Code); and defendant board members,
Although the by-laws required that a general manager first procure approval of the
including Kalaw, with bad faith and/or breach of trust for having approved the
board members before entering into contracts that would bind the corporation, the
contracts.
contrary practice by Kalaw was ratified by the Board. Evidence shows that it was
7. The lower court dismissed the suit, but the Board of Liquidators appealed, leaning
the practice of the corporation to allow its general manager to negotiate
heavily on NACOCO’s By-law requirement of prior board approval of contracts
contracts, in its copra trading for and in NACOCO’s behalf, without prior board
entered into by its GM.
approval. The Court ruled that “if the by-laws were to be literally followed, the
board should give its stamp of prior approval on all corporate contracts. But in this
ISSUE/s: WoN Kalaw and the rest of the board were guilty negligence and bad faith
case the board itself, by its acts and through acquiescence, practically laid aside
and/or breach of trust for having entered into the unprofitable contracts – NO, the
the by-law requirement of prior approval
contracts were valid corporate acts thus, Kalaw et. al not liable
DOCTRINE:
RULING: Viewed in the light of the entire record, the judgment under review must
It is possible for an express provision of the by-laws to be violated and the Board
be, as it is hereby, affirmed.
may, in certain corporate actions, bind the corporation in spite of the fact that it is
contrary to the by-law provision. 
 There are 2 ways by which corporate actions
RATIO:
may come about through its Board of Directors: 

1. General Rule: a corporate officer "intrusted with the general management and
1. The board may empower or authorize the act or contract; or
control of its business, has implied authority to make any contract or do any other
2. Ratification from the board
act which is necessary or appropriate to the conduct of the ordinary business of
As long as there is approval by the board, express or implied, it is valid to bind the
the corporation. As such officer, "he may, without any special authority from the
corporation.
 Board of Directors perform all acts of an ordinary nature, which by usage or
necessity are incident to his office, and may bind the corporation by contracts in
matters arising in the usual course of business.” Were these contracts within the
GM’s power to enter into for the corporation, given the by-laws mandate of prior
approval?
2. NACOCO’s GMs (even Kalaw’s predecessors) had been entering into contracts
presented to the board after their consummation, not before. Kalaw in fact signed
60 copra contracts without prior authority from the board in 1947, giving
NACOCO a gross profit of P3.6M. The contracts were known all along to the
board members. Nothing was said by them. The aforesaid contracts stand to prove
one thing: obviously, NACOCO board met the difficulties attendant to fast-
paced copra trading by leaving the adoption of means to end, to the sound
discretion of NACOCO's GM.
3. Settled jurisprudence has it that where similar acts have been approved by
the directors as a matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization of the board
of directors. Existence of such authority is established, by proof of the course of
business, the usage and practices of the company and by the knowledge which the
board of directors has, or must be presumed to have, of acts and doings of its
subordinates in and about the affairs of the corporation.
4. In the case at bar, the practice of the corporation has been to allow its general
manager to negotiate and execute contracts in its copra trading activities for and
in NACOCO's behalf without prior board approval. If the by-laws were to be
literally followed, the board should give its stamp of prior approval on all
corporate contracts. But that board itself, by its acts and through acquiescence,
practically laid aside the by-law requirement of prior approval. Under the given
circumstances, the Kalaw contracts are valid corporate acts.
5. Anyhow, the contracts were ratified, thus cured of defect. "Ratification by a
corporation of an unauthorized act or contract by its officers or others relates back
to the time of the act or contract ratified, and is equivalent to original authority."
6. By corporate confirmation, the contracts executed by Kalaw are thus purged of
whatever vice or defect they may have had.
006 MONTELIBANO VS. BACOLOD-MURCIA MILLING CO. (ARIELLE)
May 18, 1962| Reyes, JBL, J. | Business Judgment Rule – Transactions Entered Into
PETITIONER: Alfredo Montelibano, et al
RESPONDENTS: Bacolod-Murcia Milling Co., Inc.
SUMMARY: Montelibano et al are sugar planters adhered to Bacolod-Murcia’s
sugar central mill. The said contracts were to be in force for 30 years, also
providing that the resulting product should be divided in the ratio of 45-55 for
the mill and the planters, respectively. The milling contracts were sought to be
amended, increasing the planters’ share to 60% aside from other concessions,
and extending the operation of the contract to 45 years. A printed Amended
Milling Contract was drawn up, and the Board of Directors of Bacolod-Murcia
adopted a resolution granting further concessions to the planters aside from
those contained in the amended milling contract. In question now here is par. 9
of the amended milling contract, which provided that the sugar mills of Negros
Occidental whose annual production of sugar is more than the third of the total
production of all the sugar mills will be granted better conditions if the
conditions are better than those in the contract. Montelibano et al signed and
executed the Amended Milling Contract, but a copy of the resolution was not
attached to the printed contract until 1937. Montelibano initiated an action
contending that three Negros sugar centrals had already granted increased
participation to their planters, so they claim that under par. 9, Bacolod-Murcia
had become obligated to grant similar concessions to Montelibano et al.
Bacolod-Murcia resisted, and said that the stipulations in the resolution was
made without consideration and that the resolution was beyond the powers of
the corporate directors to adopt. The trial court ruled in favor of Bacolod-
Murcia. The issue is WoN the resolution is binding on Bacolod-Murcia. The SC
held that YES, it is binding upon them because the rule is that if the act is lawful
in itself, and not otherwise prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to the promotion of those ends, it
may fairly be considered within charter powers. As the resolution was passed in
good faith by the board of directors, it is valid and binding, and whether or not it
will cause losses or decrease the profits, the court has no authority to review
them.
DOCTRINE: When a resolution is passed in good faith by the board of
directors, it is valid and binding, and whether or not it will cause losses or
decrease the profits of the corporation, the court has no authority to review
them. Questions of policy or management are left solely to the honest decision
of officers and directors of a corporation, and the court is without authority to
substitute its judgment [for that] of the board of directors; the board is the
business manager of the corporation, and so long as it acts in good faith its
orders are not reviewable by the courts.
FACTS:
13. Plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the
Limited co-partnership Gonzaga and Company, had been and are sugar
planters adhered to defendant Bacolod-Murcia Milling Co’s sugar central
mill under identical milling contracts.
14. Originally executed in 1919, said contracts were stipulated to be in force for
30 years, and provided that the resulting product should be divided in the ratio
of 45% for the mill and 55% for the planters.
15. In 1936, the milling contracts were proposed to be amended, increasing the
planters’ share to 60% of the manufactured sugar and resulting molasses,
aside from other concessions, but extending the operation of the milling
contract from the original 30 years to 45 years.
16. A printed Amended Milling Contract form was drawn up. The Board of
Directors of Bacolod-Murcia adopted a resolution granting further
concessions to the planters over and above those contained in the printed
Amended Milling Contract.
17. The bone of contention is par. 9 of the Resolution, which provided that
during the validity of the Amended Milling Contract, the sugar mills of
Negros Occidental, whose annual production of centrifuged sugar is
more than the third of the total production of all the sugar mills of
Negros Occidental, will grant their planters if the conditions are better
than those in the contract, then those better conditions will be granted
and will be understood to be granted to the suppliers that have granted
the Amended Milling Contract. (Sorry, Google translate AF.)
18. Montelibano et al signed and executed the printed Amended Milling
Contract, but a copy of the resolution signed by the Central’s General
Manager, was not attached to the printed contract until 1937, with the
notation – the amendments transcribed above form part of the amended
milling contract, granted by the Bacolod-Murcia Milling.
19. Monteliban et al initiated the present action, contending that three Negros
sugar centrals, with a total annual production exceeding 1/3 of the production
of all the sugar central mills, had already granted increased participation
(62.5%) to their planters.
20. They also claimed that under par. 9 of the resolution, Bacolod-Murcia had
become obligated to grant similar concessions to Montelibano.
21. Bacolod-Murcia resisted stating that the stipulations contained in the
resolution were made without consideration; that the resolution in question
was null and void ab initio, being in effect a donation that was ultra vires and
beyond the powers of the corporate directors to adopt.
22. Trial court rendered judgment in favor of Bacolod-Murcia and dismissed the
complaint.
ISSUE/s:
2. WoN the resolution is binding upon Bacolod-Murcia – YES when a resolution is
passed in good faith by the board of directors, it is valid and binding, whether or
not it will cause losses or decrease in profits.
RULING: WHEREFORE, the decision under appeal is reversed and set aside; and
judgment is decreed sentencing the defendant-appellee to pay plaintiffs-appellants
the differential or increase of participation in the milled sugar in accordance with
paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to
the 60% expressed in the printed Amended Milling Contract, or the value thereof
when due.
RATIO:
1. The Court agrees with Montelibano et al. The controverted resolution was
adopted by Bacolod-Murcia as a further amendment of the proposed milling
contract, and it was approved 21 days before Montelibano et al signed the
Amended Milling Contract itself.
2. So when the Milling Contract was executed, the concessions granted by the
disputed resolution had already been incorporated into its terms.
3. No reason appears why in the face of such concessions, Montelibano should
reject them or consider them as separate and apart from the main amended
milling contract, especially taking into account that Alfredo Montelibano
was, at that time, the President of the Planters Association that had agitated
for the concessions contract.
4. The fact that it was not a separate bargain, was further shown by the fact that
a copy of the resolution was simply attached to the printed contract without
special negotiations or agreement between the parties.
5. It follows from the foregoing that the terms embodied in the resolution were
supported by the same consideration underlying the main amended milling
contract (promises and obligations undertaken by the planters and the
extension of its operative period for an additional 15 years).
6. Hence, the conclusion of the lower court that the resolution constituted
gratuitous concessions not supported by any consideration is untenable.
7. All discussions concerning donations and the lack of power of the directors
of Bacolod-Murcia to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after Montelibano
et al had already bound themselves to the terms of the printed milling
contract.
8. But this was not the case. When the resolution was adopted, Montelibano
et al were not yet obligated by the terms of the printed contract, since
they admittedly did not sign it until 21 days later. Before that, the printed
form was no more than a proposal that either party could modify at its
pleasure.
9. The resolution was actually modified by Bacolod-Murcia by adopting the
questioned resolution. So Bacolod-Murcia already understood that the
printed terms were not controlling, because it modified its resolution.
10. The Court is satisfied that such was also the understanding of Montelibano et
al, and that the minds of the parties met upon that basis. Otherwise, there
would have been no consent or meeting of the minds, and no binding contract
at all.
11. But the conduct of the parties indicates that they assumed that the signing of
the contract gave rise to a binding agreement.
12. That agreement had to exist on the basis of the printed terms as modified by
the resolution. Since there is no rational explanation for Bacolod-
Murcia’s assenting to the further concessions asked by the planters, to
allow Bacolod-Murcia now to retract such concessions would be to
sanction fraud upon the planters who relied on such additional
stipulations.
13. It is emphasized that the report submitted by the Board of Directors only
mentioned 90%, the planters having agreed to the 60-40 sharing of the sugar
set forth in the printed amended milling contracts and did not make any
reference at all to the terms of the amended contract.
14. The Directors of Bacolod-Murcia had no reason to call attention to the
provisions of the resolution in question, since it contained mostly
modifications in detail of the printed terms, and the only major change was
par. 9.
15. But when the report was made, that paragraph was not in effect yet, since it
was conditioned on other central granting better concessions to their planters,
and that did not happen until after 1950.
16. There can be no doubt that the directors had authority to modify the
proposed terms of the Amended Milling Contract for the purpose of
making its terms more acceptable to the other contracting parties.
17. The rule is that if the act is lawful in itself, and not otherwise prohibited,
is done for the purpose of serving corporate ends, and is reasonably
tributary to the promotion of those ends, it may fairly be considered
within charter powers.
18. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation’s business, fairly incident to
the express powers and reasonably necessary to their exercise.
19. As the resolution was passed in good faith by the board of directors, it is
valid and binding, and whether or not it will cause losses or decrease the
profits, the court has no authority to review them.
 007 PHILIPPINE STOCK EXCHANGE V. CA (HIRANG)
October 27, 1997|J. Torres Jr. | Business Judgement Rule
PETITIONER: PHILIPPINE STOCK EXCHANGE, INC.
RESPONDENTS: THE HONORABLE COURT OF APPEALS, SECURITIES
AND EXCHANGE COMMISSION and PUERTO AZUL LAND, INC.
SUMMARY: Puerto Azul Land Inc. (PALI) wanted to offer its shares to the public
and decided to course it through the Philippine Stock Exchange. It submitted its
application which was to be review by the Board of Governors of the PSE.
However, before giving its approval, the Board received a letter from the heirs of
Marcos stating that the properties of PALI were owned by the late Ferdinanrd
Marcos and that Ternate Development Corporation, a stockholder company in
PALI, was held in trust by Rebecco Panlilio for the benefit of the Marcoses.
Because of the conflict in the ownership of the properties of PALI, PSE rendered a
decision denying the application of PALI stating that the circumstances around the
ownership of the properties of PALI adversely affect the suitability of listing
PALIs shares in the stock exchange. PALI wrote a letter to SEC praying to
review the decision of PSE given that SEC has supervision and control over the
PSE. SEC rendered a decision reversing that of PSE and ordering it to list the
shares of PALI as it has complied with all the requirements to be listed. CA
affirmed the decision of SEC stating that PSE acted arbitrarily as PALI has already
met the requirements to be listed and that PSE is under the control and supervision
of SEC thus, it can overturn the decision of PSE. The issue in this case it WoN the
rejection of the application was proper. The court ruled that such rejection was
proper. SC explained that the PSE, though a corporation, is given a special
treatment by the lawmakers due to the special nature of stock exchange. While it is
correct that the SEC has control and supervision over all coporations in the country,
the court held that PSEs management prerogatives are not under the absolute
control of the SEC. The regulatory power of SEC over these management
prerogatives kicks in only if the PSEs judgment is attended by bad faith. In the
case at bar, there was no bad faith when PSE rendered its decision rejecting the
application of PALI. It considered facts (see ratio #10) that would bring serious
question to the qualification of PALI to sell its shares to the public through the
stock exchange. PSE has the right to reject applications which could damage its
name and goodwill. Thus, PSE can maintain a reasonable standard of propriety
in the entities who choose to transact through its facilities.
DOCTRINE: While SEC is the agency with the primary say as to whether or not
securities, including shares of stock may be traded in the stock exchange, this does
not mean that the PSE’s management prerogatives are under the absolute control of
the SEC. The PSE is, after all, a corporation authorized by its corporate franchise to
engage in its proposed and duly approved business. One of the PSEs main
concerns, as such, is still the generation of profit for its stockholders. Moreover, the
PSE has all the rights pertaining to corporations, including the right to sue and be
sued, to hold property in its own name, to enter or not to enter into contracts with
third persons, and to perform all other legal acts within its allocated express or
implied powers. (Book doctrine)
FACTS:
1. The Puerto Azul Land, Inc. (PALI), a domestic real estate corporation, had
sought to offer its shares to the public in order to raise funds allegedly to
develop its properties and pay its loans with several banking institutions.
2. PALI was issued a Permit to Sell its shares to the public by the Securities and
Exchange Commission (SEC) and to facilitate the trading of its shares among
investors, PALI sought to course the trading of its shares through the
Philippine Stock Exchange, Inc. (PSE).
3. The Listing Committee of the PSE, upon a perusal of PALI’s application,
recommended to the PSEs Board of Governors the approval of PALIs listing
application.
4. However, before such approval was granted, the Board of Governors of PSE
received a letter from the heirs of Ferdinand Marcos claiming that:
a. The late President Marcos was the legal and beneficial owner of
certain properties forming part of the Puerto Azul Beach Hotel and
Resort Complex which PALI claims to be among its assets.
b. Ternate Development Corporation, a stockholder of PALI, have
been held and continue to be held in trust by one Rebecco Panlilio
for then President Marcos and now, effectively for his estate
c. PALI’s application to be deferred
5. PALI’s answer:
a. the properties forming part of Puerto Azul Beach Hotel and Resort
Complex were not claimed by PALI as its assets. On the contrary,
the resort is actually owned by Fantasia Filipina Resort, Inc
b. Puerto Azul Country Club, entities distinct from PALI
c. Ternate Development Corporation owns only 1.20% of PALI.
6. Marcos’ contention:
a. Their claim is not confined to the facilities forming part of the Puerto
Azul Hotel and Resort Complex, thereby implying that they are also
asserting legal and beneficial ownership of other properties titled
under the name of PALI.
7. The Board of Governors of the PSE reached its decision to reject PALI’s
application, citing the existence of serious claims, issues and circumstances
surrounding PALIs ownership over its assets that adversely affect the
suitability of listing PALIs shares in the stock exchange.
8. In line with this, PALI wrote a letter to the SEC addressed to Chairman Yasay
requesting them, under its supervisory and regulatory powers over the PSE
(Under Section 6(j) of P.D. No. 902-A), to review its (PSE’s) action on the
denial of PALI’s application.
9. SEC rendered its decision reversing PSE’s decision ordering to immediately
cause the listing of the shares of PALI
 10. The same decision was affirmed by the CA stating that the SEC had both
jurisdiction and authority to look into the decision of the petitioner PSE,
pursuant to Section 3 of the Revised Securities Act in relation to Section 6(j)
and 6(m) of P.D. No. 902-A, and Section 38(b) of the Revised Securities Act.
Both as a corporation and as a stock exchange, the PSE is subject to SEC’s
jurisdiction, regulation and control. CA held that PALI complied with all the
requirements for public listing and full disclosure thus, PSE acted
arbitrarily when it rejected the application of PALI.
11. PSE’s contention:
a. Under presidential decree No. 902-A, the powers of the SEC over
stock exchanges are more limited as compared to its authority over
ordinary corporations. In connection with this, the powers of the
SEC over stock exchanges under the Revised Securities Act are
specifically enumerated, and these do not include the power to
reverse the decisions of the stock exchange
b. Such limitation is in line with the Business Judgement Rule which
states that the SEC and the courts are barred from intruding
into business judgments of corporations, when the same are
made in good faith. The said rule precludes the reversal of the
decision of the PSE to deny PALIs listing application, absent a
showing a bad faith on the part of the PSE
c. PSE retains the discretion to accept or reject applications for
listing. Thus, even if an issuer has complied with the PSE listing
rules and requirements, PSE retains the discretion to accept or
reject the issuers listing application if the PSE determines that
the listing shall not serve the interests of the investing public.
ISSUE/s: WoN rejecting the application of PALI was proper – YES. The PSE is still
a corporation that has the power to make its own business decisions. It is still
involved in the generation of profit and it can exercise its discretion to accept or
reject an application provided that such exercise of power was done in good faith.
RULING: The Court hereby GRANTS the Petition for Review on Certiorari. The
decisions of the Court of Appeals and the Securities and Exchage Commission, are
hereby REVERSED and SET ASIDE
RATIO:
1. SC held that PSE is not an ordinary corporation, in that although it is
clothed with the marking of a corporate entity, its functions as the primary
channel through which the vessels of capital trade ply.
2. The PSEs relevance to the continued operation and filtration of the securities
transactions in the country gives it a distinct color of importance such that
government intervention in its affairs becomes justified, if not necessary
3. Due to this special nature of stock exchanges, the country’s lawmakers has
seen it wise to give special treatment to the administration and regulation of
stock exchanges.
4. Section 3 of Presidential Decree 902-A, standing alone, is enough authority
to uphold the SECs challenged control authority over PSE even as it provides
that the Commission shall have absolute jurisdiction, supervision, and
control over all corporations, partnerships or associations, who are the
grantees of primary franchises and/or a license or permit issued by the
government to operate in the Philippines.
5. It is, likewise, observed that the principal function of the SEC is the
supervision and control over corporations, partnerships and associations
with the end in view that investment in these entities may be encouraged
and protected, and their activities pursued for the promotion of economic
development.
6. This is not to say, however, that the PSEs management prerogatives are
under the absolute control of the SEC. The PSE is, after all, a corporation
authorized by its corporate franchise to engage in its proposed and duly
approved business. One of the PSEs main concerns, as such, is still the
generation of profit for its stockholders.
7. Moreover, the PSE has all the rights pertaining to corporations, including
the right to sue and be sued, to hold property in its own name, to enter
(or not to enter) into contracts with third persons, and to perform all
other legal acts within its allocated express or implied powers.
8. As to its corporate and management decisions, the state will generally not
interfere with the same. Questions of policy and of management are left to
the honest decision of the officers and directors of a corporation, and the
courts are without authority to substitute their judgment for the
judgment of the board of directors. The board is the business manager of
the corporation, and so long as it acts in good faith, its orders are not
reviewable by the courts.
9. Thus, notwithstanding the regulatory power of the SEC over the PSE, and the
resultant authority to reverse the PSEs decision in matters of application for
listing in the market, the SEC may exercise such power only if the PSEs
judgment is attended by bad faith.
10. In reaching its decision to deny the application for listing of PALI, the PSE
considered important facts, which in the general scheme, brings to serious
question the qualification of PALI to sell its shares to the public through
the stock exchange.
a. PSE heard from the representative of the late President Ferdinand E.
Marcos and his family who claim the properties of the private
respondent to be part of the Marcos estate
b. PCGG already issued an order of sequestration covering the
properties of PALI. And a suit of reconveyance has already been
filed by the Sandiganbayan.
c. How the properties were effectively transferred, despite the
sequestration order, from Rebecco Panlilio to PALI in only a short
span of time, is not yet explained to the Court, but it is clear that
such circumstances give rise to serious doubt as to the integrity of
PALI as a stock issuer.
11. PSE was in the right when it refused application of PALI, for a contrary
ruling was not to the best interest of the general public.
12. Moreover, as the primary market for securities, the PSE has established its
name and goodwill, and it has the right to protect such goodwill by
maintaining a reasonable standard of propriety in the entities who choose
to transact through its facilities. It was reasonable for PSE, therefore, to
exercise its judgment in the manner it deems appropriate for its business
identity, as long as no rights are trampled upon, and public welfare is
safeguarded.
13. For the purpose of determining whether PSE acted correctly in refusing the
application of PALI, the true ownership of the properties of PALI need not
be determined as an absolute fact. What is material is the fact that
uncertainty of the properties’ ownership and alienability exists, and this
puts to question the qualification of PALIs public offering.
14. In addition to this, SEC was the one which acted arbitrarily when it relied on
the full disclosure policy to uphold the listing of PALI’s share.
15. Under the Revised Securities Act, it is provided that the Commission may
reject a registration statement and refuse to issue a permit to sell the securities
included in such registration statement if it finds that:
a. The registration statement is on its face incomplete or inaccurate in
any material respect or includes any untrue statement of a material
fact or omits to state material facts required to be stated therein or
necessary to make the statements therein not misleading
-xxx-
b. The issuer or registrant has not shown to the satisfaction of the
Commission that the sale of its security would not work to the
prejudice to the public interest or as a fraud upon the purchaser or
investors.
16. Court ruled that PALI failed on these two points, thereofore the conclusion
of SEC in upholding the listing of shares of PALI was without support.
 008 Ong Yong v. Tiu (Hilario)
April 8, 2003 | Corona, J. | Business Judgement Rule— on transactions entered into
PETITIONER: Ong Yong + Ongs
RESPONDENTS: David Tiu + Tius
SUMMARY: The Tius own First Landlink Asi Development Corporation
(FLADC) and were constructing Masagana Mall in Pasay. However, they
suffered dire financial difficulties and owed PNB P190 M so they mortgaged the
lot where the mall was being built, and the Tius invited the Ongs to invest in
FLADC. They entered into a Pre-Subscription Agreement, and agreed to maintain
equal shareholdings in FLADC (Ongs were to own 1 000 000 shares at a par value
of P 100, and the Tius were to subscribe an additional 549800 shares at P100 each
in addition to what they already have in their name). However the Tius sought
rescission of the contract on the ground that the Ongs refused to credit their
stocks.
Issue: Can Tius ask for rescission? NO.
SC ruled that the SEC order to FLADC to submit to it amended articles of
incorporation improper judicial intrusion into the internal affairs of the
corporation to compel FLADC to file at the SEC a petition for the issuance
of a certificate of decrease of stock. Decreasing a corporations authorized
capital stock is an amendment of the Articles of Incorporation. It is a decision
that only the stockholders and the directors can make, considering that they
are the contracting parties thereto.
DOCTRINE: No court can, in resolving the issues between squabbling
stockholders, order the corporation to undertake certain corporate acts, since it
would be in violation of the business judgement rule.
FACTS:
7. The Tius own First Landlink Asi Development Corporation (FLADC) and
were constructing Masagana Mall in Pasay.
8. However, they suffered dire financial difficulties and owed PNB P190 M so
they mortgaged the lot where the mall was being built, and the Tius invited
the Ongs to invest in FLADC.
9. They entered into a Pre-Subscription Agreement, and agreed to maintain
equal shareholdings in FLADC (Ongs were to own 1 000 000 shares at a par
value of P 100, and the Tius were to subscribe an additional 549800 shares
at P100 each in the form of real property in addition to what they already
have in their name). Ongs were to be in charge of managing and operating
the mall.
10. Both parties complied with their respective obligations and contributions.
11. To finance the debt to PNB, the Ongs invested more than what they agreed
to: they paid in another P70 M to FLADC and P20M to the Tius.
12. But the Tius rescinded the Pre-Subscription Agreement and accused the
Ongs of refusing to credit them FLADC shares (from their real property
contribution), from preventing Tius from working as Vice President and
Treasurer, and refusing them office space.
13. In their defense, the Ongs said that the Tius were still VP and treasurer but
they themselves refused to fulfill their corporate dutes. To justify the non-
issuance of corresponding certificate of shares of stock, the Ongs said in their
defense that the Tius refused to pay capital gains tax and documentary stamp
tax, and without that, the SEC would not approve the valuation of the Tiu’s
property contribution.
14. But the Ongs found out the truth, that the property contributions of the Tius
were really FLADC’s all along (they said that they contributed it as new
contribution but it’s really the corporations naman to begin with… Madaya
and swapang tong mga Tiu).
15. The Tius filed a case with the SEC, seeking confirmation of the rescission of
the PRe-Subscription Agreement. SEC confirmed the rescission.
a. (note pay attention to this fact this is the fact most related to our
lesson, connect with ratio 7 onwards) IN FACT, SEC even
ordered Tius to submit to it amended articles of incorporation
of FLADC to conform w the decision.
16. SEC en bank affirmed and classified the P70 M additional capital
contribution from the Ongs as premium on capital and not as a loan.
17. Dissatisfied, both parties appealed and the CA, it ordered liquidation and
payment (mej irrelevant).
18. CA commented that the rescission of the Tius was the height of ingratitude,
and found the Tius guilty of witholding FLADC funds from the Ongs. These
findings were confirmed by the SC upon appeal.
19. The CA concluded that both the Ongs and the Tius were in pari delicto (which
would not have legally entitled them to rescission) but, for practical
considerations, that is, their inability to work together, it was best to separate
the two groups by rescinding the Pre-Subscription Agreement, returning the
original investment of the Ongs and awarding practically everything else to
the Tius.
20. Their motions for reconsideration having been denied, both parties filed
separate petitions for review before the Supreme Court.
21. SC held that Ongs and Tius both violated their obligations under the Pre-
Subscription Agreement. Consequently, it held that rescission was not
possible since both parties were in pari delicto. However, this Court agreed
with the Court of Appeals that the remedy of specific performance, as
espoused by the Ongs, was not practical and sound either and would only lead
to further squabbles and numerous litigations between the parties. SC also
ruled that whatever remains of the assets of FLADC and the management
after liquidation shall belong to the Tiu’s.
 22. Tius filed Motion for Issuance of a Writ of Execution, and the Ongs opposed
and filed their own Motion for Reconsideration, saying that specific
performance and not rescission was the proper remedy under the presmises
and that assuming rescission is proper, they should be entitled to their
proportionate share in the mall.
2. Ongs say that their breach of Pre-Subscription Agreement was at
most casual, and does not justify rescission of the contract.
3. All Tiu’s allegations pertain to the FLADC’s obligations to them
and not to the Ong’s obligations to them.
4. That whatever remains after liquidation should belong to the Ongs,
not to the Tius as ruled by the SC.
ISSUE/s:
2. WoN the Tius could legally rescind the Pre-Subscription Agreement – NO,
because.
RULING: SC GRANTS Ong’s motion for reconsideratioinJudgment in question is
affirmed.
RATIO:
4. FLADC was originally incorporated with an authorized capital stock of
500,000 shares with the Tius owning 450,200 shares representing the paid-
up capital. When the Tius invited the Ongs to invest in FLADC as
stockholders, an increase of the authorized capital stock became
necessary to give each group equal (50-50) shareholdings as agreed upon in
the Pre-Subscription Agreement. The authorized capital stock was thus
increased from 500,000 shares to 2,000,000 shares with a par value of P100
each, with the Ongs subscribing to 1,000,000 shares and the Tius to 549,800
more shares in addition to their 450,200 shares to complete 1,000,000 shares.
Thus, the subject matter of the contract was the 1,000,000 unissued shares
of FLADC stock allocated to the Ongs.
5. Since these were unissued shares, the parties Pre-Subscription
Agreement was in fact a subscription contract as defined under Section
60, Title VII of the Corporation Code: Any contract for the acquisition of
unissued stock in an existing corporation or a corporation still to be formed
shall be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a purchase or some
other contract.
6. Thus, the real parties to the contract are really the corporation FLADC
and the Ongs.
7. SC gave multi-level argument as to why rescission cannot be allowed
(putting this here in case it’s asked in class):
a. Tius suit cannot prosper because in reality they are not parties
to Pre-Subscription Agreement since they are not selling their
own shares to the Ongs.
b. Ongs do not represent FLADC as its management and thus
breach by Ongs is not a breach by FLADC, they are separate.
c. If indeed the Tius were really prevented from participating in
the management of FLADC, the Corporation Code, SEC rules,
and even the Rules of Court provide for appropriate adequate
intra-corporate remedies other that rescission.
d. Even assuming the Tius have the legal standing to sue for
rescission, rescission will still violate the Trust Fund Doctrine
and procedure for valid distribution of assets and property
under the Corporation Code.
5. Contrary to the Tius allegation, rescission will, in the final analysis, result
in the premature liquidation of the corporation without the benefit of
prior dissolution in accordance with Sections 117, 118, 119 and 120 of the
Corporation Code. The Tius maintain that rescinding the subscription
contract is not synonymous to corporate liquidation because all rescission
will entail would be the simple restoration of the status quo ante and a return
to the two groups of their cash and property contributions. We wish it were
that simple. Very noticeable is the fact that the Tius do not explain why
rescission in the instant case will not effectively result in liquidation. The
Tius merely refer in cavalier fashion to the end-result of rescission (which
incidentally is 100% favorable to them) but turn a blind eye to its unfair,
inequitable and disastrous effect on the corporation, its creditors and the
Ongs.
6. [MOST IMPORTANT!!!!!]
7. Furthermore, it is an improper judicial intrusion into the internal affairs
of the corporation to compel FLADC to file at the SEC a petition for the
issuance of a certificate of decrease of stock. Decreasing a corporations
authorized capital stock is an amendment of the Articles of Incorporation.
It is a decision that only the stockholders and the directors can make,
considering that they are the contracting parties thereto.
8. In this case, the Tius are actually not just asking for a review of the
legality and fairness of a corporate decision. They want this Court to
make a corporate decision for FLADC.
9. We decline to intervene and order corporate structural changes not
voluntarily agreed upon by its stockholders and directors.
10. Truth to tell, a judicial order to decrease capital stock without the assent of
FLADCs directors and stockholders is a violation of the business judgment
rule which states that: xxx xxx xxx (C)ontracts intra vires entered into by the
board of directors are binding upon the corporation and courts will not
interfere unless such contracts are so unconscionable and oppressive as to
amount to wanton destruction to the rights of the minority, as when plaintiffs
aver that the defendants (members of the board), have concluded a transaction
among themselves as will result in serious injury to the plaintiffs
stockholders.
11. SC even cited CLV on this: Courts and other tribunals are wont to override
the business judgment of the board mainly because, courts are not in the
business of business, and the laissez faire rule or the free enterprise system
 prevailing in our social and economic set-up dictates that it is better for the e. The Ongs shortcomings were far from serious and certainly less
State and its organs to leave business to the businessmen; especially so, when than substantial; they were in fact remediable and correctable
courts are ill-equipped to make business decisions. More importantly, the under the law. It would be totally against all rules of justice,
social contract in the corporate family to decide the course of the fairness and equity to deprive the Ongs of their interests on
corporate business has been vested in the board and not with courts. petty and tenuous grounds.
12. Absent rescission, financial interests of both the Tius and the Ongs will
remain intact and safe within FLADC.
13. If rescission is granted, the Ongs will find themselves out in the streets
with nothing but the money they had in 1994 while the Tius will not only
enjoy a windfall estimated to be anywhere from P450 million to P900
million but will also take over an extremely profitable business without
much effort at all.
a. IN SHORT, Ongs will lose big time (since inflation, money 10
years ago is diff from money we have 10 years later) and then
the Tius will benefit without much effort on their part.
b. Regarding In pari delicto finding, SC finds that Ongs were more
behaved than the Tius. THe Tius were really mean and SC said
that they are “appalled by the attempt by the Tius to pull a fast
one on the Ongs becase that was there the problem precisely
started.”
c. It is clear that, when the finances of FLADC improved
considerably after the equity infusion of the Ongs, the Tius
started planning to take over the corporation again and exclude
the Ongs from it. It appears that the Tius refusal to pay transfer
taxes might not have really been at all unintentional because, by
failing to pay that relatively small amount which they could
easily afford, the Tius should have expected that they were not
going to be given the corresponding shares. It was, from every
angle, the perfect excuse for blackballing the Ongs. In other
words, the Tius created a problem then used that same problem
as their pretext for showing their partners the door. In the
process, they stood to be rewarded with a bonanza of anywhere
between P450 million to P900 million in assets (from an
investment of only P45 million which was nearly foreclosed by
PNB), to the extreme and irreparable damage of the Ongs,
FLADC and its creditors.
d. After all is said and done, no one can close his eyes to the fact
that the Masagana Citimall would not be what it has become
today were it not for the timely infusion of P190 million by the
Ongs in 1994. There are no ifs or buts about it. Without the
Ongs, the Tius would have lost everything they originally
invested in said mall. If only for this and the fact that this
Resolution can truly pave the way for both groups to enjoy the
fruits of their investments assuming good faith and honest
intentions we cannot allow the rescission of the subject
subscription agreement.
 009 Lipat v Pacific Banking Corporation (Gustilo)
April 30, 2003 | Quisumbing, J. | Theories of Estoppel & Ratification
PETITIONER: Estelita Burgos Lipat & Alfredo Lipat
RESPONDENTS: Pacific Banking Corporation, Register of Deeds
SUMMARY: The Lipat Spouses owned Belas Export Trading (BET) which was
engaged in the manufacture of garments for domestic & foreign consumption. The
Lipat Spouses also owned the Mystical Fashions in the United States, which sells
goods imported from the Philippines through BET. Mrs. Lipat designated her
daughter, Teresita B. Lipat, to manage BET in the Philippines while she was
managing Mystical Fashions in the United States. Estelita Lipat executed a SPA
appointing Teresita Lipat as her attorney-in-fact to obtain loans and other credit
accommodations from Pacific Banking. She likewise authorized Teresita to
execute mortgage contracts on properties owned or co-owned by her as security
for the obligations to be extended by Pacific Bank including any extension or
renewal thereof. Teresita, by virtue of the special power of attorney, was able to
secure for and in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific
Bank amounting to P583,854.00 to buy fabrics to be manufactured by BET and
exported to Mystical Fashions in the United States. As security therefor, the Lipat
spouses, as represented by Teresita, executed a Real Estate Mortgage over their
property located at No. 814 Aurora Blvd., Cubao, Quezon City.
On September 1979, BET was incorporated into a family corporation named Belas
Export Corporation (BEC) in order to facilitate the management of the
business. BEC was engaged in the business of manufacturing and exportation of
all kinds of garments of whatever kind and description and utilized the same
machineries and equipment previously used by BET. Its incorporators and
directors included the Lipat spouses who owned a combined 300 shares out of the
420 shares subscribed, Teresita Lipat who owned 20 shares, and other close
relatives and friends of the Lipats. Estelita Lipat was named president of BEC,
while Teresita became the vice-president and general manager.Eventually, the
loan was later restructured in the name of BEC and subsequent loans were
obtained by BEC with the corresponding promissory notes duly executed by
Teresita on behalf of the corporation. The promissory notes, export bills, and trust
receipt eventually became due and demandable. Unfortunately, BEC defaulted in
its payments. Consequently, the real estate mortgage was foreclosed and after
compliance with the requirements of the law the mortgaged property was sold at
public auction, a certificate of sale was issued to Eugenio Trinidad (Trinidad) as
the highest bidder.
The spouses Lipat filed before the Quezon City RTC a complaint for annulment
of the real estate mortgage, extrajudicial foreclosure and the certificate of sale
issued over the property against Pacific Bank and Trinidad. The RTC stated that
BEC was a mere extension of the Lipats personality and business and a mere alter
ego or business conduit of the Lipats established for their own benefit. The trial
court pierced the veil of corporate fiction and held that Belas Export Corporation
and the Lipats are one and the same. Pacific Bank had transacted business with
both BET and BEC on the supposition that both are one and the same.Hence, the
Lipats were estopped from disclaiming any obligations on the theory of separate
personality of corporations, which is contrary to principles of reason and good
faith. The CA affirmed such decision. The issue is WoN the doctrine of piercing
the veil of corporate fiction is applicable in this case? The SC held yes since
Estelita Lipat admitted that she and her husband, Alfredo, were the owners of BET
and were two of the incorporators and majority stockholders of BEC. It is also
undisputed that Estelita Lipat executed a special power of attorney in favor of her
daughter, Teresita, to obtain loans and credit lines from Pacific Bank on her behalf.
Incidentally, Teresita was designated as executive-vice president and general
manager of both BET and BEC, respectively. BEC is a mere continuation and
successor of BET, and Lipat Spouses cannot evade their obligations in the
mortgage contract secured under the name of BEC on the pretext that it was signed
for the benefit and under the name of BET.
DOCTRINE: Estoppel precludes a corporation & its Board of Directors from the
denying the validity of the transaction entered into by its officer with a third party
who in good faith, relied on the authority of the former as manager to act on behalf
of the corporation
FACTS:
1. The spouses Alfredo Lipat and Estelita Burgos Lipat (Lipat Spouses),
owned Belas Export Trading (BET), a single proprietorship with principal
office at No. 814 Aurora Boulevard, Cubao, Quezon City. BET was engaged
in the manufacture of garments for domestic and foreign consumption. The
Lipat Spouses also owned the Mystical Fashions in the United States, which
sells goods imported from the Philippines through BET. Mrs. Lipat
designated her daughter, Teresita B. Lipat, to manage BET in the Philippines
while she was managing Mystical Fashions in the United States.
2. In order to facilitate the convenient operation of BET, Estelita Lipat
executed on December 1978, a special power of attorney appointing
Teresita Lipat as her attorney-in-fact to obtain loans and other credit
accommodations from Pacific Banking Corporation (Pacific Bank). She
likewise authorized Teresita to execute mortgage contracts on properties
owned or co-owned by her as security for the obligations to be extended
by Pacific Bank including any extension or renewal thereof.
3. Teresita, by virtue of the special power of attorney, was able to secure for and
in behalf of her mother, Mrs. Lipat and BET, a loan from Pacific Bank
amounting to P583,854.00 to buy fabrics to be manufactured by BET and
exported to Mystical Fashions in the United States. As security therefor, the
Lipat spouses, as represented by Teresita, executed a Real Estate Mortgage
over their property located at No. 814 Aurora Blvd., Cubao, Quezon City.
4. Said property was likewise made to secure other additional or new loans,
discounting lines, overdrafts and credit accommodations, of whatever
amount, which the Mortgagor and/or Debtor may subsequently obtain from
the Mortgagee as well as any renewal or extension by the Mortgagor and/or
Debtor of the whole or part of said original, additional or new loans,
discounting lines, overdrafts and other credit accommodations, including
 interest and expenses or other obligations of the Mortgagor and/or Debtor
owing to the Mortgagee, whether directly, or indirectly, principal or
secondary, as appears in the accounts, books and records of the Mortgagee.
5. On September 1979, BET was incorporated into a family corporation
named Belas Export Corporation (BEC) in order to facilitate the
management of the business. BEC was engaged in the business of
manufacturing and exportation of all kinds of garments of whatever kind
and description and utilized the same machineries and equipment
previously used by BET. Its incorporators and directors included the
Lipat spouses who owned a combined 300 shares out of the 420 shares
subscribed, Teresita Lipat who owned 20 shares, and other close
relatives and friends of the Lipats. Estelita Lipat was named president
of BEC, while Teresita became the vice-president and general manager.
6. Eventually, the loan was later restructured in the name of BEC and
subsequent loans were obtained by BEC with the corresponding promissory
notes duly executed by Teresita on behalf of the corporation. A letter of credit
was also opened by Pacific Bank in favor of A. O. Knitting Manufacturing
Co., Inc., upon the request of BEC after BEC executed the corresponding
trust receipt therefor. Export bills were also executed in favor of Pacific Bank
for additional finances. These transactions were all secured by the real estate
mortgage over the Lipats property.
7. The promissory notes, export bills, and trust receipt eventually became due
and demandable. Unfortunately, BEC defaulted in its payments. After receipt
of Pacific Banks demand letters, Estelita Lipat went to the office of the banks
liquidator and asked for additional time to enable her to personally settle
BECs obligations. The bank acceded to her request but Estelita failed to fulfill
her promise.Consequently, the real estate mortgage was foreclosed and
after compliance with the requirements of the law the mortgaged
property was sold at public auction. On January 1989, a certificate of
sale was issued to Eugenio Trinidad (Trinidad) as the highest bidder.
8. The spouses Lipat filed before the Quezon City RTC a complaint for
annulment of the real estate mortgage, extrajudicial foreclosure and the
certificate of sale issued over the property against Pacific Bank and Trinidad.
The complaint alleged, among others, that the promissory notes, trust receipt,
and export bills were all ultra vires acts of Teresita as they were executed
without the requisite board resolution of the Board of Directors of BEC. The
Lipats also averred that assuming said acts were valid and binding on BEC,
the same were the corporations sole obligation, it having a personality distinct
and separate from spouses Lipat. t was likewise pointed out that Teresitas
authority to secure a loan from Pacific Bank was specifically limited to Mrs.
Lipats sole use and benefit and that the real estate mortgage was executed to
secure the Lipats and BETs P583,854.00 loan only.
9. Pacific Bank and Trinidad alleged in common that Spouses Lipat cannot
evade payments of the value of the promissory notes, trust receipt, and export
bills with their property because they and the BEC are one and the same, the
latter being a family corporation. Trinidad further claimed that he was a buyer
in good faith and for value and that Spouses Lipat are estopped from denying
BECs existence after holding themselves out as a corporation.
10. The RTC dismissed the complaint wherein it stated ruled that there was
convincing and conclusive evidence proving that BEC was a family
corporation of the Lipats. As such, it was a mere extension of the Lipats
personality and business and a mere alter ego or business conduit of the
Lipats established for their own benefit. Hence, to allow the Lipats to invoke
the theory of separate corporate personality would sanction its use as a shield
to further an end subversive of justice. Thus, the trial court pierced the veil
of corporate fiction and held that Belas Export Corporation and the Lipats are
one and the same. Pacific Bank had transacted business with both BET and
BEC on the supposition that both are one and the same.Hence, the Lipats
were estopped from disclaiming any obligations on the theory of separate
personality of corporations, which is contrary to principles of reason and
good faith.
11. The CA affirmed the decision of the RTC. It stated that Mrs. Lipat had full
control over the activities of the corporation and used the same to further her
business interests. In fact, she had benefited from the loans obtained by the
corporation to finance her business. It also found unnecessary a board
resolution authorizing Teresita Lipat to secure loans from Pacific Bank on
behalf of BEC because the corporations by-laws allowed such conduct even
without a board resolution. Finally, the mortgage property was not only liable
for the original loan of P583,854.00 but likewise for the value of the
promissory notes, trust receipt, and export bills as the mortgage contract
equally applies to additional or new loans, discounting lines, overdrafts, and
credit accommodations which the Lipats subsequently obtained from Pacific
Bank.
ISSUE/s:
1. WoN the doctrine of piercing the veil of corporate fiction is applicable in this
case?- YES because BEC is a mere continuation & successor of BET
2. WoN the Lipats property under the real estate mortgage is liable not only for
the amount of P583,854.00 but also for the value of the promissory notes,
trust receipt, and export bills subsequently incurred by BEC?- YES because
BEC merely succeeded BET as Lipat Spouses alter ego thus the Lipat
Spouses mortgaged property must be held liable for the subsequent loans
& credit lines of BEC
RULING: WHEREFORE, the petition is denied. The decision of the CA is affirmed.
RATIO:
Piercing the veil of corporate fiction
1. In finding the Lipat Spouses mortgaged property liable for the obligations of
BEC, both courts below relied upon the alter ego doctrine or instrumentality
 rule, rather than fraud in piercing the veil of corporate fiction. When the
corporation is the mere alter ego or business conduit of a person, the separate
personality of the corporation may be disregarded. This is commonly referred
to as the instrumentality rule or the alter ego doctrine, which the courts have
applied in disregarding the separate juridical personality of corporations.
2. Estelita Lipat admitted that she and her husband, Alfredo, were the
owners of BET and were two of the incorporators and majority
stockholders of BEC. It is also undisputed that Estelita Lipat executed a
special power of attorney in favor of her daughter, Teresita, to obtain
loans and credit lines from Pacific Bank on her behalf. Incidentally,
Teresita was designated as executive-vice president and general manager
of both BET and BEC, respectively.
3. Furthermore, (1) Estelita and Alfredo Lipat are the owners and majority
shareholders of BET and BEC, respectively; (2) both firms were
managed by their daughter, Teresita; (3) both firms were engaged in the
garment business, supplying products to Mystical Fashion, a U.S. firm
established by Estelita Lipat; (4) both firms held office in the same
building owned by the Lipats; (5) BEC is a family corporation with the
Lipats as its majority stockholders; (6) the business operations of the
BEC were so merged with those of Mrs. Lipat such that they were
practically indistinguishable; (7) the corporate funds were held by
Estelita Lipat and the corporation itself had no visible assets; (8) the
board of directors of BEC was composed of the Burgos and Lipat family
members; (9) Estelita had full control over the activities of and decided
business matters of the corporation; and that (10) Estelita Lipat had
benefited from the loans secured from Pacific Bank to finance her
business abroad and from the export bills secured by BEC for the
account of Mystical Fashion.
4. BEC is a mere continuation and successor of BET, and Lipat Spouses cannot
evade their obligations in the mortgage contract secured under the name of
BEC on the pretext that it was signed for the benefit and under the name of
BET.
Extent of liability of mortgage
5. The extent to which the Lipats property can be held liable under the real
estate mortgage is not limited to P583,854.00. It can be held liable for the
value of the promissory notes, trust receipt and export bills as well. For
the mortgage was executed not only for the purpose of securing the Belas
Export Tradings original loan of P583,854.00, but also for other additional or
new loans, discounting lines, overdrafts and credit accommodations, of
whatever amount.
6. The Lipat Spouses contend further that the mortgaged property should not
bind the loans and credit lines obtained by BEC as they were secured without
any proper authorization or board resolution. They also blame the bank for
its laxity and complacency in not requiring a board resolution as a requisite
for approving the loans.
7. It could not have been possible for BEC to release a board resolution since
per admissions by both Estelita Lipat and Alice Burgos, Lipat Spouses
rebuttal witness, no business or stockholders meetings were conducted nor
were there election of officers held since its incorporation. In fact, not a single
board resolution was passed by the corporate board and it was Estelita Lipat
and/or Teresita Lipat who decided business matters.The principle of estoppel
precludes Lipat Spouses from denying the validity of the transactions entered
into by Teresita Lipat with Pacific Bank, who in good faith, relied on the
authority of the former as manager to act on behalf of Estelita Lipat and both
BET and BEC.
8. While the power and responsibility to decide whether the corporation should
enter into a contract that will bind the corporation is lodged in its board of
directors, subject to the articles of incorporation, by-laws, or relevant
provisions of law, yet, just as a natural person may authorize another to do
certain acts for and on his behalf, the board of directors may validly delegate
some of its functions and powers to officers, committees, or agents. The
authority of such individuals to bind the corporation is generally derived from
law, corporate by-laws, or authorization from the board, either expressly or
impliedly by habit, custom, or acquiescence in the general course of business.
Apparent authority, is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds
out an officer or agent as having the power to act or, in other words, the
apparent authority to act in general, with which it clothes him; or (2) the
acquiescence in his acts of a particular nature, with actual or constructive
knowledge thereof, whether within or beyond the scope of his ordinary
powers.
9. Teresita Lipat had dealt with Pacific Bank on the mortgage contract by virtue
of a special power of attorney executed by Estelita Lipat.Recall that Teresita
Lipat acted as the manager of both BEC and BET and had been deciding
business matters in the absence of Estelita Lipat. Further, the export bills
secured by BEC were for the benefit of Mystical Fashion owned by Estelita
Lipat.
10. Hence, Pacific Bank cannot be faulted for relying on the same authority
granted to Teresita Lipat by Estelita Lipat by virtue of a special power
of attorney. It is a familiar doctrine that if a corporation knowingly
permits one of its officers or any other agent to act within the scope of an
apparent authority, it holds him out to the public as possessing the power
to do those acts; thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying
the agents authority.
 010 Woodchild Holdings vs. Roxas Electric and Construction (Gueco)
August 12, 2004 | Callejo, Sr., J. | Acts done by officers beyond the scope of their
authority
PETITIONER: Woodchild Holdings, Inc.
RESPONDENTS: Roxas Electric and Construction Company, Inc.
SUMMARY:
RECCI is the owner of two parcels of land (“Lot 1 and Lot 2”). A portion of Lot
1 was a road which had access to the Sumulong Highway. The board of
directors of RECCI, through a resolution, authorized its President, Roxas, to sell
Lot 2. WHI wanted to buy Lot 2 so that it could construct its warehouse
building therein, so it wrote a letter to Roxas stating its offer to buy. Roxas
accepted the offer to buy of WHI. However, apart from the sale of Lot 2, it also
granted to WHI a right of way over a portion of Lot 1. It also granted to WHI
the right to buy a portion of Lot 1 should WHI so desire. Pursuant to that
agreement in their deed of sale, WHI expressed to Roxas its desire to purchase a
portion of Lot 1. But Roxas died so WHI sought to enforce its claim against
RECCI. RECCI, however, denied the request of WHI so WHI filed an action for
specific performance and damages with the RTC. RTC ruled in favor of WHI.
On appeal, CA ruled in favor of RECCI, stating that Roxas acted beyond the
scope of his authority because the Board of Directors merely authorized him to
sell the first lot, and not to grant a right of way in favor of WHI over a portion
of the first lot, or to grant an option to the WHI to buy a portion thereof.
ISSUE: WoN RECCI is bound by the provisions of the deed of absolute sale
which grants WHI (1) the beneficial use and right of way over Lot 1, and (2)
which grants WHI the option to buy a portion of Lot 1—NO, RECCI IS NOT
BOUND BY THE PROVISIONS OF THE DEED BECAUSE ROXAS WAS
NOT AUTHORIZED UNDER THE RESOLUTION TO DO SO. RULING: In
this case, Roxas was not specifically authorized under the resolution to grant a
right of way in favor of WHI nor was he authorized to sell to WHI a portion of
Lot 1. The authority of Roxas, under the resolution, was only to sell Lot 2. It did
not include the authority to sell a portion of the adjacent lot, Lot 1 or to create or
convey real rights thereon. Neither may such authority be implied from the
authority granted to Roxas to sell Lot 2.
Regarding principle of apparent authority: For the principle to apply, WHI is
has the burden of proving the following: (a) the acts of RECCI which justifies
the belief that it had authorized Roxas; (b) knowledge by RECCI of the
unauthorized acts of Roxas; and, (c) reliance thereon by WHI consistent with
ordinary care and prudence. In this case, there is no evidence on record of
specific acts made by RECCI showing or indicating that it had full knowledge
of any representations made by Roxas to WHI that it had authorized him to
grant to WHI the option to buy a portion of Lot 1 or to create a burden or lien
thereon. The principal of apparent authority, therefore, does not apply.
DOCTRINE:
Under Article 1910 of the New Civil Code, acts done by such officers beyond the
scope of their authority cannot bind the corporation unless it has ratified such acts
expressly or tacitly, or is estopped from denying them. Thus, contracts entered
into by corporate officers beyond the scope of authority are unenforceable against
the corporation unless ratified by the corporation.
FACTS:
6. Roxas Electric and Construction Company, Inc. (“RECCI”) is the owner of
two parcels of land identified as Lot No. 491-A-3-B-1 (hereinafter as “Lot
1”) and Lot No. 491-A-3-B-2 (hereinafter as “Lot 2”). A portion of Lot 1 was
a dirt road accessing the Sumulong Highway
7. The Board of Directors of RECCI then approved a resolution authorizing the
corporation, through its President, Roberto Roxas, to sell the two lots and to
receive the proceeds of the sale for and on behalf of the company.
8. Woodchild Holdings Inc. (“WHI”) wanted to buy Lot 2 because it wanted to
construct its warehouse building therein, and it also wanted to buy a portion
of Lot 1 so that its 45 foot container van would be able to readily enter and
leave the property.
9. As such, the president of WHI, Jonathan Dy (“Dy”) wrote a letter to Roxas,
stating his offer to buy the buy the land.
10. Roxas accepted the offer and so the sale was consummated. A Deed of
Absolute Sale in favor of WHI was issued, in which the Lot was sold for
P5,000,000, and under the following terms and conditions:
a. Roxas agrees and binds itself to give WHI the beneficial use of and
a right of way from Sumulong Highway to the property herein
conveyed consists of 25 square meters wide to be used as the latter's
egress from and ingress to and an additional 25 square meters in the
corner of Lot 1, as turning and/or maneuvering area for Vendee's
vehicles.
b. Roxas agrees that in the event that the right of way is insufficient for
WHI’s use (ex entry of a 45-foot container) he (Roxas) agrees to sell
additional square meters from its current adjacent property to allow
WHI full access and full use of the property.
11. Subsequently, WHI entered into a construction agreement with Wimbeco
Builder’s Inc. (“WBI”) for the construction of its warehouse. It also entered
into a lease agreement with Poderosa Leather Goods Company, Inc.
(“Poderosa”) whereby Poderosa would lease the warehouse upon its
completion.
12. After some time, however, WHI complained to Roxas that the vehicles of
RECCI were parked on a portion of the property over which WHI had been
granted a right of way. Roxas promised to look into the matter. Dy and
Roxas discussed the need of the WHI to buy a 500-square-meter portion of
the Lot 2 as provided for in the deed of absolute sale. However, Roxas died
 soon thereafter.
13. WHI wrote the RECCI, reiterating its verbal requests to purchase a portion
of the said lot as provided for in the deed of absolute sale, and complained
about the latter’s failure to eject the squatters within the three-month period
agreed upon in the said deed. RECCI rejected the demand of WHI, so WHI
filed a case for Specific Performance and Damages in the RTC of Makati.
14. RTC ruled in favor of WHI.
15. CA reversed the RTC’s decision and dismissed the complaint. It stated that
the resolution of the Board of Directors of RECCI merely authorized
Roxas to sell the first lot, and not to grant right of way in favor of WHI
over a portion of the first lot, or to grant an option to the WHI to buy a
portion thereof.
ISSUES:
2. WoN RECCI is bound by the provisions of the deed of absolute sale which
grants WHI (1) the beneficial use and right of way over Lot 1, and (2) which
grants WHI the option to buy a portion of Lot 1—NO, RECCI IS NOT
BOUND BY THE PROVISIONS OF THE DEED BECAUSE ROXAS WAS
NOT AUTHORIZED UNDER THE RESOLUTION TO DO SO.
RULING: IN LIGHT OF ALL THE FOREGOING, judgment is hereby
rendered AFFIRMING the assailed Decision of the Court of Appeals WITH
MODIFICATION. The respondent is ordered to pay to the petitioner the amount
of P5,612,980 by way of actual damages and P100,000 by way of attorneys fees. No
costs. SO ORDERED.
RATIO:
1. Generally, the acts of corporate officers which are within the scope of their
authority are binding on the corporation. However, under Article 1910 of the
New Civil Code, if the acts done by such officers are beyond the scope of
their authority, it cannot bind the corporation unless it has ratified such acts
expressly or tacitly, or is estopped from denying them. In other words,
contracts entered into by corporate officers beyond the scope of their
authority are unenforceable against the corporation unless ratified by the
corporation.
2. In this case, Roxas was not specifically authorized under the resolution to
grant a right of way in favor of WHI nor was he authorized to sell to WHI a
portion of Lot 1. The authority of Roxas, under the resolution, was only to
sell Lot 2. It did not include the authority to sell a portion of the adjacent lot,
Lot 1 or to create or convey real rights thereon. Neither may such authority
be implied from the authority granted to Roxas to sell Lot 2.
3. The general rule is that the power of attorney must be pursued within legal
strictures, and the agent can neither go beyond it; nor beside it. The act done
must be legally identical with that authorized to be done.
4. Also, under Art. 1878 (12) of the Civil Code, a special power of attorney is
required to convey real rights over immovable property. It requires that
contracts which have for their object the creation of real rights over
immovable property must appear in a public document. In this case, there was
no such SPA executed in favor of Roxas to validly grant a right of way and
agree to sell a portion of Lot 1. The rule is that if the act of the agent is
one which requires authority in writing, those dealing with him are
charged with notice of that fact. Having acted beyond his authority, it
follows that the assailed provisions of the sale are not binding upon its
principal, RECCI.
5. Absent estoppel or ratification, apparent authority cannot remedy the
lack of the written power required under the statute of frauds. It bears
stressing that apparent authority is based on estoppel and can arise from
two instances: first, the principal may knowingly permit the agent to so
hold himself out as having such authority, and in this way, the principal
becomes estopped to claim that the agent does not have such authority;
second, the principal may so clothe the agent with the indicia of authority
as to lead a reasonably prudent person to believe that he actually has
such authority.
6. There can be no apparent authority of an agent WITHOUT acts or
conduct on the part of the principal and such acts or conduct of the
principal must have been known and relied upon in good faith and as a
result of the exercise of reasonable prudence by a third person as
claimant and such must have produced a change of position to its
detriment. The apparent power of an agent is to be determined by the
acts of the principal and not by the acts of the agent
7. For the principle of apparent authority to apply, WHI has the burden of
proving the following: (a) the acts of RECCI which justifies the belief that
it had authorized Roxas; (b) knowledge by RECCI of the unauthorized acts
of Roxas; and, (c) reliance thereon by WHI consistent with ordinary care and
prudence.
8. In this case, there is no evidence on record of specific acts made by RECCI
showing or indicating that it had full knowledge of any representations made
by Roxas to WHI that it had authorized him to grant to WHI the option to
buy a portion of Lot 1 or to create a burden or lien thereon. The principal of
apparent authority, therefore, does not apply.
 011 Francisco v. GSIS (Gonzales)
March 30, 1963 | Reyes, J.B.L., J. | Doctrine of Apparent Authority
PLAINTIFF-APPELLEE: Trinidad Francisco
DEFENDANT-APPELLANT: Government Service Insurance System
SUMMARY: Trinidad obtained a loan from GSIS and in return, she mortgaged a
parcel of land. However, she defaulted so GSIS foreclosed the mortgage and
bought the said property. Atty. Vicente (Trinidad’s father) then sent a letter to GSIS
general manager Andal, proposing the redemption of the foreclosed property
(wherein P30,000 will be given while the balance will be paid through the monthly
installments from the property). On the same day, Atty. Vicente received a
telegram from Andal that GSIS Board approved the request regarding the
redemption. Atty. Vicente thus gave the P30,000 and Trinidad turned over the
monthly rentals to GSIS. However, GSIS asked Trinidad for the proposal for the
payment of her indebtedness, since the redemption period had lapsed. Trinidad thus
filed a case for specific performance to enforce GSIS’ acceptance of his father’s
proposal through Andal’s telegram. GSIS argues that said telegram is not binding
since it was erroneous.
The issue is WoN the telegram generated a contract that is valid and binding upon
the parties – YES. *Doctrine* Since GSIS knowingly permitted Andal to do act
within the scope of an apparent authority (GSIS did not disown the telegram; it
accepted payment and kept silent about it), GSIS is estopped from denying Andal’s
authority.
DOCTRINE: If a corporation knowingly permits one of its officers, or any other
agent, to do acts within the scope of an apparent authority, and thus holds him out
to the public as possessing power to do those acts, the corporation will, as against
any one who has in good faith dealt with the corporation through such agent, be
estopped from denying his authority.
FACTS:
1. Trinidad obtained a loan of P400,000 from GSIS. She then mortgaged a
parcel of land located in Baesa, QC.
2. Trinidad defaulted so GSIS extrajudicially foreclosed the mortgage and
bought said property.
3. Trinidads father, Atty. Vicente, sent a letter to GSIS general manager Andal
a. I propose to pay P30,000 to GSIS if it would agree that foreclosure
of my daughter's mortgage would be set aside.
b. P30,000 will not cover the total arrearage of P52,000 but as regards
the balance, I propose this arrangement: GSIS would take over the
administration of the mortgaged property and to collect the monthly
installments (P5,000), which shall be applied to the payment of
Trinidad’s arrearage until the same is fully covered.
4. On the same date of the sending of the letter, Atty. Vicente received the
following telegram: GSIS BOARD APPROVE YOUR REQUEST RE
REDEMPTION OF FORECLOSED PROPERTY OF YOUR DAUGHTER
– [from GSIS General Manager] ANDAL
5. Atty.Vicente thus remitted to GSIS, through Andal, a check of P30,000.
6. GSIS received the amount of P30,000.00, and issued therefor its official
receipt. It did not, however, take over the administration of the property.
7. In the meantime, Trinidad received the monthly payments of some of the
occupants; then she remitted, through her father, the amount of P44,121.29.
GSIS received this amount, and issued the corresponding official receipt.
8. Remittances, accompanied by letters, totalling P24,604.81 were sent by
Trinidad to GSIS, all of which were received and duly receipted for.
9. However, GSIS sent three letters, asking Trinidad for a proposal for the
payment of her indebtedness, since the one-year period for redemption had
expired.
10. Atty. Vicente sent a letter protesting against GSIS’ request for proposal of
payment since GSIS accepted his offer through the telegram.
11. GSIS: the telegram should be disregarded in view of its failure to express the
contents of the board resolution due to the error of its minor employees in
couching the correct wording of the telegram. The Board Resolution
indicated: ". . . subject to the condition that Mr. Vicente J. Francisco shall pay
all expenses incurred by the GSIS in the foreclosure of the mortgage."
12. GSIS then consolidated the title to the compound in its name, and gave notice
thereof to Trinidad and to each occupant of the compound.
13. Trinidad thus filed the present suit for specific performance and damages.
14. GSIS: the binding acceptance of Francisco's offer was the resolution of the
Board, and that Andal's telegram, being erroneous, should be disregarded.
15. CFI: the offer of Atty. Vicente made on behalf of his daughter, had been
unqualifiedly accepted, and was binding.
ISSUE:
3. WoN the telegram generated a contract that is valid and binding upon the
parties – YES, since GSIS is estopped from denying Andal’s authority.
RULING: AFFIRMED CFI decision.
RATIO:
10. The terms of the offer were clear, and over the signature of GSIS’ general
manager, Andal, Trinidad was informed telegraphically that her proposal had
been accepted.
11. The telegram was within Andal's apparent authority, but the defense is that
he did not sign it, but that it was sent by the Board Secretary in his name and
without his knowledge. Assuming this to be true, how was GSIS to know it?
Corporate transactions would speedily come to a standstill were every person
dealing with a corporation held duty-bound to disbelieve every act of its
responsible officers, no matter how regular they should appear on their face.
12. If a corporation knowingly permits one of its officers, or any other agent, to
 do acts within the scope of an apparent authority, and thus holds him out to
the public as possessing power to do those acts, the corporation will, as
against any one who has in good faith dealt with the corporation through such
agent, be estopped from denying his authority.
13. If a private corporation intentionally or negligently clothes its officers or
agents with apparent power to perform acts for it, the corporation will be
estopped to deny that such apparent authority is real, as to innocent third
persons dealing in good faith with such of cers or agents.
14. Hence, even if it were the board secretary who sent the telegram, the
corporation could not evade the binding effect produced by the telegram.
15. GSIS does not disown the telegram, and even asserts that it came from its
offices, and signed "R. P. Andal, general manager by Leovigildo Monasterial,
legal counsel", wherein these phrases occur: "the telegram sent . . . by this
office" and "the telegram we sent you” but it alleges mistake in couching the
correct wording.
16. This alleged mistake cannot be taken seriously, because while the telegram
is dated 20 February 1959, GSIS informed Atty. Francisco of the alleged
mistake only on 31 May 1960, and all the while it accepted the various other
remittances, starting on 28 February 1959, sent by Trinidad to it in
compliance with her performance of her part of the new contract.
17. The inequity of permitting GSIS to deny its acceptance becomes more patent
when account is taken the fact that in remitting the payment of P30,000
advanced by her father, Trinidad’s letter to Mr. Andal quoted verbatim the
telegram of acceptance. This was in itself notice to the corporation of the
terms of the allegedly unauthorized telegram.
18. Knowledge of facts acquired or possessed by an officer or agent of a
corporation in the course of his employment, and in relation to matters within
the scope of his authority, is notice to the corporation, whether he
communicates such knowledge or not.
19. Yet, notwithstanding this notice, GSIS pocketed the amount, and kept silent
about the telegram not being in accordance with the true facts, as it now
alleges. This silence, taken together with the unconditional acceptance of
three other subsequent remittances from Trinidad, constitutes in itself a
binding ratification of the original agreement (Civil Code, Art. 1393).
 012 ASSOCIATED BANK v. SPS. PRONSTROLLER (GALINDEZ)
14 July 2008 | Nachura, J. | Doctrine of Apparent Authority
PETITIONER: Associated Bank (now United Overseas Bank)
RESPONDENTS: Spouses Rafael and Monaliza Pronstroller
SUMMARY: Spouses Vaca applied for a loan with Associated Bank and executed a REM
over their house and lot. They defaulted hence the property was sold in an auction with
Associated as the highest bidder. They filed for nullification of the REM and foreclosure.
During the pendency of the case, the Pronstrollers made an offer to buy the property at
P7.5M. They made a downpayment of 10%. Associated, through Atty. Soluta executed
their first Letter-Agreement which stated they had a 90-day period within which do deposit
the remaining balance. Because of the pendency of the case between the Vacas and
Associated, the Pronstrollers requested that they be allowed to pay the balance after the
service of the final decision of that case instead.
One month after the proposal and after the payment deadline had lapsed, Pronstrollers and
Atty. Soluta acting for Associated, executed another Letter-Agreement [SECOND]
allowing the Pronstrollers to pay the balance of the purchase proce upon receipt of a final
order from the Court of the case and/or delivery of the property to them free of occupants.
There was a reorganization in Associated and Atty. Soluta was relieved of his services.
Atty. Dayday, the new Assistant VP, found out about the second agreement and submitted
the matter to Associated. This was disapproved hence Associated sought rescission of the
contract. The Pronstrollers were given two options: pay the remaining balance with 24.5%
interest p.a. or take the refund of P750k. The Pronstrollers then filed a case for specific
performance with the RTC.
During the pendency of the case, the property was resold to the Vacas. However, the RTC
ordered a writ of preliminary injunction prohibiting them from completely demolishing the
house on the property. Then, the RTC rendered a decision in favor of the Pronstrollers citing
the doctrine of apparent authority. The CA approved the same. The SC also ruled in favor
of the Pronstrollers, because although Atty. Soluta’s authority was not placed in the Letter-
Agreement or a separate paper, Associated recognized his authority in the FIRST Letter-
Agreement. Pronstollers hence cannot be blamed in relying on the SECOND Letter-
Agreement. Associated’s inaction, coupled with the apparent authority of Atty. Soluta to
act on behalf of the corporation, validates the July 14 [SECOND] agreement and thus binds
the corporation.
DOCTRINE: Naturally, the third person has little or no information as to what
occurs in corporate meeting; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of commercial transactions can
only be maintained by holding the corporation strictly to the liability fixed upon it
by its agents in accordance with law. What transpires in the corporate board room
is entirely an internal matter. Hence, petitioner may not impute negligence on the
part of the respondents in failing to find out the scope of Atty. Soluta’s authority.
Indeed, the public has the right to rely on the trustworthiness of bank officers and
their acts.
FACTS:
1. Spouses Vaca [Vacas] executed a REM in favor of Associated Bank
[Associated] over their parcel of residential land and the house constructed
there located in Quezon City. They defaulted on their obligation hence the
property was sold at a public auction with Associated as the highest bidder.
2. TCT in the name of Vaca was cancelled and a new one was issued in favor
of Associated.
3. Vacas commenced an action for nullification of the REM and foreclosure.
Associated however filed a petition for the issuance of the writ of possession
with the RTC denied.
4. The CA ruled in favor of Associated but Spouses Vaca questioned the
decision before the SC.
5. During the pendency of the cases, Associated advertised said property for
sale at P9.7M. Respondents Rafael and Monaliza Pronstroller [Pronstrollers]
offered to purchase at P7.5M. Such offer was made through Atty. Soluta,
Associated’s VP, Corp Secretary and a member of its BOD.
6. Associated accepted the offer and The Pronstrollers paid 10% of the purchase
price as downpayment.
7. Associated, through Atty. Soluta and the Pronstrollers, executed a Letter-
Agreement [FIRST] setting forth the terms and conditions of the sale
8. Prior to the expiration of the 90-day period within which to make the escrow
depost, and because of the pendency of the case between the Vacas and
Associated over the property, Pronstrollers requested that the balance of the
purchase price be made payable only after service of the final decision of the
Court affirming Associated’s right to possess the property.
9. Atty. Soluta referred the Pronstroller’s proposal to Associated’s Asset
Recovery and Remedial Management Committee (ARRMC) but ARRMC
deffered the action.
10. One month after the proposal and after the payment deadline had lapsed,
Pronstrollers and Atty. Soluta acting for Associated, executed another Letter-
Agreement [SECOND] allowing the Pronstrollers to pay the balance of the
purchase proce upon receipt of a final order from the Court of the case and/or
delivery of the property to them free of occupants.
11. Towards the end of 1993/94 Associated reorganized its management. Atty.
Dayday became the Assistant VP and Head of the Documentation and Atty.
Soluta was relieved.
12. Atty. Dayday reviewed Associated’s records of outstanding accounts and
discovered that Pronstrollers failed to deposit the balance of the purchase
price.
13. He also found out that they asked for an extension of time to pay. The matter
was resubmitted to the ARRMC and it was disapproved. Hence, the matter
was referred to the Legal Department for rescission/cancellation of contract
due to the breach of Pronstrollers.
14. They were informed of the rescission hence they went to Atty. Dayday’s
office and gave him the Letter-Agreement to show the proposal was
approved. Atty. Dayday claimed that such letter was a mistake and Atty.
Soluta was not authorized to give an extension.
 15. The Pronstrollers proposed to pay the balance of the purchase price as
follows: P3M upon approval of proposal and balance after 6 months.
16. The proposal was disapproved by Associated and Associated advised them
that they would accept the proposal only if they’d pay an interest of 24.5%
p.a. on the unpaid balance.
17. Associated also allowed a refund of P750k if they would not agree to such.
18. The parties failed to reach an agreement and Pronstrollers through counsel
informed Associated that they would enforce the Letter-Agreement.
19. Associated countered that it was not aware of such agreement and Atty.
Soluta was unauthorized to sign for and on behalf of the bank.
20. In the Vaca case, the Court upheld Associated’s right to possess the property.
21. Pronstrollers commenced the instant case filing a complaint for specific
performance before the RTC of Antipolo. They prayed that Associated be
ordered to sell the property to them in accordance with their Letter-
Agreement.
22. They likewise caused the annotation of a lis pendens at the TCT.
23. Associated contended that their contract was already rescinded because of
failure to deposit in escrow the balance of the purchase price.
24. During the pendency of the case, Associated sold the property to the Vacas
who registered the sale. Hence the former TCT was cancelled and a new one
issued in their names.
25. As new owners, the Vacas started demolishing the house on the property but
was not completed because of a writ of preliminary injunction issued.
26. The trial court resolved the matter in favor of the Pronstrollers. Applying the
rule of apparent authority, the court upheld the Letter-Agreement.
27. The CA also affirmed the RTC decision and upheld Atty. Solutas authority
to represent Associated.
ISSUE/s:
1. WoN Associated is bound by the Letter-Agreement signed by Atty. Soluta
under the doctrine of apparent authority – YES, because Associated’s
inaction, coupled with the apparent authority of Atty. Soluta to act on behalf
of the corporation, validates the July 14 agreement and thus binds the
corporation.
RULING: WHEREFORE, premises considered, the petition is DENIED. The
Decision of the Court of Appeals AFFIRMED.
RATIO:
1. The Court notes that the Letter-Agreement [FIRST] was written on a paper
with Associated’s letterhead. It was signed by Atty. Soluta with the
conformity of Pronstrollers.
2. The authority of Atty. Soluta to act for and on behalf of Associated was not
reflected in the letter or in a separate paper attached to it. However,
Associated recognized such authority to sign the name and thus,
acknowledged its binding effect.
3. The SECOND Letter-Agreement was also written on the same type of paper
and signed by Atty. Soluta. Again, his authority was not written anywhere.
This time, however, Associated questioned the validity of the agreement,
arguing that Atty. Soluta was not authorized to modify the earlier terms of
the contract and coult not in any way bind Associated.
4. The general rule is that, in the absence of authority from the board of
directors, no person, not even its officers, can validly bind a corporation. The
power and responsibility to decide whether the corporation should enter into
a contract that will bind the corporation is lodged in the board of directors.
5. However, just as a natural person may authorize another to do certain acts for
and on his behalf, the board may validly delegate some of its functions and
powers to officers, committees and agents.
6. The authority of such individuals to bind the corporation is generally derived
from law, corporate bylaws or authorization from the board, either expressly
or impliedly, by habit, custom, or acquiescence, in the general course of
business.
7. The authority of a corporate officer or agent in dealing with third persons
may be actual or apparent. The doctrine of apparent authority, with special
reference to banks, had long been recognized in this jurisdiction.
8. Apparent authority is derived not merely from practice. Its existence may be
ascertained through:
a. The general manner in which the corporation holds out an officer or
agent as having the power to act, or in other words, the apparent
authority to act in general, with which it clothes him; or
b. The acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, within or beyond the scope of his
ordinary powers.
9. The authority to act for and to bind a corporation may be presumed from acts
of recognition in other instances, wherein the power was exercised without
any objection from its board or shareholders.
10. Undoubtedly, Associated had previously allowed Atty. Soluta to enter into
the first agreement without a board resolution expressly authorizing him,
hence it had clothed him with apparent authority to modify the same via the
second letter-agreement.
11. It is not the quantity of similar acts which establishes apparent authority,
but the vesting of a corporate officer with the power to bind the
corporation.
12. Naturally, the third person has little or no information as to what occurs in
corporate meetings; and he must necessarily rely upon the external
manifestations of corporate consent. The integrity of commercial transactions
can only be maintained by holding the corporation strictly to the liability
fixed upon it by its agents in accordance with law.
13. What transpires in the corporate board room is entirely an internal matter.
Hence, Associated may not impute negligence on the part of the Pronstrollers
in failing to find out the scope of Atty. Solutas authority.
14. Pronstrollers hence cannot be blamed in relying on the SECOND Letter-
 Agreement. Associated’s inaction, coupled with the apparent authority of
Atty. Soluta to act on behalf of the corporation, validates the July 14
agreement and thus binds the corporation.
15. All these taken together, lead to no other conclusion than that Associated
attempted to defraud the Pronstrollers. This is bolstered by the fact that it
forged another contract involving the same property, with another buyer, the
spouses Vaca, notwithstanding the pendency of the instant case.
16. If a corporation knowingly permits its officer, or any other agent, to perform
acts within the scope of an apparent authority, holding him out to the public
as possessing power to do those acts, the corporation will, as against any
person who has dealt in good faith with the corporation through such agent,
be estopped from denying such authority.
 013 WESTMONT BANK v. INLAND (Fordan)
March 23, 2009 | Carpio Morales, J. | Doctrine of Apparent Authority
PETITIONERS: Westmont Bank (formerly Associated Citizens Bank and now
United Overseas Bank, Phils.) and the Provincial Sheriff of Rizal
RESPONDENT: Inland Construction and Development Corporation
SUMMARY: Inland obtained various loans from Westmont Bank. To secure the
payment of its obligations, Inland executed real estate mortgages over 3 real
properties and issued promissory notes in favor of the bank. By a Deed of
Assignment, Conveyance and Release, Aranda, President of Inland, assigned and
conveyed all his rights and interests in favor of Abrante, Executive VP & General
Manager of Hanil-Gonzales Corporation. Under the said deed, Hanil-Gonzales
Corporation assumed the obligations of Inland. Westmont
Bank’s Account Officer, Calo, signed for its conformity to the deed. Inland was
subsequently served with a Notice of Sheriff’s Sale foreclosing the real estate
mortgages over its real properties prompting it to file a complaint
for injunction against the Westmont Bank. In its answer, Westmont Bank
underscored that it had no knowledge, much less did it give its conformity to the
alleged assignment of the obligation. RTC found that Westmont Bank ratified the
act of Calo and so it rendered judgment in favor of Inland. On appeal, the CA
affirmed the RTC’s decision insofar as it finds Westmont Bank to have ratified
the Deed of Assignment.
The issue in this case is whether or not Westmont Bank has ratified the deed of
assignment. SC held that it ratified since it failed to prove that Calo is not
authorized to bind it in the deed of assignment. The general rule remains that, in
the absence of authority from the board of directors, no person, not even its
officers, can validly bind a corporation. If a corporation, however, consciously lets
one of its officers, or any other agent, to act within the scope of an apparent
authority, it will be estopped from denying such officer’s authority.The
records show that Calo was the one assigned to transact on petitioner’s behalf
respecting the loan transactions and arrangements of Inland as well as those of
Hanil-Gonzales and Abrantes. Since it conducted business through Calo, who is
an Account Officer, it is presumed that he had authority to sign for the bank in the
Deed of Assignment. Unmistakably, the Court’s directive in Yao Ka Sin Trading
is that a corporation should first prove by clear evidence that its corporate officer
is not in fact authorized to act on its behalf before the burden of evidence shifts to
the other party to prove, by previous specific acts, that an officer was clothed by
the corporation with apparent authority. In this case, Westmont Bank failed to
discharge its primary burden of proving that Calo was not authorized to bind it, as
it did not present proof that Calo was unauthorized. It did not present, much less
cite, any Resolution from its Board of Directors or its Charteror By-laws from
which the Court could reasonably infer that he indeed had no authority to sign in
12
Kindly see details at the end of page.
its behalf or bind it in the Deed of Assignment.
DOCTRINE: The general rule remains that, in the absence of authority from the
Board of Directors, no person, not even its officers, can validly bind a corporation.
If a corporation, however, consciously lets one of its officers, or any other agent,
to act within the scope of an apparent authority, it will be estopped from denying
such officer’s authority. … Unmistakably, the Court’s directive in Yao Ka Sin
Trading is that a corporation should first prove by clear evidence that its
corporate officer is not in fact authorized to act on its behalf before the burden of
evidence shifts to the other party to prove, by previous specific acts, that an officer
was clothes by the corporation with apparent authority. (as stated in syllabus)
FACTS:
1. Inland Construction and Development Corporation (Inland) obtained various
loans and other credit accommodations from Westmont Bank (formerly
Associated Citizens Bank and now United Overseas Bank, Phils.) in 1977.
2. To secure the payment of its obligations, Inland executed real estate
mortgages over 3 real properties in Pasig City covered by TCTs (4820, 4821,
and 4822). Likewise, Inland issued 3 promissory notes with a total of
P1,095,000 (1st PN-P155,000, 2nd PN-P880,000, and 3rd PN-P60,000).
3. When the 1st and 2nd PNs fell due, Inland defaulted in its payments. It,
however, authorized the Westmont Bank to debit P350,000 from its savings
account to partially satisfy its obligations.
4. However, on May 2, 1978, Felix Aranda, President of Inland, assigned and
conveyed all his rights and interests at Hanil-Gonzales Corporation
[Hanil-Gonzales Construction & Development (Phils.) Corporation] in favor
of Horacio Abrantes, Executive Vice-President and General Manager of
Hanil-Gonzales Corporation by a Deed of Assignment12. Under the said deed,
it appears that Abrantes assumed the obligations of Inland and Aranda of the
2nd PN. Lionel Calo Jr. (Calo), Account Officer of Westmont Bank, signed
for its conformity to the deed.
5. On Dec. 14, 1979, Inland was served a Notice of Sheriffs Sale foreclosing the
real estate mortgages over its real properties, prompting it to file a complaint
for injunction against Westmont Bank and the Provincial Sheriff of Rizal at
the RTC of Pasig City. Westmont Bank underscored that it had no
knowledge, much less did it give its conformity to the alleged assignment of
the obligation covered by 2nd PN.
6. The RTC found that Westmont Bank ratified the act of its account officer
Calo when its Executive Committee failed to repudiate the assignment within
a reasonable time and even approved the request for a restructuring of Liberty
Construction and Development Corporation13/Hanil-Gonzales Corporation’s
obligations, which included the 2nd PN. In fact, the positive act on its part in
restructuring the loan of the assignee attest to its consent in the said
transaction.
13
Sister company of Hanil-Gozales Corporation
 7. Thus, RTC rendered judgment in favor of Inland. It restrained and enjoined
Westmont Bank and the Sheriff from proceeding with the foreclosure of and
conducting an auction sale on the real estate and to refund to Inland
P8,866.89, with legal interest thereon from the filing of the complaint until
full payment, with costs.
8. On appeal, the CA only affirmed that Westmont Bank has indeed ratified the
Deed of Assignment since for several years, Westmont Bank had, either
intentionally or negligently, been habitually clothing Calo with the apparent
powers to perform acts in behalf of the bank. Calo signed the subject deed of
assignment wherein the principal obligation involved a hefty sum of
P880,000. Despite the enormity of the amount involved, Westmont Bank
never made any attempt to repudiate the act of Calo until almost 7 years later,
when Mitos C. Olivares, Manager of the Cash Department, issued an
inter-office memorandum14 but the same was not offered in in evidence to
give Inland the opportunity to object to or comment on the said document,
but it was merely attached as one of the annexes to the bank’s memorandum.
Thus, no evidentiary weight may be attached to said inter-office
memorandum, which is even self serving. In fact, it ought not to be
considered at all.
9. Hence, the current appeal.15 Westmont Bank maintains that Calo had no
authority to bind it in the Deed of Assignment and that a single, isolated
unauthorized act of its agent is not sufficient to establish that it clothed him
with apparent authority. It adds that the records fail to disclose evidence of
similar acts of Calo executed either in its favor or in favor of other parties.
Moreover, it reasserts that the unauthorized act of Calo never came to its
knowledge, hence, it is not estopped from repudiating the Deed of
Assignment.
ISSUE: Whether or not Westmont Bank has ratified the deed of assignment. –YES,
since it failed to prove that Calo was not authorized to bind it in the said deed.
RULING: The petitions are denied and the decision of the CA is affirmed.
RATIO:
1. SC held that the general rule remains that, in the absence of authority
from the board of directors, no person, not even its officers, can validly
bind a corporation. If a corporation, however, consciously lets one of its
officers, or any other agent, to act within the scope of an apparent
authority, it will be estopped from denying such officers authority.
2. The records show that Calo was the one assigned to transact on its behalf
respecting the loan transactions and arrangements of Inland as well as
those of Hanil-Gonzales and Abrantes. Since it conducted business
14
Inter-office Memoradum:
2) Conforme of Associated Bank signed by Lionel Calo Jr. has no bearing since he has no authority to
sign for the bank as he was only an account officer with no signing authority;
xxxx
through Calo, who is an Account Officer, it is presumed that he had
authority to sign for the bank in the Deed of Assignment.
3. Westmont Bank cannot feign ignorance of the Deed of Assignment since it
was given notification by assignee Abrantes about his assumption of Inlands
obligation.
4. As a banking institution, it is expected to have exercised the highest degree
of diligence and meticulousness in the conduct of its business. When it
received the loan restructuring request, with specific mention of Inland’s 2nd
PN, Westmont Bank was under obligation to fastidiously scrutinize such loan
account.
5. However, Westmont Bank relies heavily on the Court’s pronouncement in
Yao Ka Sin Trading that it was incumbent upon, in this case, Inland to prove
that it had clothed its account officer with apparent power to conform to the
Deed of Assignment.
6. In Yao Ka Sin Trading, the therein respondent cement company had shown
by clear and convincing evidence that its president was not authorized to
undertake a particular transaction. It presented its by-laws stating that only
its board of directors has the power to enter into an agreement or contract of
any kind. The companys board of directors even forthwith issued a resolution
to repudiate the contract. Thus, it was only after the company successfully
discharged its burden that the other party, the therein petitioner Yao Ka Sin
Trading, had to prove that indeed the cement company had clothed its
president with the apparent power to execute the contract by evidence of
similar acts executed in its favor or in favor of other parties.
7. Unmistakably, the Courts directive in Yao Ka Sin Trading is that a
corporation should first prove by clear evidence that its corporate officer
is not in fact authorized to act on its behalf before the burden of evidence
shifts to the other party to prove, by previous specific acts, that an officer
was clothed by the corporation with apparent authority.
8. In this case, Westmont Bank failed to discharge its primary burden of
proving that Calo was not authorized to bind it, as it did not present
proof that Calo was unauthorized. It did not present, much less cite, any
Resolution from its Board of Directors or its Charter or By-laws from which
the Court could reasonably infer that he indeed had no authority to sign in its
behalf or bind it in the Deed of Assignment. The inter-office memorandum
stating that Calo had no signing authority remains self-serving as it does not
even form part of its body of evidence.
9. Thus, the assertion that it cannot be faulted for its delay in repudiating the
apparent authority of Calo is similarly flawed, there being no evidence on
record that it had actually repudiated such apparent authority. It should be
noted that it was the bank which pleaded that defense in the first place. What
is extant in the records is a reasonable certainty that the bank had ratified the
5) I suggest, Mr. Calo be asked to be present at court hearings to explain why he signed for the bank,
knowing his limitations
15
There are two petitions filed by Westmont Bank.
 Deed of Assignment.
10. The assumption that a ruling on the issue of ratification would affect any and
all foreclosure proceedings on the mortgaged properties remains unfounded.
For the challenged CA’s decision still mentioned the possibility of
foreclosing on the mortgaged properties as Inland was still indebted to the
Westmont Bank of P186, 241.86 covering the other 2 PNs and other
obligations that Inland was not able to satisfy upon maturity.

Deed of Assignment:

x x x x.

WHEREAS, among the obligations assumed by Mr. HORACIO C. ABRANTES [in

the May 2, 1978 Deed] is the account of the FIRST PARTY (Aranda and Inland) in favor of the
ASSOCIATED CITIZENS BANK as evidenced by Promissory Note No. BD-2884-77 in the
amount of EIGHT HUNDRED EIGHTY THOUSAND (P880,000.00) PESOS, x x x x;

WHEREAS, the parties herein have agreed to obtain the conformity of the
ASSOCIATED CITIZENS BANK to the foregoing arrangement x x x x;

NOW, THEREFORE, the herein parties have mutually agreed that the SECOND PARTY
(Abrantes and Hanil-Gonzalez) shall assume full and complete liability and responsibility for
the payment to ASSOCIATED CITIZENS BANK Promissory Note No. BD-2884-77 x x x x.

THE SECOND PARTY shall make such necessary arrangements with the
ASSOCIATED CITIZENS BANK for the full liquidation of said account, x x x x.

x x x x. (Emphasis and underscoring supplied)


ADVANCE PAPER CORP v. ARMA TRADERS CORP (Escalona)
December 11, 2013 | Brion, J. | Doctrine of Apparent Authority
PETITIONER: Advance Paper Corporation and George Haw
RESPONDENTS: Arma Traders Corporation, Manuel Ting, Cheng Cui, and
Benjamin Ng
SUMMARY: Advance paper is a domestic corporation engaged in the business
of manufacturing and selling various paper products. Arma Traders is also a
domestic corporation in the business of distributing school and office supplies.
Tan was the former president, while Uy was the treasurer. The two of them
represented Arma Traders when dealing with its supplier, Advance Paper, for
about 14 years. Arma Traders made an order of notebooks and other paper
products from Advance Paper and also loaned from them due to their inability to
pay their other suppliers. Arma Traders issued 82 postdated checks, and when
they were due, they were dishonored. Advance Paper made multiple demands,
but Arma Traders failed to pay. Advance Paper then filed a complaint for
collection of a sum of money against Arma Traders. One of the arguments of
Arma Traders is that Tan and Uy were never authorized by Board Resolution to
contract loans from Advance Paper, thus the corporation is not liable for the
ultra vires acts of its agents that were done in excess of their capacity.
The issue is WoN Arma Traders is liable to Advance Paper on the basis of
applying the doctrine of apparent authority.
The Supreme Court held that Arma Traders is liable to Advance Paper. The
Court discussed that apparent authority may be derived from the corporation’s
acquiescence of the acts within or beyond the agent’s scope of ordinary powers.
The Court then established that the articles of incorporation, Arma Traders may
borrow or raise money to meet the financial requirements of its business by other
evidence of indebtedness. The testimonies of Arma Traders’ officers also
established that the sole management of Arma Traders was left to Tan and Uy
and that he and the other officers never dealt with the business and management
of Arma Traders for 14 years. The Court then concluded that Arma Traders
bestowed upon Tan and Uy broad powers by allowing them to transact with third
persons without the necessary written authority from its non-performing board of
directors. Arma Traders failed to take precautions to prevent its own corporate
officers from abusing their powers. Because of its own laxity in its business
dealings, Arma Traders is now estopped from denying Tan and Uy’s authority to
obtain loan from Advance Paper.
DOCTRINE: (Based on the outline)
The doctrine of apparent authority provides that a corporation will be estopped
from denying the agent’s authority if it knowingly permits one of its officers or
any other agent to act within the scope of an apparent authority, and it holds him
out to the public as possessing the power to do those acts. The doctrine of
apparent authority does not apply if the principal did not commit any acts or
conduct which a third party knew and relied upon in good faith as a result of the
exercise of reasonable prudence. Moreover, the agent’s acts or conduct must
have produced a change of position to the third party’s detriment.
FACTS:
23. Advance Paper is a domestic corporation engaged in the business of
producing, printing, manufacturing, distributing, and selling various paper
products. George Haw is the President, while his wife Connie Haw, is the
General Manager.
24. Arma Traders is also a domestic corporation engaged in the wholesale and
distribution of school and office supplies, and novelty products. Antonio Tan
was the former President, while Uy Willy is the Treasurer. They represented
Arma Traders when dealing with its supplier, Advance Paper, for about 14
years.
25. On various dates from September to December 1994, Arma Traders
purchased on credit, notebooks and other paper products amounting to
₱7,533,001.49 from Advance Paper.
26. Upon the representation of Tan and Uy, Arma Traders also obtained
three loans from Advance Paper in November 1994 in the amounts of
₱3,380,171.82, ₱1,000,000.00, and ₱3,408,623.94 or a total of
₱7,788,796.76. Arma Traders needed the loan to settle its obligations to
other suppliers because its own collectibles did not arrive on time. Because
of its good business relations with Arma Traders, Advance Paper extended
the loans.
27. As payment for the purchases on credit and the loan transactions, Arma
Traders issued 82 postdated checks payable to cash or to Advance Paper.
Tan and Uy were Arma Traders’ authorized bank signatories who signed
and issued these checks, which had the aggregate amount of
₱15,130,636.87.
28. Advance Paper presented the checks to the drawee bank but these were
dishonored either for "insufficiency of funds" or "account closed." Despite
repeated demands, however, Arma Traders failed to settle its account with
Advance Paper.
29. On December 29, 1994, the petitioners filed a complaint for collection of
sum of money with application for preliminary attachment against Arma
Traders.
30. Petitioner’s Claims:
a. That respondents fraudulently issued the postdated checks as
payment for the purchases and loan transactions knowing that they
did not have sufficient funds with the drawee banks
31. Respondent’s claims:
a. During the trial, Ng testified that Arma Traders did not purchase
notebooks and other paper products from September to December
 1994. He claimed that during this period, Arma Traders
concentrated on Christmas items, not school and office supplies.
He also narrated that upon learning about the complaint filed by
the petitioners, he immediately looked for Arma Traders’ records
and found no receipts involving the purchases of notebooks and
other paper products from Advance Paper.
b. (Relevant to topic) That the loan transactions were ultra
vires because the board of directors of Arma Traders did not
issue a board resolution authorizing Tan and Uy to obtain the
loans from Advance Paper. They claimed that the borrowing of
money must be done only with the prior approval of the board
of directors because without the approval, the corporate
officers are acting in excess of their authority or ultra vires.
When the acts of the corporate officers are ultra vires, the
corporation is not liable for whatever acts that these officers
committed in excess of their authority. Further, the respondents
claimed that Advance Paper failed to verify Tan and Uy’s authority
to transact business with them. Hence, Advance Paper should
suffer the consequences.
32. The RTC ruled that the purchases on credit and loans were sufficiently
proven by Advance Paper. Arma Traders was ordered to pay Advance
Paper.
33. The CA ruled that Advance Paper failed to prove by preponderance of
evidence the existence of the purchases on credit and loans. This is based on
the relevant argument to the topic, that Tan and Uy had no board resolution
authorizing them to obtain the loan from Advance Paper. Therefore Arma
Traders is not liable for those loans. The CA acknowledged the fact that
Tan and Uy were bank signatories’, but authority to sign checks is different
from authority to contract loans.
ISSUES:
3. (Relevant topic) WoN Arma Traders is liable to pay the loans applying the
doctrine of apparent authority – YES. They are estopped from applying the
doctrine of apparent authority because the corporation knowingly permitted
its officers to act within such apparent authority.
RULING: Petition is granted. Arma Traders are liable to Advance Paper.
RATIO:
131. The doctrine of apparent authority provides that a corporation will be
estopped from denying the agent’s authority if it knowingly permits one of
its officers or any other agent to act within the scope of an apparent
authority, and it holds him out to the public as possessing the power to do
those acts. The doctrine of apparent authority does not apply if the principal
did not commit any acts or conduct which a third party knew and relied
upon in good faith as a result of the exercise of reasonable prudence.
Moreover, the agent’s acts or conduct must have produced a change of
position to the third party’s detriment.
132. In Inter-Asia Investment Industries v. Court of Appeals, we explained:
a. Under this provision (referring to Sec. 23 of the Corporation
Code), the power and responsibility to decide whether the
corporation should enter into a contract that will bind the
corporation is lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions of law. However,
just as a natural person who may authorize another to do
certain acts for and on his behalf, the board of directors may
validly delegate some of its functions and powers to officers,
committees or agents. The authority of such individuals to bind
the corporation is generally derived from law, corporate
bylaws or authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in the general
course of business.
133. A corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has
been conferred upon him, and this includes powers as, in the usual course of
the particular business, are incidental to, or may be implied from, the
powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent
powers as the corporation has caused person dealing with the officer or
agent to believe that it has conferred.
134. Apparent authority is derived not merely from practice. Its existence
may be ascertained through:
a. (1) The general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the
apparent authority to act in general, with which it clothes him; or
b. (2) The acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers. It requires presentation of
evidence of similar act(s) executed either in its favor or in favor
of other parties. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate
officer with the power to bind the corporation.
135. In People’s Aircargo and Warehousing Co., Inc. v. Court of Appeals, we
ruled that the doctrine of apparent authority is applied when the petitioner,
through its president Antonio Punsalan Jr., entered into the First Contract
without first securing board approval. Despite such lack of board approval,
petitioner did not object to or repudiate said contract, thus "clothing" its
president with the power to bind the corporation.
136. "Inasmuch as a corporate president is often given general supervision and
control over corporate operations, the strict rule that said officer has no
inherent power to act for the corporation is slowly giving way to the
 realization that such officer has certain limited powers in the transaction of
the usual and ordinary business of the corporation." "In the absence of a
charter or bylaw provision to the contrary, the president is presumed
to have the authority to act within the domain of the general objectives
of its business and within the scope of his or her usual duties."81
137. In the present petition, we do not agree with the CA’s findings that Arma
Traders is not liable to pay the loans due to the lack of board resolution
authorizing Tan and Uy to obtain the loans. To begin with, Arma Traders’
Articles of Incorporation provides that the corporation may borrow or
raise money to meet the financial requirements of its business by the
issuance of bonds, promissory notes and other evidence of
indebtedness. Likewise, it states that Tan and Uy are not just ordinary
corporate officers and authorized bank signatories because they are also
Arma Traders’ incorporators along with respondents Ng and Ting, and
Pedro Chao. Furthermore, the respondents, through Ng who is Arma
Traders’ corporate secretary, incorporator, stockholder and director,
testified that the sole management of Arma Traders was left to Tan and
Uy and that he and the other officers never dealt with the business and
management of Arma Traders for 14 years. He also confirmed that since
1984 up to the filing of the complaint against Arma Traders, its
stockholders and board of directors never had its meeting.
138. Thus, Arma Traders bestowed upon Tan and Uy broad powers by allowing
them to transact with third persons without the necessary written authority
from its non-performing board of directors. Arma Traders failed to take
precautions to prevent its own corporate officers from abusing their powers.
Because of its own laxity in its business dealings, Arma Traders is now
estopped from denying Tan and Uy’s authority to obtain loan from Advance
Paper.
139. We also reject the respondents’ claim that Advance Paper, through Haw,
connived with Tan and Uy. The records do not contain any evidence to
prove that the loan transactions were personal to Tan and Uy. A different
conclusion might have been inferred had the cashier’s checks been issued in
favor of Tan and Uy, and had the postdated checks in favor of Advance
Paper been either Tan and/or Uy’s, or had the respondents presented
convincing evidence to show how Tan and Uy conspired with the
petitioners to defraud Arma Traders.84 We note that the respondents initially
intended to present Sharow Ong, the secretary of Tan and Uy, to testify on
how Advance Paper connived with Tan and Uy. As mentioned, the
respondents failed to present her on the witness stand.
 015 GEORG v. HOLY TRINITY COLLEGE (Eleazar)
July 20, 2016 | Perez, J. | Doctrine of Apparent Authority
PETITIONERS: BENJIE B. GEORG represented by BENJAMIN C.
BELARMINO, JR.
RESPONDENTS: HOLY TRINITY COLLEGE, INC.
SUMMARY: The Holy Trinity College Grand Chorale and Dance Company was
organized in 1987 by Sr. Medalle, the President of respondent Holy Trinity
College. Group was slated to perform in Greece, Italy, Spain and Germany.
Edward Enriquez, who allegedly represented Sr. Medalle, contacted petitioner
Georg to seek assistance for payment of the Group's international airplane tickets.
Subsequently, Georg claimed that the second-party assignor/respondent (Holy
Trinity) and the foundation-grantor (Buenaventura) have not paid and refused to
pay their obligation under the MOA. Holy Trinity claims that Sr. Medalle was not
authorized by the corporation to enter into any loan agreement thus the MOA
executed was null and void for being ultra vires. Georg invokes, as refutation, the
doctrine of apparent authority. Issue in this case is whether or not Sr. Medalle is
authorized by respondent Holy Trinity to enter into the MOA? The Supreme Court
said yes. Technically speaking, she is authorized because there is no doubt indeed,
that Sr. Medalle was the President of the Holy Trinity College. She was never at
any given time the President of the Holy Trinity Collge Grand Chorale & Dance
Company, which is just similar to any science or math club in the school, thus, the
import of the participation of Sr. Medalle in that Memorandum of Agreement, was
in her capacity as the Holy Trinity College. Assuming arguendo that Sr. Medalle
was not authorized by the Holy Trinity College Board, the doctrine of apparent
authority applies in this case. The doctrine of apparent authority provides that a
corporation will be estopped from denying the agent's authority if it knowingly
permits one of its officers or any other agent to act within the scope of an apparent
authority, and it holds him out to the public as possessing the power to do those
acts. *see doctrine* In this case, Sr. Medalle formed and organized the Group.
She had been giving financial support to the Group, in her capacity as President
of Holy Trinity College. Sr. Navarro admitted that the Board of Trustees never
questioned the existence and activities of the Group. Thus, any agreement or
contract entered into by Sr. Medalle as President of Holy Trinity College relating
to the Group bears the consent and approval of respondent. It is through these
dynamics that we cannot fault petitioner for relying on Sr. Medalle's authority to
transact with petitioner.
DOCTRINE: The existence of apparent authority may be ascertained through (1)
the general manner in which the corporation holds out an officer or agent as having
the power to act or, in other words, the apparent authority to act in general, with
which it clothes him; or (2) the acquiescence in his acts of a particular nature, with
actual or constructive knowledge thereof, whether within or beyond the scope of
his ordinary powers (doctrine in syllabus)
FACTS:
9. The Holy Trinity College Grand Chorale and Dance Company (“the Group”)
was organized in 1987 by Sr. Medalle, the President of respondent Holy
Trinity College in Puerto Princesa City.
10. The Grand Chorale and Dance Company were two separate groups but for
the purpose of performing locally or abroad, they were usually introduced as
one entity. The Group was composed of students from Holy Trinity College.
11. In 2001, the Group was slated to perform in Greece, Italy, Spain and
Germany. Edward Enriquez, who allegedly represented Sr. Medalle,
contacted petitioner Benjie B. Georg to seek assistance for payment of the
Group's international airplane tickets.
12. Georg is the Filipino wife of a German national Heinz Georg. She owns a
German travel agency named D'Travellers Reiseburo Georg.
13. Georg, in tum, requested her brother Atty. Belarmino, to represent her in the
negotiation with Enriquez. Enriquez was referred to Georg by Dietz, another
Filipino-German who has helped Philippine cultural groups obtain European
engagements, including financial assistance.
14. A Memorandum of Agreement with Deed of Assignment (MOA) was
executed between Georg, represented by Atty. Belarmino, as first party-
assignee; the Dance Group, represented by Sr. Medalle and/or its Attorney-
in-Fact Enriquez, as second-party assignor and S.C. Roque Foundation
Incorporated, represented by Buenaventura, as foundation-grantor.
15. Under the said Agreement, petitioner, through her travel agency, will advance
the payment of international airplane tickets amounting to P4,624,705.00 in
favor of the Group on the assurance of the Group represented by Sr. Medalle
through Enriquez that there is a confirmed financial allocation of
P4,624,705.00 from the foundation-grantor, S.C. Roque Foundation (the
Foundation). The second-party assignor (Sr. Medalle) assigned said amount
in favor of Georg. Georg paid for the Dance Group's domestic and
international airplane tickets.
16. In an Amended Complaint for a Sum of Money with Damages, Georg
claimed that the second-party assignor/respondent (Holy Trinity) and the
foundation-grantor (Buenaventura) have not paid and refused to pay their
obligation under the MOA.
17. Georg prayed that they be ordered to solidarily pay the amount of
P4,624,705.00 representing the principal amount mentioned in the
Agreement, moral, exemplary, and actual damages, legal fees, and cost of
suit. The corresponding summonses were served.
18. Holy Trinity claims that Sr. Medalle was not authorized by the corporation to
enter into any loan agreement thus the MOA executed was null and void for
being ultra vires. Georg invokes, as refutation, the doctrine of apparent
authority.
19. Holy Trinity's denial of privity to the loan contract was based on the following
reasons:
a. that respondent's name does not appear on the MOA;
b. that Sr. Medalle was no longer the President of Holy Trinity College
 when she affixed her thumbmark on the MOA; and
c. that Sr. Medalle was not authorized by respondent through a board
resolution to enter into such agreement.
ISSUE/s
- W/N whether Sr. Medalle is authorized by respondent Holy Trinity College
to enter into the MOA. – YES, first of all she signed as the President of the
school, thus, obviously she is an authorized person. And even assuming
arguendo that she was not authorized by the Board, the doctrine of apparent
authority applies in this case because Sr. Medalle formed and organized the
Group. She had been giving financial support to the Group, in her capacity as
President of Holy Trinity College.
RULING: WHEREFORE, the instant petition is GRANTED. The Decision of the
Court of Appeals dated 17 November 2009 in CA-G.R. CV No. 89990 is REVERSED
and SET ASIDE. The Decision dated 29 November 2006 of the Regional Trial Court,
Branch 15, Tabaco City in Civil Case No. T-2161 is hereby REINSTATED in toto.
RATIO:
1. The trial court categorically ruled that Sr. Medalle affixed her thumbmark as
President of Holy Trinity College and therefore, respondent is a party to the
MOA:
a. From the foregoing discussion and gathering also from the
circumstances that is more or less contemporaneous and subsequent
to the execution of the Memorandum of Agreement, this court holds
the view that when Sr. Teresita Medalle, O.P. affixed her thumb
mark in the Memorandum of Agreement, that it was in her capacity
as the President of the Holy Trinity College and not that of the Holy
Trinity College Grand Chorale and Dance Company.
2. As aptly found the adjective "ITS" in the Memorandum of Agreement which
describes the Parties thereat as:
a. HOLY TRINITY COLLEGE GRAND CHORALE & DANCE
COMPANY Co., with postal address at Holy Trinity College, Puerto
Princesa City, Palawan, herein represented by its President Sister
TERESITA M. MEDALLE, O.P. and/or its attorney-in-fact
EDWARD V. ENRIQUEZ ...
3. It is thus descriptive that the entity being referred to is indeed the Holy Trinity
College. Otherwise, if what were represented to by Sr. Teresita Medalle, O.P.
was the Holy Trinity College Grand Chorale and Dance Co., it might have
been written as:
a. Holy Trinity College Grand Chorale & Dance Company.,
represented by its President Sister Medalle, O.P., and/or its attorney-
in-fact Edward V. Enriquez, with postal address at Holy Trinity
College, Puerto Princesa City Palawan
4. The court gives credence though to the testimony of Jearold Loyola that
indeed the said Grand Chorale and Dance Company are not registered with
the Securities and Exchange Commission and is therefore possessing no
juridical personality and merely owe its life and existence through the school
administration of the Holy Trinity College through its President, Holy Trinity
College.
5. There is no doubt indeed, that Sister Teresita Medalle was the President of
the Holy Trinity College. She was never at any given time the President of
the Holy Trinity Collge Grand Chorale & Dance Company, which is just
similar to any science or math club in the school.
6. We do not expect much less find it absurd that Sister Teresita Medalle, O.P.
being the school President and Vice Chairman of the Board of Trustees would
allow herself to go down to her level and hold a position as a President of
student organization.
7. With the foregoing disquisitions, the import of the participation of Sister
Teresita Medalle, O.P. in that Memorandum of Agreement, was in her
capacity as the Holy Trinity College, Inc., Puerto Princesa City, Palawan.
This Court cannot isolate the fact that right at the very commencement of
conceptualization of the said European Tour 2001 sometime in 2001, it was
Sister Teresita Medalle who spearheaded the whole activity.
8. As above-mentioned, Sister Teresita Medalle personally communicated with
Leonor Dietz, their coordinator in Germany and has herself made
arrangement for the procurement of the visa of the group.
9. The Grand Chorale and Dance Co., as testified to by Jearold Loyola have no
hands at all in the financial aspect of the group. It was also Sister Teresita
Medalle who arranges for the itinerary of the group and they have no
discretion of disobeying.
10. This makes clear to the understanding of the court that not all contracts are
drawn in perfection. Otherwise, there would have been no case at all that
reached the courts of law.
11. Per records, it appears that the Holy Trinity Grand Chorale and Dance
Company were actually two separate entities formed and organized by Sr.
Medalle in her capacity as President of Holy Trinity College.
12. Sr. Medalle, as President of Holy Trinity, is clothed with sufficient authority
to enter into a loan agreement. As held by the trial court, the Holy Trinity
College's Board of Trustees never contested the standing of the Dance and
Chorale Group and had in fact lent its support in the form of sponsoring
unifonns or freely allowed the school premises to be used by the group for
their practice sessions.
IMPORTANT:
1. Assuming arguendo that Sr. Medalle was not authorized by the Holy Trinity
College Board, the doctrine of apparent authority applies in this case.
2. The doctrine of apparent authority provides that a corporation will be
estopped from denying the agent's authority if it knowingly permits one of its
officers or any other agent to act within the scope of an apparent authority,
and it holds him out to the public as possessing the power to do those acts.
3. The existence of apparent authority may be ascertained through
 a. the general manner in which the corporation holds out an officer or
agent as having the power to act or, in other words, the apparent
authority to act in general, with which it clothes him; or
b. the acquiescence in his acts of a particular nature, with actual or
constructive knowledge thereof, whether within or beyond the scope
of his ordinary powers.
4. In this case, Sr. Medalle formed and organized the Group. She had been
giving financial support to the Group, in her capacity as President of Holy
Trinity College. Sr. Navarro admitted that the Board of Trustees never
questioned the existence and activities of the Group.
5. Thus, any agreement or contract entered into by Sr. Medalle as President of
Holy Trinity College relating to the Group bears the consent and approval of
respondent. It is through these dynamics that we cannot fault petitioner for
relying on Sr. Medalle's authority to transact with petitioner.
 016 Gokongwei, Jr. v. SEC(Dim)
April 11, 1979 | Justice Antonio | Doctrine of Corporate Opportunity
PETITIONER: John Gokongwei Jr.
RESPONDENTS: Securities and Exchange Commission, Andres Soriano, Jose
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode Conde, Miguel
Ortigas, Antonio Prieto, San Miguel Corporation, Emigdio Tanjuatco, and Eduardo
Visaya
SUMMARY: Gokongwei, a stockholder of SMC, and the owner of a rival company
called URC, filed a petition for the “declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by-laws, injunction and damages with
prayer for a preliminary injunction” against SMC and its board of directors. This was
because the Board of Directors of SMC made an amendment to the by-laws that would
restrict Gokongwei from being able to secure a seat in the Board of Directors due to
him being engaged in a competitive business. The SC could not get the required vote
to uphold the validity of the amended by-laws (it ruled in favor of the respondents in
the 1980 case though), however the Court discussed the doctrine of corporate
opportunity and the validity of such by-laws creating such restrictions on the election
of directors. This was because directors have a fiduciary relationship to the corporation
and its shareholders. The Court noted that where two corporations are competitive
in a substantial sense, it would seem improbable, if not impossible, for the
director, if he were to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above his
personal concerns.
DOCTRINE: It is well established that corporate officers are not permitted to use
their position of trust and confidence to further their private interests. The doctrine
of “corporate opportunity” is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two
entities with competing interest. The doctrine rest fundamentally on the unfairness,
in particular circumstances, of an officer or director taking advantage of an
opportunity for his personal profit when the interest of the corporation justly calls for
protection.
FACTS:
9. John Gokongwei Jr. (Gokongwei), as stockholder of San Miguel Corporation
(SMC), filed a petition for the “declaration of nullity of amended by-laws,
cancellation of certificate of filing of amended by-laws, injunction and
damages with prayer for a preliminary injunction” against the Board of
Directors of SMC, and against SMC itself, with the Securities and Exchange
Commission (SEC),
10. The respondent shareholders denied the averments of Gokongwei and
claimed that the latter, as the owner of Universal Robina Corporation
(URC), which is a corporation engaged in competitive business with
SMC, acquired enough shares of SMC to be able to vote himself as a
Board of Director in SMC. (The areas of competition between SMC and
URC in 1977 represented, therefore, for SMC, product sales of more than
P849 million.)
11. One of the questioned amendments gave the Board of Directors the
prerogative of determining whether they or other persons are engaged
in competitive or antagonistic business; that the portion of the amended
by-laws which states that in determining whether or not a person is
engaged in competitive business, the Board may consider such factors as
business and family relationship, for the purpose of restricting certain
stockholders from being elected in to the Board of Directors.
12. In a stockholders meeting, the other shareholders rejected Gokongwei in
his bid to secure such a seat in the Board of Directors of SMC, on the
ground that he was engaged in a competitive business and his securing a
seat would have subjected respondent corporation to grave
disadvantages SEC ruled in favor of the respondent-counsel.
13. Hence the petition of Gokongwei to the SC with regard to the decision of the
SEC. Gokongwei claims that the amended by-laws are invalid and
unreasonable because they were tailored to suppress the minority and
prevent them from having representation in the Board", at the same time
depriving petitioner of his "vested right" to be voted for and to vote for a
person of his choice as director.
14. Respondent shareholders claim that the exclusion of a competitor from the
Board is legitimate corporate purpose, considering that being a
competitor, Gokongwei cannot devote an unselfish and undivided
Loyalty to the corporation; that it is essentially a preventive measure to
assure stockholders of San Miguel Corporation of reasonable protective from
the unrestrained self-interest of those charged with the promotion of the
corporate enterprise; that access to confidential information by a competitor
may result either in the promotion of the interest of the competitor at the
expense of the San Miguel Corporation
ISSUES:
(2) WoN respondent SEC gravely abused its discretion in denying
petitioner's request for an examination of the records of San Miguel
International, Inc., a fully owned subsidiary of San Miguel Corporation
– YES. Statutory right of stockholder to examine the records of the company
in good faith extends to the records wholly-owned subsidiary of the said
corporation.
(3) [SYLLABUS ISSUE] WoN the provisions of the amended by-laws of
SMC, disqualifying a competitor from nomination or election to the
Board of Directors of SMC. are valid and reasonable -
RULING: WHEREFORE, Petition is granted with regard to the following:
• Gokongwei the right to examine and secure copies of the books and records
of San Miguel International.
 • Until and after Gokongwei has been properly disqualified by the SEC and
final judgement of the court, he is deemed eligible for the legal purpose of
being nominated and voted to seat as a board member of SMC.
• The Court's voting on the validity of respondent corporation's amendment of
the by-laws is inconclusive without the required majority of eight votes to
settle the issue one way or the other having been reached. [So the justices
couldn't get a majority decision; status quo remains until the BoD of
SMC make a new decision which could be appealed to the SEC, then to
the courts]
• NOTE: In the 1980 decision of this case, the Court ruled in favor of the
respondent-shareholders and upheld the prohibition against Gokongwei
due to the doctrine of Corporate Opportunity
RATIO:
[Amended by-laws of SMC disqualifying a competitor from nomination or
election to the Board of Directors of SMC]
6. Section 21 of the Corporation Law expressly gives the power to the
corporation to provide in its by-laws for the qualifications of directors and is
"highly prudent and in conformity with good practice. "
7. Any person "who buys stock in a corporation does so with the knowledge that
its affairs are dominated by a majorityof the stockholders and that he
impliedly contracts that the will of the majority shall govern in all matters
within the limits of the act of incorporation and lawfully enacted by-laws and
not forbidden by law.
A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION
AND ITS SHAREHOLDERS
8. Although in the strict and technical sense, directors of a private corporation
are not regarded as trustees, there cannot be any doubt that their character is
that of a fiduciary insofar as the corporation and the stockholders as a body
are concerned. As agents entrusted with the management of the
corporation for the collective benefit of the stockholders, "they occupy a
fiduciary relation, and in this sense the relation is one of trust."
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A
STOCKHOLDER INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO
DIRECTOR IN A CORPORATION WHOSE BUSINESS IS IN COMPETITION
WITH THAT OF THE OTHER CORPORATION, HAS BEEN SUSTAINED AS
VALID
9. It is also well established that corporate officers "are not permitted to use their
position of trust and confidence to further their private interests."
10. The DOCTRINE OF CORPORATE OPPORTUNITY is precisely a
recognition by the courts that the fiduciary standards could not be
upheld where the fiduciary was acting for two entities with competing
interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of
an opportunity for his own personal profit when the interest of the
corporation justly calls for protection.
11. It is not denied that a member of the Board of Directors of the San Miguel
Corporation has access to sensitive and highly confidential information, such
as: (a) marketing strategies and pricing structure; (b) budget for expansion
and diversification; (c) research and development; and (d) sources of funding,
availability of personnel, proposals of mergers or tie-ups with other firms.
12. Certainly, where two corporations are competitive in a substantial sense,
it would seem improbable, if not impossible, for the director, if he were
to discharge effectively his duty, to satisfy his loyalty to both
corporations and place the performance of his corporation duties above
his personal concerns.
13. The offer and assurance of petitioner that to avoid any possibility of his taking
unfair advantage of his position as director of San Miguel Corporation, he
would absent himself from meetings at which confidential matters would be
discussed, would not detract from the validity and reasonableness of the by-
laws here involved. Apart from the impractical results that would ensue from
such arrangement, it would be inconsistent with petitioner's primary motive
in running for board membership — which is to protect his investments in
San Miguel Corporation. More important, such a proposed norm of conduct
would be against all accepted principles underlying a director's duty of
fidelity to the corporation, for the policy of the law is to encourage and
enforce responsible corporate management.
(Not so important issue) [SEC gravely abused its discretion in denying
petitioner's request for an examination of the records]
14. Section 51 of the Corporation Law, "(t)he record of all business transactions
of the corporation and minutes of any meeting shall be open to the inspection
of any director, member or stockholder of the corporation at reasonable
hours."
15. The stockholder's right of inspection of the corporation's books and records
is based upon their ownership of the assets and property of the corporation.
It is, therefore, an incident of ownership of the corporate property, whether
this ownership or interest be termed an equitable ownership, a beneficial
ownership, or a ownership.
16. In the case at bar, considering that the foreign subsidiary is wholly owned by
respondent San Miguel Corporation and, therefore, under its control, it would
be more in accord with equity, good faith and fair dealing to construe
the statutory right of petitioner as stockholder to inspect the books and
records of the corporation as extending to books and records of such
wholly subsidiary which are in respondent corporation's possession and
control.
 017 LEE v. CA (Cruz)
February 4, 1992 | Gutierrez, Jr., J. |Qualification of Directors/Trustees sec 23 and 27
PETITIONER: Ramon C. Lee and Antonio DM. Lacdao
RESPONDENTS: The honorable Court of Appeals, Sacoba Manufacturing
Corp., Pablo Gonzales, Jr. and Thomas Gonzales
SUMMARY: ICB filed a complaint of sum of money against SMC and
Gonzaleses, who, in turn, filed a third party complaint against ALFA and Lee and
Lacdao, as president and vice-president. The trial court issued an order requiring
the issuance of an alias summons upon ALFA through DBP as a consequence of
Lee and Lacdao's letter informing the court that the summons for ALFA was
erroneously served upon them considering that the management of ALFA had
been transferred to the DBP. DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company
which has a separate and distinct corporate personality and existence. The issue in
this case is W/N there was proper service of summons on ALFA through Lee and
Lacdao, allegedly, of the subject corporation after the execution of a voting trust
agreement between ALFA and the DBP. The SC ruled in favor of Lee and
Lacdao. Lee and Lacdao, by virtue of the voting trust agreement executed in 1981
disposed of all their shares through assignment and delivery in favor of the DBP,
as trustee. Consequently, Lee and Lacdao ceased to own at least one share standing
in their names on the books of ALFA as required under Section 23 of the new
Corporation Code. They also ceased to have anything to do with the management
of the enterprise. Lee and Lacdao ceased to be directors. Hence, the transfer of
their shares to the DBP created vacancies in their respective positions as directors
of ALFA. The transfer of shares from the stockholders of ALFA to the DBP is the
essence of the subject voting trust agreement. Considering that the voting trust
agreement between ALFA and the DBP transferred legal ownership of the
stocks covered by the agreement to the DBP as trustee, the latter because the
stockholder of record with respect to the said shares of stocks. In the absence
of a showing that the DBP had caused to be transferred in their names one share
of stock for the purpose of qualifying as directors of ALFA, Lee and Lacdao can
no longer be deemed to have retained their status as officers of ALFA which was
the case before the execution of the subject voting trust agreement. There is no
dispute from the records that DBP has taken over full control and management of
the firm. Hence, no proper summons was given to ALFA.
DOCTRINE: Beneficial ownership under VTA no longer qualifies as a director
owning at least one share of stock in his name
FACTS:
1. International Corporate Bank, Inc. (ICB) filed a complaint of sum of money
against Sacoba Manufacturing Corp. (SMC), Pablo Gonzales, Jr. and Thomas
Gonzales (Gonzaleses), who, in turn, filed a third party complaint against
Alfa Integrated Textile Mills (ALFA) and Ramon C. Lee (Lee) and Antonio
DM. Lacdao (Lacdao) as president and vice-president.
2. Lee and Lacdao filed a motion to dismiss the third party complaint which the
RTC denied. They then filed their answer to the third party complaint.
3. Meanwhile, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through Delopment Bank of the Philippines
(DBP) as a consequence of Lee and Lacdao's letter informing the court that
the summons for ALFA was erroneously served upon them considering that
the management of ALFA had been transferred to the DBP.
4. In a manifestation, the DBP claimed that it was not authorized to receive
summons on behalf of ALFA since the DBP had not taken over the company
which has a separate and distinct corporate personality and existence.
5. The trial court issued an order advising SMC and the Gonzaleses to take the
appropriate steps to serve the summons to ALFA. They filed Manifestation
and Motion for the Declaration of Proper Service of Summons which the trial
court granted.
6. Lee and Lacdao filed an MR submitting that Rule 14, section 13 of the
Revised Rules of Court is not applicable since they were no longer officers
of ALFA (by virtue of the voting trust agreement they ceased to be officers
and directors of ALFA ) and that SMC and the Gonzaleses should have
availed of another mode of service under Rule 14, Section 16 of the said
Rules, i.e., through publication to effect proper service upon ALFA.
7. In their Comment to the MR, SMC and the Gonzaleses argued that the
voting trust agreement did not divest Lee and Lacdao of their positions as
president and executive vice-president of ALFA so that service of summons
upon ALFA through Lee and Lacdao as corporate officers was proper.
8. The trial court upheld the validity of the service of summons on ALFA
through Lee and Lacdao.
9. A second MR was filed by Lee and Lacdao reiterating their stand.
a. Attached thereto a copy of the voting trust agreement between all
the stockholders of ALFA (Lee and Lacdao included), on the one
hand, and the DBP, on the other hand, whereby the management
and control of ALFA became vested upon the DBP.
10. The trial court reversed itself by setting aside its previous Order and
declared that service upon Lee and Lacdao who were no longer corporate
officers of ALFA cannot be considered as proper service of summons on
ALFA.
11. SMC and the Gonzaleses moved for reconsideration but it was denied.
12. A petition for certiorari was belatedly submitted by SMC and the
Ginzaleses before the CA which, nonetheless, resolved to give due course
thereto.
13. The trial court, not having been notified of the pending petition
for certiorari with CA issued an Order declaring their judgement as final.
a. The SMC and the Gonzaleses were required to take positive steps
in prosecuting the third party complaint in order that the court
would not be constrained to dismiss the same for failure to
prosecute. Subsequentlythey filed an MR on which the trial court
took no further action.
 14. After Lee and Lacdao filed their answer to the petition for certiorari, the CA
rendered its decision setting aside the order of the trial court.
15. Lee and Lacdao moved for a reconsideration of the decision of the CA which
resolved to deny the same. Hence, the Lee and Lacdao filed
this certiorari petition imputing grave abuse of discretion amounting to lack
of jurisdiction on the part of the CA.
16. In the meantime, CA inadvertently made an entry of judgment, erroneously
applying the rule that the period during which an MR has been pending must
be deducted from the 15-day period to appeal. However, in its Resolutio, the
CA set aside the aforestated entry of judgment after further considering that
the rule it relied on applies to appeals from decisions of the RTC to the CA,
not to appeals from its decision to us pursuant to our ruling in the case
of Refractories Corporation of the Philippines v. Intermediate Appellate
Court.
ISSUE/s:
1. W/N there was proper service of summons on ALFA through Lee and
Lacdao, allegedly, of the subject corporation after the execution of a voting
trust agreement between ALFA and the DBP – NO. Lee and Lacdao, by
virtue of the voting trust agreement ceased to be directors of ALFA
RULING: WHEREFORE, premises considered, the petition is hereby GRANTED.
The appealed decision dated March 19, 1990 and the Court of Appeals' resolution of
May 10, 1990 are SET ASIDE and the Orders dated April 25, 1989 and October 17,
1989 issued by the Regional Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.
RATIO:
1. A voting trust is defined in Ballentine's Law Dictionary
a. (a) trust created by an agreement between a group of the
stockholders of a corporation and the trustee or by a group of
identical agreements between individual stockholders and a
common trustee, whereby it is provided that for a term of years, or
for a period contingent upon a certain event, or until the agreement
is terminated, control over the stock owned by such stockholders,
either for certain purposes or for all purposes, is to be lodged in the
trustee, either with or without a reservation to the owners, or persons
designated by them, of the power to direct how such control shall be
used.
16
Sec. 59. Voting Trusts — One or more stockholders of a stock corporation may create a voting trust for
the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the share
for a period rights pertaining to the shares for a period not exceeding five (5) years at any one time:
Provided, that in the case of a voting trust specifically required as a condition in a loan agreement, said
voting trust may be for a period exceeding (5) years but shall automatically expire upon full payment of
the loan. A voting trust agreement must be in writing and notarized, and shall specify the terms and
2. Under Section 5916 of the new Corporation Code which expressly recognizes
voting trust agreements
a. A voting trust agreement may confer upon a trustee not only the
stockholder's voting rights but also other rights pertaining to his
shares as long as the voting trust agreement is not entered "for the
purpose of circumventing the law against monopolies and illegal
combinations in restraint of trade or used for purposes of fraud."
b. Thus, the traditional concept of a voting trust agreement primarily
intended to single out a stockholder's right to vote from his other
rights as such and made irrevocable for a limited duration may in
practice become a legal device whereby a transfer of the
stockholder's shares is effected subject to the specific provision of
the voting trust agreement.
3. By its very nature, a voting trust agreement results in the separation of the
voting rights of a stockholder from his other rights such as the right to receive
dividends, the right to inspect the books of the corporation, the right to sell
certain interests in the assets of the corporation and other rights to which a
stockholder may be entitled until the liquidation of the corporation. However,
in order to distinguish a voting trust agreement from proxies and other voting
pools and agreements, it must pass three criteria or tests, namely:
a. that the voting rights of the stock are separated from the other
attributes of ownership;
b. that the voting rights granted are intended to be irrevocable for a
definite period of time; and
c. that the principal purpose of the grant of voting rights is to acquire
voting control of the corporation.
4. The law simply provides that a voting trust agreement is an agreement in
writing whereby one or more stockholders of a corporation consent to transfer
his or their shares to a trustee in order to vest in the latter voting or other
rights pertaining to said shares for a period not exceeding five years upon the
fulfillment of statutory conditions and such other terms and conditions
specified in the agreement.
5. Both under the old and the new Corporation Codes there is no dispute as to
the most immediate effect of a voting trust agreement on the status of a
stockholder who is a party to its execution — from legal titleholder or owner
of the shares subject of the voting trust agreement, he becomes the equitable
or beneficial owner.
6. Sec 23 of the present Corporation Code deleted “in his own right” provided
under sec 30 of the old Corporation Code.
a. With the omission of the phrase "in his own right" the election of
conditions thereof. A certified copy of such agreement shall be filed with the corporation and with the
Securities and Exchange Commission; otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement shall be cancelled and new ones
shall be issued in the name of the trustee or trustees stating that they are issued pursuant to said agreement.
In the books of the corporation, it shall be noted that the transfer in the name of the trustee or trustees is
made pursuant to said voting trust agreement.
 trustees and other persons who in fact are not beneficial owners of
the shares registered in their names on the books of the corporation
becomes formally legalized. Hence, this is a clear indication that in
order to be eligible as a director, what is material is the legal title to,
not beneficial ownership of, the stock as appearing on the books of
the corporation.
7. The facts of this case show that Lee and Lacdao, by virtue of the voting
trust agreement executed in 1981 disposed of all their shares through
assignment and delivery in favor of the DBP, as trustee. Consequently, Lee
and Lacdao ceased to own at least one share standing in their names on
the books of ALFA as required under Section 23 of the new Corporation
Code. They also ceased to have anything to do with the management of
the enterprise. Lee and Lacdao ceased to be directors. Hence, the
transfer of the Lee and Lacdao's shares to the DBP created vacancies in
their respective positions as directors of ALFA.
8. Considering that the voting trust agreement between ALFA and the DBP
transferred legal ownership of the stock covered by the agreement to the DBP
as trustee, the latter became the stockholder of record with respect to the said
shares of stocks.
a. In the absence of a showing that the DBP had caused to be
transferred in their names one share of stock for the purpose of
qualifying as directors of ALFA, Lee and Lacdao can no longer be
deemed to have retained their status as officers of ALFA which was
the case before the execution of the subject voting trust agreement.
There appears to be no dispute from the records that DBP has taken
over full control and management of the firm.
9. Moreover, in the Certification issued by the DBP through one Elsa A.
Guevarra, Vice-President of its Special Accounts Department II, Remedial
Management Group, Lee and Lacdao were no longer included in the list of
officers of ALFA "as of April 1982."
10. SMC and the Gonzaleses failed to substantiate their claim that the subject
voting trust agreement did not deprive Lee and Lacdao their position as
directors of ALFA, the CA committed a reversible error
11. Both parties, ALFA and the DBP, were aware at the time of the execution of
the agreement that by virtue of the transfer of shares of ALFA to the DBP,
all the directors of ALFA were stripped of their positions as such.
12. There can be no reliance on the inference that the five-year period of the
voting trust agreement in question had lapsed in 1986 so that the legal title to
the stocks covered by the said voting trust agreement ipso facto reverted to
the petitioners as beneficial owners pursuant to the 6th paragraph of section
5917 of the new Corporation Code.
17
Unless expressly renewed, all rights granted in a voting trust agreement shall automatically expire at the
end of the agreed period, and the voting trust certificate as well as the certificates of stock in the name of
the trustee or trustees shall thereby be deemed cancelled and new certificates of stock shall be reissued in
the name of the transferors.
13. On the contrary, it is manifestly clear from the terms of the voting trust
agreement between ALFA and the DBP that the duration of the agreement is
contingent upon the fulfillment of certain obligations of ALFA with the DBP.
14. Had the five-year period of the voting trust agreement expired in 1986, the
DBP would not have transferred all its rights, titles and interests in ALFA
"effective June 30, 1986" to the national government through the Asset
Privatization Trust (APT) as attested to in a Certification of the Vice
President of the DBP's Special Accounts Department II.
a. In the same certification, it is stated that the DBP, from 1987 until
1989, had handled APT's account which included ALFA's assets
pursuant to a management agreement by and between the DBP and
APT. Hence, there is evidence on record that at the time of the
service of summons on ALFA through Lee and Lacdao, the voting
trust agreement in question was not yet terminated so that the legal
title to the stocks of ALFA, then, still belonged to the DBP.
15. Thus, there was no proper service of summons on ALFA through Lee and
Lacdao.
16. Section 1318, Rule 14 of the Revised Rules of Court, it is provides for Service
upon private domestic corporation or partnership.
a. It is a basic principle in Corporation Law that a corporation has a
personality separate and distinct from the officers or members who
compose it.
b. Thus, the above rule on service of processes of a corporation
enumerates the representatives of a corporation who can validly
receive court processes on its behalf.
i. president, manager, secretary, cashier, agent or any of its
directors
17. The rationale of the rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that he
will realize his responsibilities and know what he should do with any legal
papers served on him.
18. Lee and Lacdao do not fall under any of the enumerated officers. The service
of summons upon ALFA, through them, therefore, is not valid. To rule
otherwise, will contravene the general principle that a corporation can only
be bound by such acts which are within the scope of the officer's or agent's
authority.
18
Sec. 13. Service upon private domestic corporation or partnership. — If the defendant is a corporation
organized under the laws of the Philippines or a partnership duly registered, service may be made on the
president, manager, secretary, cashier, agent or any of its directors
 018 Valle Verde County Club v. Africa (COSCOLLUELA)
September 4, 2009 | Brion, J. | Delegated Powers Coming from the Stockholders
PETITIONER: Valle Verde Country Club, Inc. Ernesto Villaluna, Ray Gamboa,
Amado M. Santiago, Jr. Fortunato Dee, Augusto Sunico. Victor Salta, Francisco
Ortigas III, Eric Roxas, in their capacities as members of the Board of Directors of
Valle Verde Country Club, Inc. and Jose Ramirez
RESPONDENTS: Victor Africa
SUMMARY: Dinglasan and Makalintal were elected in 1996 and resigned in 1998.
In 1998 and 2001, Roxas and Ramirez were elected, respectively, to fill in the
vacancies. Africa, also a member of VVCC Board questioned such appointments as
contrary to Sec. 29 of the Corporation Code. He argues that because Dinglasan and
Makalintal’s terms expired a year after their election, the stockholders should have
been the one who elected to fill in the vacancies and not the members of the BoD.
VVCC, on the other hand, argues that the term of a member shall be one year and
until his successor is elected and qualified. The SEC and RTC ruled in favor of
Africa. As to the SEC ruling which pertained to Roxas’ appointment, it became
final and executory. Only the RTC case was appealed via certiorari. The issue in
this case is WoN the members of a corporation’s board of directors elect another
directory to fill in a vacancy caused by the resignation of a hold-over director. The
SC held NO. The word “term” has acquired a definite meaning in jurisprudence.
The SC has defined it as the time during which the officer may claim to hold the
office as a right, and fixes the interval after which the several incumbents shall
succeed one another. The term of office is not affected by the holdover. Therefore,
Makalintal’s term of office expired in 1997 but by virtue of the holdover doctrine in
Sec. 23 of the Corporation Code, he continued to hold office until his resignation.
With the expiration of his term, a vacancy resulted which, by the terms of Sec. 29,
must be filled by the stockholders of VVCC in a regular or special meeting called
for the purpose. [Delegated power] The power of the corporations BoD emanates
from its stockholders. It is a creation of the stockholders and derives its power
to control and direct the affairs of the corporation from them. The underlying
policy is that the business and affairs of a corporation must be governed by a board
of directors whose members have stood for election, and who have actually been
elected by the stockholders, on an annual basis. Only in that way can the directors’
continued accountability to shareholders, and the legitimacy of their decisions that
bind the corporation’s stockholders, be assured. The theory of delegated power of
the board of directors similarly explains why, under Sec. 29, in cases where the
vacancy in the corporation’s board of directors is caused not by the expiration of a
member’s term, the successor “so elected to fill in a vacancy shall be elected only
for the unexpired term of his predecessor in office.” The law has authorized the
19
Sec. 29. Vacancies in the office of director or trustee.— Any vacancy occurring in
the board of directors or trustees other than by removal by the stockholders or
members or by expiration of term, may be filled by the vote of at least a majority of
the remaining directors or trustees, if still constituting a quorum; otherwise, said
remaining members of the board to fill in a vacancy only in specified instances, so
as not to retard or impair the corporation’s operations; yet, in recognition of the
stockholders’ right to elect the members, it limited the period during which the
successor shall serve only to the unexpired term of his predecessor in office.
DOCTRINE: The theory of delegated power of the board of directors similarly
explains why, under Sec. 29, in cases where the vacancy in the corporation’s board
of directors is caused not by the expiration of a member’s term, the successor “so
elected to fill in a vacancy shall be elected only for the unexpired term of his
predecessor in office.” The law has authorized the remaining members of the board
to fill in a vacancy only in specified instances, so as not to retard or impair the
corporation’s operations; yet, in recognition of the stockholders’ right to elect the
members, it limited the period during which the successor shall serve only to the
unexpired term of his predecessor in office.
FACTS:
1. Jaime Dinglasan and Eduardo Makalintal were elected as members of the
VVCC Board of Directors in 1996.
2. In the year 1997, 1998, 1999, 200, and 2001, however, the requisite quorum
for the holding of the stockholders’ meeting could not be obtained.
Consequently, the directors continued to serve in a hold-over capacity.
3. Both Dinglasan and Makalintal resigned in 1998. In a meeting held in the
same year, the remaining 9-member board (still constituting a quorum),
elected Roxas to fill in the vacancy created by the resignation of Dinglasan.
And then in 2001, Ramirez was elected by the board.
4. Africa, a member of VVCC, questioned the election of Roxas and Ramirez
as members of the VVCC Board with the SEC and RTC. He questioned
Roxas’ election with the SEC while the filed a case in the RTC to question
Ramirez’ appointment. In the RTC he argued that:
1. The election was contrary to Sec. 2919 of the Corporation Code.
2. He also argued that a year after Makalintal’s election as member,
Makalintal’s term should have been considered to have already
expired. Thus, the resulting vacancy in 1998 should have been filled
by the stockholders in a regular or special meeting called for that
purpose, and not by the remaining members of the VVCC Board.
3. Additionally, for the remaining board members to exercise such
power, Sec. 29 of the Corporation Code requires that there should
be an unexpired term, during which the successor-member shall
serve the remaining of the unexpired term. That since Makalintal’s
term had already expired, there was no more unexpired term during
which Ramirez could serve.
vacancies must be filled by the stockholders in a regular orspecial meeting called for
that purpose. A director or trustee so elected to fill a vacancy shall be elected only
for the unexpired term of his predecessor in office. x x x.”
 5. The RTC ruled in favor of Africa. The SEC also issued a similar ruling. No
appeal was filed with the CA as to the SEC ruling so it was deemed final and
executory.
6. However, VVCC appealed the RTC ruling via certiorari claiming that the
sole issue in the case involves a purely legal question.
7. VVCC argues that correlating Sec. 29 and Sec. 23 of the Corporation Code,
a member’s term shall be for one year and until his successor is elected and
qualified. Otherwise stated, a member’s term only expires when his successor
is elected and qualified. VVCC cited El Hogar which provies that it has been
the practice of the directors to fill in vacancies in the directorate by choosing
sutiable persons from among the stockholders.
ISSUE/s:
1. WoN the members of a corporation’s board of directors elect another
directory to fill in a vacancy caused by the resignation of a hold-over director
– NO, because based on the theory of delegated powers of BoD, it is only
when a vacancy occurs in the board of directors or trustees other than by
removal by the stockholders or members or by expiration of term, that the
BoD may fill the vacancy. This is so as not to impair the stockholders’ right
to elect the members.
RULING: WHEREFORE, we DENY the petitioners’ petition for review on
certiorari, and AFFIRM the partial decision of the Regional Trial Court, Branch 152,
Manila, promulgated on January 23, 2002, in Civil Case No. 68726. Costs against
the petitioners.
4. With the expiration of his term, a vacancy resulted which, by the terms of
Sec. 29, must be filled by the stockholders of VVCC in a regular or special
meeting called for the purpose.
5. The power of the corporations BoD emanates from its stockholders. It is
a creation of the stockholders and derives its power to control and direct
the affairs of the corporation from them. The underlying policy is that the
business and affairs of a corporation must be governed by a board of directors
whose members have stood for election, and who have actually been elected
by the stockholders, on an annual basis. Only in that way can the directors’
continued accountability to shareholders, and the legitimacy of their
decisions that bind the corporation’s stockholders, be assured.
6. The theory of delegated power of the board of directors similarly explains
why, under Sec. 29, in cases where the vacancy in the corporation’s board of
directors is caused not by the expiration of a member’s term, the successor
“so elected to fill in a vacancy shall be elected only for the unexpired term of
his predecessor in office.” The law has authorized the remaining members of
the board to fill in a vacancy only in specified instances, so as not to retard or
impair the corporation’s operations; yet, in recognition of the stockholders’
right to elect the members, it limited the period during which the successor
shall serve only to the unexpired term of his predecessor in office.
7. As to the El Hagor argument, while the Court in El Hogar approved of the
practice of the directors to fill vacancies in the directorate, that ruling was
made before the present Corporation Code was enacted.

RATIO:
1. The word “term” has acquired a definite meaning in jurisprudence. The SC
has defined it as the time during which the officer may claim to hold the
office as a right, and fixes the interval after which the several incumbents
shall succeed one another. The term of office is not affected by the holdover.
The term is fixed by statute and it does not change simply because the office
may have become vacant, nor because the incumbent holds over in office
beyond the end of the term due to the fact that a successor has not been elected
and has failed to qualify.
2. Term is distinguished from tenure which represents the term during which
the incumbent actually holds office. Tenure may be shorter or longer
(holdover) than the term for reasons within or beyond the power of the
incumbent.
3. The SC construed Sec. 29 to mean that the term of the members of the board
of directors shall be only for one year; their term expires one year after
election. The holdover period is not part of the director’s orginal term of
office nor is it a new term. Therefore, Makalintal’s term of office expired in
1997 but by virtue of the holdover doctrine in Sec. 23 of the Corporation
Code, he continued to hold office until his resignation.
 019 Western Institute of Technology Inc. v. Salas (CELAJE)
G.R. No. 113032 | August 21, 1997 | Hermosisima, JR., J. | Members of the board
may receive compensation, when they render services to the corporation in a
capacity other than as directors/trustees.
PETITIONER: WESTERN INSTITUTE OF TECHNOLOGY, INC.,
HOMERO L. VILLASIS, DIMAS ENRIQUEZ, PRESTON F. VILLASIS &
REGINALD F. VILLASIS
RESPONDENTS: RICARDO T. SALAS, SOLEDAD SALAS-TUBILLEJA,
ANTONIO S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO
PARIAN
SUMMARY: Private respondents Salases, belonging to the same family, are
the majority and controlling members of the Board of Trustees of Western
Institute of Technology, Inc. (WIT, for short), a stock corporation engaged in
the operation, among others, of an educational institution.
According to petitioners Villasis, the minority stockholders of WIT, sometime
on June 1, 1986 , a Special Board meeting was held. In said meeting, the Board
of Trustees passed Resolution No. 48, s. 1986, granting monthly compensation
to the private respondents Salases as corporate officers retroactive June 1, 1985.
A few years later, petitioners Villasis … filed an affidavit-complaint against
private respondents Salases … one for falsification of a public document and
the other for estafa. Petitioners Villasis maintain that this grant of compensation
to private respondents Salases is proscribed under Section 30 of the Corporation
Code. Issue: W/N the grant of compensation to private respondents Salases is
illegal? No.
According to Sec. 30, there is no argument that directors or trustees, as the case
may be, are not entitled to salary or other compensation when they perform
nothing more than the usual and ordinary duties of their office.
This proscription, however, against granting compensation to directors/trustees
of a corporation is not a sweeping rule. Worthy of note is the clear phraseology
of Section 30 which states: “xxx [T]he directors shall not receive any
compensation, as such directors, xxx.” The phrase as "such directors"…
delimits the scope of the prohibition to compensation given to them for services
performed purely in their capacity as directors or trustees. Thus— [Read
Doctrine]
In the case at bench, Resolution No. 48, s. 1986 granted monthly compensation
to private respondents not in their capacity as members of the board, but rather
as officers of the corporation, more particularly as Chairman, Vice-Chairman,
Treasurer and Secretary of Western Institute of Technology.
DOCTRINE: Members of the board (Directors/Trustee) may receive
compensation, in addition to reasonable per diems, when they render services to
the corporation in a capacity other than as directors/trustees.
FACTS:
20. Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-
Tubilleja, Antonio S. Salas, and Richard S. Salas, belonging to the same
family, are the majority and controlling members of the Board of Trustees of
Western Institute of Technology, Inc. (WIT, for short), a stock corporation
engaged in the operation, among others, of an educational institution.
21. According to petitioners, the minority stockholders of WIT, sometime on
June 1, 1986 in the principal office of WIT at La Paz, Iloilo City, a Special
Board meeting was held.
22. In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986,
granting monthly compensation to the private respondents Salases as
corporate officers retroactive June 1, 1985, viz.:
i. “Resolution No. 48 s. 1986
b. On the motion of Mr. Richard Salas (accused), duly seconded by
Mrs. Soledad Tubilleja (accused), it was unanimously resolved that:
c. ‘The Officers of the Corporation be granted monthly compensation
for services rendered as follows: Chairman - P9,000.00/month,
Vice-Chairman - P3,500.00/month, Corporate Treasurer -
P3,500.00/month and Corporate Secretary - P3,500.00/month,
retroactive June 1, 1985 and the ten percentum of the net profits shall
be distributed equally among the ten members of the Board of
Trustees. This shall amend and superceed(sic) any previous
resolution.’
23. A few years later, that is, on March 13, 1991, petitioners Homero Villasis,
Preston Villasis, Reginald Villasis and Dimas Enriquez filed an affidavit-
complaint against private respondents Salases … as a result of which two (2)
separate criminal informations, one for falsification of a public document and
the other for estafa.
24. The charge for falsification of public document was anchored on the private
respondents Salases’ submission of WIT’s income statement for the fiscal
year 1985-1986 with the (SEC) reflecting therein the disbursement of
corporate funds for the compensation of private respondents Salases based on
Resolution No. 4, series of 1986, making it appear that the same was passed
by the board on March 30, 1986, when in truth, the same was actually passed
on June 1, 1986, a date not covered by the corporation’s fiscal year 1985-
1986 (beginning May 1, 1985 and ending April 30, 1986).
25. Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos.
37097 and 37098, was consolidated. After a full-blown hearing, Judge
Porfirio Parian handed down a verdict of acquittal on both counts dated [5]
September 6, 1993 without imposing any civil liability against the accused
therein.
 26. Petitioners filed a MR of the civil aspect of the RTC Decision which was, gratuitously and that the return upon their shares adequately furnishes the
however, denied in an Order dated November 23, 1993. Hence, the instant motives for service, without compensation [9]

petition.
34. Under the foregoing section, there are only two (2) ways by which members
27. Petitioners Villasis would like us to hold private respondents Salases civilly of the board can be granted compensation apart from reasonable per diems:
liable despite their acquittal in Criminal Cases Nos. 37097 and 37098. They (1) when there is a provision in the by-laws fixing their compensation; and
base their claim on the alleged illegal issuance by private respondents Salases (2) when the stockholders representing a majority of the outstanding capital
of Resolution No. 48, series of 1986 ordering the disbursement of corporate stock at a regular or special stockholders’ meeting agree to give it to them.
funds in the amount of P186,470.70 representing the retroactive
35. This proscription, however, against granting compensation to
compensation as of June 1, 1985 in favor of private respondents Salases,
directors/trustees of a corporation is not a sweeping rule.
board members of WIT, plus P1,453,970.79 for the subsequent collective
salaries of private respondent Salases every 15th and 30th of the month until 36. Worthy of note is the clear phraseology of Section 30 which states: “xxx
the filing of the criminal complaints against them on March 1991. [T]he directors shall not receive any compensation, as such directors, xxx.”
28. Petitioners Villasis maintain that this grant of compensation to private 37. The phrase as such directors is not without significance for it delimits the
respondents Salases is proscribed under Section 30 of the Corporation Code. scope of the prohibition to compensation given to them for services
Thus, private respondents Salases are obliged to return these amounts to the performed purely in their capacity as directors or trustees.
corporation with interest.
38. The unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render services
to the corporation in a capacity other than as directors/trustees.
ISSUES:
39. In the case at bench, Resolution No. 48, s. 1986 granted monthly
1. W/N the grant of compensation to private respondents Salases is illegal? No.
compensation to private respondents Salases not in their capacity as members
of the board, but rather as officers of the corporation, more particularly as
Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of
RULING: WHEREFORE, the instant petition is hereby DENIED with costs
Technology.
against petitioners.
40. Clearly, therefore , the prohibition with respect to granting compensation to
corporate directors/trustees as such under Section 30 is not violated in this
RATIO: particular case. Consequently, the last sentence of Section 30…
31. We cannot sustain the petitioners Villasis. The pertinent section of the 41. does not likewise find application in this case since the compensation is being
Corporation Code provides: given to private respondents Salases in their capacity as officers of WIT and
not as board members.
a. “Sec. 30. Compensation of directors.--- In the absence of any
provision in the by-laws fixing their compensation, the directors
shall not receive any compensation, as such directors, except for
reasonable per diems: Provided, however, That any such
compensation (other than per diems) may be granted to directors by
the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders’
meeting. In no case shall the total yearly compensation of directors,
as such directors, exceed ten (10%) percent of the net income before
income tax of the corporation during the preceding year.”
32. There is no argument that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they perform nothing more
than the usual and ordinary duties of their office.
33. This rule is founded upon a presumption that directors /trustees render service
 020 AGDAO RESIDENTS, INC. v. MARAMION (CASTRO) 2. One Deed of Donation prohibits ALRAI, as donee, from partitioning or
October 17, 2016 | Jardeleza, J. | Compensation of Directors distributing individual certificates of title of the donated lots to its members,
within a period of five years from execution, unless a written authority is
secured from Dakudao.
PETITIONER: Agdao Residents, Inc. et.al
3. A violation of the prohibition will render the donation void, and title to and
RESPONDENTS: Rolando Maramion, et. al
possession of the donated lot will revert to Dakudao. The other five Deeds of
Donation do not provide for the five-year restriction.
SUMMARY: Agdao Residents Inc. or ALRAI received a donation from Dakudao
4. In the board of directors and stockholders meetings held on January 5, 2000
Inc. The said donation of parcels of land contained a prohibition as to the transfer
and January 9, 2000, respectively, members of ALRAI resolved to directly
within 5 years without the authority (out of the 6 deeds only 1 has the restriction).
transfer 10 of the donated lots to individual members and non- members of
Within the said period of restriction ALRAI transferred the said land to its BOD
ALRAI
and non-members. Take note that in this case the relevant contention is the transfer
5. The respondents (some members of ALRAI) filed a complaint against the
of the BOD of the land to its President and Secretary. Respondents Maramion et.al
said corporation and its board of directors. They alleged that the corporation
who are also members of the said ALRAI assail the validity of the transfer of the
expelled them as members of ALRAI, and that the BOD abused their powers
lot and their expulsion as members of the corporation. RTC ruled in favor of the
a officers.
members declaring all the transfer as void, while CA affirmed the ruling with
6. The respondent members of ALRAI further alleged that petitioners were
modification saying that the transfer to a certain Loy from Alcantara was valid.
engaged in the following anomalous and illegal acts:
Issues are: WoN there was a valid termination of membership of respondents – No,
a. requiring ALRAI's members to pay exorbitant arrear fees when
it did not comply with the due process requirement of the ALRAI constitution.
ALRAI's By-Laws only set membership dues at P1.00 per month;17
WoN there was a valid transfer of lot – No, it violated the fiduciary nature of the
b. partially distributing the lands donated by Dakudao to some officers
corporation and its BOD when it transferred property (as way of compensation daw
of ALRAI and to some non-members in violation of the Deeds of
but without corporate purpose) to its President and Secretary. SC affirmed the CA
Donation;
decision with modification by saying all transfers were void, furthermore it
c. illegally expelling them as members of ALRAI without due process
enunciated the following requisites before a valid transfer of property of the
d. being unable to show the books of accounts of ALRAI. They also
corporation to its BOD can be effected is found in Sec. 32 of the corporation code.
alleged that Loy (who bought one of the donated lots from
Alcantara) was a buyer in bad faith, having been aware of the status
DOCTRINE: [AS PER THE SYLLABUS] It is well settled that directors
of the land when she bought it.
presumptively serve without compensation. Hence, even though director assigning
7. Thus, respondent members prayed for:
themselves additional duties which still fall within their power much less do they
a. the restoration of their membership to ALRAI;
amount to extraordinary or unusual services to the company, they would then be
b. petitioners to stop selling the donated lands and to annul the titles
acting in excess of their authority by voting for themselves compensation for such
transferred to Javonillo, Armentano, Dela Cruz, Alcantara and Loy;
additional duties. In addition, such transfer of properties of the corporation by way
c. the production of the accounting books of ALRAI and receipts of
of payment of compensation amounts to self-dealing covered by Section 32 of the
payments from ALRAI's members;
Corporation Code
d. the accounting of the fees paid by ALRAI's members; and
e. damages
[MY TAKE AWAY FROM THE CASE] Being the corporation's agents and
8. In their Answer, petitioner BOD & Corporation alleged that ALRAI
therefore, entrusted with the management of its affairs, the directors or trustees
transferred lots to:
and other officers of a corporation occupy a fiduciary relation towards it, and
a. Alcantara as attorney's fees ALRAI owed to her late husband, who
cannot be allowed to contract with the corporation, directly or indirectly, or to
was the legal counsel of ALRAI.
sell property to it, or purchase property from it, where they act both for the
b. Javonillo and Armentano, as president and secretary of ALRAI,
corporation and for themselves.
respectively, made a lot of sacrifices for ALRAI,
c. Dela Cruz provided financial assistance to ALRAI.
FACTS: 9. RTC RULING: In favor of the complainants. The court treated the case as
1. Dakudao & Sons, Inc. (Dakudao) executed six Deeds of Donation in favor an intra-corporate dispute. It found respondents to be bona fide members of
of Agdao Landless Residents Association Inc. (ALRAI) covering 46 titled ALRAI. Being bona fide members, they are entitled to notices of meetings
lots (donated lots). held for the purpose of suspending or expelling them from ALRAI. The court
 however found that respondents were expelled without due process. It also
annulled all transfers of the donated lots because these violated the five-year
prohibition under the Deeds of Donation. It also found Loy is a purchaser in
bad faith.
10. CA RULING: Affirmed the decision of RTC with modification (declaring
the transfer to Loy from Alcantara as valid)
11. CA’S RATIO: Under Section 2, Article III of ALRAI's Amended
Constitution and By-Laws (ALRAI Constitution), the corporate secretary
should give written notice of all meetings to all members at least three
days before the date of the meeting. The CA found that respondents were
not given notices of the meetings held for the purpose of their
termination from ALRAI at least three days before the date of the meeting.
Being existing members of ALRAI, respondents are entitled to inspect
corporate books and demand accounting of corporate funds in
accordance with Section 1, Article VII and Section 6, Article V ofthe ALRAI
Constitution.
12. The CA also noted that among the donated lots transferred, only one [under
TCT No. T-41367 (now TCT No. 322971) and transferred to Alcantara] was
covered by the five-year prohibition. Although petitioners attached to their
Memorandum dated November 19, 2007 a Secretary's Certificate of Dakudao
resolving to remove the restriction from the land covered by TCT No. T-
41367, the CA did not take this certificate into consideration because
petitioners never mentioned its existence in any of their pleadings before
the court. Thus, without the required written authority from the donor, the
CA held that the disposition of the land covered by TCT No. T-41367 is
prohibited and the land's subsequent registration under TCT No. T-322971 is
void.
13. [RELEVANT TO THE DISCUSSION] However, the CA nullified the
transfers made to Javonillo and Armentano because these transfers
violated Section 6 of Article IV of the ALRAI Constitution. Section 6
prohibits directors from receiving any compensation, except for per
diems, for their services to ALRAI.
14. The CA upheld the validity of the transfers to Dela Cruz and Alcantara48
because the ALRAI Constitution does not prohibit the same. The CA held
that as a consequence, the subsequent transfer of the lot covered by TCT No.
T-41366 to Loy from Alcantara was also valid.
ISSUE/s:
21. WoN the respondents should be reinstated as members of ALRAI – Yes, the
SC did not disturb the RTC and CA findings
22. WoN the transfers of the donated lots are valid – No, violative of the fiduciary
nature of the corporation and its board of directors
RULING: PETIION IS PARTIALLY GRANTED. IT DECLARED ALL SALES
AND TRANSFERS OF TITLES AS VOID.
RATIO:
LEGITIMACY OF THE RESPONDENTS TERMINATION
1. The RTC found that respondets are bona fide members of ALRAI and this
finding was not disturbed by the CA because it was not raised as an issue
before it, thus, binding and conclusive on the parties and upon this Court. In
addition, both the RTC and the CA found that respondents were illegally
removed as members of ALRAI.
2. Both courts found that in terminating respondents from ALRAI, petitioners
deprived them of due process.
3. Section 9158 of the Corporation Code of the Philippines (Corporation Code)
provides that membership in a non-stock, non-profit corporation (as in
petitioner ALRAI in this case) shall be terminated in the manner and for the
cases provided in its articles of incorporation or the by-laws.
4. According to the ALRAI Constitution the following are the grounds for
termination of membership
a. Deliquent payment of monthly dues
b. Failure to attend any annual or special meeting of the association for
three consecutive times without justifiable cause
c. Expulsion by exacted by majority of entire votes of the entire
members on the causes enumerated namely:
i. Acts and utterances derogatory and harmful to the interest
of association
ii. Failure to attend any annual or special meeting for 6
consecutive months
iii. Any acts contrary to the objectives
5. ALRAI allege that the membership of respondents in ALRAI was terminated
due to (a) non-payment of membership dues and (b) failure to
consecutively attend meetings. However, petitioners failed to substantiate
these allegations.
6. Even assuming that ALRAI were able to prove these allegations, the
automatic termination of respondents' membership in ALRAI is still not
warranted. Because according to their constitution the said grounds
enumerated does not warrant automatic termination. Although a
membership can also be terminated through majority vote the ALRAI
Constitution provides for the guideline which is the giving of notice to
said member to be terminated.
7. The requirement of due notice becomes more essential especially so since the
ALRAI Constitution provides for the penalties to be imposed in cases where
any member is found to be in arrears in payment of contributions, or is found
to be absent from any meeting without any justifiable cause.
8. [CONCLUSION] Clearly, members proved to be in arrears in the payment
of monthly dues, contributions, or assessments shall only be automatically
suspended; while members who shall be absent from any meeting without
any justifiable cause shall only be liable for a fine. Nowhere in the ALRAI
Constitution does it say that the foregoing actions shall cause the
automatic termination of membership. Thus, the CA correctly ruled that
 "respondent MEMBERS' expulsion constitutes an infringement of their
constitutional right to due process of law.
ON THE VALIDITY OF THE TRANSFER OF LOTS
1. To resolve the issue of the validity of the transfers of the donated lots to
Javonillo, Armentano, DelaCruz, Alcantara and Loy. We agree with the CA
in ruling that the TCTs issued in the names of Javonillo, Armentano and
Alcantara are void. The court modified the ruling of the CA insofar as that
the TCTs issued in the names of Dela Cruz and Loy are also void.
2. One of the primary purposes of ALRAI is the giving of assistance in uplifting
and promoting better living conditions to all members in particular and the
public in general.
3. One of its objectives includes "to uplift and promote better living condition,
education, health and general welfare of all members in particular and the
public in general by providing its members humble shelter and decent
housing.
4. The respondent members maintain that it is pursuant to its purpose that the
objective of the properties subject of this case were donated to ALRAI.
5. The Corporation Code therefore tells us that the power of a corporation to
validly grant or convey any of its real or personal properties is
circumscribed by its primary purpose. It is therefore important to
determine whether the grant or conveyance is pursuant to a legitimate
corporate purpose, or is at least reasonable and necessary to further its
purpose.
6. Based on the records of this case, The court finds that the transfers of the
corporate properties to Javonillo, Armentano, Dela Cruz, Alcantara and Loy
are bereft of any legitimate corporate purpose, nor were they shown to
be reasonably necessary to further ALRAI's purposes. This is principally
because, as respondents argue, petitioner BOD’s "personally benefitted
themselves by allocating among themselves vast track of lands at the dire
expense of the landless general membership of the Association.
RELEVANT PART BASED ON CLV’S SYLLABUS (As to the transfer to
Javonillo and Armentano – President and Secretary of ALRAI)
20
Sec. 32 of the Corporation Code. Dealings of directors, trustees or
officers with the corporation. —A contract of the corporation with one
or more of its directors or trustees or officers is voidable, at the option
of such corporation, unless all of the following conditions are present:
1. That the presence of such director or trustee in the board meeting in
which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and
7. The Board Resolution confirming the transfer of ALRAI's corporate
properties to Javonillo and Armentano merely read, "[t]hat the herein
irrevocable confirmation is made in recognition of, and gratitude for the
outstanding services rendered by x x x Mr. Armando Javonillo, our
tireless President and Mrs. Acelita Armentano, our tactful, courageous,
and equally tireless Secretary, without whose efforts and sacrifices to
acquire a portion of the realty of Dacudao & Sons, Inc., would not have
been attained.”
8. These reasons cannot suffice to prove any legitimate corporate purpose in the
transfer of the properties to Javonillo and Armentano. For one, petitioners
cannot argue that the properties transferred to them will serve as
reimbursements of the amounts they advanced for ALRAL There is no
evidence to show that they indeed paid the realty tax on the donated lands.
Neither did petitioners present any proof of actual disbursements they
incurred whenever Javonillo and Armentano allegedly helped Atty. Pedro
Alcantara in handling the cases involving ALRAI.
9. Absent proof, there was no basis by which it could have been determined
whether the transfer of properties to Javonillo and Armentano was
reasonable under the circumstances at that time.
10. [RELEVANT PART] Second, petitioners cannot argue that the
properties are transferred as compensatioh for Javonillo. It is well settled
that directors of corporations presumptively serve without
compensation; so that while the directors, in assigning themselves
additional duties, act within their power, they nonetheless act in excess
of their authority by voting for themselves compensation for such
additional duties. Even then, aside from the claim of petitioners, there is no
showing that Javonillo rendered extraordinary or unusual services to
ALRAI.
11. The lack of legitimate corporate purpose is even more emphasized when
Javonillo and Armentano, as a director and an officer of ALRAI, respectively,
violated the fiduciary nature20
4. That in case of an officer, the contract has been previously
authorized by the board of directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of at least two- thirds (2/3) of the members in a meeting called for the
purpose: Provided, That full disclosure of the adverse interest of the
directors or trustees involved is made at such meeting: Provided,
 12. Being the corporation's agents and therefore, entrusted with the
management of its affairs, the directors or trustees and other officers of
a corporation occupy a fiduciary relation towards it, and cannot be
allowed to contract with the corporation, directly or indirectly, or to sell
property to it, or purchase property from it, where they act both for the
corporation and for themselves.
13. We note that Javonillo, as a director, signed the Board Resolutions
confirming the transfer of the corporate properties to himself, and to
Armentano. Petitioners cannot argue that the transfer of the corporate
properties to them is valid by virtue of the Resolution by the general
membership of ALRAI confirming the transfer for three reasons.
14. First, as cited, Section 32 requires that the contract should be ratified by
a vote representing at least two-thirds of the members in a meeting called
for the purpose. Records of this case do not show whether the Resolution
was indeed voted by the required percentage of membership. In fact,
respondents take exception to the credibility of the signatures of the
persons who voted in the Resolution.
15. They argue that, "from the alleged 134 signatures, 24 of which are non-
members, 4 of which were signed twice under different numbers, and 27
of which are apparently proxies unequipped with the proper
authorization. Obviously, on such alleged general membership meeting the
majority of the entire membership was not attained."
16. Second, there is also no showing that there was full disclosure of the
adverse interest of the directors involved when the Resolution was
approved. Full disclosure is required under the aforecited Section 32 of the
Corporation Code.
17. Third, Section 32 requires that the contract be fair and reasonable under
the circumstances. As previously discussed, we find that the transfer of the
corporate properties to the individual petitioners is not fair and reasonable for
(1) want of legitimate corporate purpose, and for (2) the breach of the
fiduciary nature of the positions held

however, That the contract is fair and reasonable under the

circumstances.