G.R. No.

84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO),
CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.
G.R. No. 84157 July 28, 1989
JACOB S. LIM, petitioner,
vs.
COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA,respondents.
Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.
Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.
Renato J. Robles for BORMAHECO, Inc. and Cervanteses.
Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which
modified the decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint
(petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No. 84197) was dismissed but in all other
respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the
amount of P311,056.02, with interest at the rate of 12% per annum compounded monthly; plus 15% of
the amount awarded to plaintiff as attorney's fees from July 2,1966, until full payment is made; plus
P70,000.00 moral and exemplary damages.
It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside
from Pl51,000.00,,making a total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross
party plaintiff, Bormaheco, the Cervanteses one-half and Maglana the other half, the amount of
Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral
and exemplary damages in the amount of P184,878.84 with interest from the filing of the crosscomplaints until the amount is fully paid; plus moral and exemplary damages in the amount of P50,000.00
for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another
P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the
Cervanteses and Constancio B. Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as attorney's fees and the
amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as
attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The
fact that the properties of the Bormaheco and the Cervanteses were attached and that they were required
to file a counterbond in order to dissolve the attachment, is not an act of bad faith. When a man tries to
protect his rights, he should not be saddled with moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only
secured the attachment prayed for by the plaintiff Pioneer. If an insurance company would be liable for
damages in performing an act which is clearly within its power and which is the reason for its being, then
nobody would engage in the insurance business. No further claim or counter-claim for or against anybody
is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern
Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract
(Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total
agreed price of US $109,000.00 to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila
on June 7,1965 while the other aircraft, arrived in Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed
and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the
aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes
(Cervanteses) and Constancio Maglana (respondents in both petitions) 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 (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor
of Pioneer, one signed by Maglana and the other jointly signed by Lim for SAL, Bormaheco and the Cervanteses. 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.
On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel
mortgage 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. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City
of Manila and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics
Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid
a total sum of P298,626.12.
Pioneer then filed 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,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment
against Lim and respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed 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.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint
against all other defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the
defendants was dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF
PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD 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 HEREIN PRIVATE RESPONDENTS
AS DEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability
under the surety bond in favor of JDA and subsequently collected the proceeds of such reinsurance in the
sum of P295,000.00. Defendants' alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from defendants will no longer prosper.
Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be
benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants,
hence, it instituted the action is utterly devoid of merit. Plaintiff did not even present any evidence that it is
the attorney-in-fact of the reinsurance company, authorized to institute an action for and in behalf of the
latter. To qualify a person to be a real party in interest in whose name an action must be prosecuted, he
must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on
the Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would
be benefited or injured by the judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present substantial interest as
distinguished from a mere expectancy or a future, contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers
v. Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it
has already been paid by the reinsurer the sum of P295,000.00 the bulk of defendants' alleged
obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the
former was able to foreclose extra-judicially one of the subject airplanes and its spare engine, realizing
the total amount of P37,050.00 from the sale of the mortgaged chattels. Adding the sum of P37,050.00, to
the proceeds of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in
the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only P298,666.28.
To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by the reinsurance company of the amount
plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the expense of another (Article 22, New Civil
Code). (Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its
reinsurer in the aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers
in the court below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that
it was paid by its reinsurer, still none of the respondents had any interest in the matter since the reinsurance is strictly
between the petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4) the principle of unjust
enrichment is not applicable considering that whatever amount he would recover from the co-indemnitor will be paid to the
reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as
has been paid with reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the mortgaged properties? (Record on
Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of
JDA, collected the proceeds of such reinsurance in the sum of P295,000, and paid with the said amount
the bulk of its alleged liability to JDA under the said surety bond, it is plain that on this score it no longer
has any right to collect to the extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the
amount paid to it by the reinsurers, notwithstanding that the cause of action pertains to the latter, Pioneer
says: The reinsurers opted instead that the Pioneer Insurance & Surety Corporation shall pursue alone
the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the
amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as
their attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorneyin- fact of the reinsurers for any amount. Lastly, and most important of all, Pioneer has no right to institute
and maintain in its own name an action for the benefit of the reinsurers. It is well-settled that an action
brought by an attorney-in-fact in his own name instead of that of the principal will not prosper, and this is
so even where the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be
prosecuted in the name of the real party in interest.' This provision is mandatory. The real
party in interest is the party who would be benefitted or injured by the judgment or is the
party entitled to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a real party in interest,
that there is no law permitting an action to be brought by an attorney-in-fact. Arroyo v.
Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil.
Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA
706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from
the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or
P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity
agreement is still valid and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against
defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted
payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the
petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly between the
petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code
has no basis.
In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in
similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A.
La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions or
contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7
Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
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.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031
[1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA
650 [1987]):
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).
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 petitioner's complaint as against the
respondents for the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no
cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed
on the premise that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not,
however, cite any grounds except its allegation that respondent "Maglanas defense and evidence are certainly incredible"
(p. 12, Rollo) to back up its contention.
On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the
counter-indemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the
execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the
bond provided that the same would be mortgaged to it, but this was not possible because the planes were
still in Japan and could not be mortgaged here in the Philippines. As soon as the aircrafts were brought to
the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have impaired and rendered
insufficient the security under the chattel mortgage and there is thus no other sufficient
security for the claim sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is no other security for the claim
sought to be enforced by this action, which necessarily means that the indemnity agreement had ceased
to have any force and effect at the time this action was instituted. Sec 2, Rule 129, Revised Rules of
Court.

Prescinding from the foregoing, 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. Articles 2067 and 2080 of the New Civil Code of the
Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any
further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as
surety having made of the payments to JDA, the alternative remedies open to Pioneer were as provided
in Article 1484 of the New Civil Code, known as the Recto Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and
the instant suit. Such being the case, as provided by the aforementioned provisions, Pioneer shall have
no further action against the purchaser to recover any unpaid balance and any agreement to the contrary
is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23 SCRA 791,
795-6.
The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is
not the vendor but JDA. The reason is that Pioneer is actually exercising the rights of JDA as vendor,
having subrogated it in such rights. Nor may the application of the provision be validly opposed on the
ground that these defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et al.
v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged
these defendants from any liability as alleged indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL extinguish the original obligations thru novations thus discharging the
indemnitors.
The principal hereof shall be paid in eight equal successive three months interval
installments, the first of which shall be due and payable 25 August 1965, the remainder of
which ... shall be due and payable on the 26th day x x x of each succeeding three months
and the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA,
modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the remainder
of which ... shall be due and payable on the 4th day ... of each succeeding months and
the last of which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different
from that fixed in the aforesaid memorandum; the due date of the first installment appears as October 15,
1965, and those of the rest of the installments, the 15th of each succeeding three months, that of the last
installment being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected twice, were done
without the knowledge, much less, would have it believed that these defendants Maglana (sic). Pioneer's
official Numeriano Carbonel would have it believed that these defendants and defendant Maglana knew
of and consented to the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written conformity of these
defendants, and there are no such document. The consequence of this was the extinguishment of the
obligations and of the surety bond secured by the indemnity agreement which was thereby also
extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan
Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil.
532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty The mere failure on the part of the creditor to
demand payment after the debt has become due does not of itself constitute any
extension time referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et
al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently,
Pioneer has no more cause of action to recover from these defendants, as supposed indemnitors, what it
has paid to JDA. By virtue of an express stipulation in the surety bond, the failure of JDA to present its
claim to Pioneer within ten days from default of Lim or SAL on every installment, released Pioneer from
liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his
co-debtors if such payment is made after the obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by
reason of the filing of the instant case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as plaintiff drags these defendants and
defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose agreement was to do business
through the corporate vehicle but who failed to incorporate the entity in which they had chosen to invest?
How are the losses to be treated in situations where their contributions to the intended 'corporation' were
invested not through the corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses
Cervantes, Constancio Maglana and petitioner 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. The petitioner, therefore, questions the appellate court's findings ordering him to reimburse certain amounts
given by the respondents to the petitioner as their contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount
of P184,878.74 as correctly found by the trial court, with interest from the filing of the cross-complaints
until the amount is fully paid. Defendant Lim should pay one-half of the said amount to Bormaheco and
the Cervanteses and the other one-half to defendant Maglana. It is established in the records that
defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana
representing the latter's participation in the ownership of the subject airplanes and spare parts (Exhibit
58). In addition, the cross-party plaintiffs incurred additional expenses, hence, the total sum of P
184,878.74.
We first state the principles.
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 (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94
Am. S.R. 584), 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 (Lynch v. Perryman, 119
P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). 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 (Smith v.
Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where
certain persons associated themselves as a corporation for the development of land for irrigation
purposes, and each conveyed land to the corporation, and two of them contracted to pay a third the
difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them for an accounting,
and its capital stock was treated as partnership assets, sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal. 446). 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 (London Assur.
Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), 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 (Ward v. Brigham, 127 Mass.
24). 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 (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus
Juris Secundum, Vol. 68, p. 464). (Italics supplied).
In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial
despite notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the
Cervanteses and Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner
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 defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner 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 petitioner to make contributions to a proposed corporation which was never formed because the
petitioner reneged on their agreement. Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his
airline business. Lim was to procure two DC-3's from Japan and secure the necessary certificates of
public convenience and necessity as well as the required permits for the operation thereof. Maglana
sometime in May 1965, 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. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party
complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two
airplanes and spare parts from Japan which the latter considered as their lawful contribution and
participation in the proposed corporation to be known as SAL. Arrangements and negotiations were
undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged chattel mortgage and
surety bond agreement in his personal capacity as the alleged proprietor of the SAL. The answering
defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim, when
the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file
an adverse claim in the form of third party claim. Notwithstanding repeated oral demands made by
defendants Bormaheco and Cervanteses, to defendant 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 P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and
refused to comply with them. (Record on Appeal, pp. 341-342).
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 petitioner to a reimbursement of the supposed losses of the proposed
corporation. The record shows that the petitioner 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.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.

G.R. No. 161026 October 24, 2005

HYATT ELEVATORS AND ESCALATORS CORPORATION, Petitioner,
vs.
GOLDSTAR ELEVATORS, PHILS., INC.,* Respondent.
DECISION
PANGANIBAN, J.:
ell established in our jurisprudence is the rule that the residence of a corporation is the place where its principal
office is located, as stated in its Articles of Incorporation.
The Case
Before us is a Petition for Review1 on Certiorari, under Rule 45 of the Rules of Court, assailing the June 26, 2003
Decision2 and the November 27, 2003 Resolution3 of the Court of Appeals (CA) in CA-GR SP No. 74319. The
decretal portion of the Decision reads as follows:
"WHEREFORE, in view of the foregoing, the assailed Orders dated May 27, 2002 and October 1, 2002 of the RTC,
Branch 213, Mandaluyong City in Civil Case No. 99-600, are hereby SET ASIDE. The said case is hereby
ordered DISMISSED on the ground of improper venue."4
The assailed Resolution denied petitioners Motion for Reconsideration.
The Facts
The relevant facts of the case are summarized by the CA in this wise:
"Petitioner [herein Respondent] Goldstar Elevator Philippines, Inc. (GOLDSTAR for brevity) is a domestic
corporation primarily engaged in the business of marketing, distributing, selling, importing, installing, and
maintaining elevators and escalators, with address at 6th Floor, Jacinta II Building, 64 EDSA, Guadalupe, Makati
City.
"On the other hand, private respondent [herein petitioner] Hyatt Elevators and Escalators Company (HYATT for
brevity) is a domestic corporation similarly engaged in the business of selling, installing and maintaining/servicing
elevators, escalators and parking equipment, with address at the 6th Floor, Dao I Condominium, Salcedo St.,
Legaspi Village, Makati, as stated in its Articles of Incorporation.
"On February 23, 1999, HYATT filed a Complaint for unfair trade practices and damages under Articles 19, 20 and
21 of the Civil Code of the Philippines against LG Industrial Systems Co. Ltd. (LGISC) and LG International
Corporation (LGIC), alleging among others, that: in 1988, it was appointed by LGIC and LGISC as the exclusive
distributor of LG elevators and escalators in the Philippines under a Distributorship Agreement; x x x LGISC, in the
latter part of 1996, made a proposal to change the exclusive distributorship agency to that of a joint venture
partnership; while it looked forward to a healthy and fruitful negotiation for a joint venture, however, the various
meetings it had with LGISC and LGIC, through the latters representatives, were conducted in utmost bad faith and
with malevolent intentions; in the middle of the negotiations, in order to put pressures upon it, LGISC and LGIC
terminated the Exclusive Distributorship Agreement; x x x [A]s a consequence, [HYATT] sufferedP120,000,000.00
as actual damages, representing loss of earnings and business opportunities, P20,000,000.00 as damages for its
reputation and goodwill, P1,000,000.00 as and by way of exemplary damages, andP500,000.00 as and by way of
attorneys fees.
"On March 17, 1999, LGISC and LGIC filed a Motion to Dismiss raising the following grounds: (1) lack of jurisdiction
over the persons of defendants, summons not having been served on its resident agent; (2) improper venue; and (3)
failure to state a cause of action. The [trial] court denied the said motion in an Order dated January 7, 2000.

"On March 6, 2000, LGISC and LGIC filed an Answer with Compulsory Counterclaim ex abundante cautela.
Thereafter, they filed a Motion for Reconsideration and to Expunge Complaint which was denied.
"On December 4, 2000, HYATT filed a motion for leave of court to amend the complaint, alleging that subsequent to
the filing of the complaint, it learned that LGISC transferred all its organization, assets and goodwill, as a
consequence of a joint venture agreement with Otis Elevator Company of the USA, to LG Otis Elevator Company
(LG OTIS, for brevity). Thus, LGISC was to be substituted or changed to LG OTIS, its successor-in-interest.
Likewise, the motion averred that x x x GOLDSTAR was being utilized by LG OTIS and LGIC in perpetrating their
unlawful and unjustified acts against HYATT. Consequently, in order to afford complete relief, GOLDSTAR was to
be additionally impleaded as a party-defendant. Hence, in the Amended Complaint, HYATT impleaded x x x
GOLDSTAR as a party-defendant, and all references to LGISC were correspondingly replaced with LG OTIS.
"On December 18, 2000, LG OTIS (LGISC) and LGIC filed their opposition to HYATTs motion to amend the
complaint. It argued that: (1) the inclusion of GOLDSTAR as party-defendant would lead to a change in the theory of
the case since the latter took no part in the negotiations which led to the alleged unfair trade practices subject of the
case; and (b) HYATTs move to amend the complaint at that time was dilatory, considering that HYATT was aware
of the existence of GOLDSTAR for almost two years before it sought its inclusion as party-defendant.
"On January 8, 2001, the [trial] court admitted the Amended Complaint. LG OTIS (LGISC) and LGIC filed a motion
for reconsideration thereto but was similarly rebuffed on October 4, 2001.
"On April 12, 2002, x x x GOLDSTAR filed a Motion to Dismiss the amended complaint, raising the following
grounds: (1) the venue was improperly laid, as neither HYATT nor defendants reside in Mandaluyong City, where
the original case was filed; and (2) failure to state a cause of action against [respondent], since the amended
complaint fails to allege with certainty what specific ultimate acts x x x Goldstar performed in violation of x x x Hyatts
rights. In the Order dated May 27, 2002, which is the main subject of the present petition, the [trial] court denied the
motion to dismiss, ratiocinating as follows:
Upon perusal of the factual and legal arguments raised by the movants-defendants, the court finds that these are
substantially the same issues posed by the then defendant LG Industrial System Co. particularly the matter dealing
[with] the issues of improper venue, failure to state cause of action as well as this courts lack of jurisdiction. Under
the circumstances obtaining, the court resolves to rule that the complaint sufficiently states a cause of action and
that the venue is properly laid. It is significant to note that in the amended complaint, the same allegations are
adopted as in the original complaint with respect to the Goldstar Philippines to enable this court to adjudicate a
complete determination or settlement of the claim subject of the action it appearing preliminarily as sufficiently
alleged in the plaintiffs pleading that said Goldstar Elevator Philippines Inc., is being managed and operated by the
same Korean officers of defendants LG-OTIS Elevator Company and LG International Corporation.
"On June 11, 2002, [Respondent] GOLDSTAR filed a motion for reconsideration thereto. On June 18, 2002, without
waiving the grounds it raised in its motion to dismiss, [it] also filed an Answer Ad Cautelam. On October 1, 2002,
[its] motion for reconsideration was denied.
"From the aforesaid Order denying x x x Goldstars motion for reconsideration, it filed the x x x petition for certiorari
[before the CA] alleging grave abuse of discretion amounting to lack or excess of jurisdiction on the part of the [trial]
court in issuing the assailed Orders dated May 27, 2002 and October 1, 2002."5
Ruling of the Court of Appeals
The CA ruled that the trial court had committed palpable error amounting to grave abuse of discretion when the
latter denied respondents Motion to Dismiss. The appellate court held that the venue was clearly improper, because
none of the litigants "resided" in Mandaluyong City, where the case was filed.
According to the appellate court, since Makati was the principal place of business of both respondent and petitioner,
as stated in the latters Articles of Incorporation, that place was controlling for purposes of determining the proper
venue. The fact that petitioner had abandoned its principal office in Makati years prior to the filing of the original
case did not affect the venue where personal actions could be commenced and tried.

Hence, this Petition.6

The Issue
In its Memorandum, petitioner submits this sole issue for our consideration:
"Whether or not the Court of Appeals, in reversing the ruling of the Regional Trial Court, erred as a matter of law
and jurisprudence, as well as committed grave abuse of discretion, in holding that in the light of the peculiar facts of
this case, venue was improper[.]"7
This Courts Ruling
The Petition has no merit.
Sole Issue:
Venue
The resolution of this case rests upon a proper understanding of Section 2 of Rule 4 of the 1997 Revised Rules of
Court:
"Sec. 2. Venue of personal actions. All other actions may be commenced and tried where the plaintiff or any of the
principal plaintiff resides, or where the defendant or any of the principal defendant resides, or in the case of a nonresident defendant where he may be found, at the election of the plaintiff."
Since both parties to this case are corporations, there is a need to clarify the meaning of "residence." The law
recognizes two types of persons: (1) natural and (2) juridical. Corporations come under the latter in accordance with
Article 44(3) of the Civil Code.8
Residence is the permanent home -- the place to which, whenever absent for business or pleasure, one intends to
return.9 Residence is vital when dealing with venue.10 A corporation, however, has no residence in the same sense
in which this term is applied to a natural person. This is precisely the reason why the Court in Young Auto Supply
Company v. Court of Appeals11 ruled that "for practical purposes, a corporation is in a metaphysical sense a resident
of the place where its principal office is located as stated in the articles of incorporation."12 Even before this ruling, it
has already been established that the residence of a corporation is the place where its principal office is
established.13
This Court has also definitively ruled that for purposes of venue, the term "residence" is synonymous with
"domicile."14 Correspondingly, the Civil Code provides:
"Art. 51. When the law creating or recognizing them, or any other provision does not fix the domicile of juridical
persons, the same shall be understood to be the place where their legal representation is established or where they
exercise their principal functions."15
It now becomes apparent that the residence or domicile of a juridical person is fixed by "the law creating or
recognizing" it. Under Section 14(3) of the Corporation Code, the place where the principal office of the corporation
is to be located is one of the required contents of the articles of incorporation, which shall be filed with the Securities
and Exchange Commission (SEC).
In the present case, there is no question as to the residence of respondent. What needs to be examined is that of
petitioner. Admittedly,16 the latters principal place of business is Makati, as indicated in its Articles of Incorporation.
Since the principal place of business of a corporation determines its residence or domicile, then the place indicated
in petitioners articles of incorporation becomes controlling in determining the venue for this case.
Petitioner argues that the Rules of Court do not provide that when the plaintiff is a corporation, the complaint should
be filed in the location of its principal office as indicated in its articles of incorporation.17 Jurisprudence has, however,
settled that the place where the principal office of a corporation is located, as stated in the articles, indeed

establishes its residence.18 This ruling is important in determining the venue of an action by or against a
corporation,19 as in the present case.
Without merit is the argument of petitioner that the locality stated in its Articles of Incorporation does not conclusively
indicate that its principal office is still in the same place. We agree with the appellate court in its observation that the
requirement to state in the articles the place where the principal office of the corporation is to be located "is not a
meaningless requirement. That proviso would be rendered nugatory if corporations were to be allowed to simply
disregard what is expressly stated in their Articles of Incorporation."20
Inconclusive are the bare allegations of petitioner that it had closed its Makati office and relocated to Mandaluyong
City, and that respondent was well aware of those circumstances. Assuming arguendo that they transacted
business with each other in the Mandaluyong office of petitioner, the fact remains that, in law, the latters residence
was still the place indicated in its Articles of Incorporation. Further unacceptable is its faulty reasoning that the
ground for the CAs dismissal of its Complaint was its failure to amend its Articles of Incorporation so as to reflect its
actual and present principal office. The appellate court was clear enough in its ruling that the Complaint was
dismissed because the venue had been improperly laid, not because of the failure of petitioner to amend the latters
Articles of Incorporation.
Indeed, it is a legal truism that the rules on the venue of personal actions are fixed for the convenience of the
plaintiffs and their witnesses. Equally settled, however, is the principle that choosing the venue of an action is not
left to a plaintiffs caprice; the matter is regulated by the Rules of Court.21 Allowing petitioners arguments may lead
precisely to what this Court was trying to avoid in Young Auto Supply Company v. CA:22 the creation of confusion
and untold inconveniences to party litigants. Thus enunciated the CA:
"x x x. To insist that the proper venue is the actual principal office and not that stated in its Articles of Incorporation
would indeed create confusion and work untold inconvenience. Enterprising litigants may, out of some ulterior
motives, easily circumvent the rules on venue by the simple expedient of closing old offices and opening new ones
in another place that they may find well to suit their needs."23
We find it necessary to remind party litigants, especially corporations, as follows:
"The rules on venue, like the other procedural rules, are designed to insure a just and orderly administration of
justice or the impartial and evenhanded determination of every action and proceeding. Obviously, this objective will
not be attained if the plaintiff is given unrestricted freedom to choose the court where he may file his complaint or
petition.
"The choice of venue should not be left to the plaintiffs whim or caprice. He may be impelled by some ulterior
motivation in choosing to file a case in a particular court even if not allowed by the rules on venue."24
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and Resolution AFFIRMED. Costs against
petitioner.
SO ORDERED.

G.R. No. L-23606

July 29, 1968

ALHAMBRA CIGAR & CIGARETTE MANUFACTURING COMPANY, INC., petitioner,

vs.
SECURITIES & EXCHANGE COMMISSION, respondent.
Gamboa and Gamboa for petitioner.
Office of the Solicitor General for respondent.
SANCHEZ, J.:
To the question May a corporation extend its life by amendment of its articles of incorporation effected during the
three-year statutory period for liquidation when its original term of existence had already expired? the answer of
the Securities and Exchange Commissioner was in the negative. Offshoot is this appeal.
That problem emerged out of the following controlling facts:
Petitioner Alhambra Cigar and Cigarette Manufacturing Company, Inc. (hereinafter referred to simply asAlhambra)
was duly incorporated under Philippine laws on January 15, 1912. By its corporate articles it was to exist for fifty (50)
years from incorporation. Its term of existence expired on January 15, 1962. On that date, it ceased transacting
business, entered into a state of liquidation.
Thereafter, a new corporation. Alhambra Industries, Inc. was formed to carry on the business of Alhambra.
On May 1, 1962, Alhambra's stockholders, by resolution named Angel S. Gamboa trustee to take charge of its
liquidation.
On June 20, 1963 within Alhambra's three-year statutory period for liquidation - Republic Act 3531 was enacted
into law. It amended Section 18 of the Corporation Law; it empowered domestic private corporations to extend their
corporate life beyond the period fixed by the articles of incorporation for a term not to exceed fifty years in any one
instance. Previous to Republic Act 3531, the maximum non-extendible term of such corporations was fifty years.
On July 15, 1963, at a special meeting, Alhambra's board of directors resolved to amend paragraph "Fourth" of its
articles of incorporation to extend its corporate life for an additional fifty years, or a total of 100 years from its
incorporation.
On August 26, 1963, Alhambra's stockholders, representing more than two-thirds of its subscribed capital stock,
voted to approve the foregoing resolution. The "Fourth" paragraph of Alhambra's articles of incorporation was thus
altered to read:
FOURTH. That the term for which said corporation is to exist is fifty (50) years from and after the date of
incorporation, and for an additional period of fifty (50) years thereafter.
On October 28, 1963, Alhambra's articles of incorporation as so amended certified correct by its president and
secretary and a majority of its board of directors, were filed with respondent Securities and Exchange Commission
(SEC).
On November 18, 1963, SEC, however, returned said amended articles of incorporation to Alhambra's counsel with
the ruling that Republic Act 3531 "which took effect only on June 20, 1963, cannot be availed of by the said
corporation, for the reason that its term of existence had already expired when the said law took effect in short, said
law has no retroactive effect."
On December 3, 1963, Alhambra's counsel sought reconsideration of SEC's ruling aforesaid, refiled the amended
articles of incorporation.
On September 8, 1964, SEC, after a conference hearing, issued an order denying the reconsideration sought.

Alhambra now invokes the jurisdiction of this Court to overturn the conclusion below.1
1. Alhambra relies on Republic Act 3531, which amended Section 18 of the Corporation Law. Well it is to take note
of the old and the new statutes as they are framed. Section 18, prior to and after its modification by Republic Act
3531, covers the subject of amendment of the articles of incorporation of private corporations. A provision thereof
which remains unaltered is that a corporation may amend its articles of incorporation "by a majority vote of its board
of directors or trustees and ... by the vote or written assent of the stockholders representing at least two-thirds of the
subscribed capital stock ... "
But prior to amendment by Republic Act 3531, an explicit prohibition existed in Section 18, thus:
... Provided, however, That the life of said corporation shall not be extended by said amendment beyond the
time fixed in the original articles: ...
This was displaced by Republic Act 3531 which enfranchises all private corporations to extend their corporate
existence. Thus incorporated into the structure of Section 18 are the following:
... Provided, however, That should the amendment consist in extending the corporate life, the extension
shall not exceed fifty years in any one instance: Provided, further, That the original articles, and amended
articles together shall contain all provisions required by law to be set out in the articles of incorporation: ...
As we look in retrospect at the facts, we find these: From July 15 to October 28, 1963, when Alhambra made its
attempt to extend its corporate existence, its original term of fifty years had already expired (January 15, 1962); it
was in the midst of the three-year grace period statutorily fixed in Section 77 of the Corporation Law, thus: .
SEC. 77. Every corporation whose charter expires by its own limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for other purposes is terminated in any other manner, shall
nevertheless be continued as a body corporate for three years after the time when it would have been so
dissolved, for the purpose of prosecuting and defending suits by or against it and of enabling it gradually to
settle and close its affairs, to dispose of and convey its property and to divide its capital stock, but not for the
purpose of continuing the business for which it was established.2
Plain from the language of the provision is its meaning: continuance of a "dissolved" corporation as a body
corporate for three years has for its purpose the final closure of its affairs, and no other; the corporation is
specifically enjoined from "continuing the business for which it was established". The liquidation of the corporation's
affairs set forth in Section 77 became necessary precisely because its life had ended. For this reason alone, the
corporate existence and juridical personality of that corporation to do business may no longer be extended.
Worth bearing in mind, at this juncture, is the basic development of corporation law.
The common law rule, at the beginning, was rigid and inflexible in that upon its dissolution, a corporation became
legally dead for all purposes. Statutory authorizations had to be provided for its continuance after dissolution "for
limited and specified purposes incident to complete liquidation of its affairs".3 Thus, the moment a corporation's right
to exist as an "artificial person" ceases, its corporate powers are terminated "just as the powers of a natural person
to take part in mundane affairs cease to exist upon his death".4 There is nothing left but to conduct, as it were, the
settlement of the estate of a deceased juridical person.
2. Republic Act 3531, amending Section 18 of the Corporation Law, is silent, it is true, as to when such act of
extension may be made. But even with a superficial knowledge of corporate principles, it does not take much effort
to reach a correct conclusion. For, implicit in Section 77 heretofore quoted is that the privilege given
toprolong corporate life under the amendment must be exercised before the expiry of the term fixed in the articles of
incorporation.
Silence of the law on the matter is not hard to understand. Specificity is not really necessary. The authority to
prolong corporate life was inserted by Republic Act 3531 into a section of the law that deals with the power of a
corporation to amend its articles of incorporation. (For, the manner of prolongation is through an amendment of the

articles.) And it should be clearly evident that under Section 77 no corporation in a state of liquidation can act in any
way, much less amend its articles, "for the purpose of continuing the business for which it was established".
All these dilute Alhambra's position that it could revivify its corporate life simply because when it attempted to do so,
Alhambra was still in the process of liquidation. It is surely impermissible for us to stretch the law that merely
empowers a corporation to act in liquidation to inject therein the power to extend its corporate existence.
3. Not that we are alone in this view. Fletcher has written: "Since the privilege of extension is purely statutory, all of
the statutory conditions precedent must be complied with in order that the extension may be effectuated. And,
generally these conditions must be complied with, and the steps necessary to effect the extension must be
taken,during the life of the corporation, and before the expiration of the term of existence as original fixed by its
charter or the general law, since, as a rule, the corporation is ipso facto dissolved as soon as that time expires. So
where the extension is by amendment of the articles of incorporation, the amendment must be adopted before that
time. And, similarly, the filing and recording of a certificate of extension after that time cannot relate back to the date
of the passage of a resolution by the stockholders in favor of the extension so as to save the life of the corporation.
The contrary is true, however, and the doctrine of relation will apply, where the delay is due to the neglect of the
officer with whom the certificate is required to be filed, or to a wrongful refusal on his part to receive it. And statutes
in some states specifically provide that a renewal may be had within a specified time before or after the time fixed
for the termination of the corporate existence".5
The logic of this position is well expressed in a foursquare case decided by the Court of Appeals of
Kentucky.6There, pronouncement was made as follows:
... But section 561 (section 2147) provides that, when any corporation expires by the terms of its articles of
incorporation, it may be thereafter continued to act for the purpose of closing up its business, but for no
other purpose. The corporate life of the Home Building Association expired on May 3, 1905. After that date,
by the mandate of the statute, it could continue to act for the purpose of closing up its business, but for no
other purpose. The proposed amendment was not made until January 16, 1908, or nearly three years after
the corporation expired by the terms of the articles of incorporation. When the corporate life of the
corporation was ended, there was nothing to extend. Here it was proposed nearly three years after the
corporate life of the association had expired to revivify the dead body, and to make that relate back some
two years and eight months. In other words, the association for two years and eight months had only existed
for the purpose of winding up its business, and, after this length of time, it was proposed to revivify it and
make it a live corporation for the two years and eight months daring which it had not been such.
The law gives a certain length of time for the filing of records in this court, and provides that the time may be
extended by the court, but under this provision it has uniformly been held that when the time was expired,
there is nothing to extend, and that the appeal must be dismissed... So, when the articles of a corporation
have expired, it is too late to adopt an amendment extending the life of a corporation; for, the corporation
having expired, this is in effect to create a new corporation ..."7
True it is, that the Alabama Supreme Court has stated in one case.8 that a corporation empowered by statute
torenew its corporate existence may do so even after the expiration of its corporate life, provided renewal is taken
advantage of within the extended statutory period for purposes of liquidation. That ruling, however, is inherently
weak as persuasive authority for the situation at bar for at least two reasons: First. That case was a suit for
mandamus to compel a former corporate officer to turn over books and records that came into his possession and
control by virtue of his office. It was there held that such officer was obliged to surrender his books and records even
if the corporation had already expired. The holding on the continued existence of the corporation was a mere
dictum. Second. Alabama's law is different. Corporations in that state were authorized not only to extend but also
to renew their corporate existence.That very case defined the word "renew" as follows; "To make new again; to
restore to freshness; to make new spiritually; to regenerate; to begin again; to recommence; to resume; to restore to
existence, to revive; to re-establish; to recreate; to replace; to grant or obtain an extension of Webster's New
International Dict.; 34 Cyc. 1330; Carter v. Brooklyn Life Ins. Co., 110 N.Y. 15, 21, 22, 17 N.E. 396; 54 C.J. 379.
Sec".9
On this point, we again draw from Fletcher: "There is a broad distinction between the extension of a charter and the
grant of a new one. To renew a charter is to revive a charter which has expired, or, in other words, "to give a new
existence to one which has been forfeited, or which has lost its vitality by lapse of time". To "extend" a charter is "to

increase the time for the existence of one which would otherwise reach its limit at an earlier period".10Nowhere in our
statute Section 18, Corporation Law, as amended by Republic Act 3531 do we find the word "renew" in
reference to the authority given to corporations to protract their lives. Our law limits itself to extensionof corporate
existence. And, as so understood, extension may be made only before the term provided in the corporate charter
expires.
Alhambra draws attention to another case11 which declares that until the end of the extended period for liquidation, a
dissolved corporation "does not become an extinguished entity". But this statement was obviously lifted out of
context. That case dissected the question whether or not suits can be commenced by or against a corporation within
its liquidation period. Which was answered in the affirmative. For, the corporation still exists for the settlement of its
affairs.
People, ex rel. vs. Green,12 also invoked by Alhambra, is as unavailing. There, although the corporation amended its
articles to extend its existence at a time when it had no legal authority yet, it adopted the amended articles later on
when it had the power to extend its life and during its original term when it could amend its articles.
The foregoing notwithstanding, Alhambra falls back on the contention that its case is arguably within the purview of
the law. It says that before cessation of its corporate life, it could not have extended the same, for the simple reason
that Republic Act 3531 had not then become law. It must be remembered that Republic Act 3531 took effect on
June 20, 1963, while the original term of Alhambra's existence expired before that date on January 15, 1962. The
mischief that flows from this theory is at once apparent. It would certainly open the gates for all defunct corporations
whose charters have expired even long before Republic Act 3531 came into being to resuscitate their
corporate existence.
4. Alhambra brings into argument Republic Act 1932, which amends Section 196 of the Insurance Act, now reading
as follows:
1w ph1.t

SEC. 196. Any provision of law to the contrary notwithstanding, every domestic life insurance corporation,
formed for a limited period under the provisions of its articles of incorporation, may extend its corporate
existence for a period not exceeding fifty years in any one instance by amendment to its articles of
incorporation on or before the expiration of the term so fixed in said articles ...
To be observed is that the foregoing statute unlike Republic Act 3531 expressly authorizes domestic insurance
corporations to extend their corporate existence "on or before the expiration of the term" fixed in their articles of
incorporation. Republic Act 1932 was approved on June 22, 1957, long before the passage of Republic Act 3531 in
1963. Congress, Alhambra points out, must have been aware of Republic Act 1932 when it passed Republic Act
3531. Since the phrase "on or before", etc., was omitted in Republic Act 3531, which contains no similar limitation, it
follows, according to Alhambra, that it is not necessary to extend corporate existence on or before the expiration of
its original term.
That Republic Act 3531 stands mute as to when extention of corporate existence may be made, assumes no
relevance. We have already said, in the face of a familiar precept, that a defunct corporation is bereft of any legal
faculty not otherwise expressly sanctioned by law.
Illuminating here is the explanatory note of H.B. 1774, later Republic Act 3531 now in dispute. Its first paragraph
states that "Republic Act No. 1932 allows the automatic extension of the corporate existence of domestic life
insurance corporations upon amendment of their articles of incorporation on or before the expiration of the terms
fixed by said articles". The succeeding lines are decisive: "This is a good law, a sane and sound one.There appears
to be no valid reason why it should not be made to apply to other private corporations.13
The situation here presented is not one where the law under consideration is ambiguous, where courts have to put
in harness extrinsic aids such as a look at another statute to disentangle doubts. It is an elementary rule in legal
hermeneutics that where the terms of the law are clear, no statutory construction may be permitted. Upon the basic
conceptual scheme under which corporations operate, and with Section 77 of the Corporation Law particularly in
mind, we find no vagueness in Section 18, as amended by Republic Act 3531. As we view it, by directing attention
to Republic Act 1932, Alhambra would seek to create obscurity in the law; and, with that, ask of us a ruling that such
obscurity be explained. This, we dare say, cannot be done.

The pari materia rule of statutory construction, in fact, commands that statutes must be harmonized with each
other.14 So harmonizing, the conclusion is clear that Section 18 of the Corporation Law, as amended by Republic
Act 3531 in reference to extensions of corporate existence, is to be read in the same light as Republic Act 1932.
Which means that domestic corporations in general, as with domestic insurance companies, can extend corporate
existence only on or before the expiration of the term fixed in their charters.
5. Alhambra pleads for munificence in interpretation, one which brushes technicalities aside. Bases for this posture
are that Republic Act 3531 is a remedial statute, and that extension of corporate life is beneficial to the economy.
Alhambra's stance does not induce assent. Expansive construction is possible only when there is something to
expand. At the time of the passage of Republic Act 3531, Alhambra's corporate life had already expired. It had
overstepped the limits of its limited existence. No life there is to prolong.
Besides, a new corporation Alhambra Industries, Inc., with but slight change in stockholdings15 has already
been established. Its purpose is to carry on, and it actually does carry on,16 the business of the dissolved entity. The
beneficial-effects argument is off the mark.
The way the whole case shapes up then, the only possible drawbacks of Alhambra might be that, instead of the new
corporation (Alhambra Industries, Inc.) being written off, the old one (Alhambra Cigar & Cigarette Manufacturing
Company, Inc.) has to be wound up; and that the old corporate name cannot be retained fully in its exact
form.17 What is important though is that the word Alhambra, the name that counts [it has goodwill], remains.
FOR THE REASONS GIVEN, the ruling of the Securities and Exchange Commission of November 18, 1963, and its
order of September 8, 1964, both here under review, are hereby affirmed.
Costs against petitioner Alhambra Cigar & Cigarette Manufacturing Company, Inc. So ordered.
Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Castro, Angeles and Fernando, JJ., concur.
Footnotes

G.R. No. 148830. April 13, 2005

NATIONAL HOUSING AUTHORITY, Petitioners,
vs.
COURT OF APPEALS, BULACAN GARDEN CORPORATION and MANILA SEEDLING BANK FOUNDATION,
INC., Respondents.
DECISION
CARPIO, J.:
The Case
This is a petition for review1 seeking to set aside the Decision2 dated 30 March 2001 of the Court of Appeals
("appellate court") in CA-G.R. CV No. 48382, as well as its Resolution dated 25 June 2001 denying the motion for
reconsideration. The appellate court reversed the Decision3 of Branch 87 of the Regional Trial Court of Quezon City
("trial court") dated 8 March 1994 in Civil Case No. Q-53464. The trial court dismissed the complaint for injunction
filed by Bulacan Garden Corporation ("BGC") against the National Housing Authority ("NHA"). BGC wanted to enjoin
the NHA from demolishing BGCs facilities on a lot leased from Manila Seedling Bank Foundation, Inc. ("MSBF").
MSBF allegedly has usufructuary rights over the lot leased to BGC.
Antecedent Facts
On 24 October 1968, Proclamation No. 481 issued by then President Ferdinand Marcos set aside a 120-hectare
portion of land in Quezon City owned by the NHA4 as reserved property for the site of the National Government
Center ("NGC"). On 19 September 1977, President Marcos issued Proclamation No. 1670, which removed a sevenhectare portion from the coverage of the NGC. Proclamation No. 1670 gave MSBF usufructuary rights over this
segregated portion, as follows:
Pursuant to the powers vested in me by the Constitution and the laws of the Philippines, I, FERDINAND E.
MARCOS, President of the Republic of the Philippines, do hereby exclude from the operation of Proclamation No.
481, dated October 24, 1968, which established the National Government Center Site, certain parcels of land
embraced therein and reserving the same for the Manila Seedling Bank Foundation, Inc., for use in its operation and
projects, subject to private rights if any there be, and to future survey, under the administration of the
Foundation.
This parcel of land, which shall embrace 7 hectares, shall be determined by the future survey based on the
technical descriptions found in Proclamation No. 481, and most particularly on the original survey of the area, dated
July 1910 to June 1911, and on the subdivision survey dated April 19-25, 1968. (Emphasis added)
MSBF occupied the area granted by Proclamation No. 1670. Over the years, MSBFs occupancy exceeded the
seven-hectare area subject to its usufructuary rights. By 1987, MSBF occupied approximately 16 hectares. By then
the land occupied by MSBF was bounded by Epifanio de los Santos Avenue ("EDSA") to the west, Agham Road to
the east, Quezon Avenue to the south and a creek to the north.
On 18 August 1987, MSBF leased a portion of the area it occupied to BGC and other stallholders. BGC leased the
portion facing EDSA, which occupies 4,590 square meters of the 16-hectare area.
On 11 November 1987, President Corazon Aquino issued Memorandum Order No. 127 ("MO 127") which revoked
the reserved status of "the 50 hectares, more or less, remaining out of the 120 hectares of the NHA property
reserved as site of the National Government Center." MO 127 also authorized the NHA to commercialize the area
and to sell it to the public.
On 15 August 1988, acting on the power granted under MO 127, the NHA gave BGC ten days to vacate its occupied
area. Any structure left behind after the expiration of the ten-day period will be demolished by NHA.

BGC then filed a complaint for injunction on 21 April 1988 before the trial court. On 26 May 1988, BGC amended its
complaint to include MSBF as its co-plaintiff.
The Trial Courts Ruling
The trial court agreed with BGC and MSBF that Proclamation No. 1670 gave MSBF the right to conduct the survey,
which would establish the seven-hectare area covered by MSBFs usufructuary rights. However, the trial court held
that MSBF failed to act seasonably on this right to conduct the survey. The trial court ruled that the previous surveys
conducted by MSBF covered 16 hectares, and were thus inappropriate to determine the seven-hectare area. The
trial court concluded that to allow MSBF to determine the seven-hectare area now would be grossly unfair to the
grantor of the usufruct.
On 8 March 1994, the trial court dismissed BGCs complaint for injunction. Thus:
Premises considered, the complaint praying to enjoin the National Housing Authority from carrying out the
demolition of the plaintiffs structure, improvements and facilities in the premises in question is hereby DISMISSED,
but the suggestion for the Court to rule that Memorandum Order 127 has repealed Proclamation No. 1670 is
DENIED. No costs.
SO ORDERED.5
The NHA demolished BGCs facilities soon thereafter.
The Appellate Courts Ruling
Not content with the trial courts ruling, BGC appealed the trial courts Decision to the appellate court. Initially, the
appellate court agreed with the trial court that Proclamation No. 1670 granted MSBF the right to determine the
location of the seven-hectare area covered by its usufructuary rights. However, the appellate court ruled that MSBF
did in fact assert this right by conducting two surveys and erecting its main structures in the area of its choice.
On 30 March 2001, the appellate court reversed the trial courts ruling. Thus:
WHEREFORE, premises considered, the Decision dated March 8, 1994 of the Regional Trial Court of Quezon City,
Branch 87, is hereby REVERSED and SET ASIDE. The National Housing Authority is enjoined from demolishing the
structures, facilities and improvements of the plaintiff-appellant Bulacan Garden Corporation at its leased premises
located in Quezon City which premises were covered by Proclamation No. 1670, during the existence of the contract
of lease it (Bulacan Garden) had entered with the plaintiff-appellant Manila Seedling Bank Foundation, Inc.
No costs.
SO ORDERED.6
The NHA filed a motion for reconsideration, which was denied by the appellate court on 25 June 2001.
Hence, this petition.
The Issues
The following issues are considered by this Court for resolution:
WHETHER THE PETITION IS NOW MOOT BECAUSE OF THE DEMOLITION OF THE STRUCTURES OF BGC;
and
WHETHER THE PREMISES LEASED BY BGC FROM MSBF IS WITHIN THE SEVEN-HECTARE AREA THAT
PROCLAMATION NO. 1670 GRANTED TO MSBF BY WAY OF USUFRUCT.

The Ruling of the Court

We remand this petition to the trial court for a joint survey to determine finally the metes and bounds of the sevenhectare area subject to MSBFs usufructuary rights.
Whether the Petition is Moot because of the
Demolition of BGCs Facilities
BGC claims that the issue is now moot due to NHAs demolition of BGCs facilities after the trial court dismissed
BGCs complaint for injunction. BGC argues that there is nothing more to enjoin and that there are no longer any
rights left for adjudication.
We disagree.
BGC may have lost interest in this case due to the demolition of its premises, but its co-plaintiff, MSBF, has not.
The issue for resolution has a direct effect on MSBFs usufructuary rights. There is yet the central question of the
exact location of the seven-hectare area granted by Proclamation No. 1670 to MSBF. This issue is squarely raised
in this petition. There is a need to settle this issue to forestall future disputes and to put this 20-year litigation to rest.
On the Location of the Seven-Hectare Area Granted by
Proclamation No. 1670 to MSBF as Usufructuary
Rule 45 of the 1997 Rules of Civil Procedure limits the jurisdiction of this Court to the review of errors of law.7Absent
any of the established grounds for exception,8 this Court will not disturb findings of fact of lower courts. Though the
matter raised in this petition is factual, it deserves resolution because the findings of the trial court and the appellate
court conflict on several points.
The entire area bounded by Agham Road to the east, EDSA to the west, Quezon Avenue to the south and by a
creek to the north measures approximately 16 hectares. Proclamation No. 1670 gave MSBF a usufruct over only a
seven-hectare area. The BGCs leased portion is located along EDSA.
A usufruct may be constituted for a specified term and under such conditions as the parties may deem convenient
subject to the legal provisions on usufruct.9 A usufructuary may lease the object held in usufruct.10 Thus, the NHA
may not evict BGC if the 4,590 square meter portion MSBF leased to BGC is within the seven-hectare area held in
usufruct by MSBF. The owner of the property must respect the lease entered into by the usufructuary so long as the
usufruct exists.11 However, the NHA has the right to evict BGC if BGC occupied a portion outside of the sevenhectare area covered by MSBFs usufructuary rights.
MSBFs survey shows that BGCs stall is within the seven-hectare area. On the other hand, NHAs survey shows
otherwise. The entire controversy revolves on the question of whose land survey should prevail.
MSBFs survey plots the location of the seven-hectare portion by starting its measurement from Quezon Avenue
going northward along EDSA up until the creek, which serves as the northern boundary of the land in question. Mr.
Ben Malto ("Malto"), surveyor for MSBF, based his survey method on the fact that MSBFs main facilities are located
within this area.
On the other hand, NHAs survey determines the seven-hectare portion by starting its measurement from Quezon
Avenue going towards Agham Road. Mr. Rogelio Inobaya ("Inobaya"), surveyor for NHA, based his survey method
on the fact that he saw MSBFs gate fronting Agham Road.
BGC presented the testimony of Mr. Lucito M. Bertol ("Bertol"), General Manager of MSBF. Bertol presented a
map,12 which detailed the area presently occupied by MSBF. The map had a yellow-shaded portion, which was
supposed to indicate the seven-hectare area. It was clear from both the map and Bertols testimony that MSBF
knew that it had occupied an area in excess of the seven-hectare area granted by Proclamation No. 1670.13Upon

cross-examination, Bertol admitted that he personally did not know the exact boundaries of the seven-hectare
area.14 Bertol also admitted that MSBF prepared the map without consulting NHA, the owner of the property.15
BGC also presented the testimony of Malto, a registered forester and the Assistant Vice-President of Planning,
Research and Marketing of MSBF. Malto testified that he conducted the land survey, which was used to construct
the map presented by Bertol.16 Bertol clarified that he authorized two surveys, one in 1984 when he first joined
MSBF, and the other in 1986.17 In both instances, Mr. Malto testified that he was asked to survey a total of 16
hectares, not just seven hectares. Malto testified that he conducted the second survey in 1986 on the instruction of
MSBFs general manager. According to Malto, it was only in the second survey that he was told to determine the
seven-hectare portion. Malto further clarified that he based the technical descriptions of both surveys on a
previously existing survey of the property.18
The NHA presented the testimony of Inobaya, a geodetic engineer employed by the NHA. Inobaya testified that as
part of the NHAs Survey Division, his duties included conducting surveys of properties administered by the
NHA.19 Inobaya conducted his survey in May 1988 to determine whether BGC was occupying an area outside the
seven-hectare area MSBF held in usufruct.20 Inobaya surveyed the area occupied by MSBF following the same
technical descriptions used by Malto. Inobaya also came to the same conclusion that the area occupied by MSBF,
as indicated by the boundaries in the technical descriptions, covered a total of 16 hectares. He further testified that
the seven-hectare portion in the map presented by BGC,21 which was constructed by Malto, does not tally with the
boundaries BGC and MSBF indicated in their complaint.
Article 565 of the Civil Code states:
ART. 565. The rights and obligations of the usufructuary shall be those provided in the title constituting the usufruct;
in default of such title, or in case it is deficient, the provisions contained in the two following Chapters shall be
observed.
In the present case, Proclamation No. 1670 is the title constituting the usufruct. Proclamation No. 1670 categorically
states that the seven-hectare area shall be determined "by future survey under the administration of the Foundation
subject to private rights if there be any." The appellate court and the trial court agree that MSBF has the latitude to
determine the location of its seven-hectare usufruct portion within the 16-hectare area. The appellate court and the
trial court disagree, however, whether MSBF seasonably exercised this right.
It is clear that MSBF conducted at least two surveys. Although both surveys covered a total of 16 hectares, the
second survey specifically indicated a seven-hectare area shaded in yellow. MSBF made the first survey in 1984
and the second in 1986, way before the present controversy started. MSBF conducted the two surveys before the
lease to BGC. The trial court ruled that MSBF did not act seasonably in exercising its right to conduct the survey.
Confronted with evidence that MSBF did in fact conduct two surveys, the trial court dismissed the two surveys as
self-serving. This is clearly an error on the part of the trial court. Proclamation No. 1670 authorized MSBF to
determine the location of the seven-hectare area. This authority, coupled with the fact that Proclamation No. 1670
did not state the location of the seven-hectare area, leaves no room for doubt that Proclamation No. 1670 left it to
MSBF to choose the location of the seven-hectare area under its usufruct.
More evidence supports MSBFs stand on the location of the seven-hectare area. The main structures of MSBF are
found in the area indicated by MSBFs survey. These structures are the main office, the three green houses, the
warehouse and the composting area. On the other hand, the NHAs delineation of the seven-hectare area would
cover only the four hardening bays and the display area. It is easy to distinguish between these two groups of
structures. The first group covers buildings and facilities that MSBF needs for its operations. MSBF built these
structures before the present controversy started. The second group covers facilities less essential to MSBFs
existence. This distinction is decisive as to which survey should prevail. It is clear that the MSBF intended to use the
yellow-shaded area primarily because it erected its main structures there.
Inobaya testified that his main consideration in using Agham Road as the starting point for his survey was the
presence of a gate there. The location of the gate is not a sufficient basis to determine the starting point. MSBFs
right as a usufructuary as granted by Proclamation No. 1670 should rest on something more substantial than where
MSBF chose to place a gate.

To prefer the NHAs survey to MSBFs survey will strip MSBF of most of its main facilities. Only the main building of
MSBF will remain with MSBF since the main building is near the corner of EDSA and Quezon Avenue. The rest of
MSBFs main facilities will be outside the seven-hectare area.
On the other hand, this Court cannot countenance MSBFs act of exceeding the seven-hectare portion granted to it
by Proclamation No. 1670. A usufruct is not simply about rights and privileges. A usufructuary has the duty to
protect the owners interests. One such duty is found in Article 601 of the Civil Code which states:
ART. 601. The usufructuary shall be obliged to notify the owner of any act of a third person, of which he may have
knowledge, that may be prejudicial to the rights of ownership, and he shall be liable should he not do so, for
damages, as if they had been caused through his own fault.
A usufruct gives a right to enjoy the property of another with the obligation of preserving its form and substance,
unless the title constituting it or the law otherwise provides.22 This controversy would not have arisen had MSBF
respected the limit of the beneficial use given to it. MSBFs encroachment of its benefactors property gave birth to
the confusion that attended this case. To put this matter entirely to rest, it is not enough to remind the NHA to
respect MSBFs choice of the location of its seven-hectare area. MSBF, for its part, must vacate the area that is not
part of its usufruct. MSBFs rights begin and end within the seven-hectare portion of its usufruct. This Court agrees
with the trial court that MSBF has abused the privilege given it under Proclamation No. 1670. The direct corollary of
enforcing MSBFs rights within the seven-hectare area is the negation of any of MSBFs acts beyond it.
The seven-hectare portion of MSBF is no longer easily determinable considering the varied structures erected within
and surrounding the area. Both parties advance different reasons why their own surveys should be preferred. At this
point, the determination of the seven-hectare portion cannot be made to rely on a choice between the NHAs and
MSBFs survey. There is a need for a new survey, one conducted jointly by the NHA and MSBF, to remove all
doubts on the exact location of the seven-hectare area and thus avoid future controversies. This new survey should
consider existing structures of MSBF. It should as much as possible include all of the facilities of MSBF within the
seven-hectare portion without sacrificing contiguity.
A final point. Article 605 of the Civil Code states:
ART. 605. Usufruct cannot be constituted in favor of a town, corporation, or association for more than fifty
years. If it has been constituted, and before the expiration of such period the town is abandoned, or the corporation
or association is dissolved, the usufruct shall be extinguished by reason thereof. (Emphasis added)
The law clearly limits any usufruct constituted in favor of a corporation or association to 50 years. A usufruct is
meant only as a lifetime grant. Unlike a natural person, a corporation or associations lifetime may be extended
indefinitely. The usufruct would then be perpetual. This is especially invidious in cases where the usufruct given to a
corporation or association covers public land. Proclamation No. 1670 was issued 19 September 1977, or 28 years
ago. Hence, under Article 605, the usufruct in favor of MSBF has 22 years left.
MO 127 released approximately 50 hectares of the NHA property as reserved site for the National Government
Center. However, MO 127 does not affect MSBFs seven-hectare area since under Proclamation No. 1670, MSBFs
seven-hectare area was already "exclude[d] from the operation of Proclamation No. 481, dated October 24, 1968,
which established the National Government Center Site."
WHEREFORE, the Decision of the Court of Appeals dated 30 March 2001 and its Resolution dated 25 June 2001 in
CA-G.R. CV No. 48382 are SET ASIDE. This case is REMANDED to Branch 87 of the Regional Trial Court of
Quezon City, which shall order a joint survey by the National Housing Authority and Manila Seedling Bank
Foundation, Inc. to determine the metes and bounds of the seven-hectare portion of Manila Seedling Bank
Foundation, Inc. under Proclamation No. 1670. The seven-hectare portion shall be contiguous and shall include as
much as possible all existing major improvements of Manila Seedling Bank Foundation, Inc. The parties shall submit
the joint survey to the Regional Trial Court for its approval within sixty days from the date ordering the joint survey.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Quisumbing, Ynares-Santiago, and Azcuna, JJ., concur.

G.R. No. 152685

December 4, 2007

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, petitioner,

vs.
NATIONAL TELECOMMUNICATIONS COMMISSION, JOSEPH A.SANTIAGO, in his capacity as NTC
Commissioner, and EDGARDO CABARRIOS, in his capacity as Chief, CCAD, respondents.
RESOLUTION
VELASCO, JR., J.:
Before us is a Petition for Review on Certiorari1 under Rule 45 of the Rules of Court. It assails the February 12, 2001
Decision2 of the Court of Appeals (CA) in CA-G.R. SP No. 61033, which dismissed petitioners special civil action for
certiorari and prohibition, and the March 21, 2002 Resolution3 of the CA denying petitioners motion for
reconsideration. The petition raises the sole issue on whether the appellate court erred in holding that the
assessments of the National Telecommunications Commission (NTC) were contrary to our Decision in G.R. No.
127937 entitled NTC v. Honorable Court of Appeals. 4
This case pertains to Section 40 (e)5 of the Public Service Act6 (PSA), as amended on March 15, 1984, pursuant to
Batas Pambansa Blg. 325, which authorized the NTC to collect from public telecommunications companies
Supervision and Regulation Fees (SRF) of PhP 0.50 for every PhP 100 or a fraction of the capital and stock
subscribed or paid for of a stock corporation, partnership or single proprietorship of the capital invested, or of the
property and equipment, whichever is higher.
Under Section 40 (e) of the PSA, the NTC sent SRF assessments to petitioner Philippine Long Distance Telephone
Company (PLDT) starting sometime in 1988. The SRF assessments were based on the market value of the
outstanding capital stock, including stock dividends, of PLDT. PLDT protested the assessments contending that the
SRF ought to be based on the par value of its outstanding capital stock. Its protest was denied by the NTC and
likewise, its motion for reconsideration.
PLDT appealed before the CA. The CA modified the disposition of the NTC by holding that the SRF should be
assessed at par value of the outstanding capital stock of PLDT, excluding stock dividends.
With the denial of the NTCs partial reconsideration of the CA Decision, the issue of the basis for the assessment of
the SRF was brought before this Court under G.R. No. 127937 wherein we ruled that the SRF should be based
neither on the par value nor the market value of the outstanding capital stock but on the value of the stocks
subscribed or paid including the premiums paid therefor, that is, the amount that the corporation receives, inclusive
of the premiums if any, in consideration of the original issuance of the shares. We added that in the case of stock
dividends, it is the amount that the corporation transfers from its surplus profit account to its capital account, that is,
the amount the stock dividends represent is equivalent to the value paid for its original issuance.
PLDT wanted our July 28, 1999 Decision in G.R. No. 127937 clarified. It posited that the SRF should be based on
the par value in consonance with our holding in Philippine Long Distance Telephone Company v. Public Service
Commission,7 and that the premiums on issued shares should not be included in the valuation of the outstanding
capital stock. Through our November 15, 1999 Resolution in G.R. No. 127937, we elucidated that our July 28, 1999
decision was not in conflict with our ruling in Philippine Long Distance Telephone Company since we never
enunciated in the said case that the phrase "capital stock subscribed or paid" must be determined at par value. We
reiterated that the term "capital stock subscribed or paid" is the amount that the corporation receives, inclusive of the
premiums, if any, in consideration of the original issuance of the shares.
Thereafter, to comply with our disposition in G.R. No. 127937, for the reassessment of the SRF based on the value
of the stocks subscribed or paid including the premiums paid for the stocks, if any, the NTC sent the assailed
assessments of February 10, 20008 and September 5, 20009 to PLDT which included the value of stock dividends
issued by PLDT. The assailed assessments were based on the schedule of capital stock submitted by PLDT.
PLDT now contends that our disposition in G.R. No. 127937 excluded stock dividends from the SRF coverage, while
the NTC asserts the contrary. Also, PLDT questions the assessments for violating our disposition in G.R. No.

127937 since these assessments were identical to the previous assessments from 1988 which were questioned by
PLDT in G.R. No. 127937 for being based on the market value of its outstanding capital stock.
PLDT wrote a letter protesting the assailed February 10, 2000 assessment which was not acted upon by the NTC.
Instead, the NTC sent a second assailed assessment on September 5, 2000. Thus, in an attempt to clarify and
resolve this issue, PLDT filed a Motion for Clarification of Enforcement of the Decision dated 28 July 1999 in G.R.
No. 127937 which this Court simply noted for the case had already become final and executory.
Thus, on October 2, 2000, PLDT instituted the special civil action for certiorari and prohibition docketed as CA-G.R.
SP No. 6103310 before the CA. To maintain the status quo and to defer the enforcement of the assailed
assessments and subsequent assessments, on October 3, 2000, the CA issued a Temporary Restraining Order. On
December 4, 2000, a writ of preliminary injunction was granted.
Subsequently, on February 12, 2001, the CA rendered the assailed Decision dismissing the petition. The dispositive
portion reads:
WHEREFORE, the petition is DISMISSED for lack of merit, and the writ of preliminary injunction heretofore
issued is DISSOLVED.11
PLDTs motion for reconsideration was denied by the CAs Special Division of Five on March 21, 2002.
Hence, the instant petition for review, raising the core issue:
THE COURT OF APPEALS ERRED IN HOLDING THAT THE DISPUTED NTC ASSESSMENTS WERE
NOT CONTRARY TO THE PURISIMA DECISION.12
The petition is bereft of merit.
PLDT argues that in our Decision in G.R. No. 127937 we have excluded from the coverage of the SRF the capital
stocks issued as stock dividends. Petitioner argues that G.R. No. 127937 clearly delineates between capital
subscribed and stock dividends to the effect that the latter are not included in the concept of capital stock subscribed
because subscribers or shareholders do not pay for their subscriptions as no amount is received by the corporation
in consideration of such issuances since these are effected as mere book entries, that is, the transfer from the
retained earnings account to the capital or stock account. To bolster its position, PLDT repeatedly used the phrase
"actual payments" received by a corporation as a consideration for issuances of shares which do not apply to stock
dividends.
We are not persuaded.
Crucial in point is our disquisition in G.R. No. 127937 entitled National Telecommunications Commission v.
Honorable Court of Appeals, which we quote:
The term "capital" and other terms used to describe the capital structure of a corporation are of universal
acceptance and their usages have long been established in jurisprudence. Briefly, capital refers to the value
of the property or assets of a corporation. The capital subscribed is the total amount of the capital that
persons (subscribers or shareholders) have agreed to take and pay for, which need not necessarily by,
and can be more than, the par value of the shares. In fine, it is the amount that the corporation receives,
inclusive of the premiums if any, in consideration of the original issuance of the shares. In the case
of stock dividends, it is the amount that the corporation transfers from its surplus profit account to
its capital account. It is the same amount that can be loosely termed as the "trust fund" of the corporation.
The "Trust Fund" doctrine considers this subscribed capital as a trust fund for the payment of the debts of
the corporation, to which the creditors may look for satisfaction. Until the liquidation of the corporation, no
part of the subscribed capital may be returned or released to the stockholder (except in the redemption of
redeemable shares) without violating this principle. Thus, dividends must never impair the subscribed
capital; subscription commitments cannot be condoned or remitted; nor can the corporation buy its own
shares using the subscribed capital as the considerations therefor.13 (Emphasis supplied.)

Two concepts can be gleaned from the above. First, what constitutes capital stock that is subject to the SRF.
Second, such capital stock is equated to the "trust fund" of a corporation held in trust as security for satisfaction to
creditors in case of corporate liquidation.
The first asks if stock dividends are part of the outstanding capital stocks of a corporation insofar as it is subject to
the SRF. They are. The first issue we have to tackle is, are all the stock dividends that are part of the outstanding
capital stock of PLDT subject to the SRF? Yes, they are.
PLDTs contention, that stock dividends are not similarly situated as the subscribed capital stock because the
subscribers or shareholders do not pay for their issuances as no amount was received by the corporation in
consideration of such issuances since these are effected as a mere book entry, is erroneous.
Dividends, regardless of the form these are declared, that is, cash, property or stocks, are valued at the amount of
the declared dividend taken from the unrestricted retained earnings of a corporation. Thus, the value of the
declaration in the case of a stock dividend is the actual value of the original issuance of said stocks. In G.R. No.
127937 we said that "in the case of stock dividends, it is the amount that the corporation transfers from its surplus
profit account to its capital account" or "it is the amount that the corporation receives in consideration of the original
issuance of the shares." It is "the distribution of current or accumulated earnings to the shareholders of a corporation
pro rata based on the number of shares owned."14 Such distribution in whatever form is valued at the declared
amount or monetary equivalent.
Thus, it cannot be said that no consideration is involved in the issuance of stock dividends. In fact, the declaration of
stock dividends is akin to a forced purchase of stocks. By declaring stock dividends, a corporation ploughs back a
portion or its entire unrestricted retained earnings either to its working capital or for capital asset acquisition or
investments. It is simplistic to say that the corporation did not receive any actual payment for these. When the
dividend is distributed, it ceases to be a property of the corporation as the entire or portion of its unrestricted
retained earnings is distributed pro rata to corporate shareholders.
When stock dividends are distributed, the amount declared ceases to belong to the corporation but is distributed
among the shareholders. Consequently, the unrestricted retained earnings of the corporation are diminished by the
amount of the declared dividend while the stockholders equity is increased. Furthermore, the actual payment is the
cash value from the unrestricted retained earnings that each shareholder foregoes for additional stocks/shares
which he would otherwise receive as required by the Corporation Code to be given to the stockholders subject to the
availability and conditioned on a certain level of retained earnings.15 Elsewise put, where the unrestricted retained
earnings of a corporation are more than 100% of the paid-in capital stock, the corporate Board of Directors is
mandated to declare dividends which the shareholders will receive in cash unless otherwise declared as property or
stock dividends, which in the latter case the stockholders are forced to forego cash in lieu of property or stocks.
In essence, therefore, the stockholders by receiving stock dividends are forced to exchange the monetary value of
their dividend for capital stock, and the monetary value they forego is considered the actual payment for the original
issuance of the stocks given as dividends. Therefore, stock dividends acquired by shareholders for the monetary
value they forego are under the coverage of the SRF and the basis for the latter is such monetary value as declared
by the board of directors.
On the second issue, do the assailed NTC assessments violate the ruling in G.R. No. 127937? PLDT contends that
these did since the assessments are identical to the previous assessments from 1988 which were questioned by
PLDT in the seminal G.R. No. 127937 for being based on the market value of its outstanding capital stock.
A cursory review of the assessments made by the NTC prior to our July 28, 1999 Decision in G.R. No. 127937 and
the assailed assessments of February 10, 2000 and September 5, 2000 does show that the assessments are
substantially identical. In our July 28, 1999 Decision in G.R. No. 127937, we noted, and similarly true in the petition
before us, that, "The actual capital paid or the amount of capital stock paid and for which PLDT received actual
payments were not disclosed or extant in the records before the Court."16
Hence, as before, we cannot factually determine whether the assailed assessments substantially followed our
Decision in G.R. No. 127937. It is apparent that the assessments are identical and that the NTC in the earlier case
asserted that the SRF be based on the market value of the capital stock, yet it assessed it to PLDT. However, a
closer look at the assailed assessments of February 13, 2000 and September 5, 2000 would show that the NTC

based its assessment on the schedule of capital stock submitted by PLDT. PLDT did not dispute this; it only
disputed the level of assessment which was the same as before.
Now, where should the NTC base its assessment? It is incumbent upon PLDT to furnish the NTC the actual
payment made on the subscription of its capital stock in order for the NTC to assess the proper SRF. Logically, the
NTC would base its SRF assessment of PLDT from PLDT data.
PLDT should not bewail that the assailed assessments are substantially the same assessments it protested in G.R.
No. 127937. After all, it had not shown the actual figures of the amount of premiums and subscriptions it had
received for the original issuances of its capital stock. While indeed it submitted a table of the comparative
assessments made by the NTC to this Court, PLDT has not furnished the NTC nor this Court the correct figures of
the actual payments made for its capital stock.
We are not unaware that in accounting practice, the journal entries for transactions are recorded in historical value
or cost. Thus, the purchase of properties or assets is recorded at acquisition cost. The same is true with liabilities
and equity transactions where the actual loan and the amount paid for the subscription are recorded at the actual
payment, including the premiums paid for the subscription of capital stock.
Moreover, it is common practice that the values of the accounts recorded at historical value or cost are not
increased or decreased due to market forces. In the case of properties, the appreciation in values is generally not
recorded as income nor the increase in the corresponding asset because the increase or decrease is not yet
realized until the property is actually sold. The same is true with the capital account. The market value may be much
higher than the actual payment of the par value and premium of capital stock. Still, the books of account will not
reflect such increase; and vice-versa, any decrease of the value of stocks is likewise not reflected in the books of
account. Thus, given the general practice that book entries of the premiums and subscriptions for capital stock are
the actual value for the original issuance of stocks, then the NTC was correct to follow the schedule of capital stocks
submitted by PLDT.
Moreover, the "Trust Fund" doctrine, the second concept this Court elucidated in G.R. No. 127937 and quoted
above, bolsters the correctness of the assessments made by the NTC. As a fund in trust for creditors in case of
liquidation, the actual value of the subscriptions and the value of stock dividends distributed may not be decreased
or increased by the fluctuating market value of the stocks. Thus, absent any showing by PLDT of the actual payment
it received for the original issuance of its capital stock, the assessments made by the NTC, based on the schedule
of outstanding capital stock of PLDT recorded at historical value payments made, is deemed correct.
Anent stock dividends, the value transferred from the unrestricted retained earnings of PLDT to the capital stock
account pursuant to the issuance of stock dividends is the proper basis for the assessment of the SRF, which the
NTC correctly assessed.
WHEREFORE, we DENY the petition for lack of merit, and AFFIRM the February 12, 2001 Decision and March 21,
2002 Resolution in CA-G.R. SP No. 61033. Costs against petitioner.
SO ORDERED.
Quisumbing,Chairperson Carpio,Carpio-Morales, Tinga, JJ., concur.

G.R. No. 131394

March 28, 2005

JESUS V. LANUZA, MAGADYA REYES, BAYANI REYES and ARIEL REYES, Petitioner,
vs.
COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION, DOLORES ONRUBIA, ELENITA
NOLASCO, JUAN O. NOLASCO III, ESTATE OF FAUSTINA M. ONRUBIA, PHILIPPINE MERCHANT MARINE
SCHOOL, INC., Respondents.
DECISION
TINGA, J.:
Presented in the case at bar is the apparently straight-forward but complicated question: What should be the basis
of quorum for a stockholders meetingthe outstanding capital stock as indicated in the articles of incorporation or
that contained in the companys stock and transfer book?
Petitioners seek to nullify the Court of Appeals Decision in CAG.R. SP No. 414731 promulgated on 18 August
1997, affirming the SEC Order dated 20 June 1996, and the Resolution2 of the Court of Appeals dated 31 October
1997 which denied petitioners motion for reconsideration.
The antecedents are not disputed.
In 1952, the Philippine Merchant Marine School, Inc. (PMMSI) was incorporated, with seven hundred (700)
founders shares and seventy-six (76) common shares as its initial capital stock subscription reflected in the articles
of incorporation. However, private respondents and their predecessors who were in control of PMMSI registered the
companys stock and transfer book for the first time in 1978, recording thirty-three (33) common shares as the only
issued and outstanding shares of PMMSI. Sometime in 1979, a special stockholders meeting was called and held
on the basis of what was considered as a quorum of twenty-seven (27) common shares, representing more than
two-thirds (2/3) of the common shares issued and outstanding.
In 1982, the heirs of one of the original incorporators, Juan Acayan, filed a petition with the Securities and Exchange
Commission (SEC) for the registration of their property rights over one hundred (120) founders shares and twelve
(12) common shares owned by their father. The SEC hearing officer held that the heirs of Acayan were entitled to
the claimed shares and called for a special stockholders meeting to elect a new set of officers.3The SEC En
Banc affirmed the decision. As a result, the shares of Acayan were recorded in the stock and transfer book.
On 06 May 1992, a special stockholders meeting was held to elect a new set of directors. Private respondents
thereafter filed a petition with the SEC questioning the validity of the 06 May 1992 stockholders meeting, alleging
that the quorum for the said meeting should not be based on the 165 issued and outstanding shares as per the
stock and transfer book, but on the initial subscribed capital stock of seven hundred seventy-six (776) shares, as
reflected in the 1952 Articles of Incorporation. The petition was dismissed.4 Appeal was made to the SEC En Banc,
which granted said appeal, holding that the shares of the deceased incorporators should be duly represented by
their respective administrators or heirs concerned. The SEC directed the parties to call for a stockholders meeting
on the basis of the stockholdings reflected in the articles of incorporation for the purpose of electing a new set of
officers for the corporation.5
Petitioners, who are PMMSI stockholders, filed a petition for review with the Court of Appeals.6 Rebecca Acayan,
Jayne O. Abuid, Willie O. Abuid and Renato Cervantes, stockholders and directors of PMMSI, earlier filed another
petition for review of the same SEC En Bancs orders. The petitions were thereafter consolidated.7 The consolidated
petitions essentially raised the following issues, viz: (a) whether the basis the outstanding capital stock and
accordingly also for determining the quorum at stockholders meetings it should be the 1978 stock and transfer book
or if it should be the 1952 articles of incorporation; and (b) whether the Court of Appeals "gravely erred in applying
the Espejo Decision to the benefit of respondents."8 The "Espejo Decision" is the decision of the SEC en banc in
SEC Case No. 2289 which ordered the recording of the shares of Jose Acayan in the stock and transfer book.
The Court of Appeals held that for purposes of transacting business, the quorum should be based on the
outstanding capital stock as found in the articles of incorporation.9 As to the second issue, the Court of Appeals held

that the ruling in the Acayan case would ipso facto benefit the private respondents, since to require a separate
judicial declaration to recognize the shares of the original incorporators would entail unnecessary delay and
expense. Besides, the Court of Appeals added, the incorporators have already proved their stockholdings through
the provisions of the articles of incorporation.10
In the instant petition, petitioners claim that the 1992 stockholders meeting was valid and legal. They submit that
reliance on the 1952 articles of incorporation for determining the quorum negates the existence and validity of the
stock and transfer book which private respondents themselves prepared. In addition, they posit that private
respondents cannot avail of the benefits secured by the heirs of Acayan, as private respondents must show and
prove entitlement to the founders and common shares in a separate and independent action/proceeding.
In private respondents Memorandum11 dated 08 March 2000, they point out that the instant petition raises the same
facts and issues as those raised in G.R. No. 13131512, which was denied by the First Division of this Court on 18
January 1999 for failure to show that the Court of Appeals committed any reversible error. They add that as a logical
consequence, the instant petition should be dismissed on the ground of res judicata. Furthermore, private
respondents claim that in view of the applicability of the rule on res judicata, petitioners counsel should be cited for
contempt for violating the rule against forum-shopping.13
For their part, petitioners claim that the principle of res judicata does not apply to the instant case. They argue that
the instant petition is separate and distinct from G.R. No. 131315, there being no identity of parties, and more
importantly, the parties in the two petitions have their own distinct rights and interests in relation to the subject
matter in litigation. For the same reasons, they claim that counsel for petitioners cannot be found guilty of forumshopping.14
In their Manifestation and Motion15 dated 22 September 2004, private respondents moved for the dismissal of the
instant petition in view of the dismissal of G.R. No. 131315. Attached to the said manifestation is a copy of theEntry
of Judgment16 issued by the First Division dated 01 December 1999.
The petition must be denied, not on res judicata, but on the ground that like the petition in G.R. No. 131315 it fails to
impute reversible error to the challenged Court of Appeals Decision.
Res judicata does not apply in
the case at bar.
Res judicata means a matter adjudged, a thing judicially acted upon or decided; a thing or matter settled by
judgment.17 The doctrine of res judicata provides that a final judgment, on the merits rendered by a court of
competent jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar to
subsequent actions involving the same claim, demand, or cause of action.18 The elements of res judicata are (a)
identity of parties or at least such as representing the same interest in both actions; (b) identity of rights asserted
and relief prayed for, the relief being founded on the same facts; and (c) the identity in the two (2) particulars is such
that any judgment which may be rendered in the other action will, regardless of which party is successful, amount
to res judicata in the action under consideration.19
There is no dispute as to the identity of subject matter since the crucial point in both cases is the propriety of
including the still unproven shares of respondents for purposes of determining the quorum. Petitioners, however,
deny that there is identity of parties and causes of actions between the two petitions.
The test often used in determining whether causes of action are identical is to ascertain whether the same facts or
evidence would support and establish the former and present causes of action.20 More significantly, there is identity
of causes of action when the judgment sought will be inconsistent with the prior judgment.21 In both petitions,
petitioners assert that the Court of Appeals Decision effectively negates the existence and validity of the stock and
transfer book, as well as automatically grants private respondents shares of stocks which they do not own, or the
ownership of which remains to be unproved. Petitioners in the two petitions rely on the entries in the stock and
transfer book as the proper basis for computing the quorum, and consequently determine the degree of control one
has over the company. Essentially, the affirmance of the SEC Order had the effect of diminishing their control and
interests in the company, as it allowed the participation of the individual private respondents in the election of
officers of the corporation.

Absolute identity of parties is not a condition sine qua non for res judicata to applya shared identity of interest is
sufficient to invoke the coverage of the principle.22 However, there is no identity of parties between the two cases.
The parties in the two petitions have their own rights and interests in relation to the subject matter in litigation. As
stated by petitioners in their Reply to Respondents Memorandum,23 there are no two separate actions filed, but
rather, two separate petitions for review on certiorari filed by two distinct parties with the Court and represented by
their own counsels, arising from an adverse consolidated decision promulgated by the Court of Appeals in one
action or proceeding.24 As such, res judicata is not present in the instant case.
Likewise, there is no basis for declaring petitioners or their counsel guilty of violating the rules against forumshopping. In the Verification/Certification25 portion of the petition, petitioners clearly stated that there was then a
pending motion for reconsideration of the 18 August 1997 Decision of the Court of Appeals in the consolidated
cases (CA-G.R. SP No. 41473 and CA-G.R. SP No. 41403) filed by the Abuids, as well as a motion for clarification.
Moreover, the records indicate that petitioners filed their Manifestation26 dated 20 January 1998, informing the Court
of their receipt of the petition in G.R. No. 131315 in compliance with their duty to inform the Court of the pendency of
another similar petition. The Court finds that petitioners substantially complied with the rules against forumshopping.
The Decision of the Court of
Appeals must be upheld.
The petition in this case involves the same facts and substantially the same issues and arguments as those in G.R.
No. 131315 which the First Division has long denied with finality. The First Division found the petition before it
inadequate in failing to raise any reversible error on the part of the Court of Appeals. We reach a similar conclusion
as regards the present petition.
The crucial issue in this case is whether it is the companys stock and transfer book, or its 1952 Articles of
Incorporation, which determines stockholders shareholdings, and provides the basis for computing the quorum.
We agree with the Court of Appeals.
The articles of incorporation has been described as one that defines the charter of the corporation and the
contractual relationships between the State and the corporation, the stockholders and the State, and between the
corporation and its stockholders.27 When PMMSI was incorporated, the prevailing law was Act No. 1459, otherwise
known as "The Corporation Law." Section 6 thereof states:
Sec. 6. Five or more persons, not exceeding fifteen, a majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or purposes by filing with the Securities and Exchange
Commission articles of incorporation duly executed and acknowledged before a notary public, setting forth:
....
(7) If it be a stock corporation, the amount of its capital stock, in lawful money of the Philippines, and the
number of shares into which it is divided, and if such stock be in whole or in part without par value then such
fact shall be stated; Provided, however, That as to stock without par value the articles of incorporation need
only state the number of shares into which said capital stock is divided.
(8) If it be a stock corporation, the amount of capital stock or number of shares of no-par stock actually
subscribed, the amount or number of shares of no-par stock subscribed by each and the sum paid by each
on his subscription. . . .28
A review of PMMSIs articles of incorporation29 shows that the corporation complied with the requirements laid down
by Act No. 1459. It provides in part:
7. That the capital stock of the said corporation is NINETY THOUSAND PESOS (P90,000.00) divided into
two classes, namely:
FOUNDERS STOCK - 1,000 shares at P20 par value- P 20,000.00

COMMON STOCK- 700 shares at P 100 par value P 70,000.00

TOTAL ---------------------1,700 shares----------------------------P 90,000.00
....
8. That the amount of the entire capital stock which has been actually subscribed is TWENTY ONE
THOUSAND SIX HUNDRED PESOS (P21,600.00) and the following persons have subscribed for the
number of shares and amount of capital stock set out after their respective names:
SUBSCRIBER

Crispulo J. Onrubia

SUBSCRIBED

AMOUNT
SUBSCRIBED

No. of Shares

Par Value

120 Founders

P 2,400.00

Juan H. Acayan

120 "

2, 400.00

Martin P. Sagarbarria

100 "

2, 000.00

Mauricio G. Gallaga

50 "

1, 000.00

Luis Renteria

50 "

1, 000.00

Faustina M. de Onrubia

140 "

2, 800.00

Mrs. Ramon Araneta

40 "

800.00

Carlos M. Onrubia

80 "

1,600.00

700

P 14,000.00

SUBSCRIBER

SUBSCRIBED

AMOUNT
SUBSCRIBED

No. of Shares
Par Value
Crispulo J. Onrubia

12 Common

P 1,200.00

12 "

1,200.00

Martin P. Sagarbarria

8"

800.00

Mauricio G. Gallaga

8"

800.00

Luis Renteria

8"

800.00

12 "

1,200.00

Mrs. Ramon Araneta

8"

800.00

Carlos M. Onrubia

8"

800.00

Juan H. Acayan

Faustina M. de Onrubia

76

P7,600.0030

There is no gainsaying that the contents of the articles of incorporation are binding, not only on the corporation, but
also on its shareholders. In the instant case, the articles of incorporation indicate that at the time of incorporation,
the incorporators were bona fide stockholders of seven hundred (700) founders shares and seventy-six (76)
common shares. Hence, at that time, the corporation had 776 issued and outstanding shares.
On the other hand, a stock and transfer book is the book which records the names and addresses of all
stockholders arranged alphabetically, the installments paid and unpaid on all stock for which subscription has been
made, and the date of payment thereof; a statement of every alienation, sale or transfer of stock made, the date
thereof and by and to whom made; and such other entries as may be prescribed by law.31 A stock and transfer book
is necessary as a measure of precaution, expediency and convenience since it provides the only certain and
accurate method of establishing the various corporate acts and transactions and of showing the ownership of stock
and like matters.32 However, a stock and transfer book, like other corporate books and records, is not in any sense a
public record, and thus is not exclusive evidence of the matters and things which ordinarily are or should be written
therein.33 In fact, it is generally held that the records and minutes of a corporation are not conclusive even against
the corporation but are prima facie evidence only,34 and may be impeached or even contradicted by other competent
evidence.35 Thus, parol evidence may be admitted to supply omissions in the records or explain ambiguities, or to
contradict such records.36
In 1980, Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" supplanted Act
No. 1459. BP Blg. 68 provides:
Sec. 24. Election of directors or trustees.At all elections of directors or trustees, there must be present,
either in person or by representative authorized to act by written proxy, the owners of a majority of the
outstanding capital stock, or if there be no capital stock, a majority of the members entitled to vote. . . .
Sec. 52. Quorum in meetings.- Unless otherwise provided for in this Code or in the by-laws, a quorum shall
consist of the stockholders representing a majority of the outstanding capital stock or majority of the
members in the case of non-stock corporation.
Outstanding capital stock, on the other hand, is defined by the Code as:
Sec. 137. Outstanding capital stock defined. The term "outstanding capital stock" as used in this code,
means the total shares of stock issued to subscribers or stockholders whether or not fully or partially paid
(as long as there is binding subscription agreement) except treasury shares.
Thus, quorum is based on the totality of the shares which have been subscribed and issued, whether it be founders
shares or common shares.37 In the instant case, two figures are being pitted against each other those contained in
the articles of incorporation, and those listed in the stock and transfer book.
To base the computation of quorum solely on the obviously deficient, if not inaccurate stock and transfer book, and
completely disregarding the issued and outstanding shares as indicated in the articles of incorporation would work
injustice to the owners and/or successors in interest of the said shares. This case is one instance where resort to
documents other than the stock and transfer books is necessary. The stock and transfer book of PMMSI cannot be
used as the sole basis for determining the quorum as it does not reflect the totality of shares which have been
subscribed, more so when the articles of incorporation show a significantly larger amount of shares issued and
outstanding as compared to that listed in the stock and transfer book. As aptly stated by the SEC in itsOrder dated
15 July 1996:38
It is to be explained, that if at the onset of incorporation a corporation has 771 shares subscribed, the Stock
and Transfer Book should likewise reflect 771 shares. Any sale, disposition or even reacquisition of the
company of its own shares, in which it becomes treasury shares, would not affect the total number of shares
in the Stock and Transfer Book. All that will change are the entries as to the owners of the shares but not as
to the amount of shares already subscribed.

This is precisely the reason why the Stock and Transfer Book was not given probative value. Did the shares,
which were not recorded in the Stock and Transfer Book, but were recorded in the Articles of Iincorporation
just vanish into thin air? . . . .39
As shown above, at the time the corporation was set-up, there were already seven hundred seventy-six (776) issued
and outstanding shares as reflected in the articles of incorporation. No proof was adduced as to any transaction
effected on these shares from the time PMMSI was incorporated up to the time the instant petition was filed, except
for the thirty-three (33) shares which were recorded in the stock and transfer book in 1978, and the additional one
hundred thirty-two (132) in 1982. But obviously, the shares so ordered recorded in the stock and transfer book are
among the shares reflected in the articles of incorporation as the shares subscribed to by the incorporators named
therein.
One who is actually a stockholder cannot be denied his right to vote by the corporation merely because the
corporate officers failed to keep its records accurately.40 A corporations records are not the only evidence of the
ownership of stock in a corporation.41 In an American case,42 persons claiming shareholders status in a professional
corporation were listed as stockholders in the amendment to the articles of incorporation. On that basis, they were in
all respects treated as shareholders. In fact, the acts and conduct of the parties may even constitute sufficient
evidence of ones status as a shareholder or member.43 In the instant case, no less than the articles of incorporation
declare the incorporators to have in their name the founders and several common shares. Thus, to disregard the
contents of the articles of incorporation would be to pretend that the basic document which legally triggered the
creation of the corporation does not exist and accordingly to allow great injustice to be caused to the incorporators
and their heirs.
Petitioners argue that the Court of Appeals "gravely erred in applying the Espejo decision to the benefit of
respondents." The Court believes that the more precise statement of the issue is whether in its assailed Decision,
the Court of Appeals can declare private respondents as the heirs of the incorporators, and consequently register
the founders shares in their name. However, this issue as recast is not actually determinative of the present
controversy as explained below.
Petitioners claim that the Decision of the Court of Appeals unilaterally divested them of their shares in PMMSI as
recorded in the stock and transfer book and instantly created inexistent shares in favor of private respondents. We
do not agree.
The assailed Decision merely declared that a separate judicial declaration to recognize the shares of the original
incorporators would entail unnecessary delay and expense on the part of the litigants, considering that the
incorporators had already proved ownership of such shares as shown in the articles of incorporation.44 There was no
declaration of who the individual owners of these shares were on the date of the promulgation of theDecision. As
properly stated by the SEC in its Order dated 20 June 1996, to which the appellate courts Decisionshould be
related, "if at all, the ownership of these shares should only be subjected to the proper judicial (probate) or
extrajudicial proceedings in order to determine the respective shares of the legal heirs of the deceased
incorporators."45
WHEREFORE, the petition is DENIED and the assailed Decision is AFFIRMED. Costs against petitioners.
SO ORDERED.
Puno, (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concur.