G.R. No.

L-40620 May 5, 1979

RICARDO L. GAMBOA, LYDIA R. GAMBOA, HONORIO DE 1A RAMA, EDUARDO DE
LA RAMA, and the HEIRS OF MERCEDES DE LA RAMA-BORROMEO, petitioners,
vs.
HON. OSCAR R. VICTORIANO as Presiding Judge of the Court of First Instance of
Negros Occidental, Branch II, BENJAMIN LOPUE, SR., BENJAMIN LOPUE, JR.,
LEONITO LOPUE, and LUISA U. DACLESrespondents.
CONCEPCION JR., J,:
Petition for certiorari to review the order of the respondent judge, dated January 2, 1975,
denying the petitioners' motion to dismiss the complaint filed in Civil Case No. 10257 of
the Court of First Instance of Negros Occidental, entitled, "Benjamin Lopue Sr., et al.,
plaintiffs, versus Ricardo Gamboa, et al., defendants," as well as the order dated April 4,
1975, denying the motion for the reconsideration of Said order.
In the aforementioned Civil Case No. 10257 of the Court of First Instance of Negros
Occidental, the herein petitioners, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la
Rama, Eduardo de la Rama, and the late Mercedes de la Rama-Borromeo, now
represented by her heirs, as well as Ramon de la Rama, Paz de la Rama-Battistuzzi, and
Enzo Battistuzzi, were sued by the herein private respondents, Benjamin Lopue, Sr.,
Benjamin Lopue, Jr., Leonito Lopue, and Luisa U. Dacles to nullify the issuance of 823
shares of stock of the Inocentes de la Rama, Inc. in favor of the said defendants. The gist
of the complaint, filed on April 4, 1972, is that the plaintiffs, with the exception of
Anastacio Dacles who was joined as a formal party, are the owners of 1,328 shares of
stock of the Inocentes de la Rama, Inc., a domestic corporation, with an authorized capital
stock of 3,000 shares, with a par value of P100.00 per share, 2,177 of which were
subscribed and issued, thus leaving 823 shares unissued; that upon the plaintiffs'
acquisition of the shares of stock held by Rafael Ledesma and Jose Sicangco, Jr., then
President and Vice-President of the corporation, respectively, the defendants Mercedes R.
Borromeo, Honorio de la Rama, and Ricardo Gamboa, remaining members of the board of
directors of the corporation, in order to forestall the takeover by the plaintiffs of the aforenamed corporation, surreptitiously met and elected Ricardo L. Gamboa and Honorio de la
Rama as president and vice-president of the corporation, respectively, and thereafter
passed a resolution authorizing the sale of the 823 unissued shares of the corporation to
the defendants, Ricardo L. Gamboa, Lydia R. Gamboa, Honorio de la Rama, Ramon de la
Rama, Paz R. Battistuzzi Eduardo de la Rama, and Mercedes R. Borromeo, at par value,
after which the defendants Honorio de la Rama, Lydia de la Rama-Gamboa, and Enzo
Battistuzzi were elected to the board of directors of the corporation; that the sale of the
unissued 823 shares of stock of the corporation was in violation of the plaintiffs' and preemptive rights and made without the approval of the board of directors representing 2/3
of the outstanding capital stock, and is in disregard of the strictest relation of trust
existing between the defendants, as stockholders thereof; and that the defendants Lydia
de la Rama-Gamboa, Honorio de la Rama, and Enzo Battistuzzi were not legally elected to
the board of directors of the said corporation and has unlawfully usurped or intruded into
said office to the prejudice of the plaintiffs. Wherefore, they prayed that a writ of
preliminary injunction be issued restraining the defendants from committing, or
continuing the performance of an act tending to prejudice, diminish or otherwise injure
the plaintiffs' rights in the corporate properties and funds of the corporation, and from
disposing, transferring, selling, or otherwise impairing the value of the 823 shares of stock
illegally issued by the defendants; that a receiver be appointed to preserve and

administer the property and funds of the corporation; that defendants Lydia de la RamaGamboa, Honorio de la Rama, and Enzo Battistuzzi be declared as usurpers or intruders
into the office of director in the corporation and, consequently, ousting them therefrom
and declare Luisa U. Dacles as a legally elected director of the corporation; that the sale
of 823 shares of stock of the corporation be declared null and void; and that the
defendants be ordered to pay damages and attorney's fees, as well as the costs of suit . 1
Acting upon the complaint, the respondent judge, after proper hearing, directed the clerk
of court "to issue the corresponding writ of preliminary injunction restraining the
defendants and/or their representatives, agents, or persons acting in their behalf from the
commission or continuance of any act tending in any way to prejudice, diminish or
otherwise injure plaintiffs' rights in the corporate properties and funds of the corporation
Inocentes de la Rama, Inc.' and from disposing, transferring, selling or otherwise impairing
the value of the certificates of stock allegedly issued illegally in their names on February
11, 1972, or at any date thereafter, and ordering them to deposit with the Clerk of Court
the corresponding certificates of stock for the 823 shares issued to said defendants on
February 11, 1972, upon plaintiffs' posting a bond in the sum of P50,000.00, to answer for
any damages and costs that may be sustained by the defendants by reason of the
issuance of the writ, copy of the bond to be furnished to the defendants. " 2 Pursuant
thereto, the defendants deposited with the clerk of court the corporation's certificates of
stock Nos. 80 to 86, inclusive, representing the disputed 823 shares of stock of the
corporation.3
On October 31, 1972, the plaintiffs therein, now private respondents, entered into a
compromise agreement with the defendants Ramon de la Rama, Paz de la Rama
Battistuzzi and Enzo Battistuzzi , 4 whereby the contracting parties withdrew their
respective claims against each other and the aforenamed defendants waived and
transferred their rights and interests over the questioned 823 shares of stock in favor of
the plaintiffs, as follows:
3. That the defendants Ramon L. de la Rama, Paz de la Rama Battistuzzi
and Enzo Battistuzzi will waive, cede, transfer or other wise convey, as
they hereby waive, cede, transfer and convey, free from all liens and
encumbrances unto the plaintiffs, in such proportion as the plaintiffs
may among themselves determine, all of the rights, interests,
participations or title that the defendants Ramon L. de la Rama, Paz de
la Rama Battistuzzi Enzo Battistuzzi now have or may have in the eight
hundred twenty-three (823) shares in the capital stock of the
corporation INOCENTES DELA RAMA, INC.' which were issued in the
names of the defendants in the above-entitled case on or about
February 11, 1972, or at any date thereafter and which shares are the
subject-matter of the present suit.
The compromise agreement was approved by the trial court on December 4, 1972, 5 As a
result, the defendants filed a motion to dismiss the complaint, on November 19, 1974,
upon the grounds: (1) that the plaintiffs' cause of action had been waived or abandoned;
and (2) that they were estopped from further prosecuting the case since they have, in
effect, acknowledged the validity of the issuance of the disputed 823 shares of stock. The
motion was denied on January 2, 1975.6

The defendants also filed a motion to declare the defendants Ramon L. de la Rama, Paz de
la Rama Battistuzzi and Enzo Battistuzzi in contempt of court, for having violated the writ
of preliminary injunction when they entered into the aforesaid compromise agreement
with the plaintiffs, but the respondent judge denied the said motion for lack of merit. 7
On February 10, 1975, the defendants filed a motion for the reconsideration of the order
denying their motion to dismiss the complaint' and subsequently, an Addendum thereto,
claiming that the respondent court has no jurisdiction to interfere with the management of
the corporation by the board of directors, and the enactment of a resolution by the
defendants, as members of the board of directors of the corporation, allowing the sale of
the 823 shares of stock to the defendants was purely a management concern which the
courts could not interfere with. When the trial court denied said motion and its addendum,
the defendants filed the instant petition for certiorari for the review of said orders.

An individual stockholder is permitted to institute a derivative suit on behalf of the

corporation wherein he holds stock in order to protect or vindicate corporate rights,
whenever the officials of the corporation refuse to sue, or are the ones to be sued or hold
the control of the corporation. In such actions, the suing stockholder is regarded as a
nominal party, with the corporation as the real party in interest. 12 In the case at bar,
however, the plaintiffs are alleging and vindicating their own individual interests or
prejudice, and not that of the corporation. At any rate, it is yet too early in the
proceedings since the issues have not been joined. Besides, misjoinder of parties is not a
ground to dismiss an action. 13
WHEREFORE, the petition should be, as it is hereby DISMISSED for lack of merit. With
costs against the petitioners.
SO ORDERED.

The petition is without merit. The questioned order denying the petitioners' motion to
dismiss the complaint is merely interlocutory and cannot be the subject of a petition for
certiorari. The proper procedure to be followed in such a case is to continue with the trial
of the case on the merits and, if the decision is adverse, to reiterate the issue on appeal.
It would be a breach of orderly procedure to allow a party to come before this Court every
time an order is issued with which he does not agree.
Besides, the order denying the petitioners' motion to dismiss the complaint was not
capriciously, arbitrarily, or whimsically issued, or that the respondent court lacked
jurisdiction over the cause as to warrant the issuance of the writ prayed for. As found by
the respondent judge, the petitioners have not waived their cause of action against the
petitioners by entering into a compromise agreement with the other defendants in view of
the express provision of the compromise agreement that the same "shall not in any way
constitute or be considered a waiver or abandonment of any claim or cause of action
against the other defendants." There is also no estoppel because there is nothing in the
agreement which could be construed as an affirmative admission by the plaintiff of the
validity of the resolution of the defendants which is now sought to be judicially declared
null and void. The foregoing circumstances and the fact that no consideration was
mentioned in the agreement for the transfer of rights to the said shares of stock to the
plaintiffs are sufficient to show that the agreement was merely an admission by the
defendants Ramon de la Rama, Paz de la Rama Battistuzzi and Enzo Battistuzzi of the
validity of the claim of the plaintiffs.
The claim of the petitioners, in their Addendum to the motion for reconsideration of the
order denying the motion to dismiss the complaint, questioning the trial court's
jurisdiction on matters affecting the management of the corporation, is without merit. The
well-known rule is that courts cannot undertake to control the discretion of the board of
directors about administrative matters as to which they have legitimate power
of, 10 action and contractsintra vires entered into by the board of directors are binding
upon the corporation and courts will not interfere unless such contracts are so
unconscionable and oppressive as to amount to a wanton destruction of the rights of the
minority. 11 In the instant case, the plaintiffs aver that the defendants have concluded a
transaction among themselves as will result to serious injury to the interests of the
plaintiffs, so that the trial court has jurisdiction over the case.
The petitioners further contend that the proper remedy of the plaintiffs would be to
institute a derivative suit against the petitioners in the name of the corporation in order to
secure a binding relief after exhausting all the possible remedies available within the
corporation.

shares at P10.00 per share and 150,000 preferred shares at P100.00 per share. At the
time of the amendment, the outstanding and paid up shares totalled 30,127,047 with a
total par value of P301,270,430.00. It was contended that according to section 22 of the
Corporation Law and Article VIII of the by-laws of the corporation, the power to amend,
modify, repeal or adopt new by-laws may be delegated to the Board of Directors only by
the affirmative vote of stockholders representing not less than 2/3 of the subscribed and
paid up capital stock of the corporation, which 2/3 should have been computed on the
basis of the capitalization at the time of the amendment. Since the amendment was
based on the 1961 authorization, petitioner contended that the Board acted without
authority and in usurpation of the power of the stockholders.
As a second cause of action, it was alleged that the authority granted in 1961 had already
been exercised in 1962 and 1963, after which the authority of the Board ceased to exist.
As a third cause of action, petitioner averred that the membership of the Board of
Directors had changed since the authority was given in 1961, there being six (6) new
directors.

G.R. No. L-45911 April 11, 1979

JOHN GOKONGWEI, JR., petitioner,
vs.
SECURITIES AND EXCHANGE COMMISSION, ANDRES M. SORIANO, JOSE M.
SORIANO, ENRIQUE ZOBEL, ANTONIO ROXAS, EMETERIO BUNAO, WALTHRODE B.
CONDE, MIGUEL ORTIGAS, ANTONIO PRIETO, SAN MIGUEL CORPORATION,
EMIGDIO TANJUATCO, SR., and EDUARDO R. VISAYA, respondents.
ANTONIO, J.:
The instant petition for certiorari, mandamus and injunction, with prayer for issuance of
writ of preliminary injunction, arose out of two cases filed by petitioner with the Securities
and Exchange Commission, as follows:
SEC CASE NO 1375
On October 22, 1976, petitioner, as stockholder of respondent San Miguel Corporation,
filed with the Securities and Exchange Commission (SEC) a petition for "declaration of
nullity of amended by-laws, cancellation of certificate of filing of amended by- laws,
injunction and damages with prayer for a preliminary injunction" against the majority of
the members of the Board of Directors and San Miguel Corporation as an unwilling
petitioner. The petition, entitled "John Gokongwei Jr. vs. Andres Soriano, Jr., Jose M.
Soriano, Enrique Zobel, Antonio Roxas, Emeterio Bunao, Walthrode B. Conde, Miguel
Ortigas, Antonio Prieto and San Miguel Corporation", was docketed as SEC Case No. 1375.
As a first cause of action, petitioner alleged that on September 18, 1976, individual
respondents amended by bylaws of the corporation, basing their authority to do so on a
resolution of the stockholders adopted on March 13, 1961, when the outstanding capital
stock of respondent corporation was only P70,139.740.00, divided into 5,513,974 common

As a fourth cause of action, it was claimed that prior to the questioned amendment,
petitioner had all the qualifications to be a director of respondent corporation, being a
Substantial stockholder thereof; that as a stockholder, petitioner had acquired rights
inherent in stock ownership, such as the rights to vote and to be voted upon in the
election of directors; and that in amending the by-laws, respondents purposely provided
for petitioner's disqualification and deprived him of his vested right as afore-mentioned
hence the amended by-laws are null and void. 1
As additional causes of action, it was alleged that corporations have no inherent power to
disqualify a stockholder from being elected as a director and, therefore, the questioned
act is ultra vires and void; that Andres M. Soriano, Jr. and/or Jose M. Soriano, while
representing other corporations, entered into contracts (specifically a management
contract) with respondent corporation, which was allowed because the questioned
amendment gave the Board itself the prerogative of determining whether they or other
persons are engaged in competitive or antagonistic business; that the portion of the
amended bylaws which states that in determining whether or not a person is engaged in
competitive business, the Board may consider such factors as business and family
relationship, is unreasonable and oppressive and, therefore, void; and that the portion of
the amended by-laws which requires that "all nominations for election of directors ... shall
be submitted in writing to the Board of Directors at least five (5) working days before the
date of the Annual Meeting" is likewise unreasonable and oppressive.
It was, therefore, prayed that the amended by-laws be declared null and void and the
certificate of filing thereof be cancelled, and that individual respondents be made to pay
damages, in specified amounts, to petitioner.
On October 28, 1976, in connection with the same case, petitioner filed with the Securities
and Exchange Commission an "Urgent Motion for Production and Inspection of
Documents", alleging that the Secretary of respondent corporation refused to allow him to
inspect its records despite request made by petitioner for production of certain documents
enumerated in the request, and that respondent corporation had been attempting to
suppress information from its stockholders despite a negative reply by the SEC to its
query regarding their authority to do so. Among the documents requested to be copied
were (a) minutes of the stockholder's meeting field on March 13, 1961, (b) copy of the

management contract between San Miguel Corporation and A. Soriano Corporation

(ANSCOR); (c) latest balance sheet of San Miguel International, Inc.; (d) authority of the
stockholders to invest the funds of respondent corporation in San Miguel International,
Inc.; and (e) lists of salaries, allowances, bonuses, and other compensation, if any,
received by Andres M. Soriano, Jr. and/or its successor-in-interest.
The "Urgent Motion for Production and Inspection of Documents" was opposed by
respondents, alleging, among others that the motion has no legal basis; that the demand
is not based on good faith; that the motion is premature since the materiality or relevance
of the evidence sought cannot be determined until the issues are joined, that it fails to
show good cause and constitutes continued harrasment, and that some of the information
sought are not part of the records of the corporation and, therefore, privileged.
During the pendency of the motion for production, respondents San Miguel Corporation,
Enrique Conde, Miguel Ortigas and Antonio Prieto filed their answer to the petition,
denying the substantial allegations therein and stating, by way of affirmative defenses
that "the action taken by the Board of Directors on September 18, 1976 resulting in the ...
amendments is valid and legal because the power to "amend, modify, repeal or adopt
new By-laws" delegated to said Board on March 13, 1961 and long prior thereto has never
been revoked of SMC"; that contrary to petitioner's claim, "the vote requirement for a
valid delegation of the power to amend, repeal or adopt new by-laws is determined in
relation to the total subscribed capital stock at the time the delegation of said power is
made, not when the Board opts to exercise said delegated power"; that petitioner has not
availed of his intra-corporate remedy for the nullification of the amendment, which is to
secure its repeal by vote of the stockholders representing a majority of the subscribed
capital stock at any regular or special meeting, as provided in Article VIII, section I of the
by-laws and section 22 of the Corporation law, hence the, petition is premature; that
petitioner is estopped from questioning the amendments on the ground of lack of
authority of the Board. since he failed, to object to other amendments made on the basis
of the same 1961 authorization: that the power of the corporation to amend its by-laws is
broad, subject only to the condition that the by-laws adopted should not be respondent
corporation inconsistent with any existing law; that respondent corporation should not be
precluded from adopting protective measures to minimize or eliminate situations where
its directors might be tempted to put their personal interests over t I hat of the
corporation; that the questioned amended by-laws is a matter of internal policy and the
judgment of the board should not be interfered with: That the by-laws, as amended, are
valid and binding and are intended to prevent the possibility of violation of criminal and
civil laws prohibiting combinations in restraint of trade; and that the petition states no
cause of action. It was, therefore, prayed that the petition be dismissed and that
petitioner be ordered to pay damages and attorney's fees to respondents. The application
for writ of preliminary injunction was likewise on various grounds.
Respondents Andres M. Soriano, Jr. and Jose M. Soriano filed their opposition to the
petition, denying the material averments thereof and stating, as part of their affirmative
defenses, that in August 1972, the Universal Robina Corporation (Robina), a corporation
engaged in business competitive to that of respondent corporation, began acquiring
shares therein. until September 1976 when its total holding amounted to 622,987 shares:
that in October 1972, the Consolidated Foods Corporation (CFC) likewise began acquiring
shares in respondent (corporation. until its total holdings amounted to P543,959.00 in
September 1976; that on January 12, 1976, petitioner, who is president and controlling
shareholder of Robina and CFC (both closed corporations) purchased 5,000 shares of stock
of respondent corporation, and thereafter, in behalf of himself, CFC and Robina,
"conducted malevolent and malicious publicity campaign against SMC" to generate
support from the stockholder "in his effort to secure for himself and in representation of

Robina and CFC interests, a seat in the Board of Directors of SMC", that in the
stockholders' meeting of March 18, 1976, petitioner was rejected by the stockholders in
his bid to secure a seat in the Board of Directors on the basic issue that petitioner was
engaged in a competitive business and his securing a seat would have subjected
respondent corporation to grave disadvantages; that "petitioner nevertheless vowed to
secure a seat in the Board of Directors at the next annual meeting; that thereafter the
Board of Directors amended the by-laws as afore-stated.
As counterclaims, actual damages, moral damages, exemplary damages, expenses of
litigation and attorney's fees were presented against petitioner.
Subsequently, a Joint Omnibus Motion for the striking out of the motion for production and
inspection of documents was filed by all the respondents. This was duly opposed by
petitioner. At this juncture, respondents Emigdio Tanjuatco, Sr. and Eduardo R. Visaya were
allowed to intervene as oppositors and they accordingly filed their oppositionsintervention to the petition.
On December 29, 1976, the Securities and Exchange Commission resolved the motion for
production and inspection of documents by issuing Order No. 26, Series of 1977, stating,
in part as follows:
Considering the evidence submitted before the Commission by the
petitioner and respondents in the above-entitled case, it is hereby
ordered:
1. That respondents produce and permit the inspection, copying and
photographing, by or on behalf of the petitioner-movant, John
Gokongwei, Jr., of the minutes of the stockholders' meeting of the
respondent San Miguel Corporation held on March 13, 1961, which are
in the possession, custody and control of the said corporation, it
appearing that the same is material and relevant to the issues involved
in the main case. Accordingly, the respondents should allow petitionermovant entry in the principal office of the respondent Corporation, San
Miguel Corporation on January 14, 1977, at 9:30 o'clock in the morning
for purposes of enforcing the rights herein granted; it being understood
that the inspection, copying and photographing of the said documents
shall be undertaken under the direct and strict supervision of this
Commission. Provided, however, that other documents and/or papers
not heretofore included are not covered by this Order and any
inspection thereof shall require the prior permission of this Commission;
2. As to the Balance Sheet of San Miguel International, Inc. as well as
the list of salaries, allowances, bonuses, compensation and/or
remuneration received by respondent Jose M. Soriano, Jr. and Andres
Soriano from San Miguel International, Inc. and/or its successors-ininterest, the Petition to produce and inspect the same is hereby DENIED,
as petitioner-movant is not a stockholder of San Miguel International,
Inc. and has, therefore, no inherent right to inspect said documents;
3. In view of the Manifestation of petitioner-movant dated November 29,
1976, withdrawing his request to copy and inspect the management
contract between San Miguel Corporation and A. Soriano Corporation

and the renewal and amendments thereof for the reason that he had
already obtained the same, the Commission takes note thereof; and

Manifestation to prod respondent Commission to act, petitioner was not heard prior to the
date of the stockholders' meeting.

4. Finally, the Commission holds in abeyance the resolution on the

matter of production and inspection of the authority of the stockholders
of San Miguel Corporation to invest the funds of respondent corporation
in San Miguel International, Inc., until after the hearing on the merits of
the principal issues in the above-entitled case.

Petitioner alleges that there appears a deliberate and concerted inability on the part of
the SEC to act hence petitioner came to this Court.

This Order is immediately executory upon its approval.

Dissatisfied with the foregoing Order, petitioner moved for its reconsideration.
Meanwhile, on December 10, 1976, while the petition was yet to be heard, respondent
corporation issued a notice of special stockholders' meeting for the purpose of
"ratification and confirmation of the amendment to the By-laws", setting such meeting for
February 10, 1977. This prompted petitioner to ask respondent Commission for a
summary judgment insofar as the first cause of action is concerned, for the alleged reason
that by calling a special stockholders' meeting for the aforesaid purpose, private
respondents admitted the invalidity of the amendments of September 18, 1976. The
motion for summary judgment was opposed by private respondents. Pending action on
the motion, petitioner filed an "Urgent Motion for the Issuance of a Temporary Restraining
Order", praying that pending the determination of petitioner's application for the issuance
of a preliminary injunction and/or petitioner's motion for summary judgment, a temporary
restraining order be issued, restraining respondents from holding the special stockholder's
meeting as scheduled. This motion was duly opposed by respondents.
On February 10, 1977, respondent Commission issued an order denying the motion for
issuance of temporary restraining order. After receipt of the order of denial, respondents
conducted the special stockholders' meeting wherein the amendments to the by-laws
were ratified. On February 14, 1977, petitioner filed a consolidated motion for contempt
and for nullification of the special stockholders' meeting.
A motion for reconsideration of the order denying petitioner's motion for summary
judgment was filed by petitioner before respondent Commission on March 10, 1977.
Petitioner alleges that up to the time of the filing of the instant petition, the said motion
had not yet been scheduled for hearing. Likewise, the motion for reconsideration of the
order granting in part and denying in part petitioner's motion for production of record had
not yet been resolved.
In view of the fact that the annul stockholders' meeting of respondent corporation had
been scheduled for May 10, 1977, petitioner filed with respondent Commission a
Manifestation stating that he intended to run for the position of director of respondent
corporation. Thereafter, respondents filed a Manifestation with respondent Commission,
submitting a Resolution of the Board of Directors of respondent corporation disqualifying
and precluding petitioner from being a candidate for director unless he could submit
evidence on May 3, 1977 that he does not come within the disqualifications specified in
the amendment to the by-laws, subject matter of SEC Case No. 1375. By reason thereof,
petitioner filed a manifestation and motion to resolve pending incidents in the case and to
issue a writ of injunction, alleging that private respondents were seeking to nullify and
render ineffectual the exercise of jurisdiction by the respondent Commission, to
petitioner's irreparable damage and prejudice, Allegedly despite a subsequent

SEC. CASE NO. 1423

Petitioner likewise alleges that, having discovered that respondent corporation has been
investing corporate funds in other corporations and businesses outside of the primary
purpose clause of the corporation, in violation of section 17 1/2 of the Corporation Law, he
filed with respondent Commission, on January 20, 1977, a petition seeking to have private
respondents Andres M. Soriano, Jr. and Jose M. Soriano, as well as the respondent
corporation declared guilty of such violation, and ordered to account for such investments
and to answer for damages.
On February 4, 1977, motions to dismiss were filed by private respondents, to which a
consolidated motion to strike and to declare individual respondents in default and an
opposition ad abundantiorem cautelam were filed by petitioner. Despite the fact that said
motions were filed as early as February 4, 1977, the commission acted thereon only on
April 25, 1977, when it denied respondents' motion to dismiss and gave them two (2) days
within which to file their answer, and set the case for hearing on April 29 and May 3, 1977.
Respondents issued notices of the annual stockholders' meeting, including in the Agenda
thereof, the following:
6. Re-affirmation of the authorization to the Board of Directors by the
stockholders at the meeting on March 20, 1972 to invest corporate
funds in other companies or businesses or for purposes other than the
main purpose for which the Corporation has been organized, and
ratification of the investments thereafter made pursuant thereto.
By reason of the foregoing, on April 28, 1977, petitioner filed with the SEC an urgent
motion for the issuance of a writ of preliminary injunction to restrain private respondents
from taking up Item 6 of the Agenda at the annual stockholders' meeting, requesting that
the same be set for hearing on May 3, 1977, the date set for the second hearing of the
case on the merits. Respondent Commission, however, cancelled the dates of hearing
originally scheduled and reset the same to May 16 and 17, 1977, or after the scheduled
annual stockholders' meeting. For the purpose of urging the Commission to act, petitioner
filed an urgent manifestation on May 3, 1977, but this notwithstanding, no action has
been taken up to the date of the filing of the instant petition.
With respect to the afore-mentioned SEC cases, it is petitioner's contention before this
Court that respondent Commission gravely abused its discretion when it failed to act with
deliberate dispatch on the motions of petitioner seeking to prevent illegal and/or arbitrary
impositions or limitations upon his rights as stockholder of respondent corporation, and
that respondent are acting oppressively against petitioner, in gross derogation of
petitioner's rights to property and due process. He prayed that this Court direct
respondent SEC to act on collateral incidents pending before it.

On May 6, 1977, this Court issued a temporary restraining order restraining private
respondents from disqualifying or preventing petitioner from running or from being voted
as director of respondent corporation and from submitting for ratification or confirmation
or from causing the ratification or confirmation of Item 6 of the Agenda of the annual
stockholders' meeting on May 10, 1977, or from Making effective the amended by-laws of
respondent corporation, until further orders from this Court or until the Securities and Exchange Commission acts on the matters complained of in the instant petition.
On May 14, 1977, petitioner filed a Supplemental Petition, alleging that after a restraining
order had been issued by this Court, or on May 9, 1977, the respondent Commission
served upon petitioner copies of the following orders:
(1) Order No. 449, Series of 1977 (SEC Case No. 1375); denying petitioner's motion for
reconsideration, with its supplement, of the order of the Commission denying in part
petitioner's motion for production of documents, petitioner's motion for reconsideration of
the order denying the issuance of a temporary restraining order denying the issuance of a
temporary restraining order, and petitioner's consolidated motion to declare respondents
in contempt and to nullify the stockholders' meeting;
(2) Order No. 450, Series of 1977 (SEC Case No. 1375), allowing petitioner to run as a
director of respondent corporation but stating that he should not sit as such if elected,
until such time that the Commission has decided the validity of the bylaws in dispute, and
denying deferment of Item 6 of the Agenda for the annual stockholders' meeting; and
(3) Order No. 451, Series of 1977 (SEC Case No. 1375), denying petitioner's motion for
reconsideration of the order of respondent Commission denying petitioner's motion for
summary judgment;
It is petitioner's assertions, anent the foregoing orders, (1) that respondent Commission
acted with indecent haste and without circumspection in issuing the aforesaid orders to
petitioner's irreparable damage and injury; (2) that it acted without jurisdiction and in
violation of petitioner's right to due process when it decided en banc an issue not raised
before it and still pending before one of its Commissioners, and without hearing petitioner
thereon despite petitioner's request to have the same calendared for hearing , and (3)
that the respondents acted oppressively against the petitioner in violation of his rights as
a stockholder, warranting immediate judicial intervention.
It is prayed in the supplemental petition that the SEC orders complained of be declared
null and void and that respondent Commission be ordered to allow petitioner to undertake
discovery proceedings relative to San Miguel International. Inc. and thereafter to decide
SEC Cases No. 1375 and 1423 on the merits.
On May 17, 1977, respondent SEC, Andres M. Soriano, Jr. and Jose M. Soriano filed their
comment, alleging that the petition is without merit for the following reasons:
(1) that the petitioner the interest he represents are engaged in business competitive and
antagonistic to that of respondent San Miguel Corporation, it appearing that the owns and
controls a greater portion of his SMC stock thru the Universal Robina Corporation and the
Consolidated Foods Corporation, which corporations are engaged in business directly and
substantially competing with the allied businesses of respondent SMC and of corporations
in which SMC has substantial investments. Further, when CFC and Robina had

accumulated investments. Further, when CFC and Robina had accumulated shares in SMC,
the Board of Directors of SMC realized the clear and present danger that competitors or
antagonistic parties may be elected directors and thereby have easy and direct access to
SMC's business and trade secrets and plans;
(2) that the amended by law were adopted to preserve and protect respondent SMC from
the clear and present danger that business competitors, if allowed to become directors,
will illegally and unfairly utilize their direct access to its business secrets and plans for
their own private gain to the irreparable prejudice of respondent SMC, and, ultimately, its
stockholders. Further, it is asserted that membership of a competitor in the Board of
Directors is a blatant disregard of no less that the Constitution and pertinent laws against
combinations in restraint of trade;
(3) that by laws are valid and binding since a corporation has the inherent right and duty
to preserve and protect itself by excluding competitors and antogonistic parties, under the
law of self-preservation, and it should be allowed a wide latitude in the selection of means
to preserve itself;
(4) that the delay in the resolution and disposition of SEC Cases Nos. 1375 and 1423 was
due to petitioner's own acts or omissions, since he failed to have the petition to
suspend, pendente lite the amended by-laws calendared for hearing. It was emphasized
that it was only on April 29, 1977 that petitioner calendared the aforesaid petition for
suspension (preliminary injunction) for hearing on May 3, 1977. The instant petition being
dated May 4, 1977, it is apparent that respondent Commission was not given a chance to
act "with deliberate dispatch", and
(5) that, even assuming that the petition was meritorious was, it has become moot and
academic because respondent Commission has acted on the pending incidents,
complained of. It was, therefore, prayed that the petition be dismissed.
On May 21, 1977, respondent Emigdio G, Tanjuatco, Sr. filed his comment, alleging that
the petition has become moot and academic for the reason, among others that the acts of
private respondent sought to be enjoined have reference to the annual meeting of the
stockholders of respondent San Miguel Corporation, which was held on may 10, 1977; that
in said meeting, in compliance with the order of respondent Commission, petitioner was
allowed to run and be voted for as director; and that in the same meeting, Item 6 of the
Agenda was discussed, voted upon, ratified and confirmed. Further it was averred that the
questions and issues raised by petitioner are pending in the Securities and Exchange
Commission which has acquired jurisdiction over the case, and no hearing on the merits
has been had; hence the elevation of these issues before the Supreme Court is premature.
Petitioner filed a reply to the aforesaid comments, stating that the petition presents
justiciable questions for the determination of this Court because (1) the respondent
Commission acted without circumspection, unfairly and oppresively against petitioner,
warranting the intervention of this Court; (2) a derivative suit, such as the instant case, is
not rendered academic by the act of a majority of stockholders, such that the discussion,
ratification and confirmation of Item 6 of the Agenda of the annual stockholders' meeting
of May 10, 1977 did not render the case moot; that the amendment to the bylaws which
specifically bars petitioner from being a director is void since it deprives him of his vested
rights.

Respondent Commission, thru the Solicitor General, filed a separate comment, alleging
that after receiving a copy of the restraining order issued by this Court and noting that the
restraining order did not foreclose action by it, the Commission en banc issued Orders
Nos. 449, 450 and 451 in SEC Case No. 1375.
In answer to the allegation in the supplemental petition, it states that Order No. 450 which
denied deferment of Item 6 of the Agenda of the annual stockholders' meeting of
respondent corporation, took into consideration an urgent manifestation filed with the
Commission by petitioner on May 3, 1977 which prayed, among others, that the
discussion of Item 6 of the Agenda be deferred. The reason given for denial of deferment
was that "such action is within the authority of the corporation as well as falling within the
sphere of stockholders' right to know, deliberate upon and/or to express their wishes
regarding disposition of corporate funds considering that their investments are the ones
directly affected." It was alleged that the main petition has, therefore, become moot and
academic.
On September 29,1977, petitioner filed a second supplemental petition with prayer for
preliminary injunction, alleging that the actuations of respondent SEC tended to deprive
him of his right to due process, and "that all possible questions on the facts now pending
before the respondent Commission are now before this Honorable Court which has the
authority and the competence to act on them as it may see fit." (Reno, pp. 927-928.)
Petitioner, in his memorandum, submits the following issues for resolution;
(1) whether or not the provisions of the amended by-laws of respondent corporation,
disqualifying a competitor from nomination or election to the Board of Directors are valid
and reasonable;
(2) whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International, Inc., a fully owned
subsidiary of San Miguel Corporation; and
(3) whether or not respondent SEC committed grave abuse of discretion in allowing
discussion of Item 6 of the Agenda of the Annual Stockholders' Meeting on May 10, 1977,
and the ratification of the investment in a foreign corporation of the corporate funds,
allegedly in violation of section 17-1/2 of the Corporation Law.
I
Whether or not amended by-laws are valid is purely a legal question which public interest
requires to be resolved
It is the position of the petitioner that "it is not necessary to remand the case to
respondent SEC for an appropriate ruling on the intrinsic validity of the amended by-laws
in compliance with the principle of exhaustion of administrative remedies", considering
that: first: "whether or not the provisions of the amended by-laws are intrinsically valid ...
is purely a legal question. There is no factual dispute as to what the provisions are and
evidence is not necessary to determine whether such amended by-laws are valid as
framed and approved ... "; second: "it is for the interest and guidance of the public that an
immediate and final ruling on the question be made ... "; third: "petitioner was denied due
process by SEC" when "Commissioner de Guzman had openly shown prejudice against

petitioner ... ", and "Commissioner Sulit ... approved the amended by-laws ex-parte and
obviously found the same intrinsically valid; and finally: "to remand the case to SEC would
only entail delay rather than serve the ends of justice."
Respondents Andres M. Soriano, Jr. and Jose M. Soriano similarly pray that this Court
resolve the legal issues raised by the parties in keeping with the "cherished rules of
procedure" that "a court should always strive to settle the entire controversy in a single
proceeding leaving no root or branch to bear the seeds of future ligiation", citingGayong v.
Gayos. 3 To the same effect is the prayer of San Miguel Corporation that this Court resolve
on the merits the validity of its amended by laws and the rights and obligations of the
parties thereunder, otherwise "the time spent and effort exerted by the parties concerned
and, more importantly, by this Honorable Court, would have been for naught because the
main question will come back to this Honorable Court for final resolution." Respondent
Eduardo R. Visaya submits a similar appeal.
It is only the Solicitor General who contends that the case should be remanded to the SEC
for hearing and decision of the issues involved, invoking the latter's primary jurisdiction to
hear and decide case involving intra-corporate controversies.
It is an accepted rule of procedure that the Supreme Court should always strive to settle
the entire controversy in a single proceeding, leaving nor root or branch to bear the seeds
of future litigation. 4 Thus, in Francisco v. City of Davao, 5 this Court resolved to decide the
case on the merits instead of remanding it to the trial court for further proceedings since
the ends of justice would not be subserved by the remand of the case. In Republic v.
Security Credit and Acceptance Corporation, et al., 6 this Court, finding that the main issue
is one of law, resolved to decide the case on the merits "because public interest demands
an early disposition of the case", and in Republic v. Central Surety and Insurance
Company, 7 this Court denied remand of the third-party complaint to the trial court for
further proceedings, citing precedent where this Court, in similar situations resolved to
decide the cases on the merits, instead of remanding them to the trial court where (a) the
ends of justice would not be subserved by the remand of the case; or (b) where public
interest demand an early disposition of the case; or (c) where the trial court had already
received all the evidence presented by both parties and the Supreme Court is now in a
position, based upon said evidence, to decide the case on its merits. 8 It is settled that the
doctrine of primary jurisdiction has no application where only a question of law is
involved. 8a Because uniformity may be secured through review by a single Supreme
Court, questions of law may appropriately be determined in the first instance by
courts. 8b In the case at bar, there are facts which cannot be denied, viz.: that the
amended by-laws were adopted by the Board of Directors of the San Miguel Corporation in
the exercise of the power delegated by the stockholders ostensibly pursuant to section 22
of the Corporation Law; that in a special meeting on February 10, 1977 held specially for
that purpose, the amended by-laws were ratified by more than 80% of the stockholders of
record; that the foreign investment in the Hongkong Brewery and Distellery, a beer
manufacturing company in Hongkong, was made by the San Miguel Corporation in 1948;
and that in the stockholders' annual meeting held in 1972 and 1977, all foreign
investments and operations of San Miguel Corporation were ratified by the stockholders.
II
Whether or not the amended by-laws of SMC of disqualifying a competitor from
nomination or election to the Board of Directors of SMC are valid and reasonable

The validity or reasonableness of a by-law of a corporation in purely a question of

law. 9 Whether the by-law is in conflict with the law of the land, or with the charter of the
corporation, or is in a legal sense unreasonable and therefore unlawful is a question of
law. 10 This rule is subject, however, to the limitation that where the reasonableness of a
by-law is a mere matter of judgment, and one upon which reasonable minds must
necessarily differ, a court would not be warranted in substituting its judgment instead of
the judgment of those who are authorized to make by-laws and who have exercised their
authority. 11
Petitioner claims that the amended by-laws are invalid and unreasonable because they
were tailored to suppress the minority and prevent them from having representation in
the Board", at the same time depriving petitioner of his "vested right" to be voted for and
to vote for a person of his choice as director.
Upon the other hand, respondents Andres M. Soriano, Jr., Jose M. Soriano and San Miguel
Corporation content that ex. conclusion of a competitor from the Board is legitimate
corporate purpose, considering that being a competitor, petitioner cannot devote an
unselfish and undivided Loyalty to the corporation; that it is essentially a preventive
measure to assure stockholders of San Miguel Corporation of reasonable protective from
the unrestrained self-interest of those charged with the promotion of the corporate
enterprise; that access to confidential information by a competitor may result either in the
promotion of the interest of the competitor at the expense of the San Miguel Corporation,
or the promotion of both the interests of petitioner and respondent San Miguel
Corporation, which may, therefore, result in a combination or agreement in violation of
Article 186 of the Revised Penal Code by destroying free competition to the detriment of
the consuming public. It is further argued that there is not vested right of any stockholder
under Philippine Law to be voted as director of a corporation. It is alleged that petitioner,
as of May 6, 1978, has exercised, personally or thru two corporations owned or controlled
by him, control over the following shareholdings in San Miguel Corporation, vis.: (a) John
Gokongwei, Jr. 6,325 shares; (b) Universal Robina Corporation 738,647 shares; (c)
CFC Corporation 658,313 shares, or a total of 1,403,285 shares. Since the outstanding
capital stock of San Miguel Corporation, as of the present date, is represented by
33,139,749 shares with a par value of P10.00, the total shares owned or controlled by
petitioner represents 4.2344% of the total outstanding capital stock of San Miguel
Corporation. It is also contended that petitioner is the president and substantial
stockholder of Universal Robina Corporation and CFC Corporation, both of which are
allegedly controlled by petitioner and members of his family. It is also claimed that both
the Universal Robina Corporation and the CFC Corporation are engaged in businesses
directly and substantially competing with the alleged businesses of San Miguel
Corporation, and of corporations in which SMC has substantial investments.
ALLEGED AREAS OF COMPETITION BETWEEN PETITIONER'S CORPORATIONS AND SAN
MIGUEL CORPORATION
According to respondent San Miguel Corporation, the areas of, competition are
enumerated in its Board the areas of competition are enumerated in its Board Resolution
dated April 28, 1978, thus:
Product Line Estimated Market Share Total
1977 SMC Robina-CFC

Table Eggs 0.6% 10.0% 10.6%

Layer Pullets 33.0% 24.0% 57.0%
Dressed Chicken 35.0% 14.0% 49.0%
Poultry & Hog Feeds 40.0% 12.0% 52.0%
Ice Cream 70.0% 13.0% 83.0%
Instant Coffee 45.0% 40.0% 85.0%
Woven Fabrics 17.5% 9.1% 26.6%
Thus, according to respondent SMC, in 1976, the areas of competition affecting SMC
involved product sales of over P400 million or more than 20% of the P2 billion total
product sales of SMC. Significantly, the combined market shares of SMC and CFC-Robina
in layer pullets dressed chicken, poultry and hog feeds ice cream, instant coffee and
woven fabrics would result in a position of such dominance as to affect the prevailing
market factors.
It is further asserted that in 1977, the CFC-Robina group was in direct competition on
product lines which, for SMC, represented sales amounting to more than ?478 million. In
addition, CFC-Robina was directly competing in the sale of coffee with Filipro, a subsidiary
of SMC, which product line represented sales for SMC amounting to more than P275
million. The CFC-Robina group (Robitex, excluding Litton Mills recently acquired by
petitioner) is purportedly also in direct competition with Ramie Textile, Inc., subsidiary of
SMC, in product sales amounting to more than P95 million. The areas of competition
between SMC and CFC-Robina in 1977 represented, therefore, for SMC, product sales of
more than P849 million.
According to private respondents, at the Annual Stockholders' Meeting of March 18, 1976,
9,894 stockholders, in person or by proxy, owning 23,436,754 shares in SMC, or more
than 90% of the total outstanding shares of SMC, rejected petitioner's candidacy for the
Board of Directors because they "realized the grave dangers to the corporation in the
event a competitor gets a board seat in SMC." On September 18, 1978, the Board of
Directors of SMC, by "virtue of powers delegated to it by the stockholders," approved the
amendment to ' he by-laws in question. At the meeting of February 10, 1977, these
amendments were confirmed and ratified by 5,716 shareholders owning 24,283,945
shares, or more than 80% of the total outstanding shares. Only 12 shareholders,
representing 7,005 shares, opposed the confirmation and ratification. At the Annual
Stockholders' Meeting of May 10, 1977, 11,349 shareholders, owning 27,257.014 shares,
or more than 90% of the outstanding shares, rejected petitioner's candidacy, while 946
stockholders, representing 1,648,801 shares voted for him. On the May 9, 1978 Annual
Stockholders' Meeting, 12,480 shareholders, owning more than 30 million shares, or more
than 90% of the total outstanding shares. voted against petitioner.
AUTHORITY OF CORPORATION TO PRESCRIBE QUALIFICATIONS OF DIRECTORS EXPRESSLY
CONFERRED BY LAW
Private respondents contend that the disputed amended by laws were adopted by the
Board of Directors of San Miguel Corporation a-, a measure of self-defense to protect the
corporation from the clear and present danger that the election of a business competitor
to the Board may cause upon the corporation and the other stockholders inseparable
prejudice. Submitted for resolution, therefore, is the issue whether or not respondent
San Miguel Corporation could, as a measure of self- protection, disqualify a competitor
from nomination and election to its Board of Directors.

It is recognized by an authorities that 'every corporation has the inherent power to adopt
by-laws 'for its internal government, and to regulate the conduct and prescribe the rights
and duties of its members towards itself and among themselves in reference to the
management of its affairs. 12 At common law, the rule was "that the power to make and
adopt by-laws was inherent in every corporation as one of its necessary and inseparable
legal incidents. And it is settled throughout the United States that in the absence of
positive legislative provisions limiting it, every private corporation has this inherent power
as one of its necessary and inseparable legal incidents, independent of any specific
enabling provision in its charter or in general law, such power of self-government being
essential to enable the corporation to accomplish the purposes of its creation. 13
In this jurisdiction, under section 21 of the Corporation Law, a corporation may prescribe
in its by-laws "the qualifications, duties and compensation of directors, officers and
employees ... " This must necessarily refer to a qualification in addition to that specified
by section 30 of the Corporation Law, which provides that "every director must own in his
right at least one share of the capital stock of the stock corporation of which he is a
director ... " InGovernment v. El Hogar, 14 the Court sustained the validity of a provision in
the corporate by-law requiring that persons elected to the Board of Directors must be
holders of shares of the paid up value of P5,000.00, which shall be held as security for
their action, on the ground that section 21 of the Corporation Law expressly gives the
power to the corporation to provide in its by-laws for the qualifications of directors and is
"highly prudent and in conformity with good practice. "
NO VESTED RIGHT OF STOCKHOLDER TO BE ELECTED DIRECTOR
Any person "who buys stock in a corporation does so with the knowledge that its affairs
are dominated by a majority of the stockholders and that he impliedly contracts that the
will of the majority shall govern in all matters within the limits of the act of incorporation
and lawfully enacted by-laws and not forbidden by law." 15 To this extent, therefore, the
stockholder may be considered to have "parted with his personal right or privilege to
regulate the disposition of his property which he has invested in the capital stock of the
corporation, and surrendered it to the will of the majority of his fellow incorporators. ... It
cannot therefore be justly said that the contract, express or implied, between the
corporation and the stockholders is infringed ... by any act of the former which is
authorized by a majority ... ." 16
Pursuant to section 18 of the Corporation Law, any corporation may amend its articles of
incorporation by a vote or written assent of the stockholders representing at least twothirds of the subscribed capital stock of the corporation If the amendment changes,
diminishes or restricts the rights of the existing shareholders then the disenting minority
has only one right, viz.: "to object thereto in writing and demand payment for his share."
Under section 22 of the same law, the owners of the majority of the subscribed capital
stock may amend or repeal any by-law or adopt new by-laws. It cannot be said, therefore,
that petitioner has a vested right to be elected director, in the face of the fact that the law
at the time such right as stockholder was acquired contained the prescription that the
corporate charter and the by-law shall be subject to amendment, alteration and
modification. 17
It being settled that the corporation has the power to provide for the qualifications of its
directors, the next question that must be considered is whether the disqualification of a
competitor from being elected to the Board of Directors is a reasonable exercise of
corporate authority.

A DIRECTOR STANDS IN A FIDUCIARY RELATION TO THE CORPORATION AND ITS

SHAREHOLDERS
Although in the strict and technical sense, directors of a private corporation are not
regarded as trustees, there cannot be any doubt that their character is that of a fiduciary
insofar as the corporation and the stockholders as a body are concerned. As agents
entrusted with the management of the corporation for the collective benefit of the
stockholders, "they occupy a fiduciary relation, and in this sense the relation is one of
trust." 18 "The ordinary trust relationship of directors of a corporation and stockholders",
according to Ashaman v. Miller, 19 "is not a matter of statutory or technical law. It springs
from the fact that directors have the control and guidance of corporate affairs and
property and hence of the property interests of the stockholders. Equity recognizes that
stockholders are the proprietors of the corporate interests and are ultimately the only
beneficiaries thereof * * *.
Justice Douglas, in Pepper v. Litton, 20 emphatically restated the standard of fiduciary
obligation of the directors of corporations, thus:
A director is a fiduciary. ... Their powers are powers in trust. ... He who is
in such fiduciary position cannot serve himself first and his cestuis
second. ... He cannot manipulate the affairs of his corporation to their
detriment and in disregard of the standards of common decency. He
cannot by the intervention of a corporate entity violate the ancient
precept against serving two masters ... He cannot utilize his inside
information and strategic position for his own preferment. He cannot
violate rules of fair play by doing indirectly through the corporation what
he could not do so directly. He cannot violate rules of fair play by doing
indirectly though the corporation what he could not do so directly. He
cannot use his power for his personal advantage and to the detriment of
the stockholders and creditors no matter how absolute in terms that
power may be and no matter how meticulous he is to satisfy technical
requirements. For that power is at all times subject to the equitable
limitation that it may not be exercised for the aggrandizement,
preference or advantage of the fiduciary to the exclusion or detriment of
the cestuis.
And in Cross v. West Virginia Cent, & P. R. R. Co.,

21

it was said:

... A person cannot serve two hostile and adverse master, without
detriment to one of them. A judge cannot be impartial if personally
interested in the cause. No more can a director. Human nature is too
weak -for this. Take whatever statute provision you please giving power
to stockholders to choose directors, and in none will you find any
express prohibition against a discretion to select directors having the
company's interest at heart, and it would simply be going far to deny by
mere implication the existence of such a salutary power
... If the by-law is to be held reasonable in disqualifying a stockholder in a competing
company from being a director, the same reasoning would apply to disqualify the wife and
immediate member of the family of such stockholder, on account of the supposed interest
of the wife in her husband's affairs, and his suppose influence over her. It is perhaps true
that such stockholders ought not to be condemned as selfish and dangerous to the best

interest of the corporation until tried and tested. So it is also true that we cannot condemn
as selfish and dangerous and unreasonable the action of the board in passing the by-law.
The strife over the matter of control in this corporation as in many others is perhaps
carried on not altogether in the spirit of brotherly love and affection. The only test that we
can apply is as to whether or not the action of the Board is authorized and sanctioned by
law. ... . 22
These principles have been applied by this Court in previous cases. 23
AN AMENDMENT TO THE CORPORATION BY-LAW WHICH RENDERS A STOCKHOLDER
INELIGIBLE TO BE DIRECTOR, IF HE BE ALSO DIRECTOR IN A CORPORATION WHOSE
BUSINESS IS IN COMPETITION WITH THAT OF THE OTHER CORPORATION, HAS BEEN
SUSTAINED AS VALID
It is a settled state law in the United States, according to Fletcher, that corporations have
the power to make by-laws declaring a person employed in the service of a rival company
to be ineligible for the corporation's Board of Directors. ... (A)n amendment which renders
ineligible, or if elected, subjects to removal, a director if he be also a director in a
corporation whose business is in competition with or is antagonistic to the other
corporation is valid."24 This is based upon the principle that where the director is so
employed in the service of a rival company, he cannot serve both, but must betray one or
the other. Such an amendment "advances the benefit of the corporation and is good." An
exception exists in New Jersey, where the Supreme Court held that the Corporation Law in
New Jersey prescribed the only qualification, and therefore the corporation was not
empowered to add additional qualifications. 25 This is the exact opposite of the situation in
the Philippines because as stated heretofore, section 21 of the Corporation Law expressly
provides that a corporation may make by-laws for the qualifications of directors. Thus, it
has been held that an officer of a corporation cannot engage in a business in direct
competition with that of the corporation where he is a director by utilizing information he
has received as such officer, under "the established law that a director or officer of a
corporation may not enter into a competing enterprise which cripples or injures the
business of the corporation of which he is an officer or director. 26
It is also well established that corporate officers "are not permitted to use their position of
trust and confidence to further their private interests." 27 In a case where directors of a
corporation cancelled a contract of the corporation for exclusive sale of a foreign firm's
products, and after establishing a rival business, the directors entered into a new contract
themselves with the foreign firm for exclusive sale of its products, the court held that
equity would regard the new contract as an offshoot of the old contract and, therefore, for
the benefit of the corporation, as a "faultless fiduciary may not reap the fruits of his
misconduct to the exclusion of his principal. 28
The doctrine of "corporate opportunity" 29 is precisely a recognition by the courts that the
fiduciary standards could not be upheld where the fiduciary was acting for two entities
with competing interests. This doctrine rests fundamentally on the unfairness, in
particular circumstances, of an officer or director taking advantage of an opportunity for
his own personal profit when the interest of the corporation justly calls for protection. 30
It is not denied that a member of the Board of Directors of the San Miguel Corporation has
access to sensitive and highly confidential information, such as: (a) marketing strategies
and pricing structure; (b) budget for expansion and diversification; (c) research and

development; and (d) sources of funding, availability of personnel, proposals of mergers

or tie-ups with other firms.
It is obviously to prevent the creation of an opportunity for an officer or director of San
Miguel Corporation, who is also the officer or owner of a competing corporation, from
taking advantage of the information which he acquires as director to promote his
individual or corporate interests to the prejudice of San Miguel Corporation and its
stockholders, that the questioned amendment of the by-laws was made. Certainly, where
two corporations are competitive in a substantial sense, it would seem improbable, if not
impossible, for the director, if he were to discharge effectively his duty, to satisfy his
loyalty to both corporations and place the performance of his corporation duties above his
personal concerns.
Thus, in McKee & Co. v. First National Bank of San Diego, supra the court sustained as
valid and reasonable an amendment to the by-laws of a bank, requiring that its directors
should not be directors, officers, employees, agents, nominees or attorneys of any other
banking corporation, affiliate or subsidiary thereof. Chief Judge Parker, in McKee, explained
the reasons of the court, thus:
... A bank director has access to a great deal of information concerning
the business and plans of a bank which would likely be injurious to the
bank if known to another bank, and it was reasonable and prudent to
enlarge this minimum disqualification to include any director, officer,
employee, agent, nominee, or attorney of any other bank in California.
The Ashkins case, supra, specifically recognizes protection against rivals
and others who might acquire information which might be used against
the interests of the corporation as a legitimate object of by-law
protection. With respect to attorneys or persons associated with a firm
which is attorney for another bank, in addition to the direct conflict or
potential conflict of interest, there is also the danger of inadvertent
leakage of confidential information through casual office discussions or
accessibility of files. Defendant's directors determined that its welfare
was best protected if this opportunity for conflicting loyalties and
potential misuse and leakage of confidential information was foreclosed.
In McKee the Court further listed qualificational by-laws upheld by the courts, as follows:
(1) A director shall not be directly or indirectly interested as a
stockholder in any other firm, company, or association which competes
with the subject corporation.
(2) A director shall not be the immediate member of the family of any
stockholder in any other firm, company, or association which competes
with the subject corporation,
(3) A director shall not be an officer, agent, employee, attorney, or
trustee in any other firm, company, or association which compete with
the subject corporation.
(4) A director shall be of good moral character as an essential
qualification to holding office.

(5) No person who is an attorney against the corporation in a law suit is

eligible for service on the board. (At p. 7.)
These are not based on theorical abstractions but on human experience that a person
cannot serve two hostile masters without detriment to one of them.
The offer and assurance of petitioner that to avoid any possibility of his taking unfair
advantage of his position as director of San Miguel Corporation, he would absent himself
from meetings at which confidential matters would be discussed, would not detract from
the validity and reasonableness of the by-laws here involved. Apart from the impractical
results that would ensue from such arrangement, it would be inconsistent with petitioner's
primary motive in running for board membership which is to protect his investments in
San Miguel Corporation. More important, such a proposed norm of conduct would be
against all accepted principles underlying a director's duty of fidelity to the corporation,
for the policy of the law is to encourage and enforce responsible corporate management.
As explained by Oleck: 31 "The law win not tolerate the passive attitude of directors ...
without active and conscientious participation in the managerial functions of the company.
As directors, it is their duty to control and supervise the day to day business activities of
the company or to promulgate definite policies and rules of guidance with a vigilant eye
toward seeing to it that these policies are carried out. It is only then that directors may be
said to have fulfilled their duty of fealty to the corporation."
Sound principles of corporate management counsel against sharing sensitive information
with a director whose fiduciary duty of loyalty may well require that he disclose this
information to a competitive arrival. These dangers are enhanced considerably where the
common director such as the petitioner is a controlling stockholder of two of the
competing corporations. It would seem manifest that in such situations, the director has
an economic incentive to appropriate for the benefit of his own corporation the corporate
plans and policies of the corporation where he sits as director.
Indeed, access by a competitor to confidential information regarding marketing strategies
and pricing policies of San Miguel Corporation would subject the latter to a competitive
disadvantage and unjustly enrich the competitor, for advance knowledge by the
competitor of the strategies for the development of existing or new markets of existing or
new products could enable said competitor to utilize such knowledge to his advantage. 32
There is another important consideration in determining whether or not the amended bylaws are reasonable. The Constitution and the law prohibit combinations in restraint of
trade or unfair competition. Thus, section 2 of Article XIV of the Constitution provides:
"The State shall regulate or prohibit private monopolies when the public interest so
requires. No combinations in restraint of trade or unfair competition shall be snowed."

otherwise, in restraint of trade or commerce or to prevent by artificial

means free competition in the market.
2. Any person who shag monopolize any merchandise or object of trade
or commerce, or shall combine with any other person or persons to
monopolize said merchandise or object in order to alter the price thereof
by spreading false rumors or making use of any other artifice to restrain
free competition in the market.
3. Any person who, being a manufacturer, producer, or processor of any
merchandise or object of commerce or an importer of any merchandise
or object of commerce from any foreign country, either as principal or
agent, wholesale or retailer, shall combine, conspire or agree in any
manner with any person likewise engaged in the manufacture,
production, processing, assembling or importation of such merchandise
or object of commerce or with any other persons not so similarly
engaged for the purpose of making transactions prejudicial to lawful
commerce, or of increasing the market price in any part of the
Philippines, or any such merchandise or object of commerce
manufactured, produced, processed, assembled in or imported into the
Philippines, or of any article in the manufacture of which such
manufactured, produced, processed, or imported merchandise or object
of commerce is used.
There are other legislation in this jurisdiction, which prohibit monopolies and combinations
in restraint of trade. 33
Basically, these anti-trust laws or laws against monopolies or combinations in restraint of
trade are aimed at raising levels of competition by improving the consumers'
effectiveness as the final arbiter in free markets. These laws are designed to preserve free
and unfettered competition as the rule of trade. "It rests on the premise that the
unrestrained interaction of competitive forces will yield the best allocation of our
economic resources, the lowest prices and the highest quality ... ." 34 they operate to
forestall concentration of economic power. 35 The law against monopolies and
combinations in restraint of trade is aimed at contracts and combinations that, by reason
of the inherent nature of the contemplated acts, prejudice the public interest by unduly
restraining competition or unduly obstructing the course of trade. 36

Art. 186. Monopolies and combinations in restraint of trade. The

penalty of prision correccional in its minimum period or a fine ranging
from two hundred to six thousand pesos, or both, shall be imposed
upon:

The terms "monopoly", "combination in restraint of trade" and "unfair competition" appear
to have a well defined meaning in other jurisdictions. A "monopoly" embraces any
combination the tendency of which is to prevent competition in the broad and general
sense, or to control prices to the detriment of the public. 37 In short, it is the concentration
of business in the hands of a few. The material consideration in determining its existence
is not that prices are raised and competition actually excluded, but that power exists to
raise prices or exclude competition when desired. 38Further, it must be considered that the
Idea of monopoly is now understood to include a condition produced by the mere act of
individuals. Its dominant thought is the notion of exclusiveness or unity, or the
suppression of competition by the qualification of interest or management, or it may be
thru agreement and concert of action. It is, in brief, unified tactics with regard to prices. 39

1. Any person who shall enter into any contract or agreement or shall
take part in any conspiracy or combination in the form of a trust or

From the foregoing definitions, it is apparent that the contentions of petitioner are not in
accord with reality. The election of petitioner to the Board of respondent Corporation can

Article 186 of the Revised Penal Code also provides:

bring about an illegal situation. This is because an express agreement is not necessary for
the existence of a combination or conspiracy in restraint of trade. 40 It is enough that a
concert of action is contemplated and that the defendants conformed to the
arrangements, 41 and what is to be considered is what the parties actually did and not the
words they used. For instance, the Clayton Act prohibits a person from serving at the
same time as a director in any two or more corporations, if such corporations are, by
virtue of their business and location of operation, competitors so that the elimination of
competition between them would constitute violation of any provision of the anti-trust
laws. 42 There is here a statutory recognition of the anti-competitive dangers which may
arise when an individual simultaneously acts as a director of two or more competing
corporations. A common director of two or more competing corporations would have
access to confidential sales, pricing and marketing information and would be in a position
to coordinate policies or to aid one corporation at the expense of another, thereby stifling
competition. This situation has been aptly explained by Travers, thus:
The argument for prohibiting competing corporations from sharing even
one director is that theinterlock permits the coordination of policies
between nominally independent firms to an extent that competition
between them may be completely eliminated. Indeed, if a director, for
example, is to be faithful to both corporations, some accommodation
must result. Suppose X is a director of both Corporation A and
Corporation B. X could hardly vote for a policy by A that would injure B
without violating his duty of loyalty to B at the same time he could
hardly abstain from voting without depriving A of his best judgment. If
the firms really do compete in the sense of vying for economic
advantage at the expense of the other there can hardly be any
reason for an interlock between competitors other than the suppression
of competition. 43 (Emphasis supplied.)
According to the Report of the House Judiciary Committee of the U. S. Congress on section
9 of the Clayton Act, it was established that: "By means of the interlocking directorates
one man or group of men have been able to dominate and control a great number of
corporations ... to the detriment of the small ones dependent upon them and to the injury
of the public. 44
Shared information on cost accounting may lead to price fixing. Certainly, shared
information on production, orders, shipments, capacity and inventories may lead to
control of production for the purpose of controlling prices.
Obviously, if a competitor has access to the pricing policy and cost conditions of the
products of San Miguel Corporation, the essence of competition in a free market for the
purpose of serving the lowest priced goods to the consuming public would be frustrated,
The competitor could so manipulate the prices of his products or vary its marketing
strategies by region or by brand in order to get the most out of the consumers. Where the
two competing firms control a substantial segment of the market this could lead to
collusion and combination in restraint of trade. Reason and experience point to the
inevitable conclusion that the inherent tendency of interlocking directorates between
companies that are related to each other as competitors is to blunt the edge of rivalry
between the corporations, to seek out ways of compromising opposing interests, and thus
eliminate competition. As respondent SMC aptly observes, knowledge by CFC-Robina of
SMC's costs in various industries and regions in the country win enable the former to
practice price discrimination. CFC-Robina can segment the entire consuming population
by geographical areas or income groups and change varying prices in order to maximize

profits from every market segment. CFC-Robina could determine the most profitable
volume at which it could produce for every product line in which it competes with SMC.
Access to SMC pricing policy by CFC-Robina would in effect destroy free competition and
deprive the consuming public of opportunity to buy goods of the highest possible quality
at the lowest prices.
Finally, considering that both Robina and SMC are, to a certain extent, engaged in
agriculture, then the election of petitioner to the Board of SMC may constitute a violation
of the prohibition contained in section 13(5) of the Corporation Law. Said section provides
in part that "any stockholder of more than one corporation organized for the purpose of
engaging in agriculture may hold his stock in such corporations solely for investment and
not for the purpose of bringing about or attempting to bring about a combination to
exercise control of incorporations ... ."
Neither are We persuaded by the claim that the by-law was Intended to prevent the
candidacy of petitioner for election to the Board. If the by-law were to be applied in the
case of one stockholder but waived in the case of another, then it could be reasonably
claimed that the by-law was being applied in a discriminatory manner. However, the by
law, by its terms, applies to all stockholders. The equal protection clause of the
Constitution requires only that the by-law operate equally upon all persons of a class.
Besides, before petitioner can be declared ineligible to run for director, there must be
hearing and evidence must be submitted to bring his case within the ambit of the
disqualification. Sound principles of public policy and management, therefore, support the
view that a by-law which disqualifies a competition from election to the Board of Directors
of another corporation is valid and reasonable.
In the absence of any legal prohibition or overriding public policy, wide latitude may be
accorded to the corporation in adopting measures to protect legitimate corporation
interests. Thus, "where the reasonableness of a by-law is a mere matter of judgment, and
upon which reasonable minds must necessarily differ, a court would not be warranted in
substituting its judgment instead of the judgment of those who are authorized to make bylaws and who have expressed their authority. 45
Although it is asserted that the amended by-laws confer on the present Board powers to
perpetua themselves in power such fears appear to be misplaced. This power, but is very
nature, is subject to certain well established limitations. One of these is inherent in the
very convert and definition of the terms "competition" and "competitor". "Competition"
implies a struggle for advantage between two or more forces, each possessing, in
substantially similar if not Identical degree, certain characteristics essential to the
business sought. It means an independent endeavor of two or more persons to obtain the
business patronage of a third by offering more advantageous terms as an inducement to
secure trade. 46 The test must be whether the business does in fact compete, not whether
it is capable of an indirect and highly unsubstantial duplication of an isolated or noncharacteristics activity. 47 It is, therefore, obvious that not every person or entity engaged
in business of the same kind is a competitor. Such factors as quantum and place of
business, Identity of products and area of competition should be taken into consideration.
It is, therefore, necessary to show that petitioner's business covers a substantial portion of
the same markets for similar products to the extent of not less than 10% of respondent
corporation's market for competing products. While We here sustain the validity of the
amended by-laws, it does not follow as a necessary consequence that petitioner is ipso
facto disqualified. Consonant with the requirement of due process, there must be due
hearing at which the petitioner must be given the fullest opportunity to show that he is
not covered by the disqualification. As trustees of the corporation and of the stockholders,

it is the responsibility of directors to act with fairness to the stockholders. 48 Pursuant to

this obligation and to remove any suspicion that this power may be utilized by the
incumbent members of the Board to perpetuate themselves in power, any decision of the
Board to disqualify a candidate for the Board of Directors should be reviewed by the
Securities behind Exchange Commission en banc and its decision shall be final unless
reversed by this Court on certiorari. 49 Indeed, it is a settled principle that where the
action of a Board of Directors is an abuse of discretion, or forbidden by statute, or is
against public policy, or is ultra vires, or is a fraud upon minority stockholders or creditors,
or will result in waste, dissipation or misapplication of the corporation assets, a court of
equity has the power to grant appropriate relief. 50
III
Whether or not respondent SEC gravely abused its discretion in denying petitioner's
request for an examination of the records of San Miguel International Inc., a fully owned
subsidiary of San Miguel Corporation
Respondent San Miguel Corporation stated in its memorandum that petitioner's claim that
he was denied inspection rights as stockholder of SMC "was made in the teeth of
undisputed facts that, over a specific period, petitioner had been furnished numerous
documents and information," to wit: (1) a complete list of stockholders and their
stockholdings; (2) a complete list of proxies given by the stockholders for use at the
annual stockholders' meeting of May 18, 1975; (3) a copy of the minutes of the
stockholders' meeting of March 18,1976; (4) a breakdown of SMC's P186.6 million
investment in associated companies and other companies as of December 31, 1975; (5) a
listing of the salaries, allowances, bonuses and other compensation or remunerations
received by the directors and corporate officers of SMC; (6) a copy of the US $100 million
Euro-Dollar Loan Agreement of SMC; and (7) copies of the minutes of all meetings of the
Board of Directors from January 1975 to May 1976, with deletions of sensitive data, which
deletions were not objected to by petitioner.
Further, it was averred that upon request, petitioner was informed in writing on
September 18, 1976; (1) that SMC's foreign investments are handled by San Miguel
International, Inc., incorporated in Bermuda and wholly owned by SMC; this was SMC's
first venture abroad, having started in 1948 with an initial outlay of ?500,000.00,
augmented by a loan of Hongkong $6 million from a foreign bank under the personal
guaranty of SMC's former President, the late Col. Andres Soriano; (2) that as of December
31, 1975, the estimated value of SMI would amount to almost P400 million (3) that the
total cash dividends received by SMC from SMI since 1953 has amount to US $ 9.4 million;
and (4) that from 1972-1975, SMI did not declare cash or stock dividends, all earnings
having been used in line with a program for the setting up of breweries by SMI
These averments are supported by the affidavit of the Corporate Secretary, enclosing
photocopies of the afore-mentioned documents. 51
Pursuant to the second paragraph of section 51 of the Corporation Law, "(t)he record of all
business transactions of the corporation and minutes of any meeting shall be open to the
inspection of any director, member or stockholder of the corporation at reasonable hours."
The stockholder's right of inspection of the corporation's books and records is based upon
their ownership of the assets and property of the corporation. It is, therefore, an incident
of ownership of the corporate property, whether this ownership or interest be termed an

equitable ownership, a beneficial ownership, or a ownership. 52This right is predicated

upon the necessity of self-protection. It is generally held by majority of the courts that
where the right is granted by statute to the stockholder, it is given to him as such and
must be exercised by him with respect to his interest as a stockholder and for some
purpose germane thereto or in the interest of the corporation. 53 In other words, the
inspection has to be germane to the petitioner's interest as a stockholder, and has to be
proper and lawful in character and not inimical to the interest of the
corporation. 54 In Grey v. Insular Lumber, 55 this Court held that "the right to examine the
books of the corporation must be exercised in good faith, for specific and honest purpose,
and not to gratify curiosity, or for specific and honest purpose, and not to gratify curiosity,
or for speculative or vexatious purposes. The weight of judicial opinion appears to be, that
on application for mandamus to enforce the right, it is proper for the court to inquire into
and consider the stockholder's good faith and his purpose and motives in seeking
inspection. 56 Thus, it was held that "the right given by statute is not absolute and may be
refused when the information is not sought in good faith or is used to the detriment of the
corporation." 57 But the "impropriety of purpose such as will defeat enforcement must be
set up the corporation defensively if the Court is to take cognizance of it as a qualification.
In other words, the specific provisions take from the stockholder the burden of showing
propriety of purpose and place upon the corporation the burden of showing impropriety of
purpose or motive. 58 It appears to be the general rule that stockholders are entitled to full
information as to the management of the corporation and the manner of expenditure of
its funds, and to inspection to obtain such information, especially where it appears that
the company is being mismanaged or that it is being managed for the personal benefit of
officers or directors or certain of the stockholders to the exclusion of others." 59
While the right of a stockholder to examine the books and records of a corporation for a
lawful purpose is a matter of law, the right of such stockholder to examine the books and
records of a wholly-owned subsidiary of the corporation in which he is a stockholder is a
different thing.
Some state courts recognize the right under certain conditions, while others do not. Thus,
it has been held that where a corporation owns approximately no property except the
shares of stock of subsidiary corporations which are merely agents or instrumentalities of
the holding company, the legal fiction of distinct corporate entities may be disregarded
and the books, papers and documents of all the corporations may be required to be
produced for examination, 60 and that a writ of mandamus, may be granted, as the
records of the subsidiary were, to all incontents and purposes, the records of the parent
even though subsidiary was not named as a party. 61 mandamus was likewise held proper
to inspect both the subsidiary's and the parent corporation's books upon proof of sufficient
control or dominion by the parent showing the relation of principal or agent or something
similar thereto. 62
On the other hand, mandamus at the suit of a stockholder was refused where the
subsidiary corporation is a separate and distinct corporation domiciled and with its books
and records in another jurisdiction, and is not legally subject to the control of the parent
company, although it owned a vast majority of the stock of the subsidiary. 63 Likewise,
inspection of the books of an allied corporation by stockholder of the parent company
which owns all the stock of the subsidiary has been refused on the ground that the
stockholder was not within the class of "persons having an interest." 64
In the Nash case, 65 The Supreme Court of New York held that the contractual right of
former stockholders to inspect books and records of the corporation included the right to

inspect corporation's subsidiaries' books and records which were in corporation's

possession and control in its office in New York."
In the Bailey case, 66 stockholders of a corporation were held entitled to inspect the
records of a controlled subsidiary corporation which used the same offices and had
Identical officers and directors.
In his "Urgent Motion for Production and Inspection of Documents" before respondent SEC,
petitioner contended that respondent corporation "had been attempting to suppress
information for the stockholders" and that petitioner, "as stockholder of respondent
corporation, is entitled to copies of some documents which for some reason or another,
respondent corporation is very reluctant in revealing to the petitioner notwithstanding the
fact that no harm would be caused thereby to the corporation." 67 There is no question
that stockholders are entitled to inspect the books and records of a corporation in order to
investigate the conduct of the management, determine the financial condition of the
corporation, and generally take an account of the stewardship of the officers and
directors. 68
In the case at bar, considering that the foreign subsidiary is wholly owned by respondent
San Miguel Corporation and, therefore, under its control, it would be more in accord with
equity, good faith and fair dealing to construe the statutory right of petitioner as
stockholder to inspect the books and records of the corporation as extending to books and
records of such wholly subsidiary which are in respondent corporation's possession and
control.
IV
Whether or not respondent SEC gravely abused its discretion in allowing the stockholders
of respondent corporation to ratify the investment of corporate funds in a foreign
corporation
Petitioner reiterates his contention in SEC Case No. 1423 that respondent corporation
invested corporate funds in SMI without prior authority of the stockholders, thus violating
section 17-1/2 of the Corporation Law, and alleges that respondent SEC should have
investigated the charge, being a statutory offense, instead of allowing ratification of the
investment by the stockholders.
Respondent SEC's position is that submission of the investment to the stockholders for
ratification is a sound corporate practice and should not be thwarted but encouraged.
Section 17-1/2 of the Corporation Law allows a corporation to "invest its funds in any
other corporation or business or for any purpose other than the main purpose for which it
was organized" provided that its Board of Directors has been so authorized by the
affirmative vote of stockholders holding shares entitling them to exercise at least twothirds of the voting power. If the investment is made in pursuance of the corporate
purpose, it does not need the approval of the stockholders. It is only when the purchase of
shares is done solely for investment and not to accomplish the purpose of its
incorporation that the vote of approval of the stockholders holding shares entitling them
to exercise at least two-thirds of the voting power is necessary. 69

As stated by respondent corporation, the purchase of beer manufacturing facilities by SMC

was an investment in the same business stated as its main purpose in its Articles of
Incorporation, which is to manufacture and market beer. It appears that the original
investment was made in 1947-1948, when SMC, then San Miguel Brewery, Inc., purchased
a beer brewery in Hongkong (Hongkong Brewery & Distillery, Ltd.) for the manufacture
and marketing of San Miguel beer thereat. Restructuring of the investment was made in
1970-1971 thru the organization of SMI in Bermuda as a tax free reorganization.
Under these circumstances, the ruling in De la Rama v. Manao Sugar Central Co., Inc.,
supra, appears relevant. In said case, one of the issues was the legality of an investment
made by Manao Sugar Central Co., Inc., without prior resolution approved by the
affirmative vote of 2/3 of the stockholders' voting power, in the Philippine Fiber Processing
Co., Inc., a company engaged in the manufacture of sugar bags. The lower court said that
"there is more logic in the stand that if the investment is made in a corporation whose
business is important to the investing corporation and would aid it in its purpose, to
require authority of the stockholders would be to unduly curtail the power of the Board of
Directors." This Court affirmed the ruling of the court a quo on the matter and, quoting
Prof. Sulpicio S. Guevara, said:
"j. Power to acquire or dispose of shares or securities. A private
corporation, in order to accomplish is purpose as stated in its articles of
incorporation, and subject to the limitations imposed by the Corporation
Law, has the power to acquire, hold, mortgage, pledge or dispose of
shares, bonds, securities, and other evidence of indebtedness of any
domestic or foreign corporation. Such an act, if done in pursuance of the
corporate purpose, does not need the approval of stockholders; but
when the purchase of shares of another corporation is done solely for
investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary. In any case, the
purchase of such shares or securities must be subject to the limitations
established by the Corporations law; namely, (a) that no agricultural or
mining corporation shall be restricted to own not more than 15% of the
voting stock of nay agricultural or mining corporation; and (c) that such
holdings shall be solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce of combination in
restraint of trade." The Philippine Corporation Law by Sulpicio S.
Guevara, 1967 Ed., p. 89) (Emphasis supplied.)
40. Power to invest corporate funds. A private corporation has the
power to invest its corporate funds "in any other corporation or
business, or for any purpose other than the main purpose for which it
was organized, provide that 'its board of directors has been so
authorized in a resolution by the affirmative vote of stockholders holding
shares in the corporation entitling them to exercise at least two-thirds of
the voting power on such a propose at a stockholders' meeting called
for that purpose,' and provided further, that no agricultural or mining
corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish its
purpose or purposes as stated in its articles of incorporation the
approval of the stockholders is not necessary."" (Id., p. 108) (Emphasis
ours.) (pp. 258-259).

Assuming arguendo that the Board of Directors of SMC had no authority to make the
assailed investment, there is no question that a corporation, like an individual, may ratify
and thereby render binding upon it the originally unauthorized acts of its officers or other
agents. 70 This is true because the questioned investment is neither contrary to law,
morals, public order or public policy. It is a corporate transaction or contract which is
within the corporate powers, but which is defective from a supported failure to observe in
its execution the. requirement of the law that the investment must be authorized by the
affirmative vote of the stockholders holding two-thirds of the voting power. This
requirement is for the benefit of the stockholders. The stockholders for whose benefit the
requirement was enacted may, therefore, ratify the investment and its ratification by said
stockholders obliterates any defect which it may have had at the outset. "Mere ultra
vires acts", said this Court in Pirovano, 71 "or those which are not illegal and void ab initio,
but are not merely within the scope of the articles of incorporation, are merely voidable
and may become binding and enforceable when ratified by the stockholders.
Besides, the investment was for the purchase of beer manufacturing and marketing
facilities which is apparently relevant to the corporate purpose. The mere fact that
respondent corporation submitted the assailed investment to the stockholders for
ratification at the annual meeting of May 10, 1977 cannot be construed as an admission
that respondent corporation had committed an ultra vires act, considering the common
practice of corporations of periodically submitting for the gratification of their
stockholders the acts of their directors, officers and managers.

Four (4) Justices, namely, Justices Teehankee, Concepcion, Jr., Fernandez and Guerrero
filed a separate opinion, wherein they voted against the validity of the questioned
amended bylaws and that this question should properly be resolved first by the SEC as the
agency of primary jurisdiction. They concur in the result that petitioner may be allowed to
run for and sit as director of respondent SMC in the scheduled May 6, 1979 election and
subsequent elections until disqualified after proper hearing by the respondent's Board of
Directors and petitioner's disqualification shall have been sustained by respondent SEC en
banc and ultimately by final judgment of this Court.
In resume, subject to the qualifications aforestated judgment is hereby rendered
GRANTING the petition by allowing petitioner to examine the books and records of San
Miguel International, Inc. as specified in the petition. The petition, insofar as it assails the
validity of the amended by- laws and the ratification of the foreign investment of
respondent corporation, for lack of necessary votes, is hereby DISMISSED. No costs.
Makasiar, Santos Abad Santos and De Castro, JJ., concur.
Aquino, and Melencio Herrera JJ., took no part.

WHEREFORE, judgment is hereby rendered as follows:

The Court voted unanimously to grant the petition insofar as it prays that petitioner be
allowed to examine the books and records of San Miguel International, Inc., as specified
by him.
On the matter of the validity of the amended by-laws of respondent San Miguel
Corporation, six (6) Justices, namely, Justices Barredo, Makasiar, Antonio, Santos, Abad
Santos and De Castro, voted to sustain the validity per se of the amended by-laws in
question and to dismiss the petition without prejudice to the question of the actual
disqualification of petitioner John Gokongwei, Jr. to run and if elected to sit as director of
respondent San Miguel Corporation being decided, after a new and proper hearing by the
Board of Directors of said corporation, whose decision shall be appealable to the
respondent Securities and Exchange Commission deliberating and acting en banc and
ultimately to this Court. Unless disqualified in the manner herein provided, the prohibition
in the afore-mentioned amended by-laws shall not apply to petitioner.
The afore-mentioned six (6) Justices, together with Justice Fernando, voted to declare the
issue on the validity of the foreign investment of respondent corporation as moot.
Chief Justice Fred Ruiz Castro reserved his vote on the validity of the amended by-laws,
pending hearing by this Court on the applicability of section 13(5) of the Corporation Law
to petitioner.
Justice Fernando reserved his vote on the validity of subject amendment to the by-laws
but otherwise concurs in the result.

G.R. No. 117897 May 14, 1997

ISLAMIC DIRECTORATE OF THE PHILIPPINES, MANUEL F. PEREA and SECURITIES
& EXCHANGE COMMISSION, petitioners,
vs.
COURT OF APPEALS and IGLESIA NI CRISTO, respondents.

HERMOSISIMA, JR., J.:

The subject of this petition for review is the Decision of the public respondent Court of
Appeals, 1 dated October 28, 1994, setting aside the portion of the Decision of the
Securities and Exchange Commission (SEC, for short) in SEC Case No. 4012 which
declared null and void the sale of two (2) parcels of land in Quezon City covered by the
Deed of Absolute Sale entered into by and between private respondent Iglesia Ni Cristo
(INC, for short) and the Islamic Directorate of the Philippines, Inc., Carpizo Group, (IDP, for
short).
The following facts appear of record.
Petitioner IDP-Tamano Group alleges that sometime in 1971, Islamic leaders of all Muslim
major tribal groups in the Philippines headed by Dean Cesar Adib Majul organized and
incorporated the ISLAMIC DIRECTORATE OF THE PHILIPPINES (IDP), the primary purpose of

which is to establish an Islamic Center in Quezon City for the construction of a "Mosque
(prayer place), Madrasah (Arabic School), and other religious infrastructures" so as to
facilitate the effective practice of Islamic faith in the area. 2
Towards this end, that is, in the same year, the Libyan government donated money to the
IDP to purchase land at Culiat, Tandang Sora, Quezon City, to be used as a Center for the
Islamic populace. The land, with an area of 49,652 square meters, was covered by two
titles: Transfer Certificate of Title Nos. RT-26520 (176616) 3 and RT-26521 (170567), 4 both
registered in the name of IDP.
It appears that in 1971, the Board of Trustees of the IDP was composed of the following
per Article 6 of its Articles of Incorporation:
Senator Mamintal Tamano 5
Congressman Ali Dimaporo
Congressman Salipada Pendatun
Dean Cesar Adib Majul
Sultan Harun Al-Rashid Lucman
Delegate Ahmad Alonto
Commissioner Datu Mama Sinsuat
Mayor Aminkadra Abubakar 6
According to the petitioner, in 1972, after the purchase of the land by the Libyan
government in the name of IDP, Martial Law was declared by the late President Ferdinand
Marcos. Most of the members of the 1971 Board of Trustees like Senators Mamintal
Tamano, Salipada Pendatun, Ahmad Alonto, and Congressman Al-Rashid Lucman flew to
the Middle East to escape political persecution.
Thereafter, two Muslim groups sprung, the Carpizo Group, headed by Engineer Farouk
Carpizo, and the Abbas Group, led by Mrs. Zorayda Tamano and Atty. Firdaussi Abbas.
Both groups claimed to be the legitimate IDP. Significantly, on October 3, 1986, the SEC,
in a suit between these two contending groups, came out with a Decision in SEC Case No.
2687 declaring the election of both the Carpizo Group and the Abbas Group as IDP board
members to be null and void. The dispositive portion of the SEC Decision reads:
WHEREFORE, judgment is hereby rendered declaring the elections of
both the petitioners 7 and respondents 8 as null and void for being
violative of the Articles of Incorporation of petitioner corporation. With
the nullification of the election of the respondents, the approved bylaws which they certified to this Commission as members of the Board
of Trustees must necessarily be likewise declared null and void.
However, before any election of the members of the Board of Trustees
could be conducted, there must be an approved by-laws to govern the
internal government of the association including the conduct of election.
And since the election of both petitioners and respondents have been
declared null and void, a vacuum is created as to who should adopt the
by-laws and certify its adoption. To remedy this unfortunate situation
that the association has found itself in, the members of the petitioning
corporation are hereby authorized to prepare and adopt their by-laws for
submission to the Commission. Once approved, an election of the
members of the Board of Trustees shall immediately be called pursuant
to the approved by-laws.

SO ORDERED.

Neither group, however, took the necessary steps prescribed by the SEC in its October 3,
1986 Decision, and, thus, no valid election of the members of the Board of Trustees of IDP
was ever called. Although the Carpizo Group 10 attempted to submit a set of by-laws, the
SEC found that, aside from Engineer Farouk Carpizo and Atty. Musib Buat, those who
prepared and adopted the by-laws were not bona fide members of the IDP, thus rendering
the adoption of the by-laws likewise null and void.
On April 20, 1989, without having been properly elected as new members of the Board of
Trustee of IDP, the Carpizo Group caused to be signed an alleged Board Resolution 11 of
the IDP, authorizing the sale of the subject two parcels of land to the private respondent
INC for a consideration of P22,343,400.00, which sale was evidenced by a Deed of
Absolute Sale 12 dated April 20, 1989.
On May 30, 1991, the petitioner 1971 IDP Board of Trustees headed by former Senator
Mamintal Tamano, or the Tamano Group, filed a petition before the SEC, docketed as SEC
Case No. 4012, seeking to declare null and void the Deed of Absolute Sale signed by the
Carpizo Group and the INC since the group of Engineer Carpizo was not the legitimate
Board of Trustees of the IDP.
Meanwhile, private respondent INC, pursuant to the Deed of Absolute Sale executed in its
favor, filed an action for Specific Performance with Damages against the vendor, Carpizo
Group, before Branch 81 of the Regional Trial Court of Quezon City, docketed as Civil Case
No. Q-90-6937, to compel said group to clear the property of squatters and deliver
complete and full physical possession thereof to INC. Likewise, INC filed a motion in the
same case to compel one Mrs. Leticia P. Ligon to produce and surrender to the Register of
Deeds of Quezon City the owner's duplicate copy of TCT Nos. RT-26521 and RT-26520
covering the aforementioned two parcels of land, so that the sale in INC's favor may be
registered and new titles issued in the name of INC. Mrs. Ligon was alleged to be the
mortgagee of the two parcels of land executed in her favor by certain Abdulrahman R.T.
Linzag and Rowaida Busran-Sampaco claimed to be in behalf of the Carpizo Group.
The IDP-Tamano Group, on June 11, 1991, sought to intervene in Civil Case No. Q-90-6937
averring, inter alia:
xxx xxx xxx
2. That the Intervenor has filed a case before the Securities and
Exchange Commission (SEC) against Mr. Farouk Carpizo, et. al., who,
through false schemes and machinations, succeeded in executing the
Deed of Sale between the IDP and the Iglesia Ni Kristo (plaintiff in the
instant case) and which Deed of Sale is the subject of the case at bar;
3. That the said case before the SEC is docketed as Case No. 04012, the
main issue of which is whether or not the aforesaid Deed of Sale
between IDP and the Iglesia ni Kristo is null and void, hence,
Intervenor's legal interest in the instant case. A copy of the said case is
hereto attached as Annex "A";

4. That, furthermore, Intervenor herein is the duly constituted body

which can lawfully and legally represent the Islamic Directorate of the
Philippines;
xxx xxx xxx

13

Private respondent INC opposed the motion arguing, inter alia, that the issue sought to be
litigated by way of intervention is an intra-corporate dispute which falls under the
jurisdiction of the SEC. 14
Judge Celia Lipana-Reyes of Branch 81, Regional Trial Court of Quezon City, denied
petitioner's motion to intervene on the ground of lack of juridical personality of the IDPTamano Group and that the issues being raised by way of intervention are intra-corporate
in nature, jurisdiction thereto properly pertaining to the SEC. 15
Apprised of the pendency of SEC Case No. 4012 involving the controverted status of the
IDP-Carpizo Group but without waiting for the outcome of said case, Judge Reyes, on
September 12, 1991, rendered Partial Judgment in Civil Case No. Q-90-6937 ordering the
IDP-Carpizo Group to comply with its obligation under the Deed of Sale of clearing the
subject lots of squatters and of delivering the actual possession thereof to INC. 16
Thereupon, Judge Reyes in another Order, dated March 2, 1992, pertaining also to Civil
Case No. Q-90-6937, treated INC as the rightful owner of the real properties and disposed
as follows:
WHEREFORE, Leticia P. Ligon is hereby ordered to produce and/or
surrender to plaintiff 17 the owner's copy of RT-26521 (170567) and RT26520 (176616) in open court for the registration of the Deed of
Absolute Sale in the latter's name and the annotation of the mortgage
executed in her favor by herein defendant Islamic Directorate of the
Philippines on the new transfer certificate of title to be issued to
plaintiff.
SO ORDERED.

18

On April 6, 1992, the above Order was amended by Judge Reyes directing Ligon "to deliver
the owner's duplicate copies of TCT Nos. RT-26521 (170567) and RT-26520 (176616) to
the Register of Deeds of Quezon City for the purposes stated in the Order of March 2,
1992." 19
Mortgagee Ligon went to the Court of Appeals, thru a petition for certiorari, docketed as
CA-G.R No. SP-27973, assailing the foregoing Orders of Judge Reyes. The appellate court
dismissed her petition on October 28, 1992. 20
Undaunted, Ligon filed a petition for review before the Supreme Court which was docketed
as G.R. No. 107751.
In the meantime, the SEC, on July 5, 1993, finally came out with a Decision in SEC Case
No. 4012 in this wise:

1. Declaring the by-laws submitted by the respondents

unauthorized, and hence, null and void.

21

as

2. Declaring the sale of the two (2) parcels of land in Quezon City
covered by the Deed of Absolute Sale entered into by Iglesia ni Kristo
and the Islamic Directorate of the Philippines, Inc. 22 null and void;
3. Declaring the election of the Board of Directors,
from 1986 to 1991 as null and void;

23

of the corporation

4. Declaring the acceptance of the respondents, except Farouk Carpizo

and Musnib Buat, as members of the IDP null and void.
No pronouncement as to cost.
SO ORDERED.

24

Private respondent INC filed a Motion for Intervention, dated September 7, 1993, in SEC
Case No. 4012, but the same was denied on account of the fact that the decision of the
case had become final and executory, no appeal having been taken therefrom. 25
INC elevated SEC Case No. 4012 to the public respondent Court of Appeals by way of a
special civil action forcertiorari, docketed as CA-G.R SP No. 33295. On October 28, 1994,
the court a quo promulgated a Decision in CA-G.R. SP No. 33295 granting INC's petition.
The portion of the SEC Decision in SEC Case No. 4012 which declared the sale of the two
(2) lots in question to INC as void was ordered set aside by the Court of Appeals.
Thus, the IDP-Tamano Group brought the instant petition for review, dated December 21,
1994, submitting that the Court of Appeals gravely erred in:
1) Not upholding the jurisdiction of the SEC to declare the nullity of the sale;
2) Encouraging multiplicity of suits; and
3) Not applying the principles of estoppel and laches.

26

While the above petition was pending, however, the Supreme Court rendered judgment in
G.R. No. 107751 on the petition filed by Mrs. Leticia P. Ligon. The Decision, dated June 1,
1995, denied the Ligon petition and affirmed the October 28, 1992 Decision of the Court
of Appeals in CA-G.R. No. SP-27973 which sustained the Order of Judge Reyes compelling
mortgagee Ligon to surrender the owner's duplicate copies of TCT Nos. RT-26521 (170567)
and RT-26520 (176616) to the Register of Deeds of Quezon City so that the Deed of
Absolute Sale in INC's favor may be properly registered.
Before we rule upon the main issue posited in this petition, we would like to point out that
our disposition in G.R. No. 107751 entitled, "Ligon v. Court of Appeals," promulgated on
June 1, 1995, in no wise constitutes res judicatasuch that the petition under consideration
would be barred if it were the ease. Quite the contrary, the requisites orres judicata do not
obtain in the case at bench.

Section 49, Rule 39 of the Revised Rules of Court lays down the dual aspects of res
judicata in actions in personam, to wit:
Effect of judgment. The effect of a judgment or final order rendered
by a court or judge of the Philippines, having jurisdiction to pronounce
the judgment or order, may be as follows:
xxx xxx xxx
(b) In other cases the judgment or order is, with respect to the matter
directly adjudged or as to any other matter that could have been raised
in relation thereto, conclusive between the parties and their successors
in interest by title subsequent to the commencement of the action or
special proceeding, litigating for the same thing and under the same
title and in the same capacity;
(c) In any other litigation between the same parties or their successors
in interest, that only is deemed to have been adjudged in a former
judgment which appears upon its face to have been so adjudged, or
which was actually and necessarily included therein or necessary
thereto.
Section 49(b) enunciates the first concept of res judicata known as "bar by prior
judgment," whereas, Section 49(c) is referred to as "conclusiveness of judgment."
There is "bar by former judgment" when, between the first case where the judgment was
rendered, and the second case where such judgment is invoked, there is identity of
parties, subject matter and cause of action. When the three identities are present, the
judgment on the merits rendered in the first constitutes an absolute bar to the
subsequent action. But where between the first case wherein judgment is rendered and
the second case wherein such judgment is invoked, there is only identity of parties but
there is no identity of cause of action, the judgment is conclusive in the second case, only
as to those matters actually and directly controverted and determined, and not as to
matters merely involved therein. This is what is termed "conclusiveness of judgment." 27
Neither of these concepts of res judicata find relevant application in the case at bench.
While there may be identity of subject matter (IDP property) in both cases, there is no
identity of parties. The principal parties in G.R. No. 107751 were mortgagee Leticia P.
Ligon, as petitioner, and the Iglesia Ni Cristo, as private respondent. The IDP, as
represented by the 1971 Board of Trustees or the Tamano Group, was only made an
ancillary party in G.R. No. 107751 as intervenor. 28 It was never originally a principal party
thereto. It must be noted that intervention is not an independent action, but is merely
collateral, accessory, or ancillary to the principal action. It is just an interlocutory
proceeding dependent on or subsidiary to the case between the original
parties. 29 Indeed, the IDP-Tamano Group cannot be considered a principal party in G.R.
No. 107751 for purposes of applying the principle of res judicata since the contrary goes
against the true import of the action of intervention as a mere subsidiary proceeding
without an independent life apart from the principal action as well as the intrinsic
character of the intervenor as a mere subordinate party in the main case whose right may
be said to be only in aid of the right of the original party. 30 It is only in the present case,
actually, where the IDP-Tamano Group became a principal party, as petitioner, with the

Iglesia Ni Cristo, as private respondent. Clearly, there is no identity of parties in both

cases.
In this connection, although it is true that Civil Case No. Q-90-6937, which gave rise to
G.R. No. 107751, was entitled, "Iglesia Ni Kristo, Plaintiff v. Islamic Directorate of the
Philippines, Defendant," 31 the IDP can not be considered essentially a formal party
thereto for the simple reason that it was not duly represented by a legitimate Board of
Trustees in that case. As a necessary consequence, Civil Case No. Q-90-6937, a case for
Specific Performance with Damages, a mere action in personam, did not become final and
executory insofar as the true IDP is concerned since petitioner corporation, for want of
legitimate representation, was effectively deprived of its day in court in said case. Res
inter alios judicatae nullum allis praejudicium faciunt. Matters adjudged in a cause do not
prejudice those who were not parties to it. 32 Elsewise put, no person (natural or juridical)
shall be affected by a proceeding to which he is a stranger. 33
Granting arguendo, that IDP may be considered a principal party in Ligon, res judicata as
a "bar by former judgment" will still not set in on the ground that the cause of action in
the two cases are different. The cause of action in G.R. No. 107751 is the surrender of the
owner's duplicate copy of the transfer certificates of title to the rightful possessor thereof,
whereas the cause of action in the present case is the validity of the Carpizo Group-INC
Deed of Absolute Sale.
Res Judicata in the form of "conclusiveness of judgment" cannot likewise apply for the
reason that any mention at all in Ligon as to the validity of the disputed Carpizo Board-INC
sale may only be deemed incidental to the resolution of the primary issue posed in said
case which is: Who between Ligon and INC has the better right of possession over the
owner's duplicate copy of the TCTs covering the IDP property? G.R. No. 107751 cannot be
considered determinative and conclusive on the matter of the validity of the sale for this
particular issue was not the principal thrust of Ligon. To rule otherwise would be to cause
grave and irreparable injustice to IDP which never gave its consent to the sale, thru a
legitimate Board of Trustees.
In any case, while it is true that the principle of res judicata is a fundamental component
of our judicial system, it should be disregarded if its rigid application would involve the
sacrifice of justice to technicality. 34
The main question though in this petition is: Did the Court of Appeals commit reversible
error in setting aside that portion of the SEC's Decision in SEC Case No. 4012 which
declared the sale of two (2) parcels of land in Quezon City between the IDP-Carpizo Group
and private respondent INC null and void?
We rule in the affirmative.
There can be no question as to the authority of the SEC to pass upon the issue as to who
among the different contending groups is the legitimate Board of Trustees of the IDP since
this is a matter properly falling within the original and exclusive jurisdiction of the SEC by
virtue of Sections 3 and 5(c) of Presidential Decree No. 902-A:
Sec. 3. The Commission shall have absolute jurisdiction, supervision and
control over all corporations, partnership or associations, who are the

grantees of primary franchises and/or a license or permit issued by the

government to operate in the Philippines . . . .
xxx xxx xxx
Sec. 5. In addition to the regulatory and adjudicative functions of the
Securities and Exchange Commission over corporations, partnerships
and other forms of associations registered with it as expressly granted
under existing laws and decrees, it shall have original and exclusive
jurisdiction to hear and decide cases involving:
xxx xxx xxx
c) Controversies in the selection or appointment of directors, trustees,
officers, or managers of such corporations, partnerships or associations.
....
If the SEC can declare who is the legitimate IDP Board, then by parity of
reasoning, it can also declare who is not the legitimate IDP Board. This is
precisely what the SEC did in SEC Case No. 4012 when it adjudged the election of
the Carpizo Group to the IDP Board of Trustees to be null and
void. 35 By this ruling, the SEC in effect made the unequivocal finding that the
IDP-Carpizo Group is a bogus Board of Trustees. Consequently, the Carpizo Group
is bereft of any authority whatsoever to bind IDP in any kind of transaction
including the sale or disposition of ID property.
It must be noted that SEC Case No. 4012 is not the first case wherein the SEC had the
opportunity to pass upon the status of the Carpizo Group. As far back as October 3, 1986,
the SEC, in Case No. 2687, 36 in a suit between the Carpizo Group and the Abbas Group,
already declared the election of the Carpizo Group (as well as the Abbas Group) to the IDP
Board as null and void for being violative of the Articles of Incorporation. 37 Nothing thus
becomes more settled than that the IDP-Carpizo Group with whom private respondent INC
contracted is a fake Board.
Premises considered, all acts carried out by the Carpizo Board, particularly the sale of the
Tandang Sora property, allegedly in the name of the IDP, have to be struck down for
having been done without the consent of the IDP thru a legitimate Board of Trustees.
Article 1318 of the New Civil Code lays down the essential requisites of contracts:
There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established.
All these elements must be present to constitute a valid contract. For, where
even one is absent, the contract is void. As succinctly put by Tolentino, consent is

essential for the existence of a contract, and where it is wanting, the contract is
non-existent. 38 In this case, the IDP, owner of the subject parcels of land, never
gave its consent, thru a legitimate Board of Trustees, to the disputed Deed of
Absolute Sale executed in favor of INC. This is, therefore, a case not only of
vitiated consent, but one where consent on the part of one of the supposed
contracting parties is totally wanting. Ineluctably, the subject sale is void and
produces no effect whatsoever.
The Carpizo Group-INC sale is further deemed null and void ab initio because of the
Carpizo Group's failure to comply with Section 40 of the Corporation Code pertaining to
the disposition of all or substantially all assets of the corporation:
Sec. 40. Sale or other disposition of assets. Subject to the provisions
of existing laws on illegal combinations and monopolies, a corporation
may, by a majority vote of its board of directors or trustees, sell, lease,
exchange, mortgage, pledge or otherwise dispose of all or substantially
all of its property and assets, including its goodwill, upon terms and
conditions and for such consideration, which may be money, stocks,
bonds or other instruments for the payment of money or other property
or consideration, as its board of directors or trustees may deem
expedient, when authorized by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock; or
in case of non-stock corporation, by the vote of at least two-thirds (2/3)
of the members, in a stockholders' or members' meeting duly called for
the purpose. Written notice of the proposed action and of the time and
place of the meeting shall be addressed to each stockholder or member
at his place of residence as shown on the books of the corporation and
deposited to the addressee in the post office with postage prepaid, or
served personally: Provided, That any dissenting stockholder may
exercise his appraisal right under the conditions provided in this Code.
A sale or other disposition shall be deemed to cover substantially all the
corporate property and assets if thereby the corporation would be
rendered incapable of continuing the business or accomplishing the
purpose for which it was incorporated.
xxx xxx xxx
The Tandang Sora property, it appears from the records, constitutes the only property of
the IDP. Hence, its sale to a third-party is a sale or disposition of all the corporate property
and assets of IDP falling squarely within the contemplation of the foregoing section. For
the sale to be valid, the majority vote of the legitimate Board of Trustees, concurred in by
the vote of at least 2/3 of the bona fide members of the corporation should have been
obtained. These twin requirements were not met as the Carpizo Group which voted to sell
the Tandang Sora property was a fake Board of Trustees, and those whose names and
signatures were affixed by the Carpizo Group together with the sham Board Resolution
authorizing the negotiation for the sale were, from all indications, not bona fide members
of the IDP as they were made to appear to be. Apparently, there are only fifteen (15)
official members of the petitioner corporation including the eight (8) members of the
Board of Trustees. 39

All told, the disputed Deed of Absolute Sale executed by the fake Carpizo Board and
private respondent INC was intrinsically void ab initio.
Private respondent INC nevertheless questions the authority of the SEC to nullify the sale
for being made outside of its jurisdiction, the same not being an intra-corporate dispute.
The resolution of the question as to whether or not the SEC had jurisdiction to declare the
subject sale null and void is rendered moot and academic by the inherent nullity of the
highly dubious sale due to lack of consent of the IDP, owner of the subject property. No
end of substantial justice will be served if we reverse the SEC's conclusion on the matter,
and remand the case to the regular courts for further litigation over an issue which is
already determinable based on what we have in the records.
It is unfortunate that private respondent INC opposed the motion for intervention filed by
the 1971 Board of Trustees in Civil Case. No. Q-90-6937, a case for Specific Performance
with Damages between INC and the Carpizo Group on the subject Deed of Absolute Sale.
The legitimate IDP Board could have been granted ample opportunity before the regional
trial court to shed light on the true status of the Carpizo Board and settled the matter as
to the validity of the sale then and there. But INC, wanting to acquire the property at all
costs and threatened by the participation of the legitimate IDP Board in the civil suit,
argued for the denial of the motion averring, inter alia, that the issue sought to be
litigated by the movant is intra-corporate in nature and outside the jurisdiction of the
regional trial court. 40 As a result, the motion for intervention was denied. When the
Decision in SEC Case No. 4012 came out nullifying the sale, INC came forward, this time,
quibbling over the issue that it is the regional trial court, and not the SEC, which has
jurisdiction to rule on the validity of the sale. INC is here trifling with the courts. We cannot
put a premium on this clever legal maneuverings of private respondent which, if
countenanced, would result in a failure of justice.
Furthermore, the Court observes that the INC bought the questioned property from the
Carpizo Group without even seeing the owner's duplicate copy of the titles covering the
property. This is very strange considering that the subject lot is a large piece of real
property in Quezon City worth millions, and that under the Torrens System of Registration,
the minimum requirement for one to be a good faith buyer for value is that the vendee at
least sees the owner's duplicate copy of the title and relies upon the same. 41 The private
respondent, presumably knowledgeable on the aforesaid workings of the Torrens System,
did not take heed of this and nevertheless went through with the sale with undue haste.
The unexplained eagerness of INC to buy this valuable piece of land in Quezon City
without even being presented with the owner's copy of the titles casts very serious doubt
on the rightfulness of its position as vendee in the transaction.
WHEREFORE, the petition is GRANTED. The Decision of the public respondent Court of
Appeals dated October 28, 1994 in CA-G.R. SP No. 33295 is SET ASIDE. The Decision of
the Securities and Exchange Commission dated July 5, 1993 in SEC Case No. 4012 is
REINSTATED. The Register of Deeds of Quezon City is hereby ordered to cancel the
registration of the Deed of Absolute Sale in the name of respondent Iglesia Ni Cristo, if
one has already been made. If new titles have been issued in the name of Iglesia Ni
Cristo, the Register of Deeds is hereby ordered to cancel the same, and issue new ones in
the name of petitioner Islamic Directorate of the Philippines. Petitioner corporation is
ordered to return to private respondent whatever amount has been initially paid by INC as
consideration for the property with legal interest, if the same was actually received by IDP.
Otherwise, INC may run after Engineer Farouk Carpizo and his group for the amount of
money paid.

SO ORDERED.

hands of the Orientalist Company. The defendant Ramon J. Fernandez, one of the directors
of the Orientalist Company and also its treasure, was chiefly active in this matter, being
moved by the suggestions and representations of Vicente Ocampo, manage of the
Oriental Theater, to the effect that the securing of the said films was necessary to the
success of the corporation.
Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father,
placed in the hands of Ramon J. Fernandez an offer, dated July 4, 1913, stating detail the
terms upon which the plaintiff would undertake to supply from Paris the aforesaid films.
This officer was declared to be good until the end of July; and as only about for the
Orientalist Company to act on the matter speedily, if it desired to take advantage of said
offer. Accordingly, Ramon J. Fernandez, on July 30, had an informal conference with all the
members of the company's board of directors except one, and with approval of those with
whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the
offer contained in the memorandum of July 4th for the exclusive agency of the Eclair films.
A few days later, on August 5, he addressed another letter couched in the same terms,
likewise accepting the office of the exclusive agency for the Milano Films.

G.R. No. 11897

September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,
vs.
THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.
Jose Moreno Lacalle for appellant Fernandez.
Sanz, Opisso & Luzuriaga for appellant "The Orientalist Co."
No appearance for appellee.
STREET, J.:
The Orientalist Company is a corporation, duly organized under the laws of the Philippine
Islands, and in 1913 and 1914, the time of the occurrences which gave rise to this lawsuit,
was engaged in the business of maintaining and conducting a theatre in the city of Manila
for the exhibition of cinematographic films. Under the articles of incorporation the
company is authorized to manufacture, buy, or otherwise obtain all accessories necessary
for conducting such a business. The plaintiff J. F. Ramirez was, at the same time, a
resident of the city of Paris, France, and was engaged in the business of marketing films
for a manufacturer or manufacturers, there engaged in the production or distribution of
cinematographic material. In this enterprise the plaintiff was represented in the city of
Manila by his son, Jose Ramirez.
In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila,
became apprised of the fact that the plaintiff in Paris had control of the agencies for two
different marks of films, namely, the "Eclair Films" and the "Milano Films;" and
negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as
agent of the plaintiff, for the purpose of placing the exclusive agency of these films in the

The memorandum offer contained a statement of the price at which the films would be
sold, the quantity which the representative of each was required to take and information
concerning the manner and intervals of time for the respective shipments. The expenses
of packing, transportation and other incidentals were to be at the cost of the purchaser.
There was added a clause in which J. F. Ramirez described his function in such
transactions as that of a commission agent and stated that he would see to the prompt
shipment of the films, would pay the manufacturer, and take care that the films were
insured his commission for such services being fixed at 5 per cent.
What we consider to be the most portion of the two letters of acceptance written by R. J.
Fernandez to Jose Ramirez is in the following terms:
We willingly accepted the officer under the terms communicated by your father
in his letter dated at Paris on July 4th of the present year.
These communications were signed in the following form, in which it will be noted the
separate signature of R. J. Fernandez, as an individual, is placed somewhat below and to
the left of the signature of the Orientalist Company as singed by R. J. Fernandez, in the
capacity of treasurer:

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,
Treasurer,

R. J. FERNANDEZ.
Both of these letters also contained a request that Jose Ramirez should at once telegraph
to his father in Paris that his offer had been accepted by the Orientalist Company and
instruct him to make a contract with the film companies, according to the tenor of the

offer, and in the capacity of attorney-in-fact for the Orientalist Company. The idea behind
the latter suggestion apparently was that the contract for the films would have to be
made directly between the film-producing companies and the Orientalist Company; and it
seemed convenient, in order to save time, that the Orientalist Company should clothed J.
F. Ramirez with full authority as its attorney-in-fact. This idea was never given effect; and
so far as the record shows, J. F. Ramirez himself procured the films upon his own
responsibility, as he indicated in the officer of July 4 that he would do, with the result that
the only contracting parties in this case are J. F. Ramirez of the one part, and the
Orientalist Company, with Ramon J. Fernandez of the other.
In due time the films began to arrive in Manila, a draft for the cost and expenses incident
to each shipment being attached to the proper bill of lading. It appears that the Orientalist
Company was without funds to meet these obligations and the first few drafts were dealt
with in the following manner: The drafts, upon presented through the bank, were accepted
in the name of the Orientalist Company by its president B. Hernandez, and were taken up
by the latter with his own funds. As the drafts had thus been paid by B. Hernandez, the
films which had been procured by he payment of said drafts were treated by him as his
own property; and they in fact never came into the actual possession of the Orientalist
Company as owner at all, though it is true Hernandez rented the films to the Orientalist
Company and they were exhibited by it in the Oriental Theater under an arrangement
which was made between him and the theater's manager.
During the period between February 27, 1914, and April 30, 1914, there arrived in the city
of Manila several remittances of films from Paris, and it is these shipments which have
given occasion for the present action. All of the drafts accompanying these films were
drawn, as on former occasions, upon the Orientalist Company; and all were accepted in
the name of B. Hernandez, except the last, which was accepted by B. Hernandez
individually. None of the drafts thus accepted were taken up by the drawee or by B.
Hernandez when they fell due; and it was finally necessary for the plaintiff himself to take
them up as dishonored by non-payment.
Thereupon this action was instituted by the plaintiff on May 19, 1914, against the
Orientalist Company, and Ramon J. Fernandez. As the films which accompanied the
dishonored were liable to deteriorate, the court, upon application of the plaintiff, and
apparently without opposition on the part of the defendants, appointed a receiver who
took charge of the films and sold them. The amount realized from this sale was applied to
the satisfaction of the plaintiff's claim and was accordingly delivered to him in part
payment thereof. At trial judgment was given for the balance due to the plaintiff, namely
P6,018.93, with interest from May 19, 1914, the date of the institution of the action. In the
judgment of the trial court the Orientalist Company was declared to be a principal debtor
and Ramon J. Fernandez was declared to be liable subsidiarily as guarantor. From this
judgment both of the parties defendant appealed.
In this Court neither of the parties appellant make any question with respect to the right
of the plaintiff to recover from somebody the amount awarded by the lower court; but
each of the defendants insists the other is liable for the whole. It results that the real
contention upon this appeal is between the two defendants.
It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not
challenged by the Orientalist Company that the judgment has already been executed as
against the company is exclusively and primarily liable the entire indebtedness, the
question as to the liability of Ramon J. Fernandez would be academic. But if the latter is
liable as principal obligor for the whole or any part of the debt, it will be necessary to

modify the judgment in order to adjust the rights of the defendants in accordance with
such finding.
It will be noted that the action is primarily founded upon the liability created by the letters
dated July 30th and August 5, 1913, in connection with the plaintiff's offer of July 4, 1913;
and both of the letters mentioned are copied into the complaint as the foundation of the
action. The action is not based upon the dishonored drafts which were accepted by B.
Hernandez in the name of the Orientalist Company; and although these drafts, as well as
the last draft, which was accepted by B. Hernandez individually, have been introduced in
evidence, this was evidently done for the purpose of proving the amount of damages
which the plaintiff was entitled to recover.
In the discussion which is to follow we shall consider, first, the question of the liability of
the corporation upon the contracts contained in the letters of July 30 and August 5, 1913,
and, secondly the question of the liability of Ramon J. Fernandez, based upon his personal
signature to the same documents.
As to the liability of the corporation a preliminary point of importance arises upon the
pleadings. The action, as already stated, is based upon documents purporting to be
signed by the Orientalist Company, and copies of the documents are set out in the
complaint. It was therefore incumbent upon the corporation, if it desired to question the
authority of Fernandez to bind it, to deny the due execution of said contracts under oath,
as prescribed in section 103 of the Code of Civil procedure. Said section, in the part
pertinent to the situation now under consideration, reads as follows:
When an action is brought upon a written instrument and the complaint contains
or has annexed or has annexed a copy of such instrument, the genuineness and
due execution of the instrument shall be deemed admitted, unless specifically
denied under oath in the answer.
No sworn answer denying the genuineness and due execution of the contracts in question
or questioning the authority of Ramon J. Fernandez to bind the Orientalist Company was
filed in this case; but evidence was admitted without objection from the plaintiff, tending
to show that Ramon J. Fernandez had no such authority. This evidence consisted of
extracts from the minutes of the proceedings of the company's board of directors and also
of extracts from the minutes of the proceedings of the company's stockholders, showing
that the making of this contract had been under consideration in both bodies and that the
authority to make the same had been withheld by the stockholders. It therefore becomes
necessary for us to consider whether the administration resulting from the failure of the
defendant company to deny the execution of the contracts under oath is binding upon it
for all purposes of this lawsuit, or whether such failure should be considered a mere
irregularity of procedure which was waived when the evidence referred to was admitted
without objection from the plaintiff. The proper solution of this problem makes it
necessary to consider carefully the principle underlying the provision above quoted.
That the situation was one in which an answer under oath denying the authority of the
agent should have been interposed, supposing that the company desired to contest this
point, is not open to question. In the case of Merchant vs. International Banking
Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the name of the
defendant bank as guarantor of a promissory note. The bank was sued upon this guaranty
and at the hearing attempted to prove that Brown had no authority to bind the bank by
such contract. It was held that buy failing to deny the contract under oath, the bank had

admitted the genuineness and due execution thereof, and that this admission extended
not only to the authenticity of the signature of Brown but also to his authority. Said Justice
Willard: "The failure of the defendant to deny the genuineness and due execution of this
guaranty under oath was an admission not only of the signature of Brown, but also his
authority to make the contract in behalf of the defendant and of the power the contract in
behalf of the defendant and of the power of the defendant to enter into such a contract.
The rule thus stated is in entire accord with the doctrine prevailing in the United States, as
will be seen by reference to the following, among other authorities:
The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining
corporation upon an appeal bond. The name of the company had been affixed to the
obligation by an agent, and no sufficient affidavit was filed by the corporation questioning
its signature or the authority of the agent to bind the company. It was held that the
plaintiff did not have to prove the due execution of the bond and that the corporation as
to be taken as admitting the authority of the agent to make the signature. Among other
things the court said: "But it is said that the authority of Barrett to execute the bond is
distinguishable from the signing and, although the signature must be denied under oath,
the authority of the agent need not be. Upon this we observe that the statute manifestly
refers to the legal effect of the signature, rather than the manual act of singing. If the
name of the obligor, in a bond, is subscribed by one in his presence, and by his direction,
the effect is the same as if his name should be signed with his own hand, and under such
circumstances we do not doubt that the obligor must deny his signature under oath, in
order to put the obligee to proof of the fact. Quit facit per aliam facit per se, and when the
name is signed by one thereunto authorized, it is as much as the signature of the principal
as if written with his own hand. Therefore, if the principal would deny the authority of the
agent, as the validity of the signature is thereby directly attacked, the denial must be
under oath.
In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory
note purporting to have been given by on A. B., as the treasurer of the defendant
company. Said the court: "Under the Judiciary Act of 1799, requiring the defendant to deny
on oath an instrument of writing, upon which he is sued, the plea in this case should have
been verified.
If the person who signed this note for the company, and upon which they are sued, was
not authorized to make it, let them say so upon oath, and the onus is then on the plaintiff
to overcome the plea."
It should be noted that the provision contained in section 103 of our Code of Civil
Procedure is embodied in some form or other in the statutes of probably all of the
American States, and it is not by any means peculiar to the laws of California, though it
appears to have been taken immediately from the statutes of that State. (Secs. 447, 448,
California Code of Civil Procedure.)
There is really a broader question here involved than that which relates merely to the
formality of verifying the answer with an affidavit. This question arises from the
circumstance that the answer of the corporation does not in any was challenge the
authority of Ramon J. Fernandez to bind it by the contracts in question and does not set
forth, as a special defense, any such lack of authority in him. Upon well-established
principles of pleading lack of authority in an officer of a corporation to bind it by a contract
executed by him in its name is a defense which should be specially pleaded and this

quite apart from the requirement, contained in section 103, that the answer setting up
such defense should be verified by oath. But is should not here escape observation that
section 103 also requires in denial contemplated in that section shall be specific. An
attack on the instrument in general terms is insufficient, even though the answer is under
oath. (Songco vs. Sellner, 37 Phil. Rep., 254.)
In the first edition of a well-known treatise on the laws of corporations we find the
following proposition:
If an action is brought against a corporation upon a contract alleged to be its
contract, if it desires to set up the defense that the contract was executed by one
not authorized as its agent, it must plead non est factum. (Thompson on
Corporations, 1st ed., vol. 6, sec. 7631.)
Again, says the same author:
A corporation can not avail itself of the defense that it had no power to enter into
the obligation to enforce which the suit is brought, unless it pleads that defense.
This principle applies equally where the defendant intends to challenge the
power of its officer or agent to execute in its behalf the contract upon which the
action brought and where it intends to defend on the ground of total want of
power in the corporation to make such a contract. (Opus citat. sec. 7619.)
In Simon vs. Calfee (80 Ark., 65), it was said:
Though the power of the officers of a business corporation to issue negotiable
paper in its name is not presumed, such corporation can not avail itself of a want
of power in its officers to bind it unless the defense was made on such ground.
The rule has been applied where the question was whether corporate officer, having
admitted power to make a contract, had in the particular instance exceeded that
authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it has been held that where
the answer in a suit against a corporation on its note relies simply on the want of power of
the corporation to issue notes, the defendant can not afterwards object that the plaintiff
has not shown that the officer executing the note were empowered to do so.
(Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)
The reason for the rule enunciated in the foregoing authorities will, we think, be readily
appreciated. In dealing with corporations the public at large is bound to rely to a large
extent upon outward appearances. If a man is found acting for a corporation with the
external indicia of authority, any person, not having notice of want of authority, may
usually rely upon those appearances; and if it be found that the directors had permitted
the agent to exercise that authority and thereby held him out as a person competent to
bind the corporation, or had acquiesced in a contract and retained the benefit supposed
to have been conferred by it, the corporation will be bound, notwithstanding the actual
authority may never have been granted. The public is not supposed nor required to know
the transactions which happen around the table where the corporate board of directors or
the stockholders are from time to time convoked. Whether a particular officer actually
possesses the authority which he assumes to exercise is frequently known to very few,
and the proof of it usually is not readily accessible to the stranger who deals with the
corporation on the faith of the ostensible authority exercised by some of the corporate

officers. It is therefore reasonable, in a case where an officer of a corporation has made a

contract in its name, that the corporation should be required, if it denies his authority, to
state such defense in its answer. By this means the plaintiff is apprised of the fact that the
agent's authority is contested; and he is given an opportunity to adduce evidence
showing either that the authority existed or that the contract was ratified and approved.
We are of the opinion that the failure of the defendant corporation to make any issue in its
answer with regard to the authority of Ramon J. Fernandez to bind it, and particularly its
failure to deny specifically under oath the genuineness and due execution of the contracts
sued upon, have the effect of elimination the question of his authority from the case,
considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a
written instrument, the foundation of the suit, is not denied upon oath, it shall be deemed
to be admitted. It is familiar doctrine that an admission made in a pleading can not be
controverted by the party making such admission; and all proof submitted by him
contrary thereto or inconsistent therewith should simply be ignored by the court, whether
objection is interposed by the opposite party or not. We can see no reason why a
constructive admission, created by the express words of the statute, should be considered
to have less effect than any other admission.
The parties to an action are required to submit their respective contentions to the court in
their complaint and answer. These documents supply the materials which the court must
use in order to discover the points of contention between the parties; and where the
statute says that the due execution of a document which supplies the foundation of an
action is to be taken as admitted unless denied under oath, the failure of the defendant to
make such denial must be taken to operate as a conclusive admission, so long as the
pleadings remain that form.
It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial
variances between the allegations of a pleading and the proof shall be disregarded and
the facts shall be found according to the evidence. The same section, however, recognizes
the necessity for an amendment of the pleadings. And judgment must be in conformity
with the case made in conformity with the case made in the pleadings and established by
the proof, and relief can not be granted that is substantially inconsistent with either. A
party can no more succeed upon a case proved but not alleged than upon a case alleged
but nor proved. This rule of course operates with like effect upon both parties, and applies
equality to the defendants special defense as to the plaintiffs cause of action.
Of course this Court, under section 109 of the Code of Civil Procedure, has authority even
now to permit the answer of the defendant to be amended; and if we believed that the
interests of justice so required, we would either exercise that authority or remand the
cause for a new trial in court below. As will appear further on in this opinion, however, we
think that the interests of justice will best be promoted by deciding the case, without more
ado, upon the issues presented in the record as it now stands.
That we may not appear to have overlooked the matter, we will observe that two cases
are cited from California in which the Supreme Court of the State has held that where a
release is pleaded by way of defense and evidence tending to destroy its effect is
introduced without objection, the circumstance that it was not denied under oath is
immaterial. In the earlier of these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action
was brought against a railroad company to recover damages for the death of the plaintiff's
minor son, alleged to have been killed by the negligence of the defendant. The defendant
company pleaded by way of defense a release purporting to be signed by the plaintiff, and
in its answer inserted a copy of the release. The execution of the release was not denied

under oath; but at the trial evidence was submitted on behalf of the plaintiff tending to
show that at the time he signed the release, he was incompetent by reason of
drunkenness to bind himself thereby. It was held that inasmuch as this evidence had been
submitted by the plaintiff without objection, it was proper for the court to consider it. We
do not question the propriety of that decision, especially as the issue had been passed
upon by a jury; but we believe that the decision would have been more soundly planted if
it had been said that the incapacity of the plaintiff, due to his drunken condition, was a
matter which did not involve either the genuineness or due execution of the release. Like
the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be
proved under the general issue and did not have to be set up in a sworn reply. (Cf.
Moore vs. Copp, 119 Cal., 429, 432, 433.) A somewhat similar explanation can, we think,
be given of the case of Clark vs. Child in which the rule declared in the earlier case was
followed. With respect to both decisions which we merely observe that upon point of
procedure which they are supposed to maintain, the reasoning of the court is in our
opinion unconvincing.
We shall now consider the liability of the defendant company on the merits just as if that
liability had been properly put in issue by a specific answer under oath denying the
authority of Fernandez go to bind it. Upon this question it must at the outset be premised
that Ramon J. Fernandez, as treasurer, had no independent authority to bind the company
by signing its name to the letters in question. It is declared by signing its name to the
letters in question. It is declared in section 28 of the Corporation Law that corporate
power shall be exercised, and all corporate business conducted by the board of directors;
and this principle is recognized in the by-laws of the corporation in question which contain
a provision declaring that the power to make contracts shall be vested in the board of
directors. It is true that it is also declared in the same by-laws that the president shall
have the power, and it shall be his duty, to sign contract; but this has reference rather to
the formality of reducing to proper form the contract which are authorized by the board
and is not intended to confer an independent power to make contract binding on the
corporation.
The fact that the power to make corporate contract is thus vested in the board of directors
does not signify that a formal vote of the board must always be taken before contractual
liability can be fixed upon a corporation; for the board can create liability, like an
individual, by other means than by a formal expression of its will. In this connection the
case of Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there
appeared that the secretary of the defendant corporation had signed an obligation on its
behalf binding it as guarantor of the performance of an important contract upon which the
name of another corporation appeared as principal. The defendant company set up by
way of defense that is secretary had no authority to bind it by such an engagement. The
court found that the guaranty was given with the knowledge and consent of the president
and directors, and that this consent of the president and directors, and that this consent
was given with as much observance of formality as was customary in the transaction of
the business of the company. It was held that, so far as the authority of the secretary was
concerned, the contract was binding. In discussing this point, the court quoted with
approval the following language form one of its prior decisions:
The authority of the subordinate agent of a corporation often depends upon the
course of dealings which the company or its director have sanctioned. It may be
established sometimes without reference to official record of the proceedings of
the board, by proof of the usage which the company had permitted to grow up in
business, and of the acquiescence of the board charged with the duty of
supervising and controlling the company's business.

It appears in evidence, in the case now before us, that on July 30, the date upon which the
letter accepting the offer of the Eclair films was dispatched the board of directors of the
Orientalist Company convened in special session in the office of Ramon J. Fernandez at
the request of the latter. There were present the four members, including the president,
who had already signified their consent to the making of the contract. At this meeting, as
appears from the minutes, Fernandez informed the board of the offer which had been
received from the plaintiff with reference to the importation of films. The minutes add that
terms of this offer were approved; but at the suggestion of Fernandez it was decided to
call a special meeting of the stockholders to consider the matter and definite action was
postponed.
The stockholders meeting was convoked upon September 18, 1913, upon which occasion
Fernandez informed those present of the offer in question and of the terms upon which
the films could be procured. He estimated that the company would have to make an
outlay of about P5,500 per month, if the offer for the two films should be accepted by it.
The following extracts from the minutes of this meeting are here pertinent:
Mr. Fernandez informed the stockholders that, in view of the urgency of the
matter and for the purpose of avoiding that other importers should get ahead of
the corporation in this regard, he and Messrs. B. Hernandez, Leon Monroy, and
Dr. Papa met for the purpose of considering the acceptance of the offer together
with the responsibilities attached thereto, made to the corporation by the film
manufacturers ofEclair and Milano of Paris and Italy respectively, inasmuch as
the first shipment of films was then expected to arrive.
At the same time he informed the said stockholders that he had already made
arrangements with respect to renting said films after they have been once
exhibited in the Cine Oriental, and that the corporation could very well meet the
expenditure involved and net a certain profit, but that, if we could enter into a
contract with about nine cinematographs, big gains would be obtained through
such a step.
The possibility that the corporation might not see fit to authorize the contract, or might for
lack of funds be unable to make the necessary outlay, was foreseen; and in such
contingency the stockholders were informed, that the four gentlemen above mentioned
(Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their
own account and risk, and shall be entitled only to a compensation of 10 per cent of their
outlay in importing the films, said payment to be made in shares of said corporation,
inasmuch as the corporation is lacking available funds for the purpose, and also because
there are 88 shares of stock remaining still unsold."
In view of this statement, the stockholders adopted a resolution to the effect that the
agencies of the Eclair and Milano films should be accepted, if the corporation could obtain
the money with which to meet the expenditure involved, and to this end appointed a
committee to apply to the bank for a credit. The evidence shows that an attempt was
made, on behalf of the corporation, to obtain a credit of P10,000 from the Bank of the
Philippine Islands for the purpose indicated, but the bank declined to grant his credit.
Thereafter another special meeting of the shareholders of the defendant corporation was
called at which the failure of their committee to obtain a credit from the bank was made
known. A resolution was thereupon passed to the effect that the company should pay to
Hernandez, Fernandez, Monroy, and Papa an amount equal to 10 per cent of their outlay

in importing the films, said payment to be made in shares of the company in accordance
with the suggestion made at the previous meeting. At the time this meeting was held
three shipment of the films had already been received in Manila.
We believe it is a fair inference from the recitals of the minutes of the stockholders
meeting of September 18, and especially from the first paragraph above quoted, that this
body was then cognizant that the officer had already been accepted in the name of the
Orientalist Company and that the films which were then expected to arrive were being
imported by virtue of such acceptance. Certainly four members of the board of directors
there present were aware of this fact, as the letter accepting the offer had been sent with
their knowledge and consent. In view of this circumstance, a certain doubt arises whether
they meant to utilize the financial assistance of the four so-called importers in order that
the corporation might bet the benefit of the contract for the films, just as it would have
utilized the credit of the bank if such credit had been extended. If such was the intention
of the stockholders their action amounted to a virtual, though indirect, approval of the
contract. It is not however, necessary to found the judgment on this interpretation of the
stockholders proceedings, inasmuch as we think for reasons presently to be stated, that
the corporation is bound, and we will here assume that in the end the contract were not
approved by the stockholders.
It will be observed that Ramon J. Fernandez was the particular officer and member of the
board of directors who was most active in the effort to secure the films for the
corporation. The negotiations were conducted by him with the knowledge and consent of
other members of the board; and the contract was made with their prior approval. As
appears from the papers in this record, Fernandez was the person to who keeping was
confided the printed stationery bearing the official style of the corporation, as well as
rubber stencil with which the name of the corporation could be signed to documents
bearing its name.
Ignoring now, for a moment, the transactions of the stockholders, and reverting to the
proceedings of the board of directors of the Orientalist Company, we find that upon
October 27, 1913, after Fernandez had departed from the Philippine Islands, to be absent
for many months, said board adopted a resolution conferring the following among other
powers on Vicente Ocampo, the manager of the Oriental theater, namely:
(1) To rent a box for the films in the "Kneeler Building."
(4) To be in charge of the films and of the renting of the same.
(5) To advertise in the different newspapers that we are importing films to be
exhibited in the Cine Oriental.
(6) Not to deliver any film for rent without first receiving the rental therefor or the
guaranty for the payment thereof.
(7) To buy a book and cards for indexing the names of the films.
(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the
Hon. R. Acua to enter into agreements with cinematograph proprietors in the
provinces for the purpose of renting films from us.

It thus appears that the board of directors, before the financial inability of the corporation
to proceed with the project was revealed, had already recognized the contract as being in
existence and had proceeded to take the steps necessary to utilize the films. Particularly
suggestive is the direction given at this meeting for the publication of announcements in
the newspapers to the effect that the company was engaged in importing films. In the
light of all the circumstances of the case, we are of the opinion that the contracts in
question were thus inferentially approved by the company's board of directors and that
the company is bound unless the subsequent failure of the stockholders to approve said
contracts had the effect of abrogating the liability thus created.
Both upon principle and authority it is clear that the action of the stockholders, whatever
its character, must be ignored. The functions of the stockholders of a corporation are, it
must be remembered, of a limited nature. The theory of a corporation is that the
stockholders may have all the profits but shall turn over the complete management of the
enterprise to their representatives and agents, called directors. Accordingly, there is little
for the stockholders to do beyond electing directors, making by-laws, and exercising
certain other special powers defined by-law. In conformity with this idea it is settled that
contract between a corporation and third person must be made by the director and not by
the stockholders. The corporation, in such matters, is represented by the former and not
by the latter. (Cook on Corporations, sixth ed., secs. 708, 709.) This conclusion is entirely
accordant with the provisions of section 28 of our Corporation Law already referred to. It
results that where a meeting of the stockholders is called for the purpose of passing on
the propriety of making a corporate contract, its resolutions are at most advisory and not
in any wise binding on the board.
In passing upon the liability of a corporation in cases of this kind it is always well to keep
in mind the situation as it presents itself to the third party with whom the contract is
made. Naturally he can have little or no information as to what occurs in corporate
meetings; and he must necessarily rely upon the external manifestations of corporate
consent. The integrity of commercial transactions can only be maintained by holding the
corporation strictly to the liability fixed upon it by its agents in accordance with law, and
we would be sorry to announce a doctrine which would permit the property of a man in
the city of Paris to be whisked out of his hands and carried into a remote quarter of the
earth without recourse against the corporations whose name and authority had been used
in the manner disclosed in this case. As already observed, it is familiar doctrine that if a
corporation knowingly permits one of its officer, or any other agent, to do acts within the
scope of an apparent authority, and thus hold him out to the public as possessing power
to do those acts, the corporation will as against any one who has in good faith dealt with
the corporation through such agent, be estopped from denying his authority; and where it
is said "if the corporation permits" this means the same as "if the thing is permitted by
the directing power of the corporation."
It being determined that the corporation is bound by the contract in question, it remains
to consider the character of the liability assumed by R. J. Fernandez, in affixing his
personal signature to said contract. The question here is whether Fernandez is liable
jointly with the Orientalists Company as a principal obligor, or whether his liability is that
of a guarantor merely.
As appears upon the face of the contracts, the signature of Fernandez, in his individual
capacity, is not in line with the signature of the Orientalist Company, but is set off to the
left of the company's signature and somewhat who sign contracts in some capacity other
than that of principal obligor to place their signature alone would justify a court in holding
that Fernandez here took upon himself the responsibility of a guarantor rather than that of

a principal obligor. We do, however, think, that the form in which the contract is signed
raises a doubt as to what the real intention was; and we feel justified, in looking to the
evidence to discover that intention. In this connection it is entirely clear, from the
testimony of both Ramirez and Ramon J. Fernandez, that the responsibility of the latter
was intended to be that of guarantor. There is, to be sure, a certain difference between
these witnesses as to the nature of this guaranty, inasmuch as Fernandez would have us
believe that his name was signed as a guaranty that the contract would be approved by
the corporation, while Ramirez says that the name was put on the contract for the
purpose of guaranteeing, not the approval of the contract, but its performance. We are
convinced that the latter was the real intention of the contracting parties.
We are not unmindful of the force of that rule of law which declares that oral evidence is
admissible to show the character in which the signature was affixed. This conclusion is
perhaps supported by the language of the second paragraph of article 1281 of the Civil
Code, which declares that if the words of a contract should appear contrary to the evident
intention of the parties, the intention shall prevail. But the conclusion reached is, we think,
deducible from the general principle that in case of ambiguity parol evidence is admissible
to show the intention of the contracting parties.
It should be stated in conclusion that as the issues in this case have been framed, the
only question presented to this court is: To what extent are the signatory parties to the
contract liable to the plaintiff J. F. Ramirez? No contentious issue is raised directly between
the defendants, the Orientalist Company and Ramon H. Fernandez; nor does the present
the present action involve any question as to the undertaking of Fernandez and his three
associates to effect the importation of the films upon their own account and risk. Whether
they may be bound to hold the company harmless is a matter upon which we express no
opinion.

G.R. No. L-18805

August 14, 1967

THE BOARD OF LIQUIDATORS1 representing THE GOVERNMENT OF THE REPUBLIC

OF THE PHILIPPINES, plaintiff-appellant,
vs.
HEIRS OF MAXIMO M. KALAW,2 JUAN BOCAR, ESTATE OF THE DECEASED
CASIMIRO GARCIA,3 and LEONOR MOLL, defendants-appellees.
Simeon M. Gopengco and Solicitor General for plaintiff-appellant.
L. H. Hernandez, Emma Quisumbing, Fernando and Quisumbing, Jr.; Ponce Enrile, Siguion
Reyna, Montecillo and Belo for defendants-appellees.
SANCHEZ, J.:
The National Coconut Corporation (NACOCO, for short) was chartered as a non-profit
governmental organization on May 7, 1940 by Commonwealth Act 518 avowedly for the
protection, preservation and development of the coconut industry in the Philippines. On

August 1, 1946, NACOCO's charter was amended [Republic Act 5] to grant that
corporation the express power "to buy, sell, barter, export, and in any other manner deal
in, coconut, copra, and dessicated coconut, as well as their by-products, and to act as
agent, broker or commission merchant of the producers, dealers or merchants" thereof.
The charter amendment was enacted to stabilize copra prices, to serve coconut producers
by securing advantageous prices for them, to cut down to a minimum, if not altogether
eliminate, the margin of middlemen, mostly aliens.4

An unhappy chain of events conspired to deter NACOCO from fulfilling these contracts.
Nature supervened. Four devastating typhoons visited the Philippines: the first in October,
the second and third in November, and the fourth in December, 1947. Coconut trees
throughout the country suffered extensive damage. Copra production decreased. Prices
spiralled. Warehouses were destroyed. Cash requirements doubled. Deprivation of export
facilities increased the time necessary to accumulate shiploads of copra. Quick turnovers
became impossible, financing a problem.

General manager and board chairman was Maximo M. Kalaw; defendants Juan Bocar and
Casimiro Garcia were members of the Board; defendant Leonor Moll became director only
on December 22, 1947.

When it became clear that the contracts would be unprofitable, Kalaw submitted them to
the board for approval. It was not until December 22, 1947 when the membership was
completed. Defendant Moll took her oath on that date. A meeting was then held. Kalaw
made a full disclosure of the situation, apprised the board of the impending heavy losses.
No action was taken on the contracts. Neither did the board vote thereon at the meeting
of January 7, 1948 following. Then, on January 11, 1948, President Roxas made a
statement that the NACOCO head did his best to avert the losses, emphasized that
government concerns faced the same risks that confronted private companies, that
NACOCO was recouping its losses, and that Kalaw was to remain in his post. Not long
thereafter, that is, on January 30, 1948, the board met again with Kalaw, Bocar, Garcia
and Moll in attendance. They unanimously approved the contracts hereinbefore
enumerated.

NACOCO, after the passage of Republic Act 5, embarked on copra trading activities.
Amongst the scores of contracts executed by general manager Kalaw are the disputed
contracts, for the delivery of copra, viz:
(a) July 30, 1947: Alexander Adamson & Co., for 2,000 long tons, $167.00: per
ton, f. o. b., delivery: August and September, 1947. This contract was later
assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(b) August 14, 1947: Alexander Adamson & Co., for 2,000 long tons $145.00 per
long ton, f.o.b., Philippine ports, to be shipped: September-October, 1947. This
contract was also assigned to Louis Dreyfus & Co. (Overseas) Ltd.
(c) August 22, 1947: Pacific Vegetable Co., for 3,000 tons, $137.50 per ton,
delivery: September, 1947.
(d) September 5, 1947: Spencer Kellog & Sons, for 1,000 long tons, $160.00 per
ton, c.i.f., Los Angeles, California, delivery: November, 1947.

As was to be expected, NACOCO but partially performed the contracts, as follows:

Buyers
Pacific Vegetable Oil

(f) September 12, 1947: Louis Dreyfus & Co. (Overseas) Ltd., for 3,000 long tons,
$154.00 per ton, f.o.b., 3 Philippine ports, delivery: November, 1947.

Undelivered

2,386.45

4,613.5

Spencer Kellog

None

1,00

Franklin Baker

1,000

50

800

2,20

Louis Dreyfus (Adamson contract of July 30, 1947)

1,150

85

Louis Dreyfus (Adamson Contract of August 14, 1947)

1,755

24

7,091.45

9,408.5

Louis Dreyfus
(e) September 9, 1947: Franklin Baker Division of General Foods Corporation, for
1,500 long tons, $164,00 per ton, c.i.f., New York, to be shipped in November,
1947.

Tons Delivered

TOTALS

(g) September 13, 1947: Juan Cojuangco, for 2,000 tons, $175.00 per ton,
delivery: November and December, 1947. This contract was assigned to Pacific
Vegetable Co.

The buyers threatened damage suits. Some of the claims were settled, viz: Pacific
Vegetable Oil Co., in copra delivered by NACOCO, P539,000.00; Franklin Baker
Corporation, P78,210.00; Spencer Kellog & Sons, P159,040.00.

(h) October 27, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f.,
Pacific ports, delivery: December, 1947 and January, 1948. This contract was
assigned to Pacific Vegetable Co.

But one buyer, Louis Dreyfus & Go. (Overseas) Ltd., did in fact sue before the Court of
First Instance of Manila, upon claims as follows: For the undelivered copra under the July
30 contract (Civil Case 4459); P287,028.00; for the balance on the August 14 contract
(Civil Case 4398), P75,098.63; for that per the September 12 contract reduced to
judgment (Civil Case 4322, appealed to this Court in L-2829), P447,908.40. These cases
culminated in an out-of-court amicable settlement when the Kalaw management was
already out. The corporation thereunder paid Dreyfus P567,024.52 representing 70% of
the total claims. With particular reference to the Dreyfus claims, NACOCO put up the
defenses that: (1) the contracts were void because Louis Dreyfus & Co. (Overseas) Ltd. did

(i) October 28, 1947: Fairwood & Co., for 1,000 tons, $210.00 per short ton, c.i.f.,
Pacific ports, delivery: January, 1948. This contract was assigned to Pacific
Vegetable Co.

not have license to do business here; and (2) failure to deliver was due to force majeure,
the typhoons. To project the utter unreasonableness of this compromise, we reproduce in
haec verba this finding below:
x x x However, in similar cases brought by the same claimant [Louis Dreyfus &
Co. (Overseas) Ltd.] against Santiago Syjuco for non-delivery of copra also
involving a claim of P345,654.68 wherein defendant set upsame defenses as
above, plaintiff accepted a promise of P5,000.00 only (Exhs. 31 & 32 Heirs.)
Following the same proportion, the claim of Dreyfus against NACOCO should
have been compromised for only P10,000.00, if at all. Now, why should
defendants be held liable for the large sum paid as compromise by the Board of
Liquidators? This is just a sample to show how unjust it would be to hold
defendants liable for the readiness with which the Board of Liquidators disposed
of the NACOCO funds, although there was much possibility of successfully
resisting the claims, or at least settlement for nominal sums like what happened
in the Syjuco case.5
All the settlements sum up to P1,343,274.52.
In this suit started in February, 1949, NACOCO seeks to recover the above sum of
P1,343,274.52 from general manager and board chairman Maximo M. Kalaw, and directors
Juan Bocar, Casimiro Garcia and Leonor Moll. It charges Kalaw with negligence under
Article 1902 of the old Civil Code (now Article 2176, new Civil Code); and defendant board
members, including Kalaw, with bad faith and/or breach of trust for having approved the
contracts. The fifth amended complaint, on which this case was tried, was filed on July 2,
1959. Defendants resisted the action upon defenses hereinafter in this opinion to be
discussed.
The lower court came out with a judgment dismissing the complaint without costs as well
as defendants' counterclaims, except that plaintiff was ordered to pay the heirs of Maximo
Kalaw the sum of P2,601.94 for unpaid salaries and cash deposit due the deceased Kalaw
from NACOCO.
Plaintiff appealed direct to this Court.
Plaintiff's brief did not, question the judgment on Kalaw's counterclaim for the sum of
P2,601.94.
Right at the outset, two preliminary questions raised before, but adversely decided by, the
court below, arrest our attention. On appeal, defendants renew their bid. And this, upon
established jurisprudence that an appellate court may base its decision of affirmance of
the judgment below on a point or points ignored by the trial court or in which said court
was in error.6
1. First of the threshold questions is that advanced by defendants that plaintiff Board of
Liquidators has lost its legal personality to continue with this suit.
Accepted in this jurisdiction are three methods by which a corporation may wind up its
affairs: (1) under Section 3, Rule 104, of the Rules of Court [which superseded Section 66
of the Corporation Law]7 whereby, upon voluntary dissolution of a corporation, the court
may direct "such disposition of its assets as justice requires, and may appoint a receiver

to collect such assets and pay the debts of the corporation;" (2) under Section 77 of the
Corporation Law, whereby a corporation whose corporate existence is terminated, "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;" and (3) under Section 78 of the Corporation
Law, by virtue of which the corporation, within the three year period just mentioned, "is
authorized and empowered to convey all of its property to trustees for the benefit of
members, stockholders, creditors, and others interested." 8
It is defendants' pose that their case comes within the coverage of the second method.
They reason out that suit was commenced in February, 1949; that by Executive Order
372, dated November 24, 1950, NACOCO, together with other government-owned
corporations, was abolished, and the Board of Liquidators was entrusted with the function
of settling and closing its affairs; and that, since the three year period has elapsed, the
Board of Liquidators may not now continue with, and prosecute, the present case to its
conclusion, because Executive Order 372 provides in Section 1 thereof that
Sec.1. The National Abaca and Other Fibers Corporation, the National Coconut
Corporation, the National Tobacco Corporation, the National Food Producer
Corporation and the former enemy-owned or controlled corporations or
associations, . . . are hereby abolished. The said corporations shall be liquidated
in accordance with law, the provisions of this Order, and/or in such manner as
the President of the Philippines may direct; Provided, however, That each of the
said corporations shall nevertheless be continued as a body corporate for a
period of three (3) years from the effective date of this Executive Order for the
purpose of prosecuting and defending suits by or against it and of enabling the
Board of Liquidators gradually to settle and close its affairs, to dispose of and,
convey its property in the manner hereinafter provided.
Citing Mr. Justice Fisher, defendants proceed to argue that even where it may be found
impossible within the 3 year period to reduce disputed claims to judgment, nonetheless,
"suits by or against a corporation abate when it ceases to be an entity capable of suing or
being sued" (Fisher, The Philippine Law of Stock Corporations, pp. 390-391). Corpus Juris
Secundum likewise is authority for the statement that "[t]he dissolution of a corporation
ends its existence so that there must be statutory authority for prolongation of its
life even for purposes of pending litigation"9 and that suit "cannot be continued or
revived; nor can a valid judgment be rendered therein, and a judgment, if rendered, is not
only erroneous, but void and subject to collateral attack." 10 So it is, that abatement of
pending actions follows as a matter of course upon the expiration of the legal period for
liquidation, 11 unless the statute merely requires a commencement of suit within the
added time. 12 For, the court cannot extend the time alloted by statute. 13
We, however, express the view that the executive order abolishing NACOCO and creating
the Board of Liquidators should be examined in context. The proviso in Section 1 of
Executive Order 372, whereby the corporate existence of NACOCO was continued for a
period of three years from the effectivity of the order for "the purpose of prosecuting and
defending suits by or against it and of enabling the Board of Liquidators gradually to settle
and close its affairs, to dispose of and convey its property in the manner hereinafter
provided", is to be read not as an isolated provision but in conjunction with the whole. So
reading, it will be readily observed that no time limit has been tacked to the existence of

the Board of Liquidators and its function of closing the affairs of the various government
owned corporations, including NACOCO.
By Section 2 of the executive order, while the boards of directors of the various
corporations were abolished, their powers and functions and duties under existing laws
were to be assumed and exercised by the Board of Liquidators. The President thought it
best to do away with the boards of directors of the defunct corporations; at the same
time, however, the President had chosen to see to it that the Board of Liquidators step
into the vacuum. And nowhere in the executive order was there any mention of the
lifespan of the Board of Liquidators. A glance at the other provisions of the executive
order buttresses our conclusion. Thus, liquidation by the Board of Liquidators may, under
section 1, proceed in accordance with law, the provisions of the executive order, "and/or
in such manner as the President of the Philippines may direct." By Section 4, when any
property, fund, or project is transferred to any governmental instrumentality "for
administration or continuance of any project," the necessary funds therefor shall be taken
from the corresponding special fund created in Section 5. Section 5, in turn, talks of
special funds established from the "net proceeds of the liquidation" of the various
corporations abolished. And by Section, 7, fifty per centum of the fees collected from the
copra standardization and inspection service shall accrue "to the special fund created in
section 5 hereof for the rehabilitation and development of the coconut industry." Implicit
in all these, is that the term of life of the Board of Liquidators is without time limit.
Contemporary history gives us the fact that the Board of Liquidators still exists as an
office with officials and numerous employees continuing the job of liquidation and
prosecution of several court actions.
Not that our views on the power of the Board of Liquidators to proceed to the final
determination of the present case is without jurisprudential support. The first judicial test
before this Court is National Abaca and Other Fibers Corporation vs. Pore, L-16779, August
16, 1961. In that case, the corporation, already dissolved, commenced suit within the
three-year extended period for liquidation. That suit was for recovery of money advanced
to defendant for the purchase of hemp in behalf of the corporation. She failed to account
for that money. Defendant moved to dismiss, questioned the corporation's capacity to
sue. The lower court ordered plaintiff to include as co-party plaintiff, The Board of
Liquidators, to which the corporation's liquidation was entrusted by Executive Order 372.
Plaintiff failed to effect inclusion. The lower court dismissed the suit. Plaintiff moved to
reconsider. Ground: excusable negligence, in that its counsel prepared the amended
complaint, as directed, and instructed the board's incoming and outgoing correspondence
clerk, Mrs. Receda Vda. de Ocampo, to mail the original thereof to the court and a copy of
the same to defendant's counsel. She mailed the copy to the latter but failed to send the
original to the court. This motion was rejected below. Plaintiff came to this Court on
appeal. We there said that "the rule appears to be well settled that, in the absence of
statutory provision to the contrary, pending actions by or against a corporation are abated
upon expiration of the period allowed by law for the liquidation of its affairs." We there
said that "[o]ur Corporation Law contains no provision authorizing a corporation, after
three (3) years from the expiration of its lifetime, to continue in its corporate name
actions instituted by it within said period of three (3) years." 14 However, these precepts
notwithstanding, we, in effect, held in that case that the Board of Liquidators escapes
from the operation thereof for the reason that "[o]bviously, the complete loss of plaintiff's
corporate existence after the expiration of the period of three (3) years for the settlement
of its affairs is what impelled the President to create a Board of Liquidators, to continue
the management of such matters as may then be pending." 15 We accordingly directed the
record of said case to be returned to the lower court, with instructions to admit plaintiff's
amended complaint to include, as party plaintiff, the Board of Liquidators.

Defendants' position is vulnerable to attack from another direction.

By Executive Order 372, the government, the sole stockholder, abolished NACOCO, and
placed its assets in the hands of the Board of Liquidators. The Board of Liquidators thus
became the trustee on behalf of the government. It was an express trust. The legal
interest became vested in the trustee the Board of Liquidators. The beneficial
interest remained with the sole stockholder the government. At no time had the
government withdrawn the property, or the authority to continue the present suit, from
the Board of Liquidators. If for this reason alone, we cannot stay the hand of the Board of
Liquidators from prosecuting this case to its final conclusion. 16 The provisions of Section
78 of the Corporation Law the third method of winding up corporate affairs find
application.
We, accordingly, rule that the Board of Liquidators has personality to proceed as: partyplaintiff in this case.
2. Defendants' second poser is that the action is unenforceable against the heirs of Kalaw.
Appellee heirs of Kalaw raised in their motion to dismiss, 17 which was overruled, and in
their nineteenth special defense, that plaintiff's action is personal to the deceased
Maximo M. Kalaw, and may not be deemed to have survived after his death. 18 They say
that the controlling statute is Section 5, Rule 87, of the 1940 Rules of Court. 19 which
provides that "[a]ll claims for money against the decedent, arising from contract, express
or implied", must be filed in the estate proceedings of the deceased. We disagree.
The suit here revolves around the alleged negligent acts of Kalaw for having entered into
the questioned contracts without prior approval of the board of directors, to the damage
and prejudice of plaintiff; and is against Kalaw and the other directors for having
subsequently approved the said contracts in bad faith and/or breach of trust." Clearly
then, the present case is not a mere action for the recovery of money nor a claim for
money arising from contract. The suit involves alleged tortious acts. And the action is
embraced in suits filed "to recover damages for an injury to person or property, real or
personal", which survive. 20
The leading expositor of the law on this point is Aguas vs. Llemos, L-18107, August 30,
1962. There, plaintiffs sought to recover damages from defendant Llemos. The complaint
averred that Llemos had served plaintiff by registered mail with a copy of a petition for a
writ of possession in Civil Case 4824 of the Court of First Instance at Catbalogan, Samar,
with notice that the same would be submitted to the Samar court on February 23, 1960 at
8:00 a.m.; that in view of the copy and notice served, plaintiffs proceeded to the said
court of Samar from their residence in Manila accompanied by their lawyers, only to
discover that no such petition had been filed; and that defendant Llemos maliciously
failed to appear in court, so that plaintiffs' expenditure and trouble turned out to be in
vain, causing them mental anguish and undue embarrassment. Defendant died before he
could answer the complaint. Upon leave of court, plaintiffs amended their complaint to
include the heirs of the deceased. The heirs moved to dismiss. The court dismissed the
complaint on the ground that the legal representative, and not the heirs, should have
been made the party defendant; and that, anyway, the action being for recovery of
money, testate or intestate proceedings should be initiated and the claim filed therein.
This Court, thru Mr. Justice Jose B. L. Reyes, there declared:

Plaintiffs argue with considerable cogency that contrasting the correlated

provisions of the Rules of Court, those concerning claims that are barred if not
filed in the estate settlement proceedings (Rule 87, sec. 5) and those defining
actions that survive and may be prosecuted against the executor or
administrator (Rule 88, sec. 1), it is apparent that actions for damages caused by
tortious conduct of a defendant (as in the case at bar) survive the death of the
latter. Under Rule 87, section 5, the actions that are abated by death are: (1)
claims for funeral expenses and those for the last sickness of the decedent; (2)
judgments for money; and (3) "all claims for money against the decedent, arising
from contract express or implied." None of these includes that of the plaintiffsappellants; for it is not enough that the claim against the deceased party be for
money, but it must arise from "contract express or implied", and these words
(also used by the Rules in connection with attachments and derived from the
common law) were construed in Leung Ben vs. O'Brien, 38 Phil. 182, 189-194,
"to include all purely personal obligations other than those which have
their source in delict or tort."
Upon the other hand, Rule 88, section 1, enumerates actions that survive against
a decedent's executors or administrators, and they are: (1) actions to recover
real and personal property from the estate; (2) actions to enforce a lien thereon;
and (3) actions to recover damages for an injury to person or property. The
present suit is one for damages under the last class, it having been held that
"injury to property" is not limited to injuries to specific property, but extends to
other wrongs by which personal estate is injured or diminished (Baker vs.
Crandall, 47 Am. Rep. 126; also 171 A.L.R., 1395). To maliciously cause a party to
incur unnecessary expenses, as charged in this case, is certainly injury to that
party's property (Javier vs. Araneta, L-4369, Aug. 31, 1953).
The ruling in the preceding case was hammered out of facts comparable to those of the
present. No cogent reason exists why we should break away from the views just
expressed. And, the conclusion remains: Action against the Kalaw heirs and, for the
matter, against the Estate of Casimiro Garcia survives.
The preliminaries out of the way, we now go to the core of the controversy.
3. Plaintiff levelled a major attack on the lower court's holding that Kalaw justifiedly
entered into the controverted contracts without the prior approval of the corporation's
directorate. Plaintiff leans heavily on NACOCO's corporate by-laws. Article IV (b), Chapter
III thereof, recites, as amongst the duties of the general manager, the obligation: "(b) To
perform or execute on behalf of the Corporation upon prior approval of the Board, all
contracts necessary and essential to the proper accomplishment for which the
Corporation was organized."
Not of de minimis importance in a proper approach to the problem at hand, is the nature
of a general manager's position in the corporate structure. A rule that has gained
acceptance through the years is that a corporate officer "intrusted with the general
management and control of its business, has implied authority to make any contract or do
any other act which is necessary or appropriate to the conduct of the ordinary business of
the corporation. 21As such officer, "he may, without any special authority from the Board
of Directors perform all acts of an ordinary nature, which by usage or necessity are

incident to his office, and may bind the corporation by contracts in matters arising in the
usual course of business. 22
The problem, therefore, is whether the case at bar is to be taken out of the general
concept of the powers of a general manager, given the cited provision of the NACOCO bylaws requiring prior directorate approval of NACOCO contracts.
The peculiar nature of copra trading, at this point, deserves express articulation. Ordinary
in this enterprise are copra sales for future delivery. The movement of the market requires
that sales agreements be entered into, even though the goods are not yet in the hands of
the seller. Known in business parlance as forward sales, it is concededly the practice of
the trade. A certain amount of speculation is inherent in the undertaking. NACOCO was
much more conservative than the exporters with big capital. This short-selling was
inevitable at the time in the light of other factors such as availability of vessels, the
quantity required before being accepted for loading, the labor needed to prepare and sack
the copra for market. To NACOCO, forward sales were a necessity. Copra could not stay
long in its hands; it would lose weight, its value decrease. Above all, NACOCO's limited
funds necessitated a quick turnover. Copra contracts then had to be executed on short
notice at times within twenty-four hours. To be appreciated then is the difficulty of
calling a formal meeting of the board.
Such were the environmental circumstances when Kalaw went into copra trading.
Long before the disputed contracts came into being, Kalaw contracted by himself alone
as general manager for forward sales of copra. For the fiscal year ending June 30, 1947,
Kalaw signed some 60 such contracts for the sale of copra to divers parties. During that
period, from those copra sales, NACOCO reaped a gross profit of P3,631,181.48. So
pleased was NACOCO's board of directors that, on December 5, 1946, in Kalaw's absence,
it voted to grant him a special bonus "in recognition of the signal achievement rendered
by him in putting the Corporation's business on a self-sufficient basis within a few months
after assuming office, despite numerous handicaps and difficulties."
These previous contract it should be stressed, were signed by Kalaw without prior
authority from the board. Said contracts were known all along to the board members.
Nothing was said by them. The aforesaid contracts stand to prove one thing: Obviously,
NACOCO board met the difficulties attendant to forward sales by leaving the adoption of
means to end, to the sound discretion of NACOCO's general manager Maximo M. Kalaw.
Liberally spread on the record are instances of contracts executed by NACOCO's general
manager and submitted to the board after their consummation, not before. These
agreements were not Kalaw's alone. One at least was executed by a predecessor way
back in 1940, soon after NACOCO was chartered. It was a contract of lease executed on
November 16, 1940 by the then general manager and board chairman, Maximo
Rodriguez, and A. Soriano y Cia., for the lease of a space in Soriano Building On November
14, 1946, NACOCO, thru its general manager Kalaw, sold 3,000 tons of copra to the Food
Ministry, London, thru Sebastian Palanca. On December 22, 1947, when the controversy
over the present contract cropped up, the board voted to approve a lease contract
previously executed between Kalaw and Fidel Isberto and Ulpiana Isberto covering a
warehouse of the latter. On the same date, the board gave its nod to a contract for
renewal of the services of Dr. Manuel L. Roxas. In fact, also on that date, the board
requested Kalaw to report for action all copra contracts signed by him "at the meeting
immediately following the signing of the contracts." This practice was observed in a later

instance when, on January 7, 1948, the board approved two previous contracts for the
sale of 1,000 tons of copra each to a certain "SCAP" and a certain "GNAPO".

(2) The movement of the market is such that it may not be practical always to
wait for the consummation of contracts of sale before beginning to buy copra.

And more. On December 19, 1946, the board resolved to ratify the brokerage commission
of 2% of Smith, Bell and Co., Ltd., in the sale of 4,300 long tons of copra to the French
Government. Such ratification was necessary because, as stated by Kalaw in that same
meeting, "under an existing resolution he is authorized to give a brokerage fee of only 1%
on sales of copra made through brokers." On January 15, 1947, the brokerage fee
agreements of 1-1/2% on three export contracts, and 2% on three others, for the sale of
copra were approved by the board with a proviso authorizing the general manager to pay
a commission up to the amount of 1-1/2% "without further action by the Board." On
February 5, 1947, the brokerage fee of 2% of J. Cojuangco & Co. on the sale of 2,000 tons
of copra was favorably acted upon by the board. On March 19, 1947, a 2% brokerage
commission was similarly approved by the board for Pacific Trading Corporation on the
sale of 2,000 tons of copra.

The General Manager explained that in this connection a certain amount of

speculation is unavoidable. However, he said that the Nacoco is much more
conservative than the other big exporters in this respect. 25

It is to be noted in the foregoing cases that only the brokerage fee agreements were
passed upon by the board,not the sales contracts themselves. And even those fee
agreements were submitted only when the commission exceeded the ceiling fixed by the
board.
Knowledge by the board is also discernible from other recorded instances.1wph1.t
When the board met on May 10, 1947, the directors discussed the copra situation: There
was a slow downward trend but belief was entertained that the nadir might have already
been reached and an improvement in prices was expected. In view thereof, Kalaw
informed the board that "he intends to wait until he has signed contracts to sell before
starting to buy copra."23
In the board meeting of July 29, 1947, Kalaw reported on the copra price conditions then
current: The copra market appeared to have become fairly steady; it was not expected
that copra prices would again rise very high as in the unprecedented boom during
January-April, 1947; the prices seemed to oscillate between $140 to $150 per ton; a
radical rise or decrease was not indicated by the trends. Kalaw continued to say that "the
Corporation has been closing contracts for the sale of copra generally with a margin of
P5.00 to P7.00 per hundred kilos." 24
We now lift the following excerpts from the minutes of that same board meeting of July 29,
1947:
521. In connection with the buying and selling of copra the Board
inquired whether it is the practice of the management to close contracts of sale
first before buying. The General Manager replied that this practice is generally
followed but that it is not always possible to do so for two reasons:
(1) The role of the Nacoco to stabilize the prices of copra requires that it should
not cease buying even when it does not have actual contracts of sale since the
suspension of buying by the Nacoco will result in middlemen taking advantage of
the temporary inactivity of the Corporation to lower the prices to the detriment
of the producers.

Settled jurisprudence has it that where similar acts have been approved by the directors
as a matter of general practice, custom, and policy, the general manager may bind the
company without formal authorization of the board of directors. 26 In varying language,
existence of such authority is established, by proof of the course of business, the usage
and practices of the company and by the knowledge which the board of directors has, or
must be presumed to have, of acts and doings of its subordinates in and about the affairs
of the corporation. 27So also,
x x x authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised. 28
x x x Thus, when, in the usual course of business of a corporation, an officer has
been allowed in his official capacity to manage its affairs, his authority to
represent the corporation may be implied from the manner in which he has been
permitted by the directors to manage its business.29
In the case at bar, the practice of the corporation has been to allow its general manager
to negotiate and execute contracts in its copra trading activities for and in NACOCO's
behalf without prior board approval. If the by-laws were to be literally followed, the board
should give its stamp of prior approval on all corporate contracts. But that board itself, by
its acts and through acquiescence, practically laid aside the by-law requirement of prior
approval.
Under the given circumstances, the Kalaw contracts are valid corporate acts.
4. But if more were required, we need but turn to the board's ratification of the contracts
in dispute on January 30, 1948, though it is our (and the lower court's) belief that
ratification here is nothing more than a mere formality.
Authorities, great in number, are one in the idea that "ratification by a corporation of an
unauthorized act or contract by its officers or others relates back to the time of the act or
contract ratified, and is equivalent to original authority;" and that " [t]he corporation and
the other party to the transaction are in precisely the same position as if the act or
contract had been authorized at the time." 30 The language of one case is expressive: "The
adoption or ratification of a contract by a corporation is nothing more or less than the
making of an original contract. The theory of corporate ratification is predicated on the
right of a corporation to contract, and any ratification or adoption is equivalent to a grant
of prior authority." 31
Indeed, our law pronounces that "[r]atification cleanses the contract from all its defects
from the moment it was constituted." 32 By corporate confirmation, the contracts executed
by Kalaw are thus purged of whatever vice or defect they may have. 33

In sum, a case is here presented whereunder, even in the face of an express by-law
requirement of prior approval, the law on corporations is not to be held so rigid and
inflexible as to fail to recognize equitable considerations. And, the conclusion inevitably is
that the embattled contracts remain valid.
5. It would be difficult, even with hostile eyes, to read the record in terms of "bad faith
and/or breach of trust" in the board's ratification of the contracts without prior approval of
the board. For, in reality, all that we have on the government's side of the scale is that the
board knew that the contracts so confirmed would cause heavy losses.
As we have earlier expressed, Kalaw had authority to execute the contracts without need
of prior approval. Everybody, including Kalaw himself, thought so, and for a long time.
Doubts were first thrown on the way only when the contracts turned out to be unprofitable
for NACOCO.
Rightfully had it been said that bad faith does not simply connote bad judgment or
negligence; it imports a dishonest purpose or some moral obliquity and conscious doing of
wrong; it means breach of a known duty thru some motive or interest or ill will; it partakes
of the nature of fraud.34 Applying this precept to the given facts herein, we find that there
was no "dishonest purpose," or "some moral obliquity," or "conscious doing of wrong," or
"breach of a known duty," or "Some motive or interest or ill will" that "partakes of the
nature of fraud."
Nor was it even intimated here that the NACOCO directors acted for personal reasons, or
to serve their own private interests, or to pocket money at the expense of the
corporation. 35 We have had occasion to affirm that bad faith contemplates a "state of
mind affirmatively operating with furtive design or with some motive of self-interest or ill
will or for ulterior purposes." 36 Briggs vs. Spaulding, 141 U.S. 132, 148-149, 35 L. ed. 662,
669, quotes with approval from Judge Sharswood (in Spering's App., 71 Pa. 11), the
following: "Upon a close examination of all the reported cases, although there are many
dicta not easily reconcilable, yet I have found no judgment or decree which has held
directors to account, except when they have themselves been personally guilty of some
fraud on the corporation, or have known and connived at some fraud in others, or where
such fraud might have been prevented had they given ordinary attention to their
duties. . . ." Plaintiff did not even dare charge its defendant-directors with any of these
malevolent acts.
Obviously, the board thought that to jettison Kalaw's contracts would contravene basic
dictates of fairness. They did not think of raising their voice in protest against past
contracts which brought in enormous profits to the corporation. By the same token, fair
dealing disagrees with the idea that similar contracts, when unprofitable, should not merit
the same treatment. Profit or loss resulting from business ventures is no justification for
turning one's back on contracts entered into. The truth, then, of the matter is that in
the words of the trial court the ratification of the contracts was "an act of simple justice
and fairness to the general manager and the best interest of the corporation whose
prestige would have been seriously impaired by a rejection by the board of those
contracts which proved disadvantageous." 37
The directors are not liable."

38

6. To what then may we trace the damage suffered by NACOCO.

The facts yield the answer. Four typhoons wreaked havoc then on our copra-producing
regions. Result: Copra production was impaired, prices spiralled, warehouses destroyed.
Quick turnovers could not be expected. NACOCO was not alone in this misfortune. The
record discloses that private traders, old, experienced, with bigger facilities, were not
spared; also suffered tremendous losses. Roughly estimated, eleven principal trading
concerns did run losses to about P10,300,000.00. Plaintiff's witness Sisenando Barretto,
head of the copra marketing department of NACOCO, observed that from late 1947 to
early 1948 "there were many who lost money in the trade." 39 NACOCO was not immune
from such usual business risk.
The typhoons were known to plaintiff. In fact, NACOCO resisted the suits filed by Louis
Dreyfus & Co. by pleading in its answers force majeure as an affirmative defense and
there vehemently asserted that "as a result of the said typhoons, extensive damage was
caused to the coconut trees in the copra producing regions of the Philippines and
according to estimates of competent authorities, it will take about one year until the
coconut producing regions will be able to produce their normal coconut yield and it will
take some time until the price of copra will reach normal levels;" and that "it had never
been the intention of the contracting parties in entering into the contract in question that,
in the event of a sharp rise in the price of copra in the Philippine market produce byforce
majeure or by caused beyond defendant's control, the defendant should buy the copra
contracted for at exorbitant prices far beyond the buying price of the plaintiff under the
contract." 40
A high regard for formal judicial admissions made in court pleadings would suffice to deter
us from permitting plaintiff to stray away therefrom, to charge now that the damage
suffered was because of Kalaw's negligence, or for that matter, by reason of the board's
ratification of the contracts. 41
Indeed, were it not for the typhoons, 42 NACOCO could have, with ease, met its contractual
obligations. Stock accessibility was no problem. NACOCO had 90 buying agencies spread
throughout the islands. It could purchase 2,000 tons of copra a day. The various contracts
involved delivery of but 16,500 tons over a five-month period. Despite the typhoons,
NACOCO was still able to deliver a little short of 50% of the tonnage required under the
contracts.
As the trial court correctly observed, this is a case of damnum absque injuria. Conjunction
of damage and wrong is here absent. There cannot be an actionable wrong if either one or
the other is wanting. 43
7. On top of all these, is that no assertion is made and no proof is presented which would
link Kalaw's acts ratified by the board to a matrix for defraudation of the
government. Kalaw is clear of the stigma of bad faith. Plaintiff's corporate
counsel 44 concedes that Kalaw all along thought that he had authority to enter into the
contracts, that he did so in the best interests of the corporation; that he entered into the
contracts in pursuance of an overall policy to stabilize prices, to free the producers from
the clutches of the middlemen. The prices for which NACOCO contracted in the disputed
agreements, were at a level calculated to produce profits and higher than those prevailing
in the local market. Plaintiff's witness, Barretto, categorically stated that "it would be
foolish to think that one would sign (a) contract when you are going to lose money" and
that no contract was executed "at a price unsafe for the Nacoco." 45 Really, on the basis of
prices then prevailing, NACOCO envisioned a profit of around P752,440.00. 46

Kalaw's acts were not the result of haphazard decisions either. Kalaw invariably consulted
with NACOCO's Chief Buyer, Sisenando Barretto, or the Assistant General Manager. The
dailies and quotations from abroad were guideposts to him.
Of course, Kalaw could not have been an insurer of profits. He could not be expected to
predict the coming of unpredictable typhoons. And even as typhoons supervened Kalaw
was not remissed in his duty. He exerted efforts to stave off losses. He asked the
Philippine National Bank to implement its commitment to extend a P400,000.00 loan. The
bank did not release the loan, not even the sum of P200,000.00, which, in October, 1947,
was approved by the bank's board of directors. In frustration, on December 12, 1947,
Kalaw turned to the President, complained about the bank's short-sighted policy. In the
end, nothing came out of the negotiations with the bank. NACOCO eventually faltered in
its contractual obligations.
G.R. No. L-20333

June 30, 1967

That Kalaw cannot be tagged with crassa negligentia or as much as simple negligence,
would seem to be supported by the fact that even as the contracts were being questioned
in Congress and in the NACOCO board itself, President Roxas defended the actuations of
Kalaw. On December 27, 1947, President Roxas expressed his desire "that the Board of
Directors should reelect Hon. Maximo M. Kalaw as General Manager of the National
Coconut Corporation." 47 And, on January 7, 1948, at a time when the contracts had
already been openly disputed, the board, at its regular meeting, appointed Maximo M.
Kalaw as acting general manager of the corporation.

EMILIANO ACUA, plaintiff-appellant,

vs.
BATAC PRODUCERS COOPERATIVE MARKETING ASSOCIATION, INC., JUSTINO
GALANO, TEODORO NARCISO, PABLO BACTIN, (DR.) EMMANUEL BUMANGLAG,
VENANCIO DIRIC, MARCOS ESQUIVEL, EVARISTO CAOILI, FIDEL BATTULAYAN,
DAMIAN ROSSINI, RAYMUNDO BATALLONES, PLACIDO QUIAOIT, and LEON Q.
VERANO defendants-appellees.

Well may we profit from the following passage from Montelibano vs. Bacolod-Murcia
Milling Co., Inc., L-15092, May 18, 1962:

Marquez and Marquez for plaintiff-appellant.

Estanislao A. Fernandez for defendants-appellees.

"They (the directors) hold such office charged with the duty to act for the corporation
according to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty. Whether the business of a corporation
should be operated at a loss during a business depression, or closed down at a smaller
loss, is a purely business and economic problem to be determined by the directors of the
corporation, and not by the court. It is a well known rule of law that questions of policy of
management are left solely to the honest decision of officers and directors of a
corporation, and the court is without authority to substitute its judgment for the judgment
of the board of directors; the board is the business manager of the corporation,
and solong as it acts in good faith its orders are not reviewable by the courts." (Fletcher
on Corporations, Vol. 2, p. 390.)48

MAKALINTAL, J.:

Kalaw's good faith, and that of the other directors, clinch the case for defendants.

49

Viewed in the light of the entire record, the judgment under review must be, as it is
hereby, affirmed.
Without costs. So ordered.

Appeal taken from the order dated September 10, 1962 of the Court of First Instance of
Rizal, Branch V (Quezon City) dismissing plaintiff's complaint on the ground that it states
no cause of action, and discharging the writ of preliminary attachment issued therein.
On August 9, 1962, plaintiff Emiliano Acua filed a complaint, which was later amended
on August 13, against the defendant Batac Producers Cooperative Marketing Association,
Inc., hereinafter called the Batac Procoma, Inc., or alternatively, against all the other
defendants named in the caption. The complaint alleged, inter alia, that on or about May
5, 1962 it was tentatively agreed upon between plaintiff and defendant Leon Q. Verano, as
Manager of the defendant Batac Procoma, Inc., that the former would seek and obtain the
sum of not less, than P20,000.00 to be advanced to the defendant Batac Procoma, Inc., to
be utilized by it as additional funds for its Virginia tobacco buying operations during the
current redrying season; that plaintiff would be constituted as the corporation's
representative in Manila to assist in handling and facilitating its continuous shipments of
tobacco and their delivery to the redrying plants and in speeding up the prompt payment
and collection of all amounts due to the corporation for such shipments; that for his
services plaintiff would be paid a remuneration at the rate of P0.50 per kilo of tobacco;
that said tentative agreement was favorably received by the Board of Directors of the
defendant Batac Procoma Inc., and on May 6, 1962 all the defendants named above, who
constituted the entire Board of Directors of said corporation (except Leon Q. Verano, who
was its Manager), together with defendants Justino Galano and Teodoro Narciso, as
President and Vice-President, respectively, unanimously authorized defendant Leon Q.
Verano, by a formal resolution, "to execute any agreement with any person or entity, on
behalf of the corporation, for the purpose of securing additional funds for the corporation,

as well as to secure the services of such person or entity, in the collection of all payments
due to the corporation from the PVTA for any tobacco sold and delivered to said
administration; giving and conferring upon the Manager, full and complete authority to
bind the corporation with such person or entity in any agreement, and under such
considerations, which the said Manager may deem expedient and necessary for that
purpose; that plaintiff was made to understand by all of said defendants that the original
understanding between him and defendant Leon Q. Verano was acceptable to the
corporation, except that the remuneration for the plaintiff's services would be P0.30 per
kilo of tobacco; that on May 10, 1962, the formal "Agreement" was executed between
plaintiff and defendant Leon Q. Verano, as Manager of the defendant corporation, duly
authorized by its Board of Directors for such purpose, and signed by defendants Justino
Galano and Dr. Emmanuel Bumanglag as instrumental witnesses and acknowledged by
Atty. Fernando Alcantara, the Secretary and Legal Counsel of the defendant corporation;
that upon plaintiff's inquiry, he was assured by these defendants that a formal approval of
said "Agreement" by the Board was no longer necessary, as it was a mere "formality"
appended to its authorizing resolution and as all the members of the Board had already
agreed to the same; that on the same date, May 10, 1962, plaintiff gave and turned over
to the defendant corporation, thru its treasurer, Dominador T. Cocson the sum of
P20,000.00, in the presence of defendants Leon Q. Verano, Justino Galano, Dr. Emmanuel
Bumanglag and Atty. Fernando Alcantara, for which said treasurer issued to plaintiff its
corresponding Official Receipt No. 130852; that from then on, plaintiff diligently and
religiously kept his part of the "Agreement;" that plaintiff even furnished the defendant
corporation, upon request of its Manager Leon Q. Verano three thousand (3,000) sacks
which it utilized in the shipment of its tobacco costing P6,000.00 and that plaintiff had
personally advanced out of his own personal funds the total sum of P5,000.00 with the full
knowledge, acquiescence and consent of all the individual defendants; that after the
defendant corporation was enabled to replenish its funds with continuous collections from
the PVTA for tobacco delivered due to the help, assistance and intervention of plaintiff, for
which the said corporation collected from the PVTA the total sum of P381,495.00, the
"Agreement" was disapproved by its Board of Directors on June 6, 1962. Upon the
foregoing allegations plaintiff prays: (a) that an order of attachment be issued against the
properties of defendant corporation; (b) that after due trial, judgment be rendered
condemning defendant corporation, or alternatively, all the other individual defendants,
jointly and severally, to comply with their contractual obligations and to pay plaintiff the
sum of P300,000.00 for his services, plus P31,000.00 for cash advances made by him and
P25,000.00 for attorney's fees.
On August 14, 1962, the lower court ordered the issuance of a writ of preliminary
attachment against the properties of the defendants and on the following day, after the
plaintiff had posted the required bond, the writ was accordingly issued by the Clerk of
Court.1wph1.t
On August 22, 1962, the defendants filed a motion to dismiss the complaint on the ground
that it stated no cause of action and to discharge the preliminary attachment on the
ground that it was improperly or irregularly issued. In support of the motion defendants
alleged that the contract for services was never perfected because it was not approved or
ratified but was instead disapproved by the Board of Directors of defendant Batac
Procoma, Inc., and that on the basis of plaintiff's pleadings the contract is void and
unenforceable. Defendants further denied the fact that plaintiff had performed his part of
the contract, alleging that he had not in any manner intervened in the delivery and
payment of tobacco pertaining to the defendant corporation.
On August 25, 1962, plaintiff filed a written opposition to the motion to dismiss and to
discharge the preliminary attachment.

On September 10, 1962, the trial court sustained defendants' motion and issued the
following order:
In resume the Court believes that the complaint states no cause of action and
that contract in question is void ab initio.
IN VIEW OF THE FOREGOING, the amended complaint filed in this case is hereby
ordered DISMISSED, without special pronouncement as to costs. Consequently,
the writ of preliminary attachment issued herein is ordered discharged. However,
it is of record that the defendants has (sic) deposited the Court the amount of
P20,400.00 representing the amount of money invested by the plaintiff plus the
corresponding interest thereon. Plaintiff, by virtue of this order, may withdraw
the same in due time, if he so desires, upon proper receipt therefor.
From the foregoing order plaintiff interposed the present appeal.
Appellant has assigned four errors, which we shall consider seriatim:
The first assignment reads: "As the defendants' motion to dismiss the complaint and to
discharge the preliminary attachment was based on the specific ground that the
complaint states no cause of action (Sec. 1 [f], Rule 8, Rules of Court), the lower court
should not have gone beyond, and it should have limited itself, to the facts alleged in the
complaint in considering and resolving said motion to dismiss.
It is a settled principle that when a motion to dismiss is based on the ground that the
complaint does not state a cause of action (Rule 8, Section 1, par. 7 of the old Rules; Rule
16, Section 1., par. [g] of the Revised Rules) the averments in the complaint are deemed
hypothetically admitted and the inquiry is limited to whether or not they make out a case
on which relief can be granted. If said motion assails directly or indirectly the veracity of
the allegations, it is improper to grant the motion upon the assumption that the
averments therein are true and those of the complaint are not (Carreon vs. Prov. Board of
Pampanga, 52 O.G. 6557.) The sufficiency of the motion should be tested on the strength
of the allegations of facts contained in the complaint, and no other. If these allegations
show a cause of action, or furnish sufficient basis by which the complaint can be
maintained, the complaint should not be dismissed regardless of the defenses that may
be averred by the defendants. (Josefa de Jesus, et al. vs. Santos Belarmino, 50 O.G. 30043068; Verzosa vs. Rigonan, G.R. No. L-6459, April 23, 1954; Dimayuga vs. Dimayuga, 51
O.G. 2397-2400.)
The first ground upon which the order of dismissal issued by the lower court is predicated
is that the Board of Directors of defendant corporation did not approve, the agreement in
question in fact disapproved it by a resolution passed on June 6, 1962 and that as a
consequence the "suspensive condition" attached to the agreement was never fulfilled.
The specific stipulation referred to by the Court as a suspensive condition states:
"provided, however that the contract entered into by said manager to carry out the
purposes above-mentioned shall be subject to the approve by the Board."
A perusal of the complaint reveals that it contains sufficient allegations indicating such
approval or at least subsequent ratification. On the first point we note the following
averments: that on May 9th the plaintiff met with each and all of the individual defendants
(who constituted the entire Board of Directors) and discussed with them extensively the

tentative agreement and he was made to understand that it was acceptable to them,
except as to plaintiff's remuneration; that it was finally agreed between plaintiff and all
said Directors that his remuneration would be P0.30 per kilo (of tobacco); and that after
the agreement was formally executed he was assured by said Directors that there would
be no need of formal approval by the Board. It should be noted in this connection that
although the contract required such approval it did not specify just in what manner the
same should be given.
On the question of ratification the complaint alleges that plaintiff delivered to the
defendant corporation the sum of P20,000.00 as called for in the contract; that he
rendered the services he was required to do; that he furnished said defendant 3,000 sacks
at a cost of P6,000.00 and advanced to it the further sum of P5,000.00; and that he did all
of these things with the full knowledge, acquiescence and consent of each and all of the
individual defendants who constitute the Board of Directors of the defendant corporation.
There is abundant authority in support of the proposition that ratification may be express
or implied, and that implied ratification may take diverse forms, such as by silence or
acquiescence; by acts showing approval or adoption of the contract; or by acceptance and
retention of benefits flowing therefrom.
Significantly the very resolution of the Board of Directors relied upon by defendants
appears to militate against their contention. It refers to plaintiff's failure to comply with
certain promises he had made, as well as to his interpretation of the contract with respect
to his remuneration which, according to the Board, was contrary to the intention of the
parties. The resolution then proceeds to "disapprove and/or rescind" the said contract.
The idea of conflicting interpretation, or rescission on the ground that one of the parties
has failed to fulfill his obligation under the contract, is certainly incompatible with
defendants' theory here that no contract had yet been perfected for lack of approval by
the Board of Directors.
Appellants' second assignment of error reads: "Assuming that in resolving the defendants'
motion to dismiss the lower court could consider the new facts alleged therein and the
documents annexed thereto it committed an error in extending such consideration beyond
ascertaining only if an issue of fact has been presented and in actually deciding instead
such fact in issue."
The assignment is well taken, and is the logical corollary of the rule that a motion to
dismiss on the ground that the complaint fails to state a cause of action addresses itself to
the averments in the complaint and, admitting their veracity, merely questions their
sufficiency to make out a case on which the court can grant relief. Affidavits, such as
those presented by defendants in support of the motion, can only be considered for the
purpose of ascertaining whether an issue of fact is presented, but not as a basis for
deciding the factual issue itself. This should await the trial on the merits.
The third assignment of error assails the lower court's ruling that even assuming that a
contract had been perfected no action can be maintained thereon because its object was
illegal and therefore void. Specific reference was made by said court to an affidavit
executed by appellant on May 10, 1962 which reads:
That I, EMILIANO ACUA, the party of the Second Part in the contract entered into
with the Batac Procoma, Inc., the party of the First Part in same contract declares
that the amount of P0.30 per kilo is referred to upgraded tobacco only as
delivered. This supplements paragraph three of the contract referred to.

Deliveries downgraded or maintained at the redrying plant are deemed not

included.
The lower court, in its order of dismissal, held that "the upgrading of tobaccos is clearly
prohibited under our laws," and hence the contract cannot be validly ratified. Evidently
the court had in mind a fraudulent upgrading of tobacco by appellant as part of the
services called for under the contract. This conclusion, however, is squarely traversed by
appellant in another affidavit attached to his reply and opposition to the motion to
dismiss, in which he explained the circumstances which led to the execution of the one
relied upon by the court, and the real meaning of the word "upgraded" therein. It is
therein stated:
That after the execution of the agreement (Annex "B" to the amended complaint in said
Civil Case No. Q-6547), Messrs. Verano, Galano and Dr. Bumanglag of the defendant
Corporation indicated to me that if the price of P0.30 per kilo stipulated there to be paid
to me were to be indiscriminately applied to all deliveries of tobaccos, the Corporation
would be placed in a disadvantageous and losing position, and they proceeded to explain
to me the following,
(a) that when the farmers sell their tobaccos to the Facoma, they do so in
bunches of assorted qualities which may belong either to Class A, B, C, D and E,
and upon such purchase they are initially given an arbitrary classification of any
of such classes as the case may be, the tendency generally being to give them a
lower classification to equalize or average the assorted qualities as much as
possible, and this is what is termed "downgrading;"
(b) that after the tobaccos have been purchased by the Facoma from the
farmers, they are then reassorted and re-classified in accordance with their
actual quality or grade as found by the officials of the Facoma, thus in a bunch
which are purchased as Class C, D or E, upon reclassification those found to
belong to Class A are separated from Class B, those belonging to Class B are
separated from Class C, and so on, and these bunches so reclassified necessarily
have a higher grade than the farmers, and this is what is termed "upgrading"
upon delivery original arbitrary classification given when purchased from the
which was used in the addendum;
(c) the Facoma, in turn, delivers these properly re-classified tobaccos to the
redrying plant, and there, a group of officials composed of a representative of the
redrying plant, the Bureau of Internal Revenue, the General Auditing Office, the
PVTA and the Facoma representative, then examines and grades the tobaccos,
and if the classification given by the Facoma is found correct and not changed,
then and only then would or should be entitled to collect the P0.30 per kilo, and
this they said is what is termed "grade maintained" on the other hand, if these
officials found the classification incorrect and lowers the classification given by
the Facoma, thus class A to B, or from B to C, then the tobaccos are considered
or said to be "downgraded" and in that event I should not receive any centavo for
such deliveries, and it is in this sense that I was made to understand the term;
Believing implicitly in the foregoing explanations of the defendants and in the
reasonableness of their proposal, I agreed readily and Atty. Fernando Alcantara, Legal
Counsel and Secretary of the defendant Corporation forthwith prepared, drafted and typed
the "addendum" in question in their own typewriter of the Corporation; and as I am not a

lawyer and was not well versed with the usage, customs and phraseology usually used in
tobacco trading, I relied in absolute good faith that, as explained by the defendants, there
was nothing wrong nor illegal in the use of the words "upgrading" and "downgrading"
used in said addendum, which Atty. Alcantara unfortunately used in the same;
Apart from the above, defendants knew the physical impossibility of "upgrading" the
tobaccos at the redrying plant, because at the time of the transaction, only the PTFC & RC
was allowed to accept tobacco for redrying and under the existing regulations and
practices the delivery area for tobaccos at the redrying plant is enclosed by a high wire
fence inaccessible to the general public and the only ones who actually make the grading
of tobaccos delivered, are the (1) American representative of the redrying plant (PTFC &
RC), (2) the PVTA, (3) the BIR, and (4) the General Auditing Office in the presence of the
representative of the FACOMA, and since the redrying plant is compelled to purchase 41%
of all tobaccos delivered and redried under their negotiated management contract, it is
highly improbable that the representative of the redrying plant (PTFC & RC) whose
conformity to the actual grading done must appear in the corresponding "guia" or tally
sheet, would allow the "upgrading" of tobaccos, aside from the fact that stringent
measures had been devised under the present administration to prevent the "upgrading"
of tobaccos by any party. Certainly, an impossible condition could not have been
contemplated by me and the defendants; (Record on Appeal, pp. 171-175).
The foregoing explanation, on its face, is satisfactory and deprives the term "upgraded" of
the sinister and illegal connotation attributed to it by the lower court. To be sure, whether
the allegations in this subsequent affidavit are true or not is a question of fact; but it is
precisely for this reason that they can neither be summarily admitted nor rejected for
purposes of a motion to dismiss. Due process demands that they be the subject of proof
and considered only after trial on the merits.
The other errors assigned by appellant are merely incidental to those already discussed,
and require no separate treatment.
Wherefore, the order appealed from is set aside and the case is remanded to the court a
quo for further proceedings, without prejudice to, the right of plaintiff-appellant to ask for
another writ of attachment in said court, as the circumstances may warrant. Costs against
defendants-appellees.
Concepcion, C.J., Reyes, J.B.L., Bengzon, J.P., Zaldivar, Sanchez and Castro, JJ., concur.
Dizon, J., took no part.

G.R. No. L-37281

November 10, 1933

W. S. PRICE and THE SULU DEVELOPMENT COMPANY, plaintiffs-appellants,

vs.
H. MARTIN, defendant-appellant.
THE AGUSAN COCONUT COMPANY, defendant-appellee.
HULL, J.:
Plaintiffs brought suit in the Court of First Instance of Manila praying that a mortgage
executed by the Sulu Development Company on its properties in favor of the Agusan
Coconut Company be dissolved and declared null and void, the principal contentions
being that at the stockholders' meeting in which the officers of the Sulu Development
Company were elected and at which the proposed mortgage was approved of, 97 shares
of stock of the Sulu Development Company were voted by the proxy of Mrs. Worcester, in
whose name the stock at that time stood upon the books of the company, whereas
defendant Martin claimed that he was the true owner and that he should have voted the
stock.
From the records of the Sulu Development Company it appears that at the meeting of
November 12, 1925, Martin presented evidence to the effect that he, and not Mrs.
Worcester, was the owner of the 97 shares of stock. Copies of the documents relied upon
by Martin were made a part of the record, but apparently no action was taken by the
stockholders or by the directors, and at the meetings of November 12, 17, and 19, Mrs.
Worcester's proxy apparently voted the stock without protest on the part of Martin or any
other stockholder.
As far as the record shows, every formal action taken at those three meetings was
unanimous, and Martin at the last two meetings was accompanied by two members of the
Bar of the Philippine Islands as his counsel.
The Sulu Development Company from its inception up to the time of executing the
contract was virtually owned and controlled by Martin. Prince purchased one share of
stock about a month before the called meeting but was not present at the meetings in
question.
Another ground relied upon by plaintiffs is a claim that the mortgage was without
consideration. The evidence shows that for years the Agusan Coconut Company, through
its general manager, had been advancing sums through Martin in order that the Sulu
Development Company might secure good and sufficient title to a large tract of land
situated near Siasi and thereon develop a coconut plantation. The amount of money so
advanced was in dispute, but between the meeting on November 12 and the final action
on November 19, the attorney of the Sulu Development Company, one of whom was also
an accountant, and the attorneys of the Agusan Coconut Company went over the mutual
accounts with care and arrived at the sum set forth in the mortgaged. Had there been no
agreement, suit would have been instituted by the Agusan Company against the Sulu
Development Company.
There is also a claim that there was a parol agreement between Martin and Worcester,
representing the two companies, that after the death of Mr. Worcester on May 2, 1924, the
Agusan Coconut Company failed to comply with the terms and conditions of the so-called
cultivation agreement, and Martin prayed in his special cross-complaint and counter-claim
that the Defendant Agusan Coconut Company be required to make such further cash

advances to "carry out the full scale development of the tract of land in the cultivation
agreement and as contemplated therein."
The trial court, on timely objection, refused to receive the parol evidence as to the
cultivation agreement, and after trial and a lengthy opinion, held that the mortgage in
question was valid and refused to order its cancellation.
From that decision plaintiff appeal and make the following assignments of error:
The trial court erred:
1. In refusing appellants the right to introduce evidence as to the "cultivation
agreement" extensively referred to by the parties herein.
2. In refusing to reopen the case on motion filed in due form and manner by the
plaintiffs and appellants herein, on the ground of newly discovered evidence,
such motion having been filed the rendition of the judgment herein.
3. In finding that the plaintiff, W.S. Price, did not appear here as a plaintiff to
depend his own right but for the purpose of giving aid to the defendant, Harry
Martin.
4. In ruling that although the 97 shares voted by Mrs. Nanon L. Worcester at the
meetings in question thru her proxy belonged to Harry Martin and were only held
in trust by her late husband, Dean C. Worcester, yet such trusteeship was for the
benefit of the Agusan Coconut Company, and that such company is the actual
cestui que trust thereunder, in violation of the express terms of the trust
agreement.
5. In holding that Mrs. Nanon L. Worcester could legally vote the said 97 shares
she actually voted at the meeting in question, notwithstanding the facts as found
by said court, that said shares belonged to H. Martin and were merely held in
trust by her deceased husband.
6. In finding that the 97 shares of stock in question had been adjudicated to Mrs.
Nanon L. Worcester by the commissioners on claims against the estate of her
deceased husband; that such adjudication had been approved by the Court of
First Instance of the City of Manila, and that the said Nanon L. Worcester had
inherited said shares by virtue of the will of her deceased husband.
7. In holding the effect that there was a quorum in the pretended meetings of the
stockholders of the Sulu Development Company alleged to have taken place on
November 12, 17 and 19, 1925, particularly that one asserted to have been held
on November 19, 1925, when in law and in fact there was no such quorum.
8. In finding in effect that the meetings pretended to be held by Sulu
Development on the dates aforementioned were validly and legally held and that
the action taken and proceedings had thereat were valid and effective.

9. In finding that if the defendant H. Martin had had the 97 shares in question in
his own name at the alleged meetings of the Sulu Development Company, he
would have voted them in the same way and to the same effect as the said
Nanon L. Worcester voted them.
10. In not finding that there was attendant fraud, misrepresentation and deceit in
the execution and issuance of the mortgage contract, Exhibit U.
11. In not holding that said mortgage is null and void for want of legal
consideration.
12. In finding that the plaintiffs and appellants herein are legally bound by the
said mortgage contract Exhibit U.
13. In holding that the plaintiffs and appellants herein are legally estopped to
contest the efficacy and validity of the mortgage contract, Exhibit, U.
14. In dismissing plaintiffs' complaint herein.
15. In denying plaintiffs' motion for a new trial.
While defendant Martin appeals and assigns the following errors:
1. The trial court erred in refusing to find that the one hundred shares of the
capital stock of the appellant, the Sulu Development Company, delivered on
November 23, 1922, by the appellant, H. Martin, to the late Dean C. Worcester,
were so delivered in trust to be held and used for the benefit of the said H.
Martin.
2. The trial court erred in finding that the voting by Mrs. Nanon L. Worcester, in
the meeting held by the stockholders of the appellant, the Sulu Development
Company, on November 12, 17, and 19, 1925, was legal.
3. The trial court erred in refusing to find that the mortgage involved in this
litigation, purported to have been executed by the appellant, the Sulu
Development Company, in favor of the appellee, the Agusan Coconut Company,
is null and void.
4. The trial court erred in excluding, as being within the statute of frauds,
testimony regarding a certain verbal agreement entered into by and between the
appellee, the Agusan Coconut Company, and the appellant, H. Martin, which
agreement had been fully performed by the latter.
5. The trial court erred in excluding as "Hearsay Evidence", testimony regarding
statements made by certain officials of the appellee, the Agusan Company.
6. The trial court erred in excluding the testimony of the appellant, H. Martin,
regarding matters of fact which occurred between him and certain officials of the

appellee, the Agusan Coconut Company, who had died prior to the trial of this
action.
An examination of the assignments of error will show that although this case in its main
aspects is a simple one and confined to the questions, first, as to whether the mortgage
was duly executed by the Sulu Development Company and, second, whether it was given
for a valuable consideration, many side issues of no moment were urged upon the trial
court, which probably accounts for the voluminous record with which we are confronted
and numerous assignments of error which we do not deem it necessary to discuss in
detail.
Plaintiffs contend that the transference on the books of the company of 97 shares of stock
in the name of Mrs. Worcester was fraudulent and illegal. The evidence of record,
however, under all the circumstances of the case, fails to demonstrate the allegation of
fraud, and this court believes that she acted in good faith and in the honest belief that she
had not only a legal right but a duty to participate in the stockholders meeting.
As to whether the stock was rightfully the property of Martin, that is a question for the
courts and for a stockholder's meeting. Until challenged in a proper proceeding, a
stockholder according to the books of the company has a right to participate in that
meeting, and in the absence of fraud the action of the stockholders' meeting cannot be
collaterally attacked on account of such participation. "A person who has purchased stock,
and who desires to be recognized as a stockholder, for the purpose of voting, must secure
such a standing by having the transfer recorder upon the books. If the transfer is not duly
made upon request, he has, as his remedy, to compel it to be made." (Morrill vs. Little
Falls Mfg. Co., 53 Minn., 371; 21 L.R.A., 175-178, citing Cook, Stock & Stockholders, par.
611; People vs. Robinson, 64 Cal., 373; Downing vs. Potts, 23 N.J.L., 66; State vs. Ferris, 42
Conn., 560; New York & N.H.R. Co. vs. Schuyler, 34 N.Y., 80; Bank of Commerce's App., 73
Pa., 59; Hoppin vs. Buffum, 9 R.I., 513; 11 Am. Rep., 219; Re St. Lawrence S.R. Co., 44 N. J.
L., 529.)
As to the question of lack of consideration for the mortgage, throughout the brief for
appellants it appears by the constant reiteration of the phrase that all the advances were
made "by the Agusan Coconut Company and/or its then General Manager, the late Dean
C. Worcester, to H. Martin and/or the Sulu Development Company."
It must be remembered that there is no dispute between the Worcester interests and the
Agusan Coconut Company as to who advanced the money, namely, the Agusan Coconut
Company, nor is there any difficulty in determining to whom the money was advanced.
Although Martin was virtually the owner of all the capital stock of the Sulu Development
Company, business was carried on in the name of the company, and the land and
properties were secured in the name of the company, and up to the time of the execution
of the mortgage and some time thereafter there was no claim from anybody the money
had been advanced to Martin instead of the company. Even a repeated use of the
questionable phrase "and/or" as to the grantor "and/or" as to the grantee, will not
fabricate a life-raft on which a recalcitrant debtor can reach a safe harbor of
repudiation.lawphil.net
We are therefore convinced that the contention that the mortgage was made without
consideration was a afterthought without foundation in fact and in a vain attempt to avoid
a legal and binding obligation.

We find no merit in the contention that the trial court should have concerned itself with an
alleged parol contract between Martin and Dean C. Worcester, deceased. The alleged
contract not being in writing or to be executed within a year, it is within the statute of
frauds. The value of the rule is shown in this case as it was some time after Mr.
Worcester's death before anything was heard of such an alleged agreement. Even if such
an agreement had been made and it had been proper to receive proof thereof, it would
not benefit plaintiffs as the mortgage was executed pursuant to a compromise agreement
to settle the affairs between the two companies, and all the transactions between the two
companies were merged and settle by that compromise.
The contention that a new trial should have been granted in order that plaintiffs could
present in evidence a letter from Mr. Worcester to the late Governor-General Wood, is
likewise without merit. The letter, even if admitted, would not have changed the result of
these proceedings, as a fair reading of the letter is not repugnant to a single contention of
defendant-appellee.
The judgment appealed from is therefore affirmed. Costs against appellants. So ordered.
Malcolm, Villa-Real, Abad Santos, and Imperial, JJ., concur.
G.R. No. L-17504 & L-17506

carried out by them for defendant corporation, and "to collect, produce and/or pay to the
defendant corporation the outstanding balance of the amounts so diverted and still
unpaid to defendant corporation";
Under the SECOND CAUSE OF ACTION, that the individual defendants be held liable and
be ordered to pay to the defendant corporation "whatever amounts may be recovered by
the plaintiffs in Civil Case No. 20122, entitled 'Francisco Rodriguez vs. Ma-ao Sugar Central
Co.'"; to return to the defendant corporation all amounts withdrawn by way of
discretionary funds or backpay, and to account for the difference between the
corporation's crop loan accounts payable and its crop loan accounts receivable;
Under the THIRD CAUSE OF ACTION, that the corporation be dissolved and its net assets
be distributed to the stockholders; and
Under the FOURTH CAUSE OF ACTION, that the defendants be ordered "to pay the sum of
P300,000.00 by way of compensatory, moral and exemplary damages and for expenses of
litigation, including attorney's fees and costs of the suit."
THE FIFTH CAUSE OF ACTION was an application for the provisional remedy of
receivership.

February 28, 1969

RAMON DE LA RAMA, FRANCISCO RODRIGUEZ, HORTENCIA SALAS, PAZ SALAS

and PATRIA SALAS, heirs of Magdalena Salas, as stockholders on their own
behalf and for the benefit of the Ma-ao Sugar Central Co., Inc., and other
stockholders thereof who may wish to join in this action, plaintiffs-appellants,
vs.
MA-AO SUGAR CENTRAL CO., INC., J. AMADO ARANETA, MRS. RAMON S.
ARANETA, ROMUALDO M. ARANETA, and RAMON A. YULO, defendantsappellants.
San Juan, Africa and Benedicto for plaintiffs-appellants.
Vicente Hilado and Gianzon, Sison, Yulo and Associates for defendants-appellants.
CAPISTRANO, J.:
This was a representative or derivative suit commenced on October 20, 1953, in the Court
of First Instance of Manila by four minority stockholders against the Ma-ao Sugar Central
Co., Inc. and J. Amado Araneta and three other directors of the corporation.
The complaint comprising the period November, 1946 to October, 1952, stated five
causes of action, to wit: (1) for alleged illegal and ultra-vires acts consisting of self-dealing
irregular loans, and unauthorized investments; (2) for alleged gross mismanagement; (3)
for alleged forfeiture of corporate rights warranting dissolution; (4) for alleged damages
and attorney's fees; and (5) for receivership.
Plaintiffs prayed, in substance, as follows:
Under the FIRST CAUSE OF ACTION, that the defendant J. Amado Araneta and his
individual co-defendants be ordered to render an accounting of all transactions made and

In their answer originally filed on December 1, 1953, and amended on February 1, 1955,
defendants denied "the allegations regarding the supposed gross mismanagement,
fraudulent use and diversion of corporate funds, disregard of corporate requirements,
abuse of trust and violation of fiduciary relationship, etc., supposed to have been
discovered by plaintiffs, all of which are nothing but gratuitous, unwarranted, exaggerated
and distorted conclusions not supported by plain and specific facts and transactions
alleged in the complaint."
BY WAY OF SPECIAL DEFENSES, the defendants alleged, among other things: (1) that the
complaint "is premature, improper and unjustified"; (2) that plaintiffs did not make an
"earnest, not simulated effort" to exhaust first their remedies within the corporation
before filing their complaint; (3) that no actual loss had been suffered by the defendant
corporation on account of the transactions questioned by plaintiffs; (4) that the payments
by the debtors of all amounts due to the defendant corporation constituted a full,
sufficient and adequate remedy for the grievances alleged in the complaint and (5) that
the dissolution and/or receivership of the defendant corporation would violate and impair
the obligation of existing contracts of said corporation.
BY WAY OF COUNTERCLAIM, the defendants in substance further alleged, among others,
that the complaint was premature, improper and malicious, and that the language used
was "unnecessarily vituperative abusive and insulting, particularly against defendant J.
Amado Araneta who appears to be the main target of their hatred." Wherefore, the
defendant sought to recover "compensation for damages, actual, moral, exemplary and
corrective, including reasonable attorney's fees."
After trial, the Lower Court rendered its Decision (later supplemented by an Order
resolving defendants' Motion for Reconsideration), the dispositive portion of which reads:
IN VIEW WHEREOF, the Court dismisses the petition for dissolution but condemns
J. Amado Araneta to pay unto Ma-ao Sugar Central Co., Inc. the amount of

P46,270.00 with 8% interest from the date of the filing of this complaint, plus the
costs; the Court reiterates the preliminary injunction restraining the Ma-ao Sugar
Central Co., Inc. management to give any loans or advances to its officers and
orders that this injunction be as it is hereby made, permanent; and orders it to
refrain from making investments in Acoje Mining, Mabuhay Printing, and any
other company whose purpose is not connected with the Sugar Central business;
costs of plaintiffs to be borne by the Corporation and J. Amado Araneta.
From this judgment both parties appealed directly to the Supreme Court.
Before taking up the errors respectively, assigned by the parties, we should state that the
following findings of the Lower Court on the commission of corporate irregularities by the
defendants have not been questioned by the defendants:
1. Failure to hold stockholders' meetings regularly. No stockholders' meetings
were held in 1947, 1950 and 1951;
2. Irregularities in the keeping of the books. Untrue entries were made in the
books which could not simply be considered as innocent errors;
3. Illegal investments in the Mabuhay Printing, P2,280,00, and the Acoje Mining,
P7,000.00. The investments were made not in pursuance of the corporate
purpose and without the requisite authority of two-thirds of the stockholders;
4. Unauthorized loans to J. Amado Araneta totalling P132,082.00 (which,
according to the defendants, had been fully paid), in violation of the by-laws of
the corporation which prohibits any director from borrowing money from the
corporation;
5. Diversion of corporate funds of the Ma-ao Sugar Central Co., Inc. to:
J. Amado Araneta & Co.

P243,415.62

Luzon Industrial Corp.

585,918.17

Associated Sugar

463,860.36

General Securities
Bacolod Murcia
Central Azucarera del Danao
Talisay-Silay

86,743.65
501,030.61
97,884.42
4,365.90

The Court found that sums were taken out of the funds of the Ma-ao Sugar Central Co.,
Inc. and delivered to these affiliated companies, and vice versa, without the approval of
the Ma-ao Board of Directors, in violation of Sec. III, Art. 6-A of the by-laws.
The errors assigned in the appeal of the plaintiffs, as appellants, are as follows:

I.
THE LOWER COURT ERRED IN HOLDING THAT THE INVESTMENT OF CORPORATE
FUNDS OF THE MA-AO SUGAR CENTRAL CO., INC., IN THE PHILIPPINE FIBER
PROCESSING CO., INC. WAS NOT A VIOLATION OF SEC. 17- OF THE
CORPORATION LAW.
II.
THE LOWER COURT ERRED IN NOT FINDING THAT THE MA-AO SUGAR CENTRAL
CO., INC. WAS INSOLVENT.
III.
THE LOWER COURT ERRED IN HOLDING THAT THE DISCRIMINATORY ACTS
COMMITTED AGAINST PLANTERS DID NOT CONSTITUTE MISMANAGEMENT.
IV.
THE LOWER COURT ERRED IN HOLDING THAT ITS CULPABLE ACTS WERE
INSUFFICIENT FOR THE DISSOLUTION OF THE CORPORATION.
The portions of the Decision of the Lower Court assailed by the plaintiffs as appellants are
as follows:
(1) ".... Finally, as to the Philippine Fiber, the Court takes it that defendants admit
having invested P655,000.00 in shares of stock of this company but that this was
ratified by the Board of Directors in Resolutions 60 and 80, Exhibits "R" and "R2"; more than that, defendants contend that since said company was engaged in
the manufacture of sugar bags it was perfectly legitimate for Ma-ao Sugar either
to manufacture sugar bags or invest in another corporation engaged in said
manufacture, and they quote authorities for the purpose, pp. 28-31,
memorandum; the Court is persuaded to believe that the defendants on this
point are correct, because while Sec. 17-1/2 of the Corporation Law provides
that:
No corporation organized under this act shall invest its funds in any
other corporation or business or for any purpose other than the main
purpose for which it was organized unless its board of directors has
been so authorized in a resolution by the affirmative vote of
stockholders holding shares in the corporation entitling them to exercise
at least two-thirds of the voting power on such proposal at the
stockholders' meeting called for the purpose.
the Court is convinced that that law should be understood to mean as the
authorities state, that it is prohibited to the Corporation to invest in shares of
another corporation unless such an investment is authorized by two-thirds of the
voting power of the stockholders, if the purpose of the corporation in which
investment is made is foreign to the purpose of the investing corporation
because surely there is more logic in the stand that if the investment is made in

a corporation whose business is important to the investing corporation and would

aid it in its purpose, to require authority of the stockholders would be to unduly
curtail the Power of the Board of Directors; the only trouble here is that the
investment was made without any previous authority of the Board of Directors
but was only ratified afterwards; this of course would have the effect of legalizing
the unauthorized act but it is an indication of the manner in which corporate
business is transacted by the Ma-ao Sugar administration, the fact that off and
on, there would be passed by the Board of Directors, resolutions ratifying all acts
previously done by the management, e.g. resolutions passed on February 25,
1947, and February 25, 1952, by the Board of Directors as set forth in the
affidavit of Isidro T. Dunca p. 127, etc. Vol. 1. (Decision, pp. 239-241 of Record on
Appeal.)
xxx

xxx

xxx

(2) "On the other hand, the Court has noted against plaintiffs that their
contention that Ma-ao Sugar is on the verge of bankruptcy has not been clearly
shown; against this are Exh. C to Exh. C-3 perhaps the best proof that insolvency
is still far is that this action was filed in 1953 and almost seven years have
passed since then without the company apparently getting worse than it was
before; ..." (Decision, pp. 243-244,supra.)
xxx

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xxx

(3) "As to the crop loan anomalies in that instead of giving unto the planters the
entire amount alloted for that, the Central withheld a certain portion for their own
use, as can be seen in Appendix A of Exh. C-1, while the theory of plaintiffs is
that since between the amount of P3,791,551.78 the crop loan account payable,
and the amount of P1,708,488.22, the crop loan receivable, there is a difference
of P2,083,063.56, this would indicate that this latter sum had been used by the
Central itself for its own purposes; on the other hand, defendants contend that
the first amount did not represent the totality of the crop loans obtained from the
Bank for the purpose of relending to the planters, but that it included the
Central's own credit line on its 40% share in the standing crop; and that this
irregularity amounts to a grievance by plaintiffs as planters and not as
stockholders, the Court must find that as to this count, there is really reason to
find that said anomaly is not a clear basis for the derivative suit, first, because
plaintiffs' evidence is not very sufficient to prove clearly the alleged diversion in
the face of defendants' defense; there should have been a showing that the
Central had no authority to make the diversion; and secondly, if the anomaly
existed, there is ground to hold with defendants that it was an anomaly
pernicious not to the Central but to the planters; it was not even pernicious to
the stockholders.
Going to the discriminatory acts of J. Amado Araneta, namely, manipulation of
cane allotments, withholding of molasses and alcohol shares, withholding of
trucking allowance, formation of rival planters associations, refusal to deal with
legitimate planters group, Exh. S; the Court notices that as to the failure to
provide hauling transportation, this in a way is corroborated by Exh. 7, that part
containing the decision of the Court of First Instance of Manila, civil
20122, Francisco Rodriguez v. Ma-ao Sugar; for the reason, however, that even if
these were true, those grievances were grievances of plaintiffs as planters and
not as stockholders just as the grievance as to the crop loans already adverted

to, this Court will find insufficient merit on this count. (Decision, pp. 230231, supra.)
xxx

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xxx

(4) "...; for the Court must admit its limitations and confess that it cannot pretend
to know better than the Board in matters where the Board has not transgressed
any positive statute or by-law especially where as here, there is the circumstance
that presumably, an impartial representative in the Board of Directors, the one
from the Philippine National Bank, against whom apparently plaintiffs have no
quarrel, does not appear to have made any protest against the same; the net
result will be to hold that the culpable acts proved are not enough to secure a
dissolution; the Court will only order the correction of abuses, proved as already
mentioned; nor will the Court grant any more damages one way or the other.
(Decision, p. 244,supra.)
On the other hand, the errors assigned in the appeal of the defendants as appellants are
as follows:
I.
THE LOWER COURT ERRED IN ADJUDGING J. AMADO ARANETA TO PAY TO MA-AO
SUGAR CENTRAL CO., INC., THE AMOUNT OF P46,270.00, WITH 8% INTEREST
FROM THE DATE OF FILING OF THE COMPLAINT.
II.
THE LOWER COURT ERRED IN NOT ORDERING THE PLAINTIFFS TO PAY THE
DEFENDANTS, PARTICULARLY J. AMADO ARANETA, THE DAMAGES PRAYED FOR IN
THE COUNTERCLAIM OF SAID DEFENDANTS.
The portions of the Decision of the Lower Court assailed by the defendants as appellants
are as follows:
(1) "As to the alleged juggling of books in that the personal account of J. Amado
Araneta of P46,270.00 was closed on October 31, 1947 by charges transferred to
loans receivable nor was interest paid on this amount, the Court finds that this is
related to charge No. 1, namely, the granting of personal loans to J. Amado
Araneta; it is really true that according to the books, and as admitted by
defendants, J. Amado Araneta secured personal loans; in 1947, the cash advance
to him was P132,082.00 (Exh. A); the Court has no doubt that this was against
the By-Laws which provided that:
The Directors shall not in any case borrow money from the Company.
(Sec. III, Art. 7);
the Court therefore finds this count to be duly proved; worse, the Court also finds
that as plaintiffs contend, while the books of the Corporation would show that the
last balance of P46,270.00 was written off as paid, as testified to by Auditor Mr.
Sanchez, the payment appeared to be nothing more than a transfer of his loan

receivable account, stated otherwise, the item was only transferred from the
personal account to the loan receivable account, so that again the Court
considers established the juggling of the books; and then again, it is also true
that the loans were secured without any interest and while it is true that in the
Directors' meeting of 21 October, 1953, it was resolved to collect 8%, the Court
does not see how such a unilateral action of the Board could bind the borrowers.
Be it stated that defendants have presented in evidence Exh. 5 photostatic copy
of the page in loan receivable and it is sought to be proved that J. Amado
Araneta's debt was totally paid on 31 October, 1953; to the Court, in the absence
of definite primary proof of actual payment having found out that there had
already been a juggling of books, it cannot just believe that the amount had been
paid as noted in the books. (Decision, pp. 233-235 of Record on Appeal.)
(2) "With respect to the second point in the motion for reconsideration to the
effect that the Court did not make any findings of fact on the counterclaim of
defendants, although the Court did not say that in so many words, the Court
takes it that its findings of fact on pages 17 to 21 of its decision were enough to
justify a dismissal of the counterclaim, because the counterclaims were based on
the fact that the complaint was premature, improper, malicious and that the
language is unnecessarily vituperative abusive and insulting; but the Court has
not found that the complaint is premature; nor has the Court found that the
complaint was malicious; these findings can be gleaned from the decision with
respect to the allegation that the complaint was abusive and insulting, the Court
does not concur; for it has not seen anything in the evidence that would justify a
finding that plaintiffs and been actuated by bad faith, nor is there anything in the
complaint essentially libelous; especially as the rule is that allegations in
pleading where relevant, are privileged even though they may not clearly proved
afterwards; so that the Court has not seen any merit in the counterclaims; and
the Court had believed that the decision already carried with it the implication of
the dismissal of the counterclaims, but if that is not enough, the Court makes its
position clear on this matter in this order, and clarifies that it has dismissed the
counterclaims of defendant; ..." (Order of September 3, 1960, pp. 248249, supra.)
Regarding Assignment of Errors Nos. 2, 3 and 4 contained in the brief of the plaintiffs as
appellants, it appears to us that the Lower Court was correct in its appreciation (1) that
the evidence presented did not show that the defendant Ma-ao Sugar Company was
insolvent (2) that the alleged discriminatory acts committed by the defendant Central
against the planters were not a proper subject of derivative suit, but, at most, constituted
a cause of action of the individual planters; and (3) that the acts of mismanagement
complained of and proved do not justify a dissolution of the corporation.
Whether insolvency exists is usually a question of fact, to be determined from an
inventory of the assets and their value, as well as a consideration of the
liabilities.... But the mere impairment of capital stock alone does not establish
insolvency there being other evidence as to the corporation being a going
concern with sufficient assets. Also, the excess of liabilities over assets does not
establish insolvency, when other assets are available. (Fletcher Cyc. of the Law of
Private Corporations, Vol. 15A, 1938 Ed pp. 34-37; Emphasis supplied).
But relief by dissolution will be awarded in such cases only where no other
adequate remedy is available, and is not available where the rights of the
stockholders can be, or are, protected in some other way. (16 Fletcher Cyc.

Corporations, 1942 Ed., pp. 812-813, citing "Thwing v. McDonald", 134 Minn. 148,
156 N.W. 780, 158 N.W. 820, 159 N.W. 564, Ann. Cas. 1918 E 420; Mitchell v.
Bank of St. Paul, 7 Minn. 252).
The First Assignment of Error in the brief of the plaintiffs as appellants, contending that
the investment of corporate funds by the Ma-ao Sugar Co., Inc., in another corporation
(the Philippine Fiber Processing Co., Inc.) constitutes a violation of Sec. 17- of the
Corporation Law, deserves consideration.
Plaintiffs-appellants contend that in 1950 the Ma-ao Sugar Central Co., Inc., through its
President, J. Amado Araneta,, subscribed for P300,000.00 worth of capital stock of the
Philippine Fiber Processing Co. Inc., that payments on the subscription were made on
September 20, 1950, for P150,000.00, on April 30, 1951, for P50,000.00, and on March 6,
1952, for P100,000.00; that at the time the first two payments were made there was no
board resolution authorizing the investment; and that it was only on November 26, 1951,
that the President of Ma-ao Sugar Central Co., Inc., was so authorized by the Board of
Directors.
In addition, 355,000 shares of stock of the same Philippine Fiber Processing Co., Inc.,
owned by Luzon Industrial, corporation were transferred on May 31, 1952, to the
defendant Ma-ao Sugar Central Co., Inc., with a valuation of P355,000.00 on the basis of
P1.00 par value per share. Again the "investment" was made without prior board
resolution, the authorizing resolution having been subsequentIy approved only on June 4,
1952.
Plaintiffs-appellants also contend that even assuming, arguendo, that the said Board
Resolutions are valid, the transaction, is still wanting in legality, no resolution having been
approved by the affirmative vote of stockholders holding shares in the corporation
entitling them to exercise at least two-thirds of the voting power, as required in Sec. 17-
of the Corporation Law.
The legal provision invoked by the plaintiffs, as appellants, Sec. 17- of the Corporation
Law, provides:
No corporation organized under this act shall invest its funds in any other
corporation or business, or for any purpose other than the main purpose for
which it was organized, unless its board of directors has been so authorized in a
resolution by the affirmative vote of stockholders holding shares in the
corporation entitling them to exercise at least two-thirds of the voting power on
such proposal at a stockholders' meeting called for the purpose ....
On the other hand, the defendants, as appellees, invoked Sec. 13, par. 10 of the
Corporation Law, which provides:
SEC. 13. Every corporation has the power:
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xxx

(9) To enter into any obligation or contract essential to the proper administration
of its corporate affairs or necessary for the proper transaction of the business or
accomplishment of the purpose for which the corporation was organized;
(10) Except as in this section otherwise provided, and in order to accomplish its
purpose as stated in the articles of incorporation, to acquire, hold, mortgage,
pledge or dispose of shares, bonds, securities and other evidences of
indebtedness of any domestic or foreign corporation.
A reading of the two afore-quoted provisions shows that there is need for interpretation of
the apparent conflict.
In his work entitled "The Philippine Corporation Law," now in its 5th edition, Professor
Sulpicio S. Guevara of the University of the Philippines, College of Law, a well-known
authority in commercial law, reconciled these two apparently conflicting legal provisions,
as follows:
j. Power to acquire or dispose of shares or securities. A private corporation, in
order to accomplish its purpose as stated in its articles of incorporation, and
subject to the limitations imposed by the Corporation Law, has the power to
acquire, hold, mortgage, pledge or dispose of shares, bonds, securities, and other
evidences of indebtedness of any domestic or foreign corporation. Such an act, if
done in pursuance of the corporate purpose, does not need the approval of the
stockholders; but when the purchase of shares of another corporation is done
solely for investment and not to accomplish the purpose of its incorporation, the
vote of approval of the stockholders is necessary. In any case, the purchase of
such shares or securities must be subject to the limitations established by the
Corporation Law; namely, (a) that no agricultural or mining corporation shall in
anywise be interested in any other agricultural or mining corporation; or (b) that
a non-agricultural or non-mining corporation shall be restricted to own not more
than 15% of the voting stock of any agricultural or mining corporation; and (c)
that such holdings shall be solely for investment and not for the purpose of
bringing about a monopoly in any line of commerce or combination in restraint of
trade. (The Philippine Corporation Law by Sulpicio S. Guevara, 1967 Ed., p. 89.)
(Emphasis ours.)lawphi1.nt
40. Power to invest corporate funds. A private corporation has the power to
invest its corporate funds in any other corporation or business, or for any
purpose other than the main purpose for which it was organized, provided that
'its board of directors has been so authorized in a resolution by the affirmative
vote of stockholders holding shares in the corporation entitling them to exercise
at least two-thirds of the voting power on such a proposal at a stockholders'
meeting called for that purpose,' and provided further, that no agricultural or
mining corporation shall in anywise be interested in any other agricultural or
mining corporation. When the investment is necessary to accomplish its purpose
or purposes as stated in it articles of incorporation, the approval of the
stockholders is not necessary. (Id., p. 108.) (Emphasis ours.)
We agree with Professor Guevara.
We therefore agree with the finding of the Lower Court that the investment in question
does not fall under the purview of Sec. 17- of the Corporation Law.

With respect to the defendants' assignment of errors, the second (referring to the
counterclaim) is clearly without merit. As the Lower Court aptly ruled in its Order of
September 3, 1960 (resolving the defendants' Motion for Reconsideration) the findings of
fact were enough to justify a dismissal of the counterclaim, "because the counterclaims
were based on the fact that the complaint was premature, improper, malicious and that
the language is unnecessarily vituperative abusive and insulting; but the Court has not
found that the complaint is premature; nor has the Court found that the complaint was
malicious; these findings can be gleaned from the decision; with respect to the allegation
that the complaint was abusive and insulting, the Court does not concur; for it has not
seen anything in the evidence that would justify a finding that plaintiffs had been
actuated by bad faith, nor is there anything in the complaint essentially libelous especially
as the rule is that allegations in pleadings where relevant, are privileged even though they
may not be clearly proved afterwards; ..."
As regards defendants' first assignment of error, referring to the status of the account of J.
Amado Araneta in the amount of P46,270.00, this Court likewise agrees with the finding of
the Lower Court that Exhibit 5, photostatic copy of the page on loans receivable does not
constitute definite primary proof of actual payment, particularly in this case where there is
evidence that the account in question was transferred from one account to another. There
is no better substitute for an official receipt and a cancelled check as evidence of
payment.
In the judgment, the lower court ordered the management of the Ma-ao Sugar Central Co.,
Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing and any other
company whose purpose is not connected with the sugar central business." This portion of
the decision should be reversed because, Sec. 17- of the Corporation Law allows a
corporation to "invest its fund in any other corporation or business, or for any purpose
other than the main purpose for which it was organized," provided that its board of
directors has been so authorized by the affirmative vote of stockholders holding shares
entitling them to exercise at least two-thirds of the voting power.
IN VIEW OF ALL THE FOREGOING, that part of the judgment which orders the Ma-ao Sugar
Central Co., Inc. "to refrain from making investments in Acoje Mining, Mabuhay Printing,
and any other: company whose purpose is not connected with the sugar central
business," is reversed. The other parts of the judgment are, affirmed. No special
pronouncement as to costs.

G.R. No. L-13194

January 29, 1960

BUENAVENTURA T. SALDANA, plaintiff-appellant,

vs.
PHILIPPINE GUARANTY COMPANY, INC., et al., defendants-appellees.
Gatchalian & Padilla for appellant.
Emiliano Tabasondra for appellee Company.Teodoro Padilla for the other appellees.
REYES, J.B.L., J.:
This case arose from a complaint for damages filed by Buenaventura Saldana (docketed
as Civil Case No. 32703 of the Court of First Instance of Manila) that was dismissed by
order of the Court dated August 20, 1957, for lack of sufficient cause of action. In another
order of September 30, 1957 of the same court, plaintiff's motion for reconsideration was
denied, and the case was appealed to this Court.
The facts are that on May 8, 1953, in order to secure an indebtedness of P15,000.00,
Josefina Vda. de Aleazar executed in favor of the plaintiff-appellant Buenaventura Saldana
a chattel mortgage covering properties described as follows:
A building of strong materials, used for restaurant business, located in front of
the San Juan de Dios Hospital at Dewey Boulevard, Pasay City, and the following
personal properties therein contained:
1 Radio, Zenith, cabinet type.
1 Cooler.
1 Electric range, stateside, 4 burners.
1 Frigidaire, 8 cubic feet.

1 G.E. Deepfreezer.
8 Tables, stateside.
32 Chromium chairs, stateside.
1 Sala set upholstered, 6 pieces.
1 Bedroom set, 6 pieces.
And all other furniture's, fixtures or equipment found in the said premises.
Subsequent to the execution of said mortgage and while the same was still in force, the
defendant Hospital de San Juan de Dios, Inc. obtained, in Civil Case No. 1930 of the
Municipal Court of Pasay City, a judgment was duly Josewfina Vda. de Eleazar. A writ of
execution was duly issued and, on January 28, 1957, the same was served on the
judgment debtor by the sheriff of Pasay City; whereupon the following properties of
Josefina Eleazar were levied upon:
8 Tables with 4 (upholstered) chairs each.
1 Table with 4 (wooden) chairs.
1 Table (large) with 5 chairs.
1 Radio-phono (Zenith, 8 tubes).
2 Showcases (big, with mirrors).

On January 31, 1957, the plaintiff-appellant Saldana filed a third-party claim asserting that
the above-described properties levied are subject to his chattel mortgage of May 8, 1953.
In virtue thereof, the sheriff released only some of the property originally included in the
levy of January 28, 1957, to wit:
1 Radio, Zenith, cabinet type.
8 Tables, stateside.
32 Chromiun chairs, stateside.
1 G.E. Deep freezer.
To proceed with the execution sale of the rest of the properties still under levy, the
defendants-appellees Hospital de San Juan de Dios, Inc. and the Philippine Guaranty Co.,
Inc., executed an indemnity bond to answer for any damages that plaintiff might suffer.
Accordingly, on February 13, 1957, the said properties were sold to the defendant hospital
as the highest bidder, for P1,500.00.
Appellants claims that the phrase in the chattel mortgage contract "and all other
furnitures, fixtures and equipment found in the said premises", validly and sufficiently
covered within its terms the personal properties disposed of in the auction sale, as to
warrant an action for damages by the plaintiff mortgagee.
There is merit in appellant's contention. Section 7 of Act No. 1508, commonly and better
known as the Chattel Mortgage Law, does not demand a minute and specific description
of every chattel mortgaged in the deal of mortgage but only requires that the description
of the properties be such "as to enable the parties in the mortgage, or any other person,
after reasonable inquiry and investigation to identify the same". Gauged by this standard,
general description have been held by this Court. (See Stockholder vs. Ramirez, 44 Phil.,
993; Pedro de Jesus vs. Guam Bee Co., Inc., 72 Phil., 464).

1 Rattan sala set with 4 chairs, 1 table and 3 sidetables .

1 Wooden drawer.
1 Tocador (brown with mirror).
1 Aparador .
2 Beds (single type).
1 Freezer (deep freeze).
1 Gas range (magic chef, with 4 burners).
1 Freezer (G.E.).

A similar rule obtains in the United States courts and decisions there have repeatedly
upheld clauses of general import in mortgages of chattels other than goods for trade, and
containing expressions similar to that of the contract now before us. Thus, "and all other
stones belonging to me and all other goods and chattels" (Russel vs. Winne, 97 Am. Dec.
755); "all of the property of the said W.W. Allen used or situated upon the leased
premises" (Dorman vs. Crooks State Bank, 64 A.L.R. 614); "all goods in the store where
they are doing business in E. City, N.C." (Davis vs. Turner, 120 Fed. 605); "all and singular
the goods, wares, stock, iron tools manufactured articles and property of every
description, being situated in or about the shop or building now occupied by me in Howley
Stree" (Winslow vs. Merchants Ins. Co., 38 Am. Dec. 368,) were held sufficient description,
on the theory that parol evidence could supplement it to render identification rule is
expressed in Walker vs. Johnson (Mont.) 1254 A.L.R. 937:
The courts and textbook writers have developed several rules for determination
of the sufficiency of the description in a chattel mortgage. The rules are general
in nature and are different where the controversy is between the parties to the
mortgage from the situation where third parties with out actual notice come in. In
11 C.J. 457, it is said: "Ad against third persons the description in the mortgage
must point out its subject matter so that such person may identify the chattels

observed, but it is not essential that the description be so specific that the
property may be identified by it alone, if such description or means of
identification which, if pursued will disclose the property conveyed." In 5 R.C.L.
423 the rule is stated that a description which will enable a third person, aided
by inquires which the instrument itself suggest to identify the property is
sufficiently definite." In 1 Jones on Chattel Mortgages and Conditional Sales,
Bowers Edition, at page 95 the writer says: "As to them (third persons), the
description is sufficient if it points to evidence whereby the precise thing
mortgaged may be ascertained with certainty." Here there is nothing in the
description "873 head of sheep" from which anyone, the mortgagee or third
persons, could ascertain with any certainty what chattels were covered by the
mortgage.

We find that the ground for the appealed order (lack of cause of action) does not appear
so indubitable as to warrant a dismissal of the action without inquiry into the merits and
without the description in the deed of mortgage (Nico vs. Blanco, 81 Phil., 213;
Zobel vs. Abreau, 52 Off. Gaz., 3592).
Wherefore, the orders appealed from are set aside and the case remanded to the lower
court for further proceedings. Costs against appellee.
Paras, C.J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia,
Barrera and Gutierrez David, J., concur.

In many instances the courts have held the description good where, though
otherwise faulty, the mortgage explicity states that the property is in the
possession of the mortgagor, and especially where it is the only property of that
kind owned by him.
The specifications in the chattel mortgage contract in the instant case, we believe, in
substantial compliance with the "reasonable description rule" fixed by the chattel
Mortgage Act. We may notice in the agreement, moreover, that the phrase in question is
found after an enumeration of other specific articles. It can thus be reasonably inferred
therefrom that the "furnitures, fixture and equipment" referred to are properties of like
nature, similarly situated or similarly used in the restaurant of the mortgagor located in
front of the San Juan de Dos Hospital at Dewey Boulevard, Pasay City, which articles can
be definitely pointed out or ascertain by simple inquiry at or about the premises. Note
that the limitation found in the last paragraph of section 7 of the Chattel Mortgage Law 1on
"like or subsituated properties" make reference to those "thereafter acquired by the
mortgagor and placed in the same depository as the property originally mortgaged", not
to those already existing and originally included at the date of the constitution of the
chattel mortgage. A contrary view would unduly impose a more rigid condition than what
the law prescribes, which is that the description be only such as to enable identification
after a reasonable inquiry and investigation.
The case of Giberson vs. A.N. Jureidini Bros., 44 Phil., 216, 219, cited by the appellees and
the lower court, cannot be likened to the case at bar, for there, what were sought to be
mortgaged included two stores wit all its merchandise, effects, wares, and other bazar
goods which were being constantly disposed of and replaced with new supplies in
connection with the business, thereby making any particular or definite identification
either impractical or impossible under the circumstances. Here, the properties deemed
overed were more or less fixed, or at least permanently situated or used in the premises
of the mortgagor's restaurant.
The rule in the Jureidini case is further weakened by the court's observation that (44 Phil.,
p. 220)
Moreover, if there should exist any doubts on the questions we have just
discussed, they should be treshed out in the insolvency proceedings,
which appears inconsistent with the definitive character of the rulings invoked.

G.R. No. 93695 February 4, 1992

RAMON C. LEE and ANTONIO DM. LACDAO, petitioners,
vs.
THE HON. COURT OF APPEALS, SACOBA MANUFACTURING CORP., PABLO
GONZALES, JR. and THOMAS GONZALES, respondents.
Cayanga, Zuniga & Angel Law Offices for petitioners.
Timbol & Associates for private respondents.

GUTIERREZ, JR., J.:

What is the nature of the voting trust agreement executed between two parties in this
case? Who owns the stocks of the corporation under the terms of the voting trust
agreement? How long can a voting trust agreement remain valid and effective? Did a
director of the corporation cease to be such upon the creation of the voting trust
agreement? These are the questions the answers to which are necessary in resolving the
principal issue in this petition for certiorari whether or not there was proper service of
summons on Alfa Integrated Textile Mills (ALFA, for short) through the petitioners as
president and vice-president, allegedly, of the subject corporation after the execution of a
voting trust agreement between ALFA and the Development Bank of the Philippines (DBP,
for short).

On January 2, 1989, the trial court upheld the validity of the service of summons on ALFA
through the petitioners, thus, denying the latter's motion for reconsideration and requiring
ALFA to filed its answer through the petitioners as its corporate officers.
On January 19, 1989, a second motion for reconsideration was filed by the petitioners
reiterating their stand that by virtue of the voting trust agreement they ceased to be
officers and directors of ALFA, hence, they could no longer receive summons or any court
processes for or on behalf of ALFA. In support of their second motion for reconsideration,
the petitioners attached thereto a copy of the voting trust agreement between all the
stockholders of ALFA (the petitioners included), on the one hand, and the DBP, on the
other hand, whereby the management and control of ALFA became vested upon the DBP.

From the records of the instant case, the following antecedent facts appear:
On November 15, 1985, a complaint for a sum of money was filed by the International
Corporate Bank, Inc. against the private respondents who, in turn, filed a third party
complaint against ALFA and the petitioners on March 17, 1986.
On September 17, 1987, the petitioners filed a motion to dismiss the third party complaint
which the Regional Trial Court of Makati, Branch 58 denied in an Order dated June 27,
1988.
On July 18, 1988, the petitioners filed their answer to the third party complaint.
Meanwhile, on July 12, 1988, the trial court issued an order requiring the issuance of
an alias summons upon ALFA through the DBP as a consequence of the petitioner's letter
informing the court that the summons for ALFA was erroneously served upon them
considering that the management of ALFA had been transferred to the DBP.
In a manifestation dated July 22, 1988, the DBP claimed that it was not authorized to
receive summons on behalf of ALFA since the DBP had not taken over the company which
has a separate and distinct corporate personality and existence.
On August 4, 1988, the trial court issued an order advising the private respondents to take
the appropriate steps to serve the summons to ALFA.
On August 16, 1988, the private respondents filed a Manifestation and Motion for the
Declaration of Proper Service of Summons which the trial court granted on August 17,
1988.
On September 12, 1988, the petitioners filed a motion for reconsideration submitting that
Rule 14, section 13 of the Revised Rules of Court is not applicable since they were no
longer officers of ALFA and that the private respondents should have availed of another
mode of service under Rule 14, Section 16 of the said Rules, i.e.,through publication to
effect proper service upon ALFA.
In their Comment to the Motion for Reconsideration dated September 27, 1988, the
private respondents argued that the voting trust agreement dated March 11, 1981 did not
divest the petitioners of their positions as president and executive vice-president of ALFA
so that service of summons upon ALFA through the petitioners as corporate officers was
proper.

On April 25, 1989, the trial court reversed itself by setting aside its previous Order dated
January 2, 1989 and declared that service upon the petitioners who were no longer
corporate officers of ALFA cannot be considered as proper service of summons on ALFA.
On May 15, 1989, the private respondents moved for a reconsideration of the above Order
which was affirmed by the court in its Order dated August 14, 1989 denying the private
respondent's motion for reconsideration.
On September 18, 1989, a petition for certiorari was belatedly submitted by the private
respondent before the public respondent which, nonetheless, resolved to give due course
thereto on September 21, 1989.
On October 17, 1989, the trial court, not having been notified of the pending petition
for certiorari with public respondent issued an Order declaring as final the Order dated
April 25, 1989. The private respondents in the said Order were required to take positive
steps in prosecuting the third party complaint in order that the court would not be
constrained to dismiss the same for failure to prosecute. Subsequently, on October 25,
1989 the private respondents filed a motion for reconsideration on which the trial court
took no further action.
On March 19, 1990, after the petitioners filed their answer to the private respondents'
petition for certiorari, the public respondent rendered its decision, the dispositive portion
of which reads:
WHEREFORE, in view of the foregoing, the orders of respondent judge
dated April 25, 1989 and August 14, 1989 are hereby SET ASIDE and
respondent corporation is ordered to file its answer within the
reglementary period. (CA Decision, p. 8; Rollo, p. 24)
On April 11, 1990, the petitioners moved for a reconsideration of the decision of the public
respondent which resolved to deny the same on May 10, 1990. Hence, the petitioners
filed this certiorari petition imputing grave abuse of discretion amounting to lack of
jurisdiction on the part of the public respondent in reversing the questioned Orders dated
April 25, 1989 and August 14, 1989 of the court a quo, thus, holding that there was proper
service of summons on ALFA through the petitioners.
In the meantime, the public respondent inadvertently made an entry of judgment on July
16, 1990 erroneously applying the rule that the period during which a motion for
reconsideration has been pending must be deducted from the 15-day period to appeal.

However, in its Resolution dated January 3, 1991, the public respondent set aside the
aforestated entry of judgment after further considering that the rule it relied on applies to
appeals from decisions of the Regional Trial Courts to the Court of Appeals, not to appeals
from its decision to us pursuant to our ruling in the case of Refractories Corporation of the
Philippines v. Intermediate Appellate Court, 176 SCRA 539 [1989]. (CA Rollo, pp. 249-250)
In their memorandum, the petitioners present the following arguments, to wit:
(1) that the execution of the voting trust agreement by a stockholders
whereby all his shares to the corporation have been transferred to the
trustee deprives the stockholders of his position as director of the
corporation; to rule otherwise, as the respondent Court of Appeals did,
would be violative of section 23 of the Corporation Code ( Rollo, pp. 2703273); and
(2) that the petitioners were no longer acting or holding any of the
positions provided under Rule 14, Section 13 of the Rules of Court
authorized to receive service of summons for and in behalf of the
private domestic corporation so that the service of summons on ALFA
effected through the petitioners is not valid and ineffective; to maintain
the respondent Court of Appeals' position that ALFA was properly served
its summons through the petitioners would be contrary to the general
principle that a corporation can only be bound by such acts which are
within the scope of its officers' or agents' authority (Rollo, pp. 273-275)
In resolving the issue of the propriety of the service of summons in the instant case, we
dwell first on the nature of a voting trust agreement and the consequent effects upon its
creation in the light of the provisions of the Corporation Code.
A voting trust is defined in Ballentine's Law Dictionary as follows:
(a) trust created by an agreement between a group of the stockholders
of a corporation and the trustee or by a group of identical agreements
between individual stockholders and a common trustee, whereby it is
provided that for a term of years, or for a period contingent upon a
certain event, or until the agreement is terminated, control over the
stock owned by such stockholders, either for certain purposes or for all
purposes, is to be lodged in the trustee, either with or without a
reservation to the owners, or persons designated by them, of the power
to direct how such control shall be used. (98 ALR 2d. 379 sec. 1 [d]; 19
Am J 2d Corp. sec. 685).
Under Section 59 of the new Corporation Code which expressly recognizes voting trust
agreements, a more definitive meaning may be gathered. The said provision partly reads:
Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of conferring upon
a trustee or trustees the right to vote and other rights pertaining to the
share for a period rights pertaining to the shares for a period not
exceeding five (5) years at any one time: Provided, that in the case of a
voting trust specifically required as a condition in a loan agreement,

said voting trust may be for a period exceeding (5) years but shall
automatically expire upon full payment of the loan. A voting trust
agreement must be in writing and notarized, and shall specify the terms
and conditions thereof. A certified copy of such agreement shall be filed
with the corporation and with the Securities and Exchange Commission;
otherwise, said agreement is ineffective and unenforceable. The
certificate or certificates of stock covered by the voting trust agreement
shall be cancelled and new ones shall be issued in the name of the
trustee or trustees stating that they are issued pursuant to said
agreement. In the books of the corporation, it shall be noted that the
transfer in the name of the trustee or trustees is made pursuant to said
voting trust agreement.
By its very nature, a voting trust agreement results in the separation of the voting rights
of a stockholder from his other rights such as the right to receive dividends, the right to
inspect the books of the corporation, the right to sell certain interests in the assets of the
corporation and other rights to which a stockholder may be entitled until the liquidation of
the corporation. However, in order to distinguish a voting trust agreement from proxies
and other voting pools and agreements, it must pass three criteria or tests, namely: (1)
that the voting rights of the stock are separated from the other attributes of ownership;
(2) that the voting rights granted are intended to be irrevocable for a definite period of
time; and (3) that the principal purpose of the grant of voting rights is to acquire voting
control of the corporation. (5 Fletcher, Cyclopedia of the Law on Private Corporations,
section 2075 [1976] p. 331citing Tankersly v. Albright, 374 F. Supp. 538)
Under section 59 of the Corporation Code, supra, a voting trust agreement may confer
upon a trustee not only the stockholder's voting rights but also other rights pertaining to
his shares as long as the voting trust agreement is not entered "for the purpose of
circumventing the law against monopolies and illegal combinations in restraint of trade or
used for purposes of fraud." (section 59, 5th paragraph of the Corporation Code) Thus, the
traditional concept of a voting trust agreement primarily intended to single out a
stockholder's right to vote from his other rights as such and made irrevocable for a limited
duration may in practice become a legal device whereby a transfer of the stockholder's
shares is effected subject to the specific provision of the voting trust agreement.
The execution of a voting trust agreement, therefore, may create a dichotomy between
the equitable or beneficial ownership of the corporate shares of a stockholders, on the one
hand, and the legal title thereto on the other hand.
The law simply provides that a voting trust agreement is an agreement in writing whereby
one or more stockholders of a corporation consent to transfer his or their shares to a
trustee in order to vest in the latter voting or other rights pertaining to said shares for a
period not exceeding five years upon the fulfillment of statutory conditions and such other
terms and conditions specified in the agreement. The five year-period may be extended in
cases where the voting trust is executed pursuant to a loan agreement whereby the
period is made contingent upon full payment of the loan.
In the instant case, the point of controversy arises from the effects of the creation of the
voting trust agreement. The petitioners maintain that with the execution of the voting
trust agreement between them and the other stockholders of ALFA, as one party, and the
DBP, as the other party, the former assigned and transferred all their shares in ALFA to
DBP, as trustee. They argue that by virtue to of the voting trust agreement the petitioners

can no longer be considered directors of ALFA. In support of their contention, the

petitioners invoke section 23 of the Corporation Code which provides, in part, that:
Every director must own at least one (1) share of the capital stock of the
corporation of which he is a director which share shall stand in his name
on the books of the corporation. Any director who ceases to be the
owner of at least one (1) share of the capital stock of the corporation of
which he is a director shall thereby cease to be director . . . (Rollo, p.
270)
The private respondents, on the contrary, insist that the voting trust agreement between
ALFA and the DBP had all the more safeguarded the petitioners' continuance as officers
and directors of ALFA inasmuch as the general object of voting trust is to insure
permanency of the tenure of the directors of a corporation. They cited the commentaries
by Prof. Aguedo Agbayani on the right and status of the transferring stockholders, to wit:
The "transferring stockholder", also called the "depositing stockholder",
is equitable owner for the stocks represented by the voting trust
certificates and the stock reversible on termination of the trust by
surrender. It is said that the voting trust agreement does not destroy the
status of the transferring stockholders as such, and thus render them
ineligible as directors. But a more accurate statement seems to be that
for some purposes the depositing stockholder holding voting trust
certificates in lieu of his stock and being the beneficial owner thereof,
remains and is treated as a stockholder. It seems to be deducible from
the case that he may sue as a stockholder if the suit is in equity or is of
an equitable nature, such as, a technical stockholders' suit in right of
the corporation. [Commercial Laws of the Philippines by Agbayani, Vol. 3
pp. 492-493, citing 5 Fletcher 326, 327] (Rollo, p. 291)
We find the petitioners' position meritorious.
Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a party
to its execution from legal titleholder or owner of the shares subject of the voting trust
agreement, he becomes the equitable or beneficial owner. (Salonga,Philippine Law on
Private Corporations, 1958 ed., p. 268; Pineda and Carlos, The Law on Private
Corporations and Corporate Practice, 1969 ed., p. 175; Campos and Lopez-Campos, The
Corporation Code; Comments, Notes & Selected Cases, 1981, ed., p. 386;
Agbayani, Commentaries and Jurisprudence on the Commercial Laws of the
Philippines, Vol. 3, 1988 ed., p. 536). The penultimate question, therefore, is whether the
change in his status deprives the stockholder of the right to qualify as a director under
section 23 of the present Corporation Code which deletes the phrase "in his own right."
Section 30 of the old Code states that:
Every director must own in his own right at least one share of the capital
stock of the stock corporation of which he is a director, which stock shall
stand in his name on the books of the corporation. A director who
ceases to be the owner of at least one share of the capital stock of a
stock corporation of which is a director shall thereby cease to be a
director . . . (Emphasis supplied)

Under the old Corporation Code, the eligibility of a director, strictly speaking, cannot be
adversely affected by the simple act of such director being a party to a voting trust
agreement inasmuch as he remains owner (although beneficial or equitable only) of the
shares subject of the voting trust agreement pursuant to which a transfer of the
stockholder's shares in favor of the trustee is required (section 36 of the old Corporation
Code). No disqualification arises by virtue of the phrase "in his own right" provided under
the old Corporation Code.
With the omission of the phrase "in his own right" the election of trustees and other
persons who in fact are not beneficial owners of the shares registered in their names on
the books of the corporation becomes formally legalized (see Campos and LopezCampos, supra, p. 296) Hence, this is a clear indication that in order to be eligible as a
director, what is material is the legal title to, not beneficial ownership of, the stock as
appearing on the books of the corporation (2 Fletcher, Cyclopedia of the Law of Private
Corporations, section 300, p. 92 [1969]citing People v. Lihme, 269 Ill. 351, 109 N.E. 1051).
The facts of this case show that the petitioners, by virtue of the voting trust agreement
executed in 1981 disposed of all their shares through assignment and delivery in favor of
the DBP, as trustee. Consequently, the petitioners ceased to own at least one share
standing in their names on the books of ALFA as required under Section 23 of the new
Corporation Code. They also ceased to have anything to do with the management of the
enterprise. The petitioners ceased to be directors. Hence, the transfer of the petitioners'
shares to the DBP created vacancies in their respective positions as directors of ALFA. The
transfer of shares from the stockholder of ALFA to the DBP is the essence of the subject
voting trust agreement as evident from the following stipulations:
1. The TRUSTORS hereby assign and deliver to the TRUSTEE the
certificate of the shares of the stocks owned by them respectively and
shall do all things necessary for the transfer of their respective shares to
the TRUSTEE on the books of ALFA.
2. The TRUSTEE shall issue to each of the TRUSTORS a trust certificate
for the number of shares transferred, which shall be transferrable in the
same manner and with the same effect as certificates of stock subject
to the provisions of this agreement;
3. The TRUSTEE shall vote upon the shares of stock at all meetings of
ALFA, annual or special, upon any resolution, matter or business that
may be submitted to any such meeting, and shall possess in that
respect the same powers as owners of the equitable as well as the legal
title to the stock;
4. The TRUSTEE may cause to be transferred to any person one share of
stock for the purpose of qualifying such person as director of ALFA, and
cause a certificate of stock evidencing the share so transferred to be
issued in the name of such person;
xxx xxx xxx
9. Any stockholder not entering into this agreement may transfer his
shares to the same trustees without the need of revising this

agreement, and this agreement shall have the same force and effect
upon that said stockholder. (CA Rollo, pp. 137-138; Emphasis supplied)
Considering that the voting trust agreement between ALFA and the DBP transferred legal
ownership of the stock covered by the agreement to the DBP as trustee, the latter
became the stockholder of record with respect to the said shares of stocks. In the absence
of a showing that the DBP had caused to be transferred in their names one share of stock
for the purpose of qualifying as directors of ALFA, the petitioners can no longer be deemed
to have retained their status as officers of ALFA which was the case before the execution
of the subject voting trust agreement. There appears to be no dispute from the records
that DBP has taken over full control and management of the firm.
Moreover, in the Certification dated January 24, 1989 issued by the DBP through one Elsa
A. Guevarra, Vice-President of its Special Accounts Department II, Remedial Management
Group, the petitioners were no longer included in the list of officers of ALFA "as of April
1982." (CA Rollo, pp. 140-142)
Inasmuch as the private respondents in this case failed to substantiate their claim that the
subject voting trust agreement did not deprive the petitioners of their position as directors
of ALFA, the public respondent committed a reversible error when it ruled that:
. . . while the individual respondents (petitioners Lee and Lacdao) may
have ceased to be president and vice-president, respectively, of the
corporation at the time of service of summons on them on August 21,
1987, they were at least up to that time, still directors . . .
The aforequoted statement is quite inaccurate in the light of the express terms of
Stipulation No. 4 of the subject voting trust agreement. Both parties, ALFA and the DBP,
were aware at the time of the execution of the agreement that by virtue of the transfer of
shares of ALFA to the DBP, all the directors of ALFA were stripped of their positions as
such.
There can be no reliance on the inference that the five-year period of the voting trust
agreement in question had lapsed in 1986 so that the legal title to the stocks covered by
the said voting trust agreement ipso facto reverted to the petitioners as beneficial owners
pursuant to the 6th paragraph of section 59 of the new Corporation Code which reads:
Unless expressly renewed, all rights granted in a voting trust agreement
shall automatically expire at the end of the agreed period, and the
voting trust certificate as well as the certificates of stock in the name of
the trustee or trustees shall thereby be deemed cancelled and new
certificates of stock shall be reissued in the name of the transferors.
On the contrary, it is manifestly clear from the terms of the voting trust agreement
between ALFA and the DBP that the duration of the agreement is contingent upon the
fulfillment of certain obligations of ALFA with the DBP. This is shown by the following
portions of the agreement.
WHEREAS, the TRUSTEE is one of the creditors of ALFA, and its credit is
secured by a first mortgage on the manufacturing plant of said
company;

WHEREAS, ALFA is also indebted to other creditors for various financial

accomodations and because of the burden of these obligations is
encountering very serious difficulties in continuing with its operations.
WHEREAS, in consideration of additional accommodations from the
TRUSTEE, ALFA had offered and the TRUSTEE has accepted participation
in the management and control of the company and to assure the
aforesaid participation by the TRUSTEE, the TRUSTORS have agreed to
execute a voting trust covering their shareholding in ALFA in favor of the
TRUSTEE;
AND WHEREAS, DBP is willing to accept the trust for the purpose
aforementioned.
NOW, THEREFORE, it is hereby agreed as follows:
xxx xxx xxx
6. This Agreement shall last for a period of Five (5) years, and is
renewable for as long as the obligations of ALFA with DBP, or any
portion thereof, remains outstanding; (CA Rollo, pp. 137-138)
Had the five-year period of the voting trust agreement expired in 1986, the DBP would not
have transferred all its rights, titles and interests in ALFA "effective June 30, 1986" to the
national government through the Asset Privatization Trust (APT) as attested to in a
Certification dated January 24, 1989 of the Vice President of the DBP's Special Accounts
Department II. In the same certification, it is stated that the DBP, from 1987 until 1989,
had handled APT's account which included ALFA's assets pursuant to a management
agreement by and between the DBP and APT (CA Rollo, p. 142) Hence, there is evidence
on record that at the time of the service of summons on ALFA through the petitioners on
August 21, 1987, the voting trust agreement in question was not yet terminated so that
the legal title to the stocks of ALFA, then, still belonged to the DBP.
In view of the foregoing, the ultimate issue of whether or not there was proper service of
summons on ALFA through the petitioners is readily answered in the negative.
Under section 13, Rule 14 of the Revised Rules of Court, it is provided that:
Sec. 13. Service upon private domestic corporation or partnership. If
the defendant is a corporation organized under the laws of the
Philippines or a partnership duly registered, service may be made on
the president, manager, secretary, cashier, agent or any of its directors.
It is a basic principle in Corporation Law that a corporation has a personality separate and
distinct from the officers or members who compose it. (See Sulo ng Bayan Inc. v. Araneta,
Inc., 72 SCRA 347 [1976]; Osias Academy v. Department of Labor and Employment, et al.,
G.R. Nos. 83257-58, December 21, 1990). Thus, the above rule on service of processes of
a corporation enumerates the representatives of a corporation who can validly receive
court processes on its behalf. Not every stockholder or officer can bind the corporation
considering the existence of a corporate entity separate from those who compose it.

The rationale of the aforecited rule is that service must be made on a representative so
integrated with the corporation sued as to make it a priori supposable that he will realize
his responsibilities and know what he should do with any legal papers served on him. (Far
Corporation v. Francisco, 146 SCRA 197 [1986] citing Villa Rey Transit, Inc. v. Far East
Motor Corp. 81 SCRA 303 [1978]).
The petitioners in this case do not fall under any of the enumerated officers. The service
of summons upon ALFA, through the petitioners, therefore, is not valid. To rule otherwise,
as correctly argued by the petitioners, will contravene the general principle that a
corporation can only be bound by such acts which are within the scope of the officer's or
agent's authority. (see Vicente v. Geraldez, 52 SCRA 210 [1973]).
WHEREFORE, premises considered, the petition is hereby GRANTED. The appealed
decision dated March 19, 1990 and the Court of Appeals' resolution of May 10, 1990 are
SET ASIDE and the Orders dated April 25, 1989 and October 17, 1989 issued by the
Regional Trial Court of Makati, Branch 58 are REINSTATED.
SO ORDERED.
Feliciano, Bidin, Davide, Jr. and Romero, JJ., concur.
G.R. No. L-34192 June 30, 1988
NATIONAL INVESTMENT AND DEVELOPMENT CORPORATION, EUSEBIO VILLATUYA
MARIO Y. CONSING and ROBERTO S. BENEDICTO, petitioners,
vs.
HON. BENJAMIN AQUINO, in his official capacity as Presiding Judge of Branch VIII
of the Court of First Instance of Rizal, BATJAK INC., GRACIANO A. GARCIA and
MARCELINO CALINAWAN JR., respondents.
G.R. No. L-34213 June 30, 1988
PHILIPPINE NATIONAL BANK, petitioner,
vs.
HON. BENJAMIN H. AQUINO, in his capacity as Presiding Judge of the Court of
First Instance of Rizal, Branch VIII and BATJAK INCORPORATED, respondents.

PADILLA, J.:
These two (2) separate petitions for certiorari and prohibition, with preliminary injunction,
seek to annul and set aside the orders of respondent judge, dated 16 August 1971 and 30
September 1971, in Civil Case No. 14452 of the Court of First Instance of Rizal, entitled
Batjak Inc. vs. NIDC et al." The order of 16 August 1971 1 granted the alternative petition
of private respondent Batjak, Inc. Batjak for short) for the appointment of receiver and
denied petitioners' motion to dismiss the complaint of said private respondent. The order
dated 30 September 1971 2 denied petitioners' motion for reconsideration of the order
dated 16 August 1971.
The herein petitions likewise seek to prohibit the respondent judge from hearing and/or
conducting any further proceedings in Civil Case No. 14452 of said court.
Batjak, (Basic Agricultural Traders Jointly Administered Kasamahan) is a Filipino-American
corporation organized under the laws of the Philippines, primarily engaged in the
manufacture of coconut oil and copra cake for export. In 1965, Batjak's financial condition
deteriorated to the point of bankruptcy. As of that year, Batjak's indebtedness to some
private banks and to the Philippine National Bank (PNB) amounted to P11,915,000.00,
shown as follows:
Republic Bank P 2,324,000.00
Philippine Commercial and
Industrial Bank 1,346,000.00
Manila Banking Corporation 2,000,000.00
Manufacturers Bank 440,000.00
Hongkong and Shanghai
Banking Corporation 250,000.00

Cruz, Palafox, Alfonso and Associates for petitioner NIDC in G.R. No. 34192.
Foreign Export Advances
The Chief Legal Counsel for petitioner PNB in G.R. No. 34213.
(against immediate shipment) 555,000.00
Reyes and Sundiam Law Office for respondent Batjak, Inc.
PNB export advance line
Duran, Chuanico Oebanda, Benemerito & Associates for private respondents in G.R. Nos.
34192 & 34213.
Tolentino, Garcia, Cruz & Reyes for movant in G.R. No. L-34192.

(against immediate shipment) 5,000,000.00

TOTAL 11,915,000.00

As security for the payment of its obligations and advances against shipments, Batjak
mortgaged its three (3) coco-processing oil mills in Sasa, Davao City, Jimenez, Misamis
Occidental and Tanauan, Leyte to Manila Banking Corporation (Manila Bank), Republic
Bank (RB), and Philippine Commercial and Industrial Bank (PCIB), respectively. In need for
additional operating capital to place the three (3) coco-processing mills at their optimum
capacity and maximum efficiency and to settle, pay or otherwise liquidate pending
financial obligations with the different private banks, Batjak applied to PNB for additional
financial assistance. On 5 October 1965, a Financial Agreement was submitted by PNB to
Batjak for acceptance. The Financial Agreement reads:

4) That you shall exercise (execute) a first mortgage on all your

properties located at Sasa, Davao City; Jimenez, Misamis Occidental;
and Tanauan, Leyte and assign leasehold rights on the property on
which your plant at Sasa, Davao City is erected in favor of PNB;
5) That a voting trust agreement for five (5) years over 60% of the
oustanding paid up and subscribed shares shall be executed by your
stockholders in favor of NIDC;
6) That this accomodation shall be secured by the joint and several
signatures of officers and directors;

PHILIPPINE NATIONAL BANK

Manila, Philippines

7) That the number of the Board of Directors shall be increased to seven

(7), three (3) from your firm and the other four (4) from the PNB-NIDC;

International Department
October 5, 1965
BATJAK, INCORPORATED

8) That a comptroller, at your expense, shall be appointed by PNB-NIDC

to supervise the financial management of your firm;
9) That the past due accounts of P 5 million with the International
Department of the PNB shall be transferred to the Loans & Discount
Department and to be treated as a Demand Loan;

3rd Floor, G. Puyat Bldg.

Escolta, Manila
Attn.: Mr. CIRIACO B. MENDOZA
Vice-President & General Manager
Gentlemen:

10) That any excess of NIDC investment as required in Condition 1 after

payment of the obligations to three (3) Banks (RB, MBTC, & PCIB) shall
be applied to reduce the above Demand Loan of P 5 million;
11) That we shall grant you an export advance of P3 million to be used
for copra purchases, subject to the following conditions:
a) That the line shall expire on September 30, 1966
but revocable at the Bank(s) option;

We are pleased to advise that our Board of Directors

approved for you the following:
1) That NIDC shall invest P6,722,500.00 in the form of preferred shares
of stocks at 9% cumulative, participating and convertible within 5 years
at par into common stocks to liquidate your accounts with the Republic
Bank, Manufacturers Bank & Trust Company and the PCIB which,
however, shall be applied to the latter three (3) banks accounts with the
Loans & Discounts Dept. NIDC shall match your P 10 million subscription
by an additional investment of P3,277,500 within a period of one to two
years at NIDC's option;
2) That NIDC will guaranty for five (5) years your account with the
Manila Banking Corporation;
3) That the above banks (Republic Bank, PCIB, MBTC and Manila Banking
Corp.) shall release in favor of PNB the first and any mortgage they hold
on your properties;

b) That drawings against the line shall be allowed only

when an irrevocable export L/C for coconut products
has been established or assigned in your favor and
you shall assign to us all proceeds of negotiations to
be received from your letters of credit;
c) That drawings against the line be limited to 60% of
the peso value of the export letters of credit computed
at P3.50 per $1.00 but total drawings shall not in any
event exceed P3,000,000.00;
d) That release or releases against the line shall be
covered by promissory note or notes for 90 days but
not beyond the expiry dates of the coveting L/C and
proceeds of said L/C shall first be applied to the
correspondent drawings on the line;

e) That drawings against the line shall be charged

interest at the rate of 9% per annum and subject to
1/2% penalty charge on all drawings not paid or
extended on maturity date; and
f) That within 90 days from date of release against the
line, you shall negotiate with us on equivalent amount
in export bills, otherwise, the line shag be temporarily
suspended until the outstanding export advance is
fully liquidated.

wholly-owned subsidiary of PNB. To secure the advance, Batjak mortgaged the oil mill in
Sasa, Davao City to NIDC. 4
Next, a Voting Trust Agreement was executed on 26 October 1965 in favor of NIDC by the
stockholders representing 60% of the outstanding paid-up and subscribed shares of
Batjak. This agreement was for a period of five (5) years and, upon its expiration, was to
be subject to negotiation between the parties. The voting Trust Agreement reads:
VOTING TRUST AGREEMENT
KNOW ALL MEN BY THESE PRESENTS:

We are writing the National Investment & Development Corporation, the

Republic Bank, the Philippine Commercial & Industrial Bank and the
Manufacturers Bank & Trust Company and the Manila Banking
Corporation regarding the above.

This AGREEMENT made and executed by the undersigned stockholders

of BATJAK, INC., a corporation duly organized and existing under the
laws of the Philippines, whose names are hereinbelow subscribed
hereinafter caged the SUBSCRIBERS, and the NATIONAL INVESTMENT
AND DEVELOPMENT CORPORATION, hereinafter referred to as the
trustee.

In connection with the above, kindly submit to us two (2) copies of your
board resolution certified to under oath by your corporate secretary
accepting the conditions enumerated above authorizing the above
transactions and the officer or officers to sign on behalf of the
corporation.

WITNESSETH:

Thank you.
Very truly yours,
(SGD.) JOSE B.
SAMSON
The terms and conditions of the Financial Agreement were duly accepted by Batjak. Under
said Agreement, NIDC would, as it actually did, invest P6,722,500.00 in Batjak in the form
of preferred shares of stock convertible within five (5) years at par into common stock, to
liquidate Batjak's obligations to Republic Bank (RB), Manufacturers Bank and Trust
Company (MBTC) and Philippine Commercial & Industrial Bank (PCIB), and the balance of
the investment was to be applied to Batjak's past due account of P 5 million with the PNB.
Upon receiving payment, RB, PCIB, and MBTC released in favor of PNB the first and any
mortgages they held on the properties of Batjak.
As agreed, PNB also granted Batjak an export-advance line of P 3 million, later increased
to P 5million, and a standby letter of credit facility in the amount of P5,850,000.00. As of
29 September 1966, the financial accomodation that had been extended by PNB to Batjak
amounted to a total of P 14,207,859.51.
As likewise agreed, Batjak executed a first mortgage in favor of PNB on all its properties
located at Jimenez, Misamis Occidental and Tanauan, Leyte. Batjak's plant in Sasa, Davao
City was mortgaged to the Manila Bank which, in 1967, instituted foreclosure proceedings
against the same but which were aborted by the payment by Batjak of the sum of
P2,400,000.00 to Manila Bank, and which amount was advanced to Batjak by NIDC, a

WHEREAS, the SUBSCRIBERS are owners respectively of the capital

stock of the BATJAK, INC. (hereinafter called the CORPORATION) in the
amounts represented by the number of shares set fort opposite their
respective names hereunder;
AND WHEREAS, with a view or establishing a safe and competent
management to operate the corporation for the best interest of all the
stockholders thereof, and as mutually agreed between the
SUBSCRIBERS and the TRUSTEE, this Voting Trust Agreement has been
executed under the following terms and conditions.
NOW THEREFORE, the undersigned stockholders, in consideration of
the premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in the
TRUSTEE the voting rights of the shares of stock held by the
undersigned in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from and
after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein provided
is hereby made, constituted and appointed as a VOTING TRUSTEE to act
for and in the name of the SUBSCRIBERS, it being understood, however,
that this Voting Trust Agreement shall, upon its expiration be subject to
a re-negotiation between the parties, as may be warranted by the
balance and attending circumstance of the loan investment of the
TRUSTEE or otherwise in the CORPORATION.

2. ASSIGNMENT OF STOCK CERTIFICATES UPON ISSUANCE The

undersigned stockholders hereby transfer and assign their common
shares to the capital stock of the CORPORATION to the extent shown
hereunder:
JAMES A. KEISTER 21,500 shares
JOHNNY LIEUSON 20,300 shares
CBM FINANCE & INVESTMENT
CORP. (C.B. Mendoza, Pres.) 5,000 shares
ALEJANDRO G. BELTRAN 4,000 shares
ESPERANZA A. ZAMORA 3,000 shares
CIRIACO B. MENDOZA 2,000 shares
FIDELA DE GUZMAN 2,000 shares
LLOYD D. COMBS 2,000 shares
RENATO B. BEJAR 200 shares
TOTAL 60,000 shares
to the TRUSTEE by virtue of the provisions hereof and do hereby
authorize the Secretary of the CORPORATION to issue the corresponding
certificate directly in the name of the TRUSTEE and on which certificates
it shall appear that they have been issued pursuant to this Voting Trust
Agreement and the said TRUSTEE shall hold in escrow all such
certificates during the term of the Agreement. In turn, the TRUSTEE
shall deliver to the undersigned stockholders the corresponding Voting
Trust certificates provided for in Sec. 36 of Act No. 1459.
3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors in
trust, if anym shall have the power and it shall be its duty to vote the
shares of the undersigned subject hereof and covered by this
Agreement at all annual, adjourned and special meetings of the
CORPORATION on all questions, motions, resolutions and matters
including the election of directors and such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION and of the
existing legislations are entitled to vote, which may be voted upon at
any and all said meetings and shall also have the power to execute and
acknowledge any agreements or documents that may be necessary in
its opinion to express the consent or assent of all or any of the
stockholders of the CORPORATION with respect to any matter or thing to

which any consent or assent of the stockholders may be necessary,

proper or convenient.
4. FILING of AGREEMENT An executed copy of this Agreement shall be
filed with the CORPORATION at its office in the City of Manila wherever it
may be transfered therefrom and shall constitute irrevocable authority
and absolute direction of the officers of the CORPORATION whose duty is
to sign and deliver stock certificates to make delivery only to said voting
trustee of the shares and certificates of stock subject to the provisions
of this Agreement as aforesaid. Such copy of this Agreement shall at all
times be open to inspection by any stockholder, as provided by law.
5. DIVIDEND the full and absolute beneficial interest in the shares
subject of this Agreement shall remain with the stockholders executing
the same and any all dividends which may be declared by the
CORPORATION shall belong and be paid to them exclusively in
accordance with their stockholdings after deducting therefrom or
applying the same to whatever liabilities the stockholders may have in
favor of the TRUSTEE by virtue of any Agreement or Contract that may
have been or will be executed by and between the TRUSTEE and the
CORPORATION or between the former and the undersigned
stockholders.
6 COMPENSATION; IMMUNITY The TRUSTEE or its successor in trust
shall not receive any compensation for its serviceexcept perhaps that
which the CORPORATION may grant to the TRUSTEE's authorized
representative, if any. Expenses costs, champs, and other liabilities
incurred in the carrying out of the but herein established or by reason
thereof, shall be paid for with the funds of the CORPORATION. The
TRUSTEE or any of its duly authorized representative shall incur no
liability by reason of any error of law or of any matter or thing done or
omitted under this Agreement, except for his own individual
malfeasance.
7. REPRESENTATION The TRUSTEE, being a corporation and a juridical
person shall accomplish the foregoing objectives and perform its
functions under this Agreement as well as enjoy and exercise the
powers, privileges, rights and interests herein established through its
duly authorized and accredited re resentatives . p with full authority
under the specific appointment or designation or Proxy.
8. IRREVOCABILITY This Agreement shall during its 5-year term or any
extension thereof be binding upon and inure to the benefit of the
undersigned stockholders and their respective legal representatives,
pledges, transferees, and/or assigns and shall be irrevocable during the
said terms and/or its extension pursuant to the provisions of paragraph
1 hereof. It is hereby understood and the undersigned stockholders have
bound as they hereby bind themselves to make a condition of every
pledge, transfer of assignment of their interests in the CORPORATION
that the interests and participation so pledged, transferred or assigned
is evidenced by annotations in the certificates of stocks or in the books
of the corporation, shall be subject to this Agreement and the same

shall be binding upon the pledgees, transferees and assigns while the
trust herein created still subsists.
9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof
shall be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.
10. ACCEPTANCE OF TRUST The TRUSTEE hereby accepts the trust
created by this Agreement under the signature of its duly authorized
representative affixed hereinbelow and agrees to perform the same in
accordance with the term/s hereof.

N
A
L
I
N
V
E
S
T
M
E
N
T
A
N
D

IN WITNTESS HEREOF, the undersigned stockholders and the TRUSTEE

by its representatives, have hereunto affixed their signatures this 26
day of October, 1965 in the City of Manila, Philippines.

D
E
V
E
L
O
P
M
E
N
T

(SGD) JAMES A. KEISER (SGD) JOHNNY LIEUSON

Stockholder Stockholder
CBM FINANCE & INVESTMENT CORPORATION
By: (SGD) C.B. MENDOZA
President

C
O
R
P
O
R
A
T
I
O
N

ESPERANZA A. ZAMORA (SGD) ALEJANDRO G. BELTRAN

By: (SGD) MARIANO ZAMORA Stockholder
ESPERANZA A. ZAMORA
(SGD) FIDELA DE GUZMAN (SGD) CIRIACO B. MENDOZA
Stockholder Stockholder

B
y
:

(SGD) RENATO B. BEJAR (SGD) LLOYD D. COMBS

Stockholder Stockholder
N
A
T
I
O

(
S
G
D
)
I
G

N
A
C
I
O
D
E
B
U
Q
U
E
J
R
.

In July 1967, forced by the insolvency of Batjak, PNB instituted extrajudicial foreclosure
proceedings against the oil mills of Batjak located in Tanauan, Leyte and Jimenez, Misamis
Occidental. The properties were sold to PNB as the highest bidder. One year thereafter, or
in September 1968, final Certificates of Sale were issued by the provincial sheriffs of
Leyte 6 and Misamis Occidental 7 for the two (2) oil mills in Tanauan and Jimenez in favor
of PNB, after Batjak failed to exercise its right to redeem the foreclosed properties within
the allowable one year period of redemption. Subsequently, PNB transferred the
ownership of the two (2) oil mills to NIDC which, as aforestated, was a wholly-owned PNB
subsidiary.
As regards the oil mill located at Sasa, Davao City, the same was similarly foreclosed
extrajudicial by NIDC. It was sold to NIDC as the highest bidder. After Batjak failed to
redeem the property, NIDC consolidated its ownership of the oil mill. 8
Three (3) years thereafter, or on 31 August 1970, Batjak represented by majority
stockholders, through Atty. Amado Duran, legal counsel of private respondent Batjak,
wrote a letter to NIDC inquiring if the latter was still interested in negotiating the renewal
of the Voting Trust Agreement. 9 On 22 September 1970, legal counsel of Batjak wrote
another letter to NIDC informing the latter that Batjak would now safely assume that NIDC
was no longer interested in the renewal of said Voting Trust Agreement and, in view
thereof, requested for the turn-over and transfer of all Batjak assets, properties,
management and operations. 10
On 23 September 1970, legal counsel of Batjak sent stin another letter to NIDC, this time
asking for a complete accounting of the assets, properties, management and operation of
Batjak, preparatory to their turn-over and transfer to the stockholders of Batjak. 11
NIDC replied, confirming the fact that it had no intention whatsoever to comply with the
demands of Batjak. 12

On 24 February 1971, Batjak filed before the Court of First Instance of Rizal a special civil
action for mandamus with preliminary injunction against herein petitioners docketed as
Civil Case No. 14452. 13
On 14 April 1971, in said Civil Case No. 14452, Batjak filed an urgent ex parte motion for
the issuance of a writ of preliminary prohibitory and mandatory injunction. 14 On the same
day, respondent judge issued a restraining order "prohibiting defendants (herein
petitioners) from removing any record, books, commercial papers or cash, and leasing,
renting out, disposing of or otherwise transferring any or all of the properties,
machineries, raw materials and finished products and/or by-products thereof now in the
factory sites of the three (3) modem coco milling plants situated in Jimenez, Misamis
Occidental, Sasa, Davao City, and Tanauan, Leyte." 15
The order of 14 April 1971 was subsequently amended by respondent judge upon an ex
parte motion of private respondent Batjak so as to include the premises of NIDC in Makati
and those of PNB in Manila, as among the premises which private respondent Batjak was
authorized to enter in order to conduct an inventory.

Vice-President
On 24 April 1971, NIDC and PNB filed an opposition to the ex parte application for the
issuance of a writ of preliminary prohibitory and mandatory injunction and a motion to set
aside restraining order.
Before the court could act on the said motion, private respondent Batjak filed on 3 May
1971 a petition for receivership as alternative to writ of preliminary prohibitory and
mandatory injunction. 16 This was opposed by PNB and NIDC . 17
On 8 May 1971., NIDC and PNB filed a motion to dismiss Batjak's complaints.

18

On 16 August 1971, respondent judge issued the now assailed order denying petitioners'
motion to dismiss and appointing a set of three (3) receivers. 19 NIDC moved for
reconsideration of the aforesaid order. 20 On 30 September 1971, respondent judge denied
the motion for reconsideration. 21
Hence, these two (2) petitions, which have been consolidated, as they involve a resolution
of the same issues. In their manifestation with motion for early decision, dated 25 August
1986, private respondent, Batjak contends that the NIDC has already been abolished or
scrapped by its parent company, the PNB.
After a careful study and examination of the records of the case, the Court finds and holds
for the petitioners.
1. On the denial of petitioners' motion to dismiss.
As a general rule, an order denying a motion to quash or to dismiss is interlocutory and
cannot be the subject of a petition for certiorari. The remedy of the aggrieved party in a
denied motion to dismiss is to file an answer and interpose, as defense or defenses, the
objection or objections raised by him in said motion to dismiss, then proceed to trial and,
in case of adverse decision, to elevate the entire case by appeal in due course. However,
under certain situations, recourse to the extraordinary legal remedies of certiorari,
prohibition and mandamus to question the denial of a motion to dismiss or quash is

considered proper, in the interest of more enlightened and substantial justice. As the court
said in Pineda and Ampil Manufacturing Co. vs. Bartolome, 95 Phil. 930,938
For analogous reasons it may be said that the petition for certiorari
interposed by the accused against the order of the court a quo denying
the motion to quash may be entertained, not only because it was
rendered in a criminal case, but because it was rendered, as claimed,
with grave abuse of discretion, as found by the Court of Appeals. ..
and reiterated in Mead v. Argel

22

citing Yap v. Lutero (105 Phil. 1307):

However, were we to require adherence to this pretense, the case at bar

would have to be dismissed and petitioner required to go through the
inconvenience, not to say the mental agony and torture, of submitting
himself to trial on the merits in Case No. 166443, apart from the
expenses incidental thereto, despite the fact that his trial and conviction
therein would violate one of this [sic] constitutional rights, and that, an
appeal to this Court, we would, therefore, have to set aside the
judgment of conviction of the lower court. This would, obviously, be
most unfair and unjust. Under the circumstances obtaining the present
case, the flaw in the procedure followed by petitioner herein may be
overlooked, in the interest of a more enlightened and substantial justice.
Thus, where there is patent grave abuse of discretion, in denying the motion to dismiss,
as in the present case, this Court may entertain the petition for certiorari interposed by
the party against whom the said order is issued.
In their motion to dismiss Batjaks complaint, in Civil Case No. 14452, NIDC and PNB raised
common grounds for its allowance, to wit:
1. This Honorable Court (the trial court) has no jurisdiction over the
subject of the action or suit;
2. The venue is improperly laid; and
3. Plaintiff has no legal capacity to sue.
In addition, PNB contended that the complaint states no cause of action (Rule 16, Sec. 1,
Par. a, c, d & g, Rules of Court).
Anent the first ground, it is a well-settled rule that the jurisdiction of a Court of First
Instance to issue a writ of preliminary or permanent injunction is confined within the
boundaries of the province where the land in controversy is situated. 23 The petition for
mandamus of Batjak prayed that NIDC and PNB be ordered to surrender, relinquish and
turnover to Batjak the assets, management and operation of Batjak particularly the three
(3) oil mills located in Sasa, Davao City, Jimenez, Misamis Occidental and Tanauan, Leyte.
Clearly, what Batjak asked of respondent court was the exercise of power or authority
outside its jurisdiction.

On the matter of proper venue, Batjak's complaint should have been filed in the provinces
where said oil mills are located. Under Rule 4, Sec. 2, paragraph A of the Rules of Court,
"actions affecting title to, or for recovery of possession, or for partition or condemnation
of, or foreclosure of mortgage on, real property, shall be commenced and tried in the
province where the property or any part thereof lies."
In support of the third ground of their motion to dismiss, PNB and NIDC contend that
Batjak's complaint for mandamus is based on its claim or right to recovery of possession
of the three (3) oil mills, on the ground of an alleged breach of fiduciary relationship.
Noteworthy is the fact that, in the Voting Trust Agreement, the parties thereto were NIDC
and certain stockholders of Batjak. Batjak itself was not a signatory thereto. Under Sec. 2,
Rule 3 of the Rules of Court, every action must be prosecuted and defended in the name
of the real party in interest. Applying the rule in the present case, the action should have
been filed by the stockholders of Batjak, who executed the Voting Trust Agreement with
NIDC, and not by Batjak itself which is not a party to said agreement, and therefore, not
the real party in interest in the suit to enforce the same.
In addition, PNB claims that Batjak has no cause of action and prays that the petition for
mandamus be dismissed. A careful reading of the Voting Trust Agreement shows that PNB
was really not a party thereto. Hence, mandamus will not lie against PNB.
Moreover, the action instituted by Batjak before the respondent court was a special civil
action for mandamus with prayer for preliminary mandatory injunction. Generally,
mandamus is not a writ of right and its allowance or refusal is a matter of discretion to be
exercised on equitable principles and in accordance with well-settled rules of law, and that
it should never be used to effectuate an injustice, but only to prevent a failure of
justice. 24 The writ does not issue as a matter of course. It will issue only where there is a
clear legal right sought to be enforced. It will not issue to enforce a doubtful right. A clear
legal right within the meaning of Sec. 3, Rule 65 of the Rules of Court means a right
clearly founded in or granted by law, a right which is enforceable as a matter of law.
Applying the above-cited principles of law in the present case, the Court finds no clear
right in Batjak to be entitled to the writ prayed for. It should be noted that the petition for
mandamus filed by it prayed that NIDC and PNB be ordered to surrender, relinquish and
turn-over to Batjak the assets, management, and operation of Batjak particularly the
three (3) oil mills and to make the order permanent, after trial, and ordering NIDC and
PNB to submit a complete accounting of the assets, management and operation of Batjak
from 1965. In effect, what Batjak seeks to recover is title to, or possession of, real
property (the three (3) oil mills which really made up the assets of Batjak) but which the
records show already belong to NIDC. It is not disputed that the mortgages on the three
(3) oil mills were foreclosed by PNB and NIDC and acquired by them as the highest bidder
in the appropriate foreclosure sales. Ownership thereto was subsequently consolidated by
PNB and NIDC, after Batjak failed to exercise its right of redemption. The three (3) oil mills
are now titled in the name of NIDC. From the foregoing, it is evident that Batjak had no
clear right to be entitled to the writ prayed for. In Lamb vs. Philippines(22 Phil. 456) citing
the case of Gonzales V. Salazar vs. The Board of Pharmacy, 20 Phil. 367, the Court said
that the writ of mandamus will not issue to give to the applicant anything to which he is
not entitled by law.
2. On the appointment of receiver.

A receiver of real or personal property, which is the subject of the action, may be
appointed by the court when it appears from the pleadings that the party applying for the
appointment of receiver has an interest in said property. 25 The right, interest, or claim in
property, to entitle one to a receiver over it, must be present and existing.
As borne out by the records of the case, PNB acquired ownership of two (2) of the three
(3) oil mills by virtue of mortgage foreclosure sales. NIDC acquired ownership of the third
oil mill also under a mortgage foreclosure sale. Certificates of title were issued to PNB and
NIDC after the lapse of the one (1) year redemption period. Subsequently, PNB transferred
the ownership of the two (2) oil mills to NIDC. There can be no doubt, therefore, that NIDC
not only has possession of, but also title to the three (3) oil mills formerly owned by
Batjak. The interest of Batjak over the three (3) oil mills ceased upon the issuance of the
certificates of title to PNB and NIDC confirming their ownership over the said properties.
More so, where Batjak does not impugn the validity of the foreclosure proceedings.
Neither Batjak nor its stockholders have instituted any legal proceedings to annul the
mortgage foreclosure aforementioned.
Batjak premises its right to the possession of the three (3) off mills on the Voting Trust
Agreement, claiming that under said agreement, NIDC was constituted as trustee of the
assets, management and operations of Batjak, that due to the expiration of the Voting
Trust Agreement, on 26 October 1970, NIDC should tum over the assets of the three (3) oil
mills to Batjak. The relevant provisions of the Voting Trust Agreement, particularly
paragraph 4 & No. 1 thereof, are hereby reproduced:
NOW THEREFORE, the undersigned stockholders, in consideration of the
premises and of the mutual covenants and agreements herein
contained and to carry out the foregoing purposes in order to vest in the
TRUSTEE the voting right.8 of the shares of stock held by the
undersigned in the CORPORATION as hereinafter stated it is mutually
agreed as follows:
1. PERIOD OF DESIGNATION For a period of five (5) years from and
after date hereof, without power of revocation on the part of the
SUBSCRIBERS, the TRUSTEE designated in the manner herein provided
is hereby made, constituted and appointed as a VOTING TRUSTEE to act
for and in the name of the SUBSCRIBERS, it being understood, however,
that this Voting Trust Agreement shall, upon its expiration be subject to
a re-negotiation between the parties, as may be warranted by the
balance and attending circumstance of the loan investment of the
TRUSTEE or otherwise in the CORPORATION.
and No. 3 thereof reads:
3. VOTING POWER OF TRUSTEE The TRUSTEE and its successors in
trust, if any, shall have the power and it shall be its duty to vote the
shares of the undersigned subject hereof and covered by this
Agreement at all annual, adjourned and special meetings of the
CORPORATION on all questions, motions, resolutions and matters
including the election of directors and all such matters on which the
stockholders, by virtue of the by-laws of the CORPORATION and of the
existing legislations are entitled to vote, which may be voted upon at
any and all said meetings and shall also have the power to execute and

acknowledge any agreements or documents that may be necessary in

its opinion to express the consent or assent of all or any of the
stockholders of the CORPORATION with respect to any matter or thing to
which any consent or assent of the stockholders may be necessary,
proper or convenient.
From the foregoing provisions, it is clear that what was assigned to NIDC was the power to
vote the shares of stock of the stockholders of Batjak, representing 60% of Batjak's
outstanding shares, and who are the signatories to the agreement. The power entrusted
to NIDC also included the authority to execute any agreement or document that may be
necessary to express the consent or assent to any matter, by the stockholders. Nowhere
in the said provisions or in any other part of the Voting Trust Agreement is mention made
of any transfer or assignment to NIDC of Batjak's assets, operations, and management.
NIDC was constituted as trustee only of the voting rights of 60% of the paid-up and
outstanding shares of stock in Batjak. This is confirmed by paragraph No. 9 of the Voting
Trust Agreement, thus:
9. TERMINATION Upon termination of this Agreement as heretofore
provided, the certificates delivered to the TRUSTEE by virtue hereof
shall be returned and delivered to the undersigned stockholders as the
absolute owners thereof, upon surrender of their respective voting trust
certificates, and the duties of the TRUSTEE shall cease and terminate.Under the aforecited provision, what was to be returned by NIDC as trustee to Batjak's
stockholders, upon the termination of the agreement, are the certificates of shares of
stock belonging to Batjak's stockholders, not the properties or assets of Batjak itself which
were never delivered, in the first place to NIDC, under the terms of said Voting Trust
Agreement.
In any event, a voting trust transfers only voting or other rights pertaining to the shares
subject of the agreement or control over the stock. The law on the matter is Section 59,
Paragraph 1 of the Corporation Code (BP 68) which provides:
Sec. 59. Voting Trusts One or more stockholders of a stock
corporation may create a voting trust for the purpose of confering upon
a trustee or trusties the right to vote and other rights pertaining to the
shares for a period not exceeding five (5) years at any one time: ... 26
The acquisition by PNB-NIDC of the properties in question was not made or effected under
the capacity of a trustee but as a foreclosing creditor for the purpose of recovering on a
just and valid obligation of Batjak.
Moreover, the prevention of imminent danger to property is the guiding principle that
governs courts in the matter of appointing receivers. Under Sec. 1 (b), Rule 59 of the
Rules of Court, it is necessary in granting the relief of receivership that the property or
fired be in danger of loss, removal or material injury.
In the case at bar, Batjak in its petition for receivership, or in its amended petition
therefor, failed to present any evidence, to establish the requisite condition that the
property is in danger of being lost, removed or materially injured unless a receiver is
appointed to guard and preserve it.

WHEREFORE, the petitions are GRANTED. The orders of the respondent judge, dated 16
August 1971 and 30 September 1971, are hereby ANNULLED and SET ASIDE. The
respondent judge and/or his successors are ordered to desist from hearing and/or
conducting any further proceedings in Civil Case No. 14452, except to dismiss the same.
With costs against private respondents.
SO ORDERED.

addition of the allegation that the latter is the custodian of the business records of the
respondent company.
By the plain language of sections 515 and 222 of our Code of Civil Procedure, the right of
action in such a proceeding as this is given against the corporation; and the respondent
corporation in this case was the only absolutely necessary party. In the Ohio case of
Cincinnati Volksblatt Co. vs. Hoffmister (61 Ohio St., 432; 48 L. R. A., 735), only the
corporation was named as defendant, while the complaint, in language almost identical
with that in the case at bar, alleged a demand upon and refusal by the corporation.
Nevertheless the propriety of naming the secretary of the corporation as a codefendant
cannot be questioned, since such official is customarily charged with the custody of all
documents, correspondence, and records of a corporation, and he is presumably the
person against whom the personal orders of the court would be made effective in case the
relief sought should be granted. Certainly there is nothing in the complaint to indicate that
the secretary is an improper person to be joined. The petitioner might have named the
president of the corporation as a respondent also; and this official might be brought in
later, even after judgment rendered, if necessary to the effectuation of the order of the
court.
Section 222 of our Code of Civil Procedure is taken from the California Code, and a
decision of the California Supreme Court Barber vs. Mulford (117 Cal., 356) is quite
clear upon the point that both the corporation and its officers may be joined as
defendants.

G.R. No. L-15568

November 8, 1919

W. G. PHILPOTTS, petitioner,
vs.
PHILIPPINE MANUFACTURING COMPANY and F. N. BERRY, respondents.
Lawrence and Ross for petitioner.
Crossfield and O'Brien for defendants.

STREET, J.:
The petitioner, W. G. Philpotts, a stockholder in the Philippine Manufacturing Company,
one of the respondents herein, seeks by this proceeding to obtain a writ of mandamus to
compel the respondents to permit the plaintiff, in person or by some authorized agent or
attorney, to inspect and examine the records of the business transacted by said company
since January 1, 1918. The petition is filed originally in this court under the authority of
section 515 of the Code of Civil Procedure, which gives to this tribunal concurrent
jurisdiction with the Court of First Instance in cases, among others, where any corporation
or person unlawfully excludes the plaintiff from the use and enjoyment of some right to
which he is entitled. The respondents interposed a demurrer, and the controversy is now
before us for the determination of the questions thus presented.
The first point made has reference to a supposed defect of parties, and it is said that the
action can not be maintained jointly against the corporation and its secretary without the

The real controversy which has brought these litigants into court is upon the question
argued in connection with the second ground of demurrer, namely, whether the right
which the law concedes to a stockholder to inspect the records can be exercised by a
proper agent or attorney of the stockholder as well as by the stockholder in person. There
is no pretense that the respondent corporation or any of its officials has refused to allow
the petitioner himself to examine anything relating to the affairs of the company, and the
petition prays for a peremptory order commanding the respondents to place the records
of all business transactions of the company, during a specified period, at the disposal of
the plaintiff or his duly authorized agent or attorney, it being evident that the petitioner
desires to exercise said right through an agent or attorney. In the argument in support of
the demurrer it is conceded by counsel for the respondents that there is a right of
examination in the stockholder granted under section 51 of the Corporation Law, but it is
insisted that this right must be exercised in person.
The pertinent provision of our law is found in the second paragraph of section 51 of Act
No. 1459, which reads as follows: "The record of all business transactions of the
corporation and the minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours."
This provision is to be read of course in connecting with the related provisions of sections
51 and 52, defining the duty of the corporation in respect to the keeping of its records.
Now it is our opinion, and we accordingly hold, that the right of inspection given to a
stockholder in the provision above quoted can be exercised either by himself or by any
proper representative or attorney in fact, and either with or without the attendance of the
stockholder. This is in conformity with the general rule that what a man may do in person

he may do through another; and we find nothing in the statute that would justify us in
qualifying the right in the manner suggested by the respondents.
This conclusion is supported by the undoubted weight of authority in the United States,
where it is generally held that the provisions of law conceding the right of inspection to
stockholders of corporations are to be liberally construed and that said right may be
exercised through any other properly authorized person. As was said in Foster vs. White
(86 Ala., 467), "The right may be regarded as personal, in the sense that only a
stockholder may enjoy it; but the inspection and examination may be made by another.
Otherwise it would be unavailing in many instances." An observation to the same effect is
contained in Martin vs. Bienville Oil Works Co. (28 La., 204), where it is said: "The
possession of the right in question would be futile if the possessor of it, through lack of
knowledge necessary to exercise it, were debarred the right of procuring in his behalf the
services of one who could exercise it." In Deadreck vs. Wilson (8 Baxt. [Tenn.], 108), the
court said: "That stockholders have the right to inspect the books of the corporation,
taking minutes from the same, at all reasonable times, and may be aided in this by
experts and counsel, so as to make the inspection valuable to them, is a principle too well
settled to need discussion." Authorities on this point could be accumulated in great
abundance, but as they may be found cited in any legal encyclopedia or treaties devoted
to the subject of corporations, it is unnecessary here to refer to other cases announcing
the same rule.
In order that the rule above stated may not be taken in too sweeping a sense, we deem it
advisable to say that there are some things which a corporation may undoubtedly keep
secret, notwithstanding the right of inspection given by law to the stockholder; as for
instance, where a corporation, engaged in the business of manufacture, has acquired a
formula or process, not generally known, which has proved of utility to it in the
manufacture of its products. It is not our intention to declare that the authorities of the
corporation, and more particularly the Board of Directors, might not adopt measures for
the protection of such process form publicity. There is, however, nothing in the petition
which would indicate that the petitioner in this case is seeking to discover anything which
the corporation is entitled to keep secret; and if anything of the sort is involved in the
case it may be brought out at a more advanced stage of the proceedings.lawphil.net
The demurrer is overruled; and it is ordered that the writ of mandamus shall issue as
prayed, unless within 5 days from notification hereof the respondents answer to the
merits. So ordered.
Arellano, C.J., Torres, Johnson, Araullo, Malcolm and Avancea, JJ., concur.
G.R. No. L-22442

August 1, 1924

ANTONIO PARDO, petitioner,

vs.
THE HERCULES LUMBER CO., INC., and IGNACIO FERRER, respondents.
W.J. O'Donovan and M.H. de Joya for petitioner.
Sumulong and Lavides and Ross, Lawrence and Selph for respondents.
STREET, J.:

The petitioner, Antonio Pardo, a stockholder in the Hercules Lumber Company, Inc., one of
the respondents herein, seeks by this original proceeding in the Supreme Court to obtain
a writ of mandamus to compel the respondents to permit the plaintiff and his duly
authorized agent and representative to examine the records and business transactions of
said company. To this petition the respondents interposed an answer, in which, after
admitting certain allegations of the petition, the respondents set forth the facts upon
which they mainly rely as a defense to the petition. To this answer the petitioner in turn
interposed a demurrer, and the cause is now before us for determination of the issue thus
presented.
It is inferentially, if not directly admitted that the petitioner is in fact a stockholder in the
Hercules Lumber Company, Inc., and that the respondent, Ignacio Ferrer, as acting
secretary of the said company, has refused to permit the petitioner or his agent to inspect
the records and business transactions of the said Hercules Lumber Company, Inc., at
times desired by the petitioner. No serious question is of course made as to the right of
the petitioner, by himself or proper representative, to exercise the right of inspection
conferred by section 51 of Act No. 1459. Said provision was under the consideration of this
court in the case of Philpotts vs. Philippine Manufacturing Co., and Berry (40 Phil., 471),
where we held that the right of examination there conceded to the stockholder may be
exercised either by a stockholder in person or by any duly authorized agent or
representative.
The main ground upon which the defense appears to be rested has reference to the time,
or times, within which the right of inspection may be exercised. In this connection the
answer asserts that in article 10 of the By-laws of the respondent corporation it is
declared that "Every shareholder may examine the books of the company and other
documents pertaining to the same upon the days which the board of directors shall
annually fix." It is further averred that at the directors' meeting of the respondent
corporation held on February 16, 1924, the board passed a resolution to the following
effect:
The board also resolved to call the usual general (meeting of shareholders) for March 30
of the present year, with notice to the shareholders that the books of the company are at
their disposition from the 15th to 25th of the same month for examination, in appropriate
hours.
The contention for the respondent is that this resolution of the board constitutes
a lawful restriction on the right conferred by statute; and it is insisted that as the
petitioner has not availed himself of the permission to inspect the books and
transactions of the company within the ten days thus defined, his right to
inspection and examination is lost, at least for this year.
We are entirely unable to concur in this contention. The general right given by the statute
may not be lawfully abridged to the extent attempted in this resolution. It may be
admitted that the officials in charge of a corporation may deny inspection when sought at
unusual hours or under other improper conditions; but neither the executive officers nor
the board of directors have the power to deprive a stockholder of the right altogether. A
by-law unduly restricting the right of inspection is undoubtedly invalid. Authorities to this
effect are too numerous and direct to require extended comment. (14 C.J., 859; 7 R.C.L.,
325; 4 Thompson on Corporations, 2nd ed., sec. 4517; Harkness vs. Guthrie, 27 Utah,
248; 107 Am., St. Rep., 664. 681.) Under a statute similar to our own it has been held that
the statutory right of inspection is not affected by the adoption by the board of directors

of a resolution providing for the closing of transfer books thirty days before an election.
(State vs. St. Louis Railroad Co., 29 Mo., Ap., 301.)
It will be noted that our statute declares that the right of inspection can be exercised "at
reasonable hours." This means at reasonable hours on business days throughout the year,
and not merely during some arbitrary period of a few days chosen by the directors.
In addition to relying upon the by-law, to which reference is above made, the answer of
the respondents calls in question the motive which is supposed to prompt the petitioner to
make inspection; and in this connection it is alleged that the information which the
petitioner seeks is desired for ulterior purposes in connection with a competitive firm with
which the petitioner is alleged to be connected. It is also insisted that one of the purposes
of the petitioner is to obtain evidence preparatory to the institution of an action which he
means to bring against the corporation by reason of a contract of employment which once
existed between the corporation and himself. These suggestions are entirely apart from
the issue, as, generally speaking, the motive of the shareholder exercising the right is
immaterial. (7 R.C.L., 327.)
We are of the opinion that, upon the allegations of the petition and the admissions of the
answer, the petitioner is entitled to relief. The demurrer is, therefore, sustained; and the
writ of mandamus will issue as prayed, with the costs against the respondent. So ordered.

EUGENIO VERAGUTH, Director and Stockholder of the Isabela Sugar Company,

Inc., petitioner,
vs.
ISABELA SUGAR COMPANY, INC., GIL MONTILLA, Acting President, and AGUSTIN
B. MONTILLA, Secretary of the same corporation, respondents.
MALCOLM, J.:
The parties to this action are Eugenio Veraguth, a director and stockholder of the Isabela
Sugar Company, Inc., who is the petitioner, and the Isabela Sugar Company, Inc., Gil
Montilla, acting president of the company, and Agustin B. Montilla, secretary of the
company, who are the respondents. The petitioner prays: (a) That the respondents be
required within five days from receipt of notice of this petition to show cause why they
refuse to notify the petitioner, as director, of the regular and special meetings of the
board of directors, and to place at his disposal at reasonable hours, the minutes, and
documents, and books of the aforesaid corporation, for his inspection as director and
stockholder, and to issue, upon payment of the fees, certified copies of any
documentation in connection with said minutes, documents, and books of the corporation;
and (b) that, in view of the memoranda and hearing of the parties, a final and absolute
writ of mandamus be issued to each and all of the respondents to notify immediately the
petitioner within the reglamentary period, of all regular and special meetings of the board
of directors of the Isabela Sugar Central Company, Inc., and to place at his disposal at
reasonable hours the minutes, documents, and books of said corporation for his
inspection as director and stockholder, and to issue immediately, upon payment of the
fees, certified copies of any documentation in connection with said minutes, documents,
and the books of the aforesaid corporation. To the petition an answer has been interposed
by the respondent, too long to be here summarized, which raised questions of fact and
law. Following the taking of considerable before the clerk as commissioner, the case has
been submitted on memoranda.
It should first be observed that when the case was filed here, it was, in accordance with
settled practice, dismissed without prejudice to the right of the petitioner to present the
action before the Court of First Instance of Occidental Negros. Thereafter, on a motion of
reconsideration being presented, this order was set aside and the case was permitted to
continue in this court. On further reflection, we now feel that this was error, and that it
would have been the correct practice to have required the petitioner to present the action
in a court of First Instance which is better equipped for the taking of testimony and the
resolution of questions of fact than is the appellate court. Only with considerable difficulty,
therefore, can we decide the issues of fact, since none of the members of the court saw or
heard the witnesses testify.

G.R. No. L-37064

October 4, 1932

Speaking to the first point with which the petition is concerned, relating to the alleged
failure of the secretary of the company to notify the petitioner in due time of a special
meeting of the company, we find by-laws, together with a resolution of the board of
directors, providing for the holding of ordinary and special meetings. Whether there was a
malicious attempt to keep Director Veraguth from attending a special meeting of the
board of the board of directors at which the compensation of the attorneys of the
company was fixed, or whether Director Veraguth, in a spirit of antogonism, has made this
merely a pretext to cause trouble, we are unable definitely to say. This much, however,
can appropriately be stated and is decisive, and this is that the meeting in question is in
the past and, therefore, now merely presents an academic question; that no damage was
caused to Veraguth by the action taken at the special meeting which he did not attend,
since his interests were fully protected by the Philippine National Bank; and that as to

meetings in the future it is to be presumed that the secretary of the company will fulfill
the requirements of the resolutions of the company pertaining to regular and special
meetings. It will, of course, be incumbent upon Veraguth to give formal notice to the
secretary of his post-office address if he desires notice sent to a particular
residence. 1awphil.net
On the second question pertaining to the right of inspection of the books of the company,
we find Director Veraguth telegraphing the secretary of the company, asking the latter to
forward in the shortest possible time a certified copy of the resolution of the board of
directors concerning the payment of attorney's fees in the case against the Isabela Sugar
Company and others. To this the secretary made answer by letter stating that, since the
minutes of the meeting in question had not been signed by the directors present, a
certified copy could not be furnished and that as to other proceedings of the stockholders
a request should be made to the president of the Isabela Sugar Company, Inc. It further
appears that the board of directors adopted a resolution providing for inspection of the
books and the taking of copies "by authority of the President of the corporation previously
obtained in each case."
The Corporation Law, section 51, provides that:
All business corporations shall keep and carefully preserve a record of all
business transactions, and a minute of all meetings of directors, members, or
stockholders, in which shall be set forth in detail the time and place of holding
the meeting was regular or special, if special its object, those present and
absent, and every act done or ordered done at the meeting. . . .
The record of all business transactions of the corporation and the minutes of any
meeting shall be open to the inspection of any director, member, or stockholder
of the corporation at reasonable hours.
The above puts in statutory form the general principles of Corporation Law. Directors of a
corporation have the unqualified right to inspect the books and records of the corporation
at all reasonable times. Pretexts may not be put forward by officers of corporations to
keep a director or shareholder from inspecting the books and minutes of the corporation,
and the right of inspection is not to be denied on the ground that the director or
shareholder is on unfriendly terms with the officers of the corporation whose records are
sought to be inspected. A director or stockholder can not of course make copies,
abstracts, and memoranda of documents, books, and papers as an incident to the right of
inspection, but cannot, without an order of a court, be permitted to take books from the
office of the corporation. We do not conceive, however, that a director or stockholder has
any absolute right to secure certified copies of the minutes of the corporation until these
minutes have been written up and approved by the directors. (See Fisher's Philippine Law
of Stock Corporations, sec. 153, and Fletcher Cyclopedia Corporations, vol. 4, Chap. 45.)
Combining the facts and the law, we do not think that anything improper occurred when
the secretary declined to furnish certified copies of minutes which had not been approved
by the board of directors, and that while so much of the last resolution of the board of
directors as provides for prior approval of the president of the corporation before the
books of the corporation can be inspected puts an illegal obstacle in the way of a
stockholder or director, that resolution, so far as we are aware, has not been enforced to
the detriment of anyone. In addition, it should be said that this is a family dispute, the
petitioner and the individual respondents belonging to the same family; that a test case

between the petitioner and the respondents has not been begun in the Court of First
Instance of Occidental Negros involving hundreds of thousands of pesos, and that the
appellate court should not intrude its views to give an advantage to either party. We rule
that the petitioner has not made out a case for relief by mandamus.
Petition denied with costs.
Avancea, C.J., Villamor, Villa-Real, Hull and Imperial, JJ., concur.

G.R. No. L-33320 May 30, 1983

RAMON A. GONZALES, petitioner,
vs.
THE PHILIPPINE NATIONAL BANK, respondent.
VASQUEZ, J.:
Petitioner Ramon A. Gonzales instituted in the erstwhile Court of First Instance of Manila a
special civil action for mandamus against the herein respondent praying that the latter be
ordered to allow him to look into the books and records of the respondent bank in order to
satisfy himself as to the truth of the published reports that the respondent has guaranteed
the obligation of Southern Negros Development Corporation in the purchase of a US$ 23
million sugar-mill to be financed by Japanese suppliers and financiers; that the respondent
is financing the construction of the P 21 million Cebu-Mactan Bridge to be constructed by
V.C. Ponce, Inc., and the construction of Passi Sugar Mill at Iloilo by the Honiron
Philippines, Inc., as well as to inquire into the validity of Id transactions. The petitioner has
alleged hat his written request for such examination was denied by the respondent. The
trial court having dismissed the petition for mandamus, the instant appeal to review the
said dismissal was filed.
The facts that gave rise to the subject controversy have been set forth by the trial court in
the decision herein sought to be reviewed, as follows:
Briefly stated, the following facts gathered from the stipulation of the
parties served as the backdrop of this proceeding.
Previous to the present action, the petitioner instituted several cases in
this Court questioning different transactions entered into by the Bark
with other parties. First among them is Civil Case No. 69345 filed on
April 27, 1967, by petitioner as a taxpayer versus Sec. Antonio Raquiza
of Public Works and Communications, the Commissioner of Public
Highways, the Bank, Continental Ore Phil., Inc., Continental Ore, Huber
Corporation, Allis Chalmers and General Motors Corporation In the
course of the hearing of said case on August 3, 1967, the personality of
herein petitioner to sue the bank and question the letters of credit it has
extended for the importation by the Republic of the Philippines of public
works equipment intended for the massive development program of the
President was raised. In view thereof, he expressed and made known his

intention to acquire one share of stock from Congressman Justiniano

Montano which, on the following day, August 30, 1967, was transferred
in his name in the books of the Bank.
Subsequent to his aforementioned acquisition of one share of stock of
the Bank, petitioner, in his dual capacity as a taxpayer and stockholder,
filed the following cases involving the bank or the members of its Board
of Directors to wit:
l. On October l8,1967, Civil Case No. 71044 versus the Board of
Directors of the Bank; the National Investment and Development Corp.,
Marubeni Iida Co., Ltd., and Agro-Inc. Dev. Co. or Saravia;
2. On May 11, 1968, Civil Case No. 72936 versus Roberto Benedicto and
other Directors of the Bank, Passi (Iloilo) Sugar Central, Inc., CalinogLambunao Sugar Mill Integrated Farming, Inc., Talog sugar Milling Co.,
Inc., Safary Central, Inc., and Batangas Sugar Central Inc.;
3. On May 8, 1969, Civil Case No. 76427 versus Alfredo Montelibano and
the Directors of both the PNB and DBP;
On January 11, 1969, however, petitioner addressed a letter to the
President of the Bank (Annex A, Pet.), requesting submission to look into
the records of its transactions covering the purchase of a sugar central
by the Southern Negros Development Corp. to be financed by Japanese
suppliers and financiers; its financing of the Cebu-Mactan Bridge to be
constructed by V.C. Ponce, Inc. and the construction of the Passi Sugar
Mills in Iloilo. On January 23, 1969, the Asst. Vice-President and Legal
Counsel of the Bank answered petitioner's letter denying his request for
being not germane to his interest as a one-share stockholder and for the
cloud of doubt as to his real intention and purpose in acquiring said
share. (Annex B, Pet.) In view of the Bank's refusal the petitioner
instituted this action.' (Rollo, pp. 16-18.)
The petitioner has adopted the above finding of facts made by the trial court in its brief
which he characterized as having been "correctly stated." (Petitioner-Appellant"s Brief, pp.
57.)
The court a quo denied the prayer of the petitioner that he be allowed to examine and
inspect the books and records of the respondent bank regarding the transactions
mentioned on the grounds that the right of a stockholder to inspect the record of the
business transactions of a corporation granted under Section 51 of the former Corporation
Law (Act No. 1459, as amended) is not absolute, but is limited to purposes reasonably
related to the interest of the stockholder, must be asked for in good faith for a specific
and honest purpose and not gratify curiosity or for speculative or vicious purposes; that
such examination would violate the confidentiality of the records of the respondent bank
as provided in Section 16 of its charter, Republic Act No. 1300, as amended; and that the
petitioner has not exhausted his administrative remedies.
Assailing the conclusions of the lower court, the petitioner has assigned the single error to
the lower court of having ruled that his alleged improper motive in asking for an

examination of the books and records of the respondent bank disqualifies him to exercise
the right of a stockholder to such inspection under Section 51 of Act No. 1459, as
amended. Said provision reads in part as follows:
Sec. 51. ... The record of all business transactions of the corporation and
the minutes of any meeting shall be open to the inspection of any
director, member or stockholder of the corporation at reasonable hours.
Petitioner maintains that the above-quoted provision does not justify the qualification
made by the lower court that the inspection of corporate records may be denied on the
ground that it is intended for an improper motive or purpose, the law having granted such
right to a stockholder in clear and unconditional terms. He further argues that, assuming
that a proper motive or purpose for the desired examination is necessary for its exercise,
there is nothing improper in his purpose for asking for the examination and inspection
herein involved.
Petitioner may no longer insist on his interpretation of Section 51 of Act No. 1459, as
amended, regarding the right of a stockholder to inspect and examine the books and
records of a corporation. The former Corporation Law (Act No. 1459, as amended) has
been replaced by Batas Pambansa Blg. 68, otherwise known as the "Corporation Code of
the Philippines."
The right of inspection granted to a stockholder under Section 51 of Act No. 1459 has
been retained, but with some modifications. The second and third paragraphs of Section
74 of Batas Pambansa Blg. 68 provide the following:
The records of all business transactions of the corporation and the
minutes of any meeting shag be open to inspection by any director,
trustee, stockholder or member of the corporation at reasonable hours
on business days and he may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
Any officer or agent of the corporation who shall refuse to allow any
director, trustee, stockholder or member of the corporation to examine
and copy excerpts from its records or minutes, in accordance with the
provisions of this Code, shall be liable to such director, trustee,
stockholder or member for damages, and in addition, shall be guilty of
an offense which shall be punishable under Section 144 of this Code:
Provided, That if such refusal is made pursuant to a resolution or order
of the board of directors or trustees, the liability under this section for
such action shall be imposed upon the directors or trustees who voted
for such refusal; and Provided, further, That it shall be a defense to any
action under this section that the person demanding to examine and
copy excerpts from the corporation's records and minutes has
improperly used any information secured through any prior examination
of the records or minutes of such corporation or of any other
corporation, or was not acting in good faith or for a legitimate purpose
in making his demand.
As may be noted from the above-quoted provisions, among the changes introduced in the
new Code with respect to the right of inspection granted to a stockholder are the following
the records must be kept at the principal office of the corporation; the inspection must be

made on business days; the stockholder may demand a copy of the excerpts of the
records or minutes; and the refusal to allow such inspection shall subject the erring officer
or agent of the corporation to civil and criminal liabilities. However, while seemingly
enlarging the right of inspection, the new Code has prescribed limitations to the same. It
is now expressly required as a condition for such examination that the one requesting it
must not have been guilty of using improperly any information through a prior
examination, and that the person asking for such examination must be "acting in good
faith and for a legitimate purpose in making his demand."
The unqualified provision on the right of inspection previously contained in Section 51, Act
No. 1459, as amended, no longer holds true under the provisions of the present law. The
argument of the petitioner that the right granted to him under Section 51 of the former
Corporation Law should not be dependent on the propriety of his motive or purpose in
asking for the inspection of the books of the respondent bank loses whatever validity it
might have had before the amendment of the law. If there is any doubt in the correctness
of the ruling of the trial court that the right of inspection granted under Section 51 of the
old Corporation Law must be dependent on a showing of proper motive on the part of the
stockholder demanding the same, it is now dissipated by the clear language of the
pertinent provision contained in Section 74 of Batas Pambansa Blg. 68.
Although the petitioner has claimed that he has justifiable motives in seeking the
inspection of the books of the respondent bank, he has not set forth the reasons and the
purposes for which he desires such inspection, except to satisfy himself as to the truth of
published reports regarding certain transactions entered into by the respondent bank and
to inquire into their validity. The circumstances under which he acquired one share of
stock in the respondent bank purposely to exercise the right of inspection do not argue in
favor of his good faith and proper motivation. Admittedly he sought to be a stockholder in
order to pry into transactions entered into by the respondent bank even before he
became a stockholder. His obvious purpose was to arm himself with materials which he
can use against the respondent bank for acts done by the latter when the petitioner was a
total stranger to the same. He could have been impelled by a laudable sense of civic
consciousness, but it could not be said that his purpose is germane to his interest as a
stockholder.
We also find merit in the contention of the respondent bank that the inspection sought to
be exercised by the petitioner would be violative of the provisions of its charter. (Republic
Act No. 1300, as amended.) Sections 15, 16 and 30 of the said charter provide
respectively as follows:
Sec. 15. Inspection by Department of Supervision and Examination of
the Central Bank. The National Bank shall be subject to inspection by
the Department of Supervision and Examination of the Central Bank'

Sec. 30. Penalties for violation of the provisions of this Act. Any
director, officer, employee, or agent of the Bank, who violates or permits
the violation of any of the provisions of this Act, or any person aiding or
abetting the violations of any of the provisions of this Act, shall be
punished by a fine not to exceed ten thousand pesos or by
imprisonment of not more than five years, or both such fine and
imprisonment.
The Philippine National Bank is not an ordinary corporation. Having a charter of its own, it
is not governed, as a rule, by the Corporation Code of the Philippines. Section 4 of the said
Code provides:
SEC. 4. Corporations created by special laws or charters. Corporations
created by special laws or charters shall be governed primarily by the
provisions of the special law or charter creating them or applicable to
them. supplemented by the provisions of this Code, insofar as they are
applicable.
The provision of Section 74 of Batas Pambansa Blg. 68 of the new Corporation Code with
respect to the right of a stockholder to demand an inspection or examination of the books
of the corporation may not be reconciled with the abovequoted provisions of the charter
of the respondent bank. It is not correct to claim, therefore, that the right of inspection
under Section 74 of the new Corporation Code may apply in a supplementary capacity to
the charter of the respondent bank.
WHEREFORE, the petition is hereby DISMISSED, without costs.

G.R. No. 123553 July 13, 1998

(CA-G.R. No. 33291) July 13, 1998
NORA A. BITONG, petitioner,

Sec. 16. Confidential information. The Superintendent of Banks and

the Auditor General, or other officers designated by law to inspect or
investigate the condition of the National Bank, shall not reveal to any
person other than the President of the Philippines, the Secretary of
Finance, and the Board of Directors the details of the inspection or
investigation, nor shall they give any information relative to the funds in
its custody, its current accounts or deposits belonging to private
individuals, corporations, or any other entity, except by order of a Court
of competent jurisdiction,'

vs.
COURT OF APPEALS (FIFTH DIVISION), EUGENIA D. APOSTOL, JOSE A. APOSTOL,
MR. & MS. PUBLISHING CO., LETTY J. MAGSANOC, AND ADORACION G.
NUYDA, respondents.
(CA-G.R. No. 33873) July 13, 1998

NORA A. BITONG, petitioner,

vs.
COURT OF APPEALS (FIFTH DIVISION) and EDGARDO B. ESPIRITU, respondents.

BELLOSILLO, J.:
These twin cases originated from a derivative suit 1 filed by petitioner Nora A. Bitong
before the Securities and Exchange Commission (SEC hereafter) allegedly for the benefit
of private respondent Mr. & Ms. Publishing Co., Inc. (Mr. & Ms. hereafter), among others, to
hold respondent spouses Eugenia D. Apostol and Jose A. Apostol 2 liable for fraud,
misrepresentation, disloyalty, evident bad faith, conflict of interest and mismanagement
in directing the affairs of Mr. & Ms. to the damage and prejudice of Mr. & Ms. and its
stockholders, including petitioner.
Alleging before the SEC that she had been the Treasurer and a Member of the Board of
Directors of Mr. & Ms. from the time it was incorporated on 29 October 1976 to 11 April
1989, and was the registered owner of 1,000 shares of stock out of the 4,088 total
outstanding shares, petitioner complained of irregularities committed from 1983 to 1987
by Eugenia D. Apostol, President and Chairperson of the Board of Directors. Petitioner
claimed that except for the sale of the name Philippine Inquirer to Philippine Daily
Inquirer (PDI hereafter) all other transactions and agreements entered into by Mr. & Ms.
with PDI were not supported by any bond and/or stockholders' resolution. And, upon
instructions of Eugenia D. Apostol, Mr. & Ms. made several cash advances to PDI on
various occasions amounting to P3.276 million. On some of these borrowings PDI paid no
interest whatsoever. Despite the fact that the advances made by Mr. & Ms. to PDI were
booked as advances to an affiliate, there existed no board or stockholders' resolution,
contract nor any other document which could legally authorize the creation of and support
to an affiliate.
Petitioner further alleged that respondents Eugenia and Jose Apostol were stockholders,
directors and officers in both Mr. & Ms. and PDI. In fact on 2 May 1986 respondents
Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G. Nuyda subscribed to PDI shares
of stock at P50,000.00 each or a total of P150,000.00. The stock subscriptions were paid
for by Mr. & Ms. and initially treated, as receivables from officers and employees. But, no
payments were ever received from respondents, Magsanoc and Nuyda.
The petition principally sought to (a) enjoin respondents Eugenia D. Apostol and Jose A.
Apostol from further acting as president-director and director, respectively, of Mr. & Ms.
and disbursing any money or funds except for the payment of salaries and similar
expenses in the ordinary course of business, and from disposing of their Mr. & Ms. shares;
(b) enjoin respondents Apostol spouses, Magsanoc and Nuyda from disposing of the PDI
shares of stock registered in their names; (c) compel respondents Eugenia and Jose
Apostol to account for and reconvey all profits and benefits accruing to them as a result of
their improper and fraudulent acts; (d) compel respondents Magsanoc and Nuyda to
account for and reconvey to Mr. & Ms. all shares of stock paid from cash advances from it
and all accessions or fruits thereof; (e) hold respondents Eugenia and Jose Apostol liable
for damages suffered by Mr. & Ms. and the other stockholders, including petitioner, by

reason of their improper and fraudulent acts; (f) appoint a management committee for Mr.
& Ms. during the pendency of the suit to prevent further dissipation and loss of its assets
and funds as well as paralyzation of business operations; and, (g) direct the management
committee for Mr. & Ms. to file the necessary action to enforce its rights against PDI and
other third parties.
Private respondents Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms., on the other hand,
refuted the allegations of petitioner by starting with a narration of the beginnings of Mr. &
Ms. They recounted that on 9 March 1976 Ex Libris Publishing Co., Inc. (Ex
Libris hereafter) was incorporated for the purpose of publishing a weekly magazine. Its
original principal stockholders were spouses Senator Juan Ponce Enrile (then Minister of
National Defense) and Cristina Ponce Enrile through Jaka Investments Corporation (JAKA
hereafter), and respondents Eugenia and Jose Apostol. When Ex Libris suffered financial
difficulties, JAKA and the Apostols, together with new investors Luis Villafuerte and Ramon
Siy, restructured Ex Libris by organizing a new corporation known as Mr. & Ms.
The original stockholders of Mr. & Ms., i.e., JAKA, Luis Villafuerte, Ramon Siy, the Apostols
and Ex Libriscontinued to be virtually the same up to 1989. Thereafter it was agreed
among them that, they being close friends, Mr. & Ms. would be operated as a partnership
or a close corporation; respondent Eugenia D. Apostol would manage the affairs of Mr. &
Ms.; and, no shares of stock would be sold to third parties without first offering the shares
to the other stockholders so that transfers would be limited to and only among the
original stockholders.
Private respondents also asserted that respondent Eugenia D. Apostol had been informing
her business partners of her actions as manager, and obtaining their advice and consent.
Consequently the other stockholders consented, either expressly or impliedly, to her
management. They offered no objections. As a result, the business prospered. Thus, as
shown in a statement prepared by the accounting firm Punongbayan and Araullo, there
were increases from 1976 to 1988 in the total assets of Mr. & Ms. from P457,569.00 to
P10,143,046.00; in the total stockholders' equity from P203,378.00 to P2,324,954.00; and,
in the net sales, from P301,489.00 to P16,325,610.00. Likewise, cash dividends were
distributed and received by the stockholders.
Private respondents further contended that petitioner, being merely a holder-in-trust of
JAKA shares, only represented and continued to represent JAKA in the board. In the
beginning, petitioner cooperated with and assisted the management until mid-1986 when
relations between her and her principals on one hand, and respondent Eugenia D. Apostol
on the other, became strained due to political differences. Hence from mid-1986 to mid1988 petitioner refused to speak with respondent Eugenia D. Apostol, and in 1988 the
former became openly critical of the management of the latter. Nevertheless, respondent
Eugenia D. Apostol always made available to petitioner and her representatives all the
books of the corporation.
Private respondents averred that all the PDI shares owned by respondents Eugenia and
Jose Apostol were acquired through their own private funds and that the loan of
P750,000.00 by PDI from Mr. & Ms. had been fully paid with 20% interest per annum. And,
it was PDI, not Mr. & Ms., which loaned off P250,000.00 each to respondents Magsanoc
and Nuyda. Private respondents further argued that petitioner was not the true party to
this case, the real party being JAKA which continued to be the true stockholder of Mr. &
Ms.; hence, petitioner did not have the personality to initiate and prosecute the derivative
suit which, consequently, must be dismissed.

On 6 December 1990, the SEC Hearing Panel 3 issued a writ of preliminary injunction
enjoining private respondents from disbursing any money except for the payment of
salaries and other similar expenses in the regular course of business. The Hearing Panel
also enjoined respondent Apostol spouses, Nuyda and Magsanoc from disposing of their
PDI shares, and further ruled
. . . respondents' contention that petitioner is not entitled to the
provisional reliefs prayed for because she is not the real party in interest
. . . is bereft of any merit. No less than respondents' Amended Answer,
specifically paragraph V, No. 8 on Affirmative Allegations/Defenses
states that "The petitioner being herself a minor stockholder and holderin-trust of JAKA shares represented and continues to represent JAKA in
the Board." This statement refers to petitioner sitting in the board of
directors of Mr. & Ms. in two capacities, one as a minor stockholder and
the other as the holder in trust of the shares of JAKA in Mr. & Ms. Such
reference alluded to by the respondents indicates an admission on
respondents' part of the petitioner's legal personality to file a derivative
suit for the benefit of the respondent Mr. & Ms. Publishing Co., Inc.
The Hearing Panel however denied petitioner's prayer for the constitution of a
management committee.
On 25 March 1991 private respondents filed a Motion to Amend Pleadings to Conform to
Evidence alleging that the issue of whether petitioner is the real party-in-interest had
been tried by express or implied consent of the parties through the admission of
documentary exhibits presented by private respondents proving that the real party-ininterest was JAKA, not petitioner Bitong. As such, No. 8, par. V (Affirmative
Allegations/Defenses),Answer to the Amended Petition, was stipulated due to
inadvertence and excusable mistake and should be amended. On 10 October 1991 the
Hearing Panel denied the motion for amendment.
Petitioner testified at the trial that she became the registered and beneficial owner of 997
shares of stock of Mr. & Ms. out of the 4,088 total outstanding shares after she acquired
them from JAKA through a deed of sale executed on 25 July 1983 and recorded in the
Stock and Transfer Book of Mr. & Ms. under Certificate of Shares of Stock No. 008. She
pointed out that Senator Enrile decided that JAKA should completely divest itself of its
holdings in Mr. & Ms. and this resulted in the sale to her of JAKA's interest and holdings in
that publishing firm.
Private respondents refuted the statement of petitioner that she was a stockholder of Mr.
& Ms. since 25 July 1983 as respondent Eugenia D. Apostol signed Certificate of Stock No.
008 only on 17 March 1989, and not on 25 July 1983. Respondent Eugenia D. Apostol
explained that she stopped using her long signature (Eugenia D. Apostol) in 1987 and
changed it to E.D. Apostol, the signature which appeared on the face of Certificate of
Stock No. 008 bearing the date 25 July 1983. And, since the Stock and Transfer Book
which petitioner presented in evidence was not registered with the SEC, the entries
therein including Certificate of Stock No. 008 were fraudulent. Respondent Eugenia D.
Apostol claimed that she had not seen the Stock and Transfer Book at anytime until 21
March 1989 when it was delivered by petitioner herself to the office of Mr. & Ms., and that
petitioner repeatedly referred to Senator Enrile as "my principal" during the Mr. & Ms.
board meeting of 22 September 1988, seven (7) times no less.

On 3 August 1993, after trial on the merits, the SEC Hearing Panel dismissed the
derivative suit filed by petitioner and dissolved the writ of preliminary injunction barring
private respondents from disposing of their PDI shares and any of Mr. & Ms. assets. The
Hearing Panel ruled that there was no serious mismanagement of Mr. & Ms. which would
warrant drastic corrective measures. It gave credence to the assertion of respondent
Eugenia D. Apostol that Mr. & Ms. was operated like a close corporation where important
matters were discussed and approved through informal consultations at breakfast
conferences. The Hearing Panel also concluded that while the evidence presented tended
to show that the real party-in-interest indeed was JAKA and/or Senator Enrile, it viewed the
real issue to be the alleged mismanagement, fraud and conflict of interest on the part of
respondent Eugenia D. Apostol, and allowed petitioner to prosecute the derivative suit if
only to resolve the real issues. Hence, for this purpose, the Hearing Panel considered
petitioner to be the real party-in-interest.
On 19 August 1993 respondent Apostol spouses sold the PDI shares registered in the
name of their holding company, JAED Management Corporation, to Edgardo B. Espiritu. On
25 August 1993 petitioner Bitong appealed to the SEC En Banc.
On 24 January 1994 the SEC En Banc 4 reversed the decision of the Hearing Panel and,
among others, ordered private respondents to account for, return and deliver to Mr. & Ms.
any and all funds and assets that they disbursed from the coffers of the corporation
including shares of stock, profits, dividends and/or fruits that they might have received as
a result of their investment in PDI, including those arising from the P150,000.00 advanced
to respondents Eugenia D. Apostol, Leticia J. Magsanoc and Adoracion G. Nuyda; account
for and return any profits and fruits of all amounts irregularly or unlawfully advanced to
PDI and other third persons; and, cease and desist from managing the affairs of Mr. & Ms.
for reasons of fraud, mismanagement, disloyalty and conflict of interest.
The SEC En Banc also declared the 19 August 1993 sale of the PDI shares of JAED
Management Corporation to Edgardo B. Espiritu to be tainted with fraud, hence, null and
void, and considered Mr. & Ms. as the true and lawful owner of all the PDI shares acquired
by respondents Eugenia D. Apostol, Magsanoc and Nuyda. It also declared all subsequent
transferees of such shares as trustees for the benefit of Mr. & Ms. and ordered them to
forthwith deliver said shares to Mr. & Ms.
Consequently, respondent Apostol spouses, Magsanoc, Nuyda, and Mr. & Ms. filed a
petition for review before respondent Court of Appeals, docketed as CA-GR No. SP 33291,
while respondent Edgardo B. Espiritu filed a petition for certiorari and prohibition also
before respondent Court of Appeals, docketed as CA-GR No. SP 33873. On 8 December
1994 the two (2) petitions were consolidated.
On 31 August 1995 respondent appellate court rendered a decision reversing the SEC En
Banc and held that from the evidence on record petitioner was not the owner of any share
of stock in Mr. & Ms. and therefore not the real party-in-interest to prosecute the
complaint she had instituted against private respondents. Accordingly, petitioner alone
and by herself as an agent could not file a derivative suit in behalf of her principal. For not
being the real party-in-interest, petitioner's complaint did not state a cause of action, a
defense which was never waived; hence, her petition should have been dismissed.
Respondent appellate court ruled that the assailed orders of the SEC were issued in
excess of jurisdiction, or want of it, and thus were null and void. 5 On 18 January 1996,
petitioner's motion for reconsideration was denied for lack of merit.

Before this Court, petitioner submits that in paragraph 1 under the caption "I. The Parties"
of her Amended Petition before the SEC, she stated that she was a stockholder and
director of Mr. & Ms. In par. 1 under the caption "II. The Facts" she declared that she "is
the registered owner of 1,000 shares of stock of Mr. & Ms. out of the latter's 4,088 total
outstanding shares" and that she was a member of the Board of Directors of Mr. & Ms. and
treasurer from its inception until 11 April 1989. Petitioner contends that private
respondents did not deny the above allegations in their answer and therefore they are
conclusively bound by this judicial admission. Consequently, private respondents'
admission that petitioner has 1,000 shares of stock registered in her name in the books of
Mr. & Ms. forecloses any question on her status and right to bring a derivative suit on
behalf of Mr. & Ms.
Not necessarily. A party whose pleading is admitted as an admission against interest is
entitled to overcome by evidence the apparent inconsistency, and it is competent for the
party against whom the pleading is offered to show that the statements were
inadvertently made or were made under a mistake of fact. In addition, a party against
whom a single clause or paragraph of a pleading is offered may have the right to
introduce other paragraphs which tend to destroy the admission in the paragraph offered
by the adversary. 6
The Amended Petition before the SEC alleges

V. AFFIRMATIVE ALLEGATIONS/DEFENSES
Respondents respectfully allege by way of Affirmative
Allegations/Defenses, that . . . .
3. Fortunately, respondent Apostol was able to convince Mr. Luis
Villafuerte to take interest in the business and he, together with the
original investors, restructured the Ex Libris Publishing Company by
organizing a new corporation known as Mr. & Ms. Publishing Co., Inc. . . .
Mr. Luis Villafuerte contributed his own P100,000.00. JAKA and
respondent Jose Z. Apostol, original investors of Ex Libris contributed
P100,000.00 each; Ex Libris Publishing Company was paid 800 shares
for the name of Mr. & Ms. magazine and goodwill. Thus, the original
stockholders of respondent Mr. & Ms. were:
Cert./No./Date Name of Stockholder No. of Shares %
001-9-15-76 JAKA Investments Corp. 1,000 21%
002-9-15-76 Luis Villafuerte 1,000 21%

I. THE PARTIES
1. Petitioner is a stockholder and director of Mr. & Ms. . . . .
II. THE FACTS
1. Petitioner is the registered owner of 1,000 shares of stock of Mr. & Ms.
out of the latter's 4,088 total outstanding shares. Petitioner, at all times
material to this petition, is a member of the Board of Directors of Mr. &
Ms. and from the inception of Mr. & Ms. until 11 April 1989 was its
treasurer . . .
On the other hand, the Amended Answer to the Amended Petition states
I. PARTIES
1. Respondents admit the allegations contained in Caption I, pars. 1 to 4
of the Petition referring to the personality, addresses and capacity of the
parties to the petition except . . . but qualify said admission insofar as
they are limited, qualified and/or expanded by allegations in the
Affirmative Allegations/Defenses . . .
II. THE FACTS
1. Respondents admit paragraph 1 of the Petition, but qualify said
admission as to the beneficial ownership of the shares of stock
registered in the name of the petitioner, the truth being as stated in the
Affirmative Allegations/Defenses of this Answer . . .

003-9-15-76 Ramon L. Siy 1,000 21%

004-9-15-76 Jose Z. Apostol 1,000 21%
005-9-15-76 Ex Libris Publishing Co. 800 16%

4,800 96%
4. The above-named original stockholders of respondent Mr. & Ms.
continue to be virtually the same stockholders up to this date . . . .
8. The petitioner being herself a minor stockholder and holder-in-trust of
JAKA shares, represented and continues to represent JAKA in the
Board . . . .
21. Petitioner Nora A. Bitong is not the true party to this case, the true
party being JAKA Investments Corporation which continues to be the
true stockholder of respondent Mr. & Ms. Publishing Co., Inc.,
consequently, she does not have the personality to initiate and
prosecute this derivative suit, and should therefore be dismissed . . . .
The answer of private respondents shows that there was no judicial admission that
petitioner was a stockholder of Mr. & Ms. to entitle her to file a derivative suit on behalf of
the corporation. Where the statements of the private respondents were qualified with
phrases such as, "insofar as they are limited, qualified and/or expanded by," "the truth

being as stated in the Affirmative Allegations/Defenses of this Answer" they cannot be

considered definite and certain enough, cannot be construed as judicial admissions. 7
More so, the affirmative defenses of private respondents directly refute the representation
of petitioner that she is a true and genuine stockholder of Mr. & Ms. by stating
unequivocally that petitioner is not the true party to the case but JAKA which continues to
be the true stockholder of Mr. & Ms. In fact, one of the reliefs which private respondents
prayed for was the dismissal of the petition on the ground that petitioner did not have the
legal interest to initiate and prosecute the same.
When taken in its totality, the Amended Answer to the Amended Petition, or even the
Answer to the Amended Petition alone, clearly raises an issue as to the legal personality
of petitioner to file the complaint. Every alleged admission is taken as an entirety of the
fact which makes for the one side with the qualifications which limit, modify or destroy its
effect on the other side. The reason for this is, where part of a statement of a party is
used against him as an admission, the court should weigh any other portion connected
with the statement, which tends to neutralize or explain the portion which is against
interest.
In other words, while the admission is admissible in evidence, its probative value is to be
determined from the whole statement and others intimately related or connected
therewith as an integrated unit. Although acts or facts admitted do not require proof and
cannot be contradicted, however, evidence aliunde can be presented to show that the
admission was made through palpable mistake. 8 The rule is always in favor of liberality in
construction of pleadings so that the real matter in dispute may be submitted to the
judgment of the court. 9
Petitioner also argues that since private respondents failed to appeal the 6 December
1990 Order and the 3 August 1993 Decision of the SEC Hearing Panel declaring that she
was the real party-in-interest and had legal personality to sue, they are now estopped
from questioning her personality.
Not quite. The 6 December 1990 Order is clearly an interlocutory order which cannot be
considered as having finally resolved on the merits the issue of legal capacity of
petitioner. The SEC Hearing Panel discussed the issue of legal capacity solely for the
purpose of ruling on the application for writ of preliminary injunction as an incident to the
main issues raised in the complaint. Being a mere interlocutory order, it is not appealable.
For, an interlocutory order refers to something between the commencement and end of
the suit which decides some point or matter but it is not the final decision of the whole
controversy. 10 Thus, even though the 6 December 1990 Order was adverse to private
respondents, they had the legal right and option not to elevate the same to the SEC En
Banc but rather to await the decision which resolves all the issues raised by the parties
and to appeal therefrom by assigning all errors that might have been committed by the
Hearing Panel.
On the other hand, the 3 August 1993 Decision of the Hearing Panel dismissing the
derivative suit for failure to prove the charges of mismanagement, fraud, disloyalty and
conflict of interest and dissolving the writ of preliminary injunction, was favorable to
private respondents. Hence, they were not expected to appeal therefrom.

In fact, in the 3 August 1993 Decision, the Hearing Panel categorically stated that the
evidence presented showed that the real party-in-interest was not petitioner Bitong but
JAKA and/or Senator Enrile. Petitioner was merely allowed to prosecute her complaint so
as not to sidetrack "the real issue to be resolved (which) was the allegation of
mismanagement, fraud and conflict of interest allegedly committed by respondent
Eugenia D. Apostol." It was only for this reason that petitioner was considered to be
capacitated and competent to file the petition.
Accordingly, with the dismissal of the complaint of petitioner against private respondents,
there was no compelling reason for the latter to appeal to the SEC En Banc. It was in fact
petitioner's turn as the aggrieved party to exercise her right to appeal from the decision. It
is worthy to note that even during the appeal of petitioner before the SEC En Banc private
respondents maintained their vigorous objection to the appeal and reiterated petitioner's
lack of legal capacity to sue before the SEC.
Petitioner then contends that she was a holder of the proper certificates of shares of stock
and that the transfer was recorded in the Stock and Transfer Book of Mr. & Ms. She
invokes Sec. 63 of The Corporation Code which provides that no transfer shall be valid
except as between the parties until the transfer is recorded in the books of the
corporation, and upon its recording the corporation is bound by it and is estopped to deny
the fact of transfer of said shares. Petitioner alleges that even in the absence of a stock
certificate, a stockholder solely on the strength of the recording in the stock and transfer
book can exercise all the rights as stockholder, including the right to file a derivative suit
in the name of the corporation. And, she need not present a separate deed of sale or
transfer in her favor to prove ownership of stock.
Sec. 63 of The Corporation Code expressly provides
Sec. 63. Certificate of stock and transfer of shares. The capital stock
of stock corporations shall be divided into shares for which certificates
signed by the president or vice president, countersigned by the
secretary or assistant secretary, and sealed with the seal of the
corporation shall be issued in accordance with the by-laws. Shares of
stock so issued are personal property and may be transferred by
delivery of the certificate or certificates indorsed by the owner or his
attorney-in-fact or other person legally authorized to make the transfer.
No transfer however shall be valid except as between the parties until
the transfer is recorded in the books of the corporation showing the
names of the parties to the transaction, the date of the transfer, the
number of the certificate or certificates and the number of shares
transferred . . . .
This provision above quoted envisions a formal certificate of stock which can be issued
only upon compliance with certain requisites. First, the certificates must be signed by the
president or vice-president, countersigned by the secretary or assistant secretary, and
sealed with the seal of the corporation. A mere typewritten statement advising a
stockholder of the extent of his ownership in a corporation without qualification and/or
authentication cannot be considered as a formal certificate of stock. 11 Second, delivery of
the certificate is an essential element of its issuance. Hence, there is no issuance of a
stock certificate where it is never detached from the stock books although blanks therein
are properly filled up if the person whose name is inserted therein has no control over the
books of the company. 12 Third, the par value, as to par value shares, or the full
subscription as to no par value shares, must first be fully paid. Fourth, the original

certificate must be surrendered where the person requesting the issuance of a certificate
is a transferee from a stockholder.
The certificate of stock itself once issued is a continuing affirmation or representation that
the stock described therein is valid and genuine and is at least prima facie evidence that
it was legally issued in the absence of evidence to the contrary. However, this
presumption may be rebutted. 13 Similarly, books and records of a corporation which
include even the stock and transfer book are generally admissible in evidence in favor of
or against the corporation and its members to prove the corporate acts, its financial
status and other matters including one's status as a stockholder. They are ordinarily the
best evidence of corporate acts and proceedings.
However, the books and records of a corporation are not conclusive even against the
corporation but are prima facie evidence only. Parol evidence may be admitted to supply
omissions in the records, explain ambiguities, or show what transpired where no records
were kept, or in some cases where such records were contradicted. 14The effect of entries
in the books of the corporation which purport to be regular records of the proceedings of
its board of directors or stockholders can be destroyed by testimony of a more conclusive
character than mere suspicion that there was an irregularity in the manner in which the
books were kept. 15
The foregoing considerations are founded on the basic principle that stock issued without
authority and in violation of law is void and confers no rights on the person to whom it is
issued and subjects him to no liabilities.16 Where there is an inherent lack of power in the
corporation to issue the stock, neither the corporation nor the person to whom the stock is
issued is estopped to question its validity since an estopped cannot operate to create
stock which under the law cannot have existence. 17
As found by the Hearing Panel and affirmed by respondent Court of Appeals, there is
overwhelming evidence that despite what appears on the certificate of stock and stock
and transfer book, petitioner was not a bona fidestockholder of Mr. & Ms. before March
1989 or at the time the complained acts were committed to qualify her to institute a
stockholder's derivative suit against private respondents. Aside from petitioner's own
admissions, several corporate documents disclose that the true party-in-interest is not
petitioner but JAKA.
Thus, while petitioner asserts in her petition that Certificate of Stock No. 008 dated 25 July
1983 was issued in her name, private respondents argue that this certificate was signed
by respondent Eugenia D. Apostol as President only in 1989 and was fraudulently
antedated by petitioner who had possession of the Certificate Book and the Stock and
Transfer Book. Private respondents stress that petitioner's counsel entered into a
stipulation on record before the Hearing Panel that the certificate was indeed signed by
respondent Apostol only in 1989 and not in 1983.
In her reply, petitioner admits that while respondent Eugenia D. Apostol signed the
Certificate of Stock No. 008 in petitioner's name only in 1989, it was issued by the
corporate secretary in 1983 and that the other certificates covering shares in Mr. & Ms.
had not yet been signed by respondent Eugenia D. Apostol at the time of the filing of the
complaint with the SEC although they were issued years before.
Based on the foregoing admission of petitioner, there is no truth to the statement written
in Certificate of Stock No. 008 that the same was issued and signed on 25 July 1983 by its

duly authorized officers specifically the President and Corporate Secretary because the
actual date of signing thereof was 17 March 1989. Verily, a formal certificate of stock
could not be considered issued in contemplation of law unless signed by the president or
vice-president and countersigned by the secretary or assistant secretary.
In this case, contrary to petitioner's submission, the Certificate of Stock No. 008 was only
legally issued on 17 March 1989 when it was actually signed by the President of the
corporation, and not before that date. While a certificate of stock is not necessary to make
one a stockholder, e.g., where he is an incorporator and listed as stockholder in the
articles of incorporation although no certificate of stock has yet been issued, it is
supposed to serve as paper representative of the stock itself and of the owner's interest
therein. Hence, when Certificate of Stock No. 008 was admittedly signed and issued only
on 17 March 1989 and not on 25 July 1983, even as it indicates that petitioner owns 997
shares of stock of Mr. & Ms., the certificate has no evidentiary value for the purpose of
proving that petitioner was a stockholder since 1983 up to 1989.
And even the factual antecedents of the alleged ownership by petitioner in 1983 of shares
of stock of Mr. & Ms. are indistinctive if not enshrouded in inconsistencies. In her
testimony before the Hearing Panel, petitioner said that early in 1983, to relieve Mr. & Ms.
from political pressure, Senator Enrile decided to divest the family holdings in Mr. & Ms. as
he was then part of the government and Mr. & Ms. was evolving to be an opposition
newspaper. The JAKA shares numbering 1,000 covered by Certificate of Stock No. 001
were thus transferred to respondent Eugenia D. Apostol in trust or in blank. 18
Petitioner now claims that a few days after JAKA's shares were transferred to respondent
Eugenia D. Apostol, Senator Enrile sold to petitioner 997 shares of JAKA. For this purpose,
a deed of sale was executed and antedated to 10 May 1983. 19 This submission of
petitioner is however contradicted by the records which show that a deed of sale was
executed by JAKA transferring 1,000 shares of Mr. & Ms. to respondent Apostol on 10 May
1983 and not to petitioner. 20
Then Senator Enrile testified that in May or June 1983 he was asked at a media interview
if his family owned shares of stock in Mr. & Ms. Although he and his family were
stockholders at that time he denied it so as not to embarrass the magazine. He called up
petitioner and instructed her to work out the documentation of the transfer of shares from
JAKA to respondent Apostol to be covered by a declaration of trust. His instruction was to
transfer the shares of JAKA in Mr. & Ms. and Ex Libris to respondent Apostol as a nominal
holder. He then finally decided to transfer the shareholdings to petitioner. 21
When asked if there was any document or any written evidence of that divestment in
favor of petitioner, Senator Enrile answered that there was an endorsement of the shares
of stock. He said that there was no other document evidencing the assignment to
petitioner because the stocks were personal property that could be transferred even
orally. 22 Contrary to Senator Enrile's testimony, however, petitioner maintains that
Senator Enrile executed a deed of sale in her favor.
A careful perusal of the records shows that neither the alleged endorsement of Certificate
of Stock No. 001 in the name of JAKA nor the alleged deed of sale executed by Senator
Enrile directly in favor of petitioner could have legally transferred or assigned on 25 July
1983 the shares of stock in favor of petitioner because as of 10 May 1983 Certificate of
Stock No. 001 in the name of JAKA was already cancelled and a new one, Certificate of

Stock No. 007, issued in favor of respondent Apostol by virtue of a Declaration of Trust and
Deed of Sale. 23
It should be emphasized that on 10 May 1983 JAKA executed, a deed of sale over 1,000
Mr. & Ms. shares in favor of respondent Eugenio D. Apostol. On the same day, respondent
Apostol signed a declaration of trust stating that she was the registered owner of 1,000
Mr. & Ms. shares covered by Certificate of Stock No. 007.
The declaration of trust further showed that although respondent Apostol was the
registered owner, she held the shares of stock and dividends which might be paid in
connection therewith solely in trust for the benefit of JAKA, her principal. It was also stated
therein that being a trustee, respondent Apostol agreed, on written request of the
principal, to assign and transfer the shares of stock and any and all such distributions or
dividends unto the principal or such other person as the principal would nominate or
appoint.
Petitioner was well aware of this trust, being the person in charge of this documentation
and being one of the witnesses to the execution of this
document. 24 Hence, the mere alleged endorsement of Certificate of Stock No. 001 by
Senator Enrile or by a duly authorized officer of JAKA to effect the transfer of shares of
JAKA to petitioner could not have been legally feasible because Certificate of Stock No.
001 was already canceled by virtue of the deed of sale to respondent Apostol.
And, there is nothing in the records which shows that JAKA had revoked the trust it
reposed on respondent Eugenia D. Apostol. Neither was there any evidence that the
principal had requested her to assign and transfer the shares of stock to petitioner. If it
was true that the shares of stock covered by Certificate of Stock No. 007 had been
transferred to petitioner, the person who could legally endorse the certificate was private
respondent Eugenia D. Apostol, she being the registered owner and trustee of the shares
of stock covered by Certificate of Stock No. 007. It is a settled rule that the trustee should
endorse the stock certificate to validate the cancellation of her share and to have the
transfer recorded in the books of the corporation. 25
In fine, the records are unclear on how petitioner allegedly acquired the shares of stock of
JAKA. Petitioner being the chief executive officer of JAKA and the sole person in charge of
all business and financial transactions and affairs of JAKA 26 was supposed to be in the
best position to show convincing evidence on the alleged transfer of shares to her, if
indeed there was a transfer. Considering that petitioner's status is being questioned and
several factual circumstances have been presented by private respondents disproving
petitioner's claim, it was incumbent upon her to submit rebuttal evidence on the manner
by which she allegedly became a stockholder. Her failure to do so taken in the light of
several substantial inconsistencies in her evidence is fatal to her case.
The rule is that the endorsement of the certificate of stock by the owner or his attorney-infact or any other person legally authorized to make the transfer shall be sufficient to
effect the transfer of shares only if the same is coupled with delivery. The delivery of the
stock certificate duly endorsed by the owner is the operative act of transfer of shares from
the lawful owner to the new transferee.
Thus, for a valid transfer of stocks, the requirements are as follows: (a) There must be
delivery of the stock certificate; (b) The certificate must be endorsed by the owner or his
attorney-in-fact or other persons legally authorized to make the transfer; and, (c) to be

valid against third parties, the transfer must be recorded in the books of the
corporation. 27 At most, in the instant case, petitioner has satisfied only the third
requirement. Compliance with the first two requisites has not been clearly and sufficiently
shown.
Considering that the requirements provided under Sec. 63 of The Corporation Code should
be mandatorily complied with, the rule on presumption of regularity cannot apply. The
regularity and validity of the transfer must be proved. As it is, even the credibility of the
stock and transfer book and the entries thereon relied upon by petitioner to show
compliance with the third requisite to prove that she was a stockholder since 1983 is
highly doubtful.
The records show that the original stock and transfer book and the stock certificate book
of Mr. & Ms. were in the possession of petitioner before their custody was transferred to
the Corporate Secretary, Atty. Augusto San Pedro. 28 On 25 May 1988, Assistant Corporate
Secretary Renato Jose Unson wrote Mr. & Ms. about the lost stock and transfer book which
was also noted by the corporation's external auditors, Punongbayan and Araullo, in their
audit. Atty. Unson even informed respondent Eugenia D. Apostol as President of Mr. & Ms.
that steps would be undertaken to prepare and register a new Stock and Transfer Book
with the SEC. Incidentally, perhaps strangely, upon verification with the SEC, it was
discovered that the general file of the corporation with the SEC was missing. Hence, it was
even possible that the original Stock and Transfer Book might not have been registered at
all.
On 20 October 1988 respondent Eugenia D. Apostol wrote Atty. Augusto San Pedro noting
the changes he had made in the Stock and Transfer Book without prior notice to the
corporate officers. 29 In the 27 October 1988 directors' meeting, respondent Eugenia D.
Apostol asked about the documentation to support the changes in the Stock and Transfer
Book with regard to the JAKA shares. Petitioner answered that Atty. San Pedro made the
changes upon her instructions conformably with established practice. 30
This simply shows that as of 1988 there still existed certain issues affecting the ownership
of the JAKA shares, thus raising doubts whether the alleged transactions recorded in the
Stock and Transfer Book were proper, regular and authorized. Then, as if to magnify and
compound the uncertainties in the ownership of the shares of stock in question, when the
corporate secretary resigned, the Stock and Transfer Book was delivered not to the
corporate office where the book should be kept but to petitioner. 31
That JAKA retained its ownership of its Mr. & Ms. shares was clearly shown by its receipt of
the dividends issued in December 1986. 32 This only means, very obviously, that Mr. & Ms.
shares in question still belonged to JAKA and not to petitioner. For, dividends are
distributed to stockholders pursuant to their right to share in corporate profits. When a
dividend is declared, it belongs to the person who is the substantial and beneficial owner
of the stock at the time regardless of when the distribution profit was earned. 33
Finally, this Court takes notice of the glaring and open admissions of petitioner made, not
just seven (7) but nine (9) times, during the 22 September 1988 meeting of the board of
directors that the Enriles were her principals or shareholders, as shown by the minutes
thereof which she duly signed 34
5. Mrs. E. Apostol explained to the Directors that through her efforts, the
asset base of the Company has improved and profits were realized. It is

for this reason that the Company has declared a 100% cash dividend in
1986. She said that it is up for the Board to decide based on this
performance whether she should continue to act as Board Chairman or
not. In this regard, Ms. N.A. Bitong expressed her recollection of how ExLibris/Mr. & Ms. were organized and her participation for and on behalf
of her principals, as follows: She recalled that her principals were invited
by Mrs. E. Apostol to invest in Ex-Libris and eventually Mr. & Ms. The
relationship between her principals and Mrs. E. Apostol made it possible
for the latter to have access to several information concerning certain
political events and issues. In many instances, her principals supplied
first hand and newsworthy information that made Mr. & Ms. a popular
paper . . . .
6. According to Ms. Bitong, her principals were instrumental in helping
Mr. & Ms. survive during those years that it was cash strapped . . . . Ms.
N.A. Bitong pointed out that the practice of using the former Minister's
influence and stature in the government is one thing which her
principals themselves are strongly against . . . .
7. . . . . At this point, Ms. N. Bitong again expressed her recollection of
the subject matter as follows: (a) Mrs. E. Apostol, she remembers,
brought up the concept of a cooperative-ran newspaper company in one
of her breakfast session with her principals sometime during the end of
1985. Her principals when asked for an opinion, said that they
recognized the concept as something very noble and visible . . . . Then
Ms. Bitong asked a very specific question "When you conceptualized
Ex-Libris and Mr. & Ms., did you not think of my shareholders the Ponce
Enriles as liabilities? How come you associated yourself with them then
and not now? What is the difference?" Mrs. Apostol did not answer the
question.
The admissions of a party against his interest inscribed upon the record books of a
corporation are competent and persuasive evidence against him. 35 These admissions
render nugatory any argument that petitioner is a bona fidestockholder of Mr. & Ms. at
any time before 1988 or at the time the acts complained of were committed. There is no
doubt that petitioner was an employee of JAKA as its managing officer, as testified to by
Senator Enrile himself. 36 However, in the absence of a special authority from the board of
directors of JAKA to institute a derivative suit for and in its behalf, petitioner is disqualified
by law to sue in her own name. The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in the board of directors that exercises its
corporate powers and not in the president or officer thereof. 37

Hence, a stockholder may sue for mismanagement, waste or dissipation of corporate

assets because of a special injury to him for which he is otherwise without redress. 39 In
effect, the suit is an action for specific performance of an obligation owed by the
corporation to the stockholders to assist its rights of action when the corporation has been
put in default by the wrongful refusal of the directors or management to make suitable
measures for its protection. 40
The basis of a stockholder's suit is always one in equity. However, it cannot prosper
without first complying with the legal requisites for its institution. The most important of
these is the bona fide ownership by a stockholder of a stock in his own right at the time of
the transaction complained of which invests him with standing to institute a derivative
action for the benefit of the corporation. 41
WHEREFORE, the petition is DENIED. The 31 August 1995 Decision of the Court of Appeals
dismissing the complaint of petitioner Nora A. Bitong in CA-G.R. No. SP 33291, and
granting the petition for certiorari and prohibition filed by respondent Edgardo U. Espiritu
as well as annulling the 5 November 1993, 24 January 1993 and 18 February 1994 Orders
of the SEC En Banc in CA-G.R. No. SP 33873, is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. 85339 August 11, 1989
SAN MIGUEL CORPORATION, represented by EDUARDO DE LOS
ANGELES, petitioners,
vs.
ERNEST KAHN, ANDRES SORIANO III, BENIGNO TODA, JR., ANTONIO ROXAS,
ANTONIO PRIETO, FRANCISCO EIZMENDI, JR., EDUARDO SORIANO, RALPH KAHN
and RAMON DEL ROSARIO, JR.,respondents.
Romulo, Mabanta, Buenaventura, Sayoc & De Los Angeles petitioner.
Roco & Bunag Law Offices for respondent Ernest Kahn.
Siguion Reyna, Montecillo and Ongsiako for other respondents.

NARVASA, J.:
It is well settled in this jurisdiction that where corporate directors are guilty of a breach of
trust, not of mere error of judgment or abuse of discretion, and intracorporate remedy is
futile or useless, a stockholder may institute a suit in behalf of himself and other
stockholders and for the benefit of the corporation, to bring about a redress of the wrong
inflicted directly upon the corporation and indirectly upon the stockholders. 38 The
stockholder's right to institute a derivative suit is not based on any express provision
of The Corporation Code but is impliedly recognized when the law makes corporate
directors or officers liable for damages suffered by the corporation and its stockholders for
violation of their fiduciary duties.

On December 15, 1983, 33,133,266 shares of the outstanding capital stock of the San
Miguel Corporation were acquired 1 by fourteen (14) other corporations, 2 and were placed
under a Voting Trust Agreement in favor of the late Andres Soriano, Jr. When the latter
died, Eduardo M. Cojuangco, Jr. was elected Substitute Trustee on April 9, 1984 with power
to delegate the trusteeship in writing to Andres Soriano III. 3 Shortly after the Revolution of
February, 1986, Cojuangco left the country amid "persistent reports" that "huge and
unusual cash disbursements from the funds of SMC" had been irregularly made, and the
resources of the firm extensively used in support of the candidacy of Ferdinand Marcos
during the snap elections in February, 1986 . 4

On March 26, 1986, an "Agreement" was executed between Andres Soriano III, as "Buyer,"
and the 14 corporations, as "Sellers," for the purchase by Soriano, "for himself and as
agent of several persons," of the 33,133,266 shares of stock at the price of P100.00 per
share, or "an aggregate sum of Three Billion Three Hundred Thirteen Million Three
Hundred Twenty Six Thousand Six Hundred (P3,313,326,600.00) Pesos payable in
specified installments. 5 The Agreement revoked the voting trust above mentioned, and
expressed the desire of the 14 corporations to sell the shares of stock "to pay certain
outstanding and unpaid debts," and Soriano's own wish to purchase the same "in order to
institutionalize and stabilize the management of the COMPANY in .. (himself) and the
professional officer corps, mandated by the COMPANY's By- laws, and to direct the
COMPANY towards giving the highest priority to its principal products and extensive
support to agriculture programme of' the Government ... 6 Actually, according to Soriano
and the other private respondents, the buyer of the shares was a foreign company,
Neptunia Corporation Limited (of Hongkong, a wholly owned subsidiary of San Miguel
International which is, in turn, a wholly owned subsidiary of San Miguel Corporation; 7 and
it was Neptunia which on or about April 1, 1986 had made the down payment of
P500,000,000.00, "from the proceeds of certain loans". 8
At this point the 33,133,266 SMC shares were sequestered by the Presidential Commission
on Good Government (PCGG), on the ground that the stock belonged to Eduardo
Cojuangco, Jr., allegedly a close associate and dummy of former President Marcos, and the
sale thereof was "in direct contravention of .. Executive Orders Numbered 1 and 2 (..
dated February 28, 1986 and March 12, 1986, respectively) which prohibit .. the transfer,
conveyance, encumbrance, concealment or liquidation of assets and properties acquired
by former President Ferdinand Marcos and/or his wife, Mrs. Imelda Romualdez Marcos,
their close relatives, subordinates, business associates. 9 The sequestration was
subsequently lifted, and the sale allowed to proceed, on representations by San Miguel
Corporation x x that the shares were 'owned by 1.3 million coconut farmers;' the seller
corporations were 'fully owned' by said farmers and Cojuangco owned only 2 shares in
one of the companies, etc. However, the sequestration was soon re-imposed by Order of
the PCGG dated May 19, 1986 .. The same order forbade the SMC corporate Secretary to
register any transfer or encumbrance of any of the stock without the PCGG's prior written
authority. 10
San Miguel promptly suspended payment of the other installments of the price to the
fourteen (14) seller corporations. The latter as promptly sued for rescission and
damages. 11
On June 4,1986, the PCGG directed San Miguel Corporation"to issue qualifying shares" in
the corporation to seven (7) individuals, including Eduardo de los Angeles, "from the
sequestered shares registered as street certificates under the control of Anscor- Hagedorn
Securities, Inc.," to "be held in trust by .. (said seven [7] persons) for the benefit of
Anscor-Hagedom Securities, Inc. and/or whoever shall finally be determined to be the
owner/owners of said shares. 12
In December, 1986, the SMC Board, by Resolution No. 86-122, "decided to assume the
loans incurred by Neptunia for the down payment ((P500M)) on the 33,133,266 shares."
The Board opined that there was "nothing illegal in this assumption (of liability for the
loans)," since Neptunia was "an indirectly wholly owned subsidiary of SMC," there "was no
additional expense or exposure for the SMC Group, and there were tax and other benefits
which would redound to the SMC group of companies. 13

However, at the meeting of the SMC Board on January 30, 1987, Eduardo de los Angeles,
one of the PCGG representatives in the SMC board, impugned said Resolution No. 86-12-2,
denying that it was ever adopted, and stating that what in truth was agreed upon at the
meeting of December 4, 1986 was merely a "further study" by Director Ramon del Rosario
of a plan presented by him for the assumption of the loan. De los Angeles also pointed out
certain "deleterious effects" thereof. He was however overruled by private
respondents. 14 When his efforts to obtain relief within the corporation and later the PCGG
proved futile, he repaired to the Securities and Exchange Commission (SEC).lwph1.t
He filed with the SEC in April, 1987, what he describes as a derivative suit in behalf of San
Miguel Corporation, against ten (10) of the fifteen-member Board of Directors who had
"either voted to approve and/or refused to reconsider and revoke Board Resolution No. 8612-2." 15 His Amended Petition in the SEC recited substantially the foregoing antecedents
and the following additional facts, to wit:
a) On April 1, 1986 Soriano, Kahn and Roxas, as directors of' Neptunia
Corporation, Ltd., had met and passed a resolution authorizing the
company to borrow up to US $26,500,000.00 from the Hongkong &
Shanghai Banking Corporation, Hongkong "to enable the Soriano family
to initiate steps and sign an agreement for the purchase of some
33,133,266 shares of San ,Miguel Corporation. 16
b) The loan of $26,500,000.00 was obtained on the same day, the
corresponding loan agreement having been signed for Neptunia by
Ralph Kahn and Carl Ottiger. At the latter's request, the proceeds of the
loan were deposited in different banks 17 for the account of "Eduardo J.
Soriano".
c) Three (3) days later, on April 4, 1986, Soriano III sent identical letters
to the stockholders of San Miguel Corporation, 18 inter alia soliciting
their proxies and announcing that "the Soriano family, friends and
affiliates acquired a considerable block of San Miguel Corporation shares
only a few days ago .., the transaction .. (having been) made through
the facilities of the Manila Stock Exchange, and 33,133,266 shares ..
(having thereby been) purchased for the aggregate price of'
P3,313,326,600.00." The letters also stated that the purchase was "an
exercise of the Sorianos' right to buy back the same number of shares
purchased in 1983 by the .. (14 seller corporations)."
d) In implementing the assumption of the Neptunia loan and the
purchase agreement for which said loan was obtained, which
assumption constituted an improper use of corporate funds to pay
personal obligations of Andres Soriano III, enabling him; to purchase
stock of the corporation using funds of' the corporation itself, the
respondents, through various subsequent machinations and
manipulations, for interior motives and in breach of fiduciary duty,
compound the damages caused San Miguel Corporation by, among
other things: (1) agreeing to pay a higher price for the shares than was
originally covenanted in order to prevent a rescission of the purchase
agreement by the sellers; (2) urging UCPB to accept San Miguel
Corporation and Neptunia as buyers of the shares, thereby committing
the former to the purchase of its own shares for at least 25% higher
than the price at which they were fairly traded in the stock exchanges,

and shifting to said corporations the personal obligations of Soriano III

under the purchase agreement; and (3) causing to be applied to the
part payment of P1,800,000.00 on said purchase, various assets and
receivables of San Miguel Corporation.
The complaint closed with a prayer for injunction against the execution or consummation
of any agreement causing San Miguel Corporation to purchase the shares in question or
entailing the use of its corporate funds or assets for said purchase, and against Andres
Soriano III from further using or disposing of the funds or assets of the corporation for his
obligations; for the nullification of the SMC Board's resolution of April 2, 1987 making San
Miguel Corporation a party to the purchase agreement; and for damages.
Ernest Kahn moved to dismiss de los Angeles' derivative suit on two grounds, to wit:
1 De los Angeles has no legal capacity to sue because
a) having been merely imposed by
the PCGG as a director on San
Miguel, he has no standing to bring
a minority derivative suit;
b) he personally holds only 20
shares and hence cannotfairly and
adequately represent the minority
stockholders of the corporation;
c) he has not come to court with
clean hands; and
2. The Securities & Exchange Commission has no jurisdiction over the
controversy because the matters involved are exclusively within the
business judgment of the Board of Directors. 19
Kahn's motion to dismiss was subsequently adopted by his correspondents . 20
The motion to dismiss was denied by SEC Healing Officer Josefina L. Pasay Paz, by order
dated September 4, 1987. 21 In her view
1) the fact that de los Angeles was a PCGG nominee was irrelevant
because in law, ownership of even one share only, sufficed to qualify a
person to bring a derivative suit;
2) it is indisputable that the action had been brought by de los Angeles
for the benefit of the corporation and all the other stockholders;
3) he was a stockholder at the time of the commission of the acts
complained of, the number of shares owned by him being to repeat,
immaterial;

4) there is no merit in the assertion that he had come to Court with

unclean hands, it not having been shown that he participated in the act
complained of or ratified the same; and
5) where business judgment transgresses the law, the securities and
Exchange Commission always has competence to inquire thereinto.
Kahn filed a petition for certiorari and prohibition with the Court of Appeals, seeking the
annulment of this adverse resolution of the SEC Hearing Officer and her perpetual
inhibition from proceeding with SEC Case No. 3152.
A Special Division of that Court sustained him, upon a vote of three-to-two. The
majority 22 ruled that de los Angeles had no egal capacity to institute the derivative suit, a
conclusion founded on the following propositions:
1) a party "who files a derivative suit should adequately represent the
interests of the minority stockholders;" since "De los Angeles holds 20
shares of stock out of 121,645,860 or 0.00001644% (appearing to be
undisputed), (he) cannot even be remotely said to adequately represent
the interests of the minority stockholders, (e)specially so when .. de los
Angeles was put by the PCGG to vote the majority stock," a situation
generating "a genuine conflict of interest;"
2) de los Angeles has not met this conflict-of-interest argument, i.e.,
that his position as PCGG-nominated director is inconsistent with his
assumed role of representative of minority stockholders; not having
been elected by the minority, his voting would expectedly consider the
interest of the entity which placed him in the board of directors;
3) Baseco v. PCGG, May 27,1987, 23 has laid down the principle that the
(a) PCGG cannot exercise acts of dominion over sequestered property,
(b) it has only powers of administration, and (c) its voting of
sequestered stock must be done only pursuant to its power of
administration; and
4) de los Angeles' suit is not a derivative suit, a derivative suit being one
brought for the benefit of the corporation.
The dissenting Justices, 24 on the other hand, were of the opinion that the suit had been
properly brought by de los Angeles because
1) the number of shares owned by him was immaterial, he being a
stockholder in his own right;
2) he had not voted in favor of the resolution authorizing the purchase
of the shares; and
3) even if PCGG was not the owner of the sequestered shares, it had the
right to seek the protection of the interest of the corporation, it having
been held that even an unregistered shareholder or an equitable owner

of shares and pledgees of shares may be deemed a shareholder for

purposes of instituting a derivative suit.
De los Angeles has appealed to this Court. He prays for reversal of the judgment of the
Court of Appeals, imputing to the latter the following errors:
1) having granted the writ of certiorari despite the fact that Kahn had
not first resorted to the plain remedy available to him, i.e., appeal to the
SEC en banc and despite the fact that no question of jurisdiction was
involved;

d) the Order of the SEC Investigating Officer denying the motion to

dismiss was issued without or in excess of jurisdiction, hence was
correctly nullified by the Court of Appeals; and
e) de los Angeles had not raised the issue of absence of a motion for
reconsideration by respondents in the SEC case; in any event, such a
motion was unnecessary in the premises.
De los Angeles' Reply seeks to make the following points:
1) since the law lays down three (3) requisites for a derivative suit, viz:

2) having ruled on Kahn's petition on the basis merely of his factual

allegations, although he (de los Angeles) had disputed them and there
had been no trial in the SEC; and
3) having held that he (de los Angeles) could not file a derivative suit as
stockholder and/or director of the San Miguel Corporation.
For their part, and in this Court, the respondents make the following assertions:
1) SEC has no jurisdiction over the dispute at bar which involves the
ownership of the 33,133,266 shares of SMC stock, in light of this Court's
Resolution in G.R. Nos. 74910, 5075, 75094, 76397, 79459 and 79520,
promulgated on August 10, 1988; 25
2) de los Angeles was beholden to the controlling stockholder in the
corporation (PCGG), which had "imposed" him on the corporation; since
the PCGG had a clear conflict of interest with the minority, de los
Angeles, as director of the former, had no legal capacity to sue on
behalf of the latter;
3) even assuming absence of conflict of interest, de los Angeles does
not fairly and adequately represent the interest of the minority
stockholders;
4) the respondents had properly applied for certiorari with the Court of
Appeals because
a) that Court had, by law, exclusive appellate jurisdiction over officers
and agencies exercising quasi-judicial functions, and hence file
competence to issue the writ of certiorari;
b) the principle of exhaustion of administrative remedies does not apply
since the issue involved is one of law;
c) said respondents had no plain, speedy and adequate remedy within
SEC;

a) the party bringing suit should be a shareholder as

of the time of the act or transaction complained of,
b) he has exhausted intra-corporate remedies, i.e.,
has made a demand on the board of directors for the
appropriate relief but the latter has failed or refused to
heed his plea; and
c) c)the cause of action actually devolves on the
corporation, the ,wrongdoing or harm having been
caused to the corporation and not to .the particular
stockholder bringing the suit;
and since (1) he is admittedly the owner of 20 shares of SMC stock in his own right,
having acquired those shares as early as 1977, (2) he had sought without success to have
the board of' directors remedy with wrong, and (3) that wrong was in truth a 'wrong
against the stockholders of the corporation, generally, ,and not against him individually
and it was the corporation, and not he, particularly, that would be entitled to the
appropriate' relief the propriety of his suit cannot be gainsaid;
2) Kahn had not limited himself to questions of law in the proceedings in
the Court of Appeals and hence could not claim exclusion from the
scope of the doctrine of exhaustion of remedies; moreover, Rule 65,
invoked by him, bars a resort to certiorari. where a plain, speedy and
accurate remedy was available to him in this case, to wit, a motion for
reconsideration before the Sec en banc and, contrary to the
respondent's claim, De Los Angeles had in fact asserted to this
propositions before the Appellate Tribunal; and
3) the respondent had not raised the issue of jurisdiction before the
Court of Appeals; indeed, they admit to their Comment that that
issue has not yet been resolved by the SEC," be this as it may, the
derivative suit does not fall within the BASECO doctrine since it does not
involve any question of ownership of the 33,133,266 sequestered SMC
shares but rather, the validity of the resolution of the board of directors
for the assumption by the corporation, for the benefit of certain of its
officers and stockholders, of liability for loans contracted by another

corporation, which is an intra-corporate dispute within the exclusive

jurisdiction of the SEC.
1. De los Angeles is not opposed to the asserted position of the PCGG
that the sequestered SMC shares of stock belong to Ferdinand Marcos
and/or his dummies and/or cronies. His consent to sit in the board as
nominee of PCGG unquestionably indicates his advocacy of the PCGG
position. He does not here seek, and his complaint in the SEC does not
pray for, the annulment of the purchase by SMC of the stock in question,
or even the subsequent purchase of the same stock by others 26which
proposition was challenged by (1) one Evio, in SEC Case No. 3000; (2)
by the 14 corporations which sold the stock to SMC, in Civil Case No.
13865 of the Manila RTC, said cases having later become subject of G.R.
No. 74910 of this Court; (3) by Neptunia, SMC, and others, in G.R. No.
79520 of this Court; and (4) by Eduardo Cojuangco and others in Civil
Case No. 16371 of the RTC, Makati, [on the theory that the sequestered
stock in fact belonged to coconut planters and oil millers], said case
later having become subject of G.R. No. 79459 of this court . 27 Neither
does de los Angeles impugn, obviously, the right of the PCGG to vote
the sequestered stock thru its nominee directors as was done by
United Coconut Planters Bank and the 14 seller corporations (in SEC
Case No. 3005, later consolidated with SEC Case No. 3000 above
mentioned, these two (2) cases later having become subject of G.R.No.
76397) as well as by one Clifton Ganay, a UCPB stockholder (in G.R. No.
75094 of this Court).lwph1.t 28
The subject matter of his complaint in the SEC does not therefore fall within the ambit of
this Court's Resolution of August 10, 1988 on the cases just mentioned, to the effect that,
citing PCGG v. Pena, et al 29 an cases of the Commission regarding 'the funds, moneys,
assets, and properties illegally acquired or misappropriated by former President Ferdinand
Marcos, Mrs. Imelda Romualdez Marcos, their close relatives, Subordinates, Business
Associates, Dummies, Agents, or Nominees, whether civil or criminal, are lodged within
the exclusive and original jurisdiction of the Sandiganbayan,' and all incidents arising
from, incidental to, or related to, such cases necessarily fall likewise under the
Sandiganbayan's exclusive and original jurisdiction, subject to review on certiorari
exclusively by the Supreme Court." His complaint does not involve any property illegally
acquired or misappropriated by Marcos, et al., or "any incidents arising from, incidental to,
or related to" any case involving such property, but assets indisputably belonging to San
Miguel Corporation which were, in his (de los Angeles') view, being illicitly committed by a
majority of its board of directors to answer for loans assumed by a sister corporation,
Neptunia Co., Ltd.
De los Angeles' complaint, in fine, is confined to the issue of the validity of the assumption
by the corporation of the indebtedness of Neptunia Co., Ltd., allegedly for the benefit of
certain of its officers and stockholders, an issue evidently distinct from, and not even
remotely requiring inquiry into the matter of whether or not the 33,133,266 SMC shares
sequestered by the PCGG belong to Marcos and his cronies or dummies (on which- issue,
as already pointed out, de los Angeles, in common with the PCGG, had in fact espoused
the affirmative). De los Angeles' dispute, as stockholder and director of SMC, with other
SMC directors, an intra-corporate one, to be sure, is of no concern to the Sandiganbayan,
having no relevance whatever to the ownership- of the sequestered stock. The contention,
therefore, that in view of this Court's ruling as regards the sequestered SMC stock above
adverted to, the SEC has no jurisdiction over the de los Angeles complaint, cannot be
sustained and must be rejected. The dispute concerns acts of the board of directors

claimed to amount to fraud and misrepresentation which may be detrimental to the

interest of the stockholders, or is one arising out of intra-corporate relations between and
among stockholders, or between any or all of them and the corporation of which they are
stockholders . 30
2. The theory that de los Angeles has no personality to bring suit in
behalf of the corporation because his stockholding is minuscule, and
there is a "conflict of interest" between him and the PCGG cannot be
sustained, either.
It is claimed that since de los Angeles 20 shares (owned by him since 1977) represent
only. 00001644% of the total number of outstanding shares (1 21,645,860), he cannot be
deemed to fairly and adequately represent the interests of the minority stockholders. The
implicit argument that a stockholder, to be considered as qualified to bring a derivative
suit, must hold a substantial or significant block of stock finds no support whatever in
the law. The requisites for a derivative suit 31 are as follows:
a) the party bringing suit should be a shareholder as of the time of the
act or transaction complained of, the number of his shares not being
material; 32
b) he has tried to exhaust intra-corporate remedies, i.e., has made a
demand on the board of directors for the appropriate relief but the latter
has failed or refused to heed his plea; 33 and
c) the cause of action actually devolves on the corporation, the
wrongdoing or harm having been, or being caused to the corporation
and not to the particular stockholder bringing the suit. 34
The bona fide ownership by a stockholder of stock in his own right suffices to invest him
with standing to bring a derivative action for the benefit of the corporation. The number of
his shares is immaterial since he is not suing in his own behalf, or for the protection or
vindication of his own particular right, or the redress of a wrong committed against him,
individually, but in behalf and for the benefit of the corporation.
3. Neither can the "conflict-of-interest" theory be upheld. From the
conceded premise that de los Angeles now sits in the SMC Board of
Directors by the grace of the PCGG, it does not follow that he is legally
obliged to vote as the PCGG would have him do, that he cannot
legitimately take a position inconsistent with that of the PCGG, or that,
not having been elected by the minority stockholders, his vote would
necessarily never consider the latter's interests. The proposition is not
only logically indefensible, non sequitur, but also constitutes an
erroneous conception of a director's role and function, it being plainly a
director's duty to vote according to his own independent judgment and
his own conscience as to what is in the best interests of the company.
Moreover, it is undisputed that apart from the qualifying shares given to
him by the PCGG, he owns 20 shares in his own right, as regards which
he cannot from any aspect be deemed to be "beholden" to the PCGG,
his ownership of these shares being precisely what he invokes as the
source of his authority to bring the derivative suit.

4. It is also theorized, on the authority of the BASECO decision, that the

PCGG has no power to vote sequestered shares of stock as an act of
dominion but only in pursuance to its power of administration. The
inference is that the PCGG's act of voting the stock to elect de los
Angeles to the SMC Board of Directors was unauthorized and void;
hence, the latter could not bring suit in the corporation's behalf. The
argument is strained and obviously of no merit. As already more than
plainly indicated, it was not necessary for de los Angeles to be a director
in order to bring a derivative action; all he had to be was a stockholder,
and that he was owning in his own right 20 shares of stock, a fact not
disputed by the respondents.
Nor is there anything in the Baseco decision which can be interpreted as ruling that
sequestered stock may not under any circumstances be voted by the PCGG to elect a
director in the company in which such stock is held. On the contrary, that it held such act
permissible is evident from the context of its reference to the Presidential Memorandum of
June 26, 1986 authorizing the PCGG, "pending the outcome of proceedings to determine
the ownership of .. sequestered shares of stock,"'to vote such shares .. at all stockholders'
meetings called for the election of directors ..," the only caveat being that the stock is not
to be voted simply because the power to do so exists, whether it be to oust and replace
directors or to effect substantial changes in corporate policy, programs or practice, but
only "for demonstrably weighty and defensible grounds" or "when essential to prevent
disappearance or wastage of corporate property."
The issues raised here do not peremptorily call for a determination of whether or not in
voting petitioner de los Angeles to the San Miguel Board, the PCGG kept within the
parameters announced in Baseco; and absent any showing to the contrary, consistently
with the presumption that official duty is regularly performed, it must be assumed to have
done so.
WHEREFORE, the petition is GRANTED. The appealed decision of the Court of Appeals in
CA- G.R. SP No. 12857 setting aside the order of September 4, 1987 issued in SEC Case
No. 3153 and dismissing said case is REVERSED AND SET ASIDE. The further disposition
in the appealed decision for the issuance of a writ of preliminary injunction upon the filing
and approval of a bond of P500,000.00 by respondent Ernest Kahn (petitioner in the
Appellate Court) is also SET ASIDE, and any writ of injunction issued pursuant thereto is
lifted. Costs against private respondents.
SO ORDERED.

4. In holding that any of the debit items appearing in Exhibits C-1 to C-9 and
especially the industrial and internal-revenue taxes, are items that should be
charged against capital and not against current profits.1awphil.net
5. In holding that it was within the power of the stockholders of the bank to ratify
the so-called interpretation by defendants of said article 30.
This action was commenced by the plaintiff as a shareholder of the Banco Espaol-Filipino
for the benefit of the bank and all of the stockholders thereof. Its purpose is to require the
defendants as former directors and councilors of the bank to refund a portion of the
compensation paid to them for their services, on the ground that the amounts thereof
have been wrongfully computed.
The complaint contains three separate causes of action, of which the first only is here
involved. The defendants' demurrer to this cause of action was sustained upon the ground
that the facts alleged therein were not sufficient to entitle the plaintiff to the relief sought.
Upon appeal this judgment was reversed and the record returned for further proceedings.
(19 Phil. Rep., 82.) The complaint was not thereafter amended.

G.R. No. L-7945 December 1, 1914

CANDIDO PASCUAL, plaintiff-appellant,
vs.
EUGENIO DEL SAZ OROZCO, ET AL., defendants-appellees.
C. W. Ney and O'Brien & De Witt for appellant.
Hausermann, Cohn & Fisher for appellees.

TRENT, J.:
The plaintiff appeals from a judgment upon the merits in favor of the defendants, and
insists that the court erred:
1. In holding that the interpretation placed upon article 30 of the bank's charter
by the decision of the Supreme Court herein is not the law of the case.
2. In holding that the defendants had a right to deduct their compensation from
the gross profits of the bank.
3. In holding that it was proper for defendants to compute their compensation
upon the gross profits before charging against such gross profits the aggregate
amount of accounts written off as uncollectible (dudosa y fallida) as shown in
Exhibits C-1 to C-9, inclusive.

The question raised by the plaintiff in his first assignment of error requires an examination
of the pertinent allegations in the first cause of action. These allegations are as follows.
X. That, notwithstanding the fact that article 30 of the said by-laws (Exhibit B)
clearly and unequivocally prescribes that the net profits of the said bank shall be
apportioned as follows: Then per cent for the board of directors, five per cent for
the board of managers (composed of counselors and trustees) in compensation
for their services as such, and the remainder, eighty-five per cent, integrally for
the shareholders of the said bank, the defendants, as such members of the said
boards of directors and managers, respectively, did, during each and all of the
years specified, fraudulently and to the great detriment of the said Bank and its
shareholders, and without the knowledge, consent or acquiescence of the latter,
appropriate to themselves for their own use from the profits of the said Bank
sums of money reaching an approximate amount of twenty thousand pesos, or a
total sum of one hundred thousand pesos during the five years aforementioned,
by deducting their said ten and five per cent, respectively, from the gross profits
instead of deducting them from the net profits of the said bank.
XI. That the said defendants, during the time mentioned, carefully concealed in
all the balances and reports of the said Bank published by them every indication
that might gave the stockholders of the said Bank the slightest suspicion that the
said defendants were fraudulently appropriating to themselves the funds of the
same; and that the plaintiff learned of such appropriation, by a mere chance, in
the month of November, 1907.
The Banco Espaol-Filipino was a banking corporation which, until January 1, 1908, was
controlled by the by-laws and regulations annexed to the complaint as Exhibits A and B.
On November 13, 1903, the plaintiff acquired 10 shares of the capital stock and has been
the registered holder of these shares since that date. The defendants filled, during the
time mentioned in the complaint, the offices of director, consiliario, and sindico, and
collectively constituted the board of government. The only compensation to which the
defendants were entitled for their services is that prescribed by article 30 of the by-laws
then in force.

This article reads: "Of the profits or gains which may result from the bank's operations,
after deducting all the expenses of its administration and the part, if any, which
corresponds to the legal reserve fund, there shall be set apart ten per cent remaining shall
belong integrally to the shareholders pro data the number of shares owned by each."
Since the date on which the plaintiff acquired his shares, the earnings of each half-year of
the bank have been liquidated in the manner set forth in the Exhibits C-1 to C-9, inclusive,
attached to the agreed statement of facts, and the respective defendants have
individually collected for their services the sums specified in Exhibit D.
Under date of November 15, 2907, the plaintiff addressed to the defendants a letter
alleging that the earnings of the bank had not been apportioned in accordance with the
provisions of article 30, supra, and making demand upon them for the refund to the bank
of a portion of the amounts received by them in compensation for their services. The
defendants refused to comply with this demand and on December 7, 1907, the plaintiff
commenced an action seeking the same relief herein prayed for. This action was
dismissed, and on December 21, 1907, the shareholders of the bank were convened in a
special meeting "for the express purpose of discussing and taking action relative to the
alleged interpretation of article 30 of the by-laws." At this shareholders' meeting there
were present, either in person or by proxy, 183 persons and entities, holding 6,499 shares
of the total issue of 7,500. Among those present at this meeting was plaintiff's attorney.
The plaintiff's letter, referred to above, was read, as was the complaint which the plaintiff
had previously filed, and, after a discussion in which the appellant's attorney took part, a
resolution was adopted ratifying and approving the distribution of the bank's earnings as
made, and authorizing the defendants to proceed in the same manner with the earnings
of the latter half of the year 1907. In favor of this resolution there was a total of 555
votes, representing 5,550 shares. Soon thereafter the present action was commenced.
As will be seen from the plaintiff's first assignment of error and the argument of counsel
relating thereto, it is strongly urged that inquiry respecting the interpretation and
application of article 30, supra, has been closed by the decision of this court rendered
upon the demurrer of the defendants to the complaint. Under the doctrine ofstare
decisis the plaintiff insists that "the law of the case" has been established and that it has
been necessarily decided that the remuneration received by the defendants for their
services was not in accordance with article 30.
The decision is relied upon by the plaintiff is that of Pascual vs. Del Saz Orozco (19 Phil.
Rep., 82). "The law of the case," established by that decision, is the law of the case which
was before the court and which the court thereby decided.1awphil.net
The plaintiff, as will be seen from paragraphs 10 and 11, above quoted, whose sufficiency
was then and there under consideration, alleged that the defendants, in violation of article
30, had fraudulently misappropriated to themselves certain funds of the bank by
computing their percentages upon the gross earnings of the bank and, by a series of
fraudulent concealment's, had withheld the knowledge thereof from the shareholders. The
demurrer admitted the facts as alleged and raised the question of the right of the plaintiff
to recover upon those facts. The ruling of the lower court was to the effect that, even
assuming the facts to be as alleged in the complaint, the plaintiff had no right of action.
On appeal the Supreme Court considered this very question and necessarily none other,
which relates to the point now under consideration, and, in reversing the ruling of the
lower court, decided that, assuming the facts to be as alleged in the complaint, the
plaintiff did have a cause of action. If these were the facts of the case now under
consideration, there would be neither occasion nor opportunity to further discuss the law

applicable thereto. But the case which the present appeal presents is not the case at all.
Since that decision was rendered the case has been tried and the facts now before the
court for consideration are not the allegations that the defendants fraudulently misappropriated to themselves certain funds of the bank, and by a series of concealment's
withheld the knowledge thereof from the shareholders, but the real facts as they have
been stipulated in the agreed statement. These facts are that the defendants did not, as
alleged, fraudulently misappropriate certain funds of the bank by computing their
percentages upon the gross earnings, but the first deduct the expenses of administration,
and that none of the acts of the defendants were tainted in any way with fraud.
In this particular the case now under consideration is clearly differentiated and
distinguished from the former case. In the case the court decided that the defendants
may not fraudulently compute their percentages upon the gross earnings, and that a
complaint which alleges that they have done so states a cause of action. This was
question submitted and decided. The question submitted upon the present appeal is
whether the computation really made is in accordance with article 30. This holding is not
in conflict with the rule announced in the cases cited and relied upon by counsel for the
plaintiff.
For example, in the case of Heidt vs. Minor (113 Cal., 385), the court said: "Moreover, the
rule of the law of the case only applies when, on subsequent trial, the issues and the facts
found remain substantially the same."itc@alf
In the case of Foregerson et al. vs. Smith (104 Ind., 246), the court laid down this rule:
"But where the questions are necessarily involved, . . . the judgment on appeal rules the
case throughout all its subsequent stages. The decision is an adjudication concluding the
courts and the parties. It is not, of course, conclusive in judgment in the case in which it
was rendered, upon the parties and those in privity with them. . . . We regard the former
decision as adjudicating all of the controlling questions in the case, for it was not possible
to reach the conclusion there announced without deciding that the property in the
promissory notes in controversy was in the administrator of the estate of Mahala Shaw
deceased."
In Standard Sewing Machine Co. vs. Leslie (118 Fed., 557), the court used this language:
"It is a familiar and entirely righteous rule that a court of review is precluded from
agitating the questions that were made, considered, and decided on previous reviews. The
former decision furnishes 'the law of the case' not only to the tribunal to which the cause
is remanded, but to the appellate tribunal itself on a subsequent writ or appeal."
Now, has the remuneration of the defendants for their services been computed in
accordance with article 30 of the by-laws?
The item of "profit and loss" for each half year, during the entire period covered by the
complaint, was made up by crediting to it all the items of net profits produced by the
various accounts of the bank, including the accounts of current debtors, the profits from
exchange, the profits in the sale of money, the profits from the discount of bills and notes,
the net proceeds from the real properties of the bank after the payment of all the expense
thereof, including taxes, insurance, and repairs, and all other net profits obtained by the
bank. To the debit of this "profit and loss" account were entered all sums paid out by the
bank as interest upon fixed deposits or credit balances of current accounts. The items of
"general expenses" included salaries, light , water, stationery, stamps, attorneys' fees,
and all other items of general expenses incurred either by the main office in Manila or by

the branch office in Iloilo. In short, it appears that every expenditure of whatever nature
made from the funds of the bank, with the exception of the industrial tax (later internalrevenue tax) and amounts set off against bad accounts, was included in the item of
"general expenses," or, what amounted to the same thing, deducted from the "profit and
loss" account before computing the remuneration received by the respective defendants
for their services. Upon this point it might be well to set out in full Exhibit C-1. (Exhibits C2 to
C-9, inclusive, were made up in the same manner.) This exhibit is as follows:
1903.
December 31. Balance of the account of profit and loss .............................
$196,580.22 Deduction of surplus of June 30, last .....................................
7,816.38
188,763.84 Do. General
expenses ............................................................... 51,753.77
137,010.07 Compensation for the board of government, 15
per cent ....................................................................................... 20,551.51
116,458.56 Dividend of 4 per cent on
$1,500,000 .................................... 60,000.00 56,458.56 Industrial tax
(later internal revenue) 5 per cent of
$60,000 ....................................................................................... 3,000.00
53,458.56 Balance on June 30 carried forward .....................................
7,816.38 61,274.94 Amount for bad
accounts .................................................... 60,000.00 Balance for next
semester ................................. 1,274.94
To this method of computing the defendants' remuneration the objection of the plaintiff is
twofold:
(a) That before computing the defendants' remuneration there was not first
deducted from the earnings or gains the amount payable as industrial tax (later
internal revenue), and
(b) That before computing the defendant's remuneration there was not first
deducted from the earnings or gains the amounts retained to cover bad
accounts.
From an examination of article 30 it will be seen that only two items from the gross profits
of the bank are to be deducted before computing the compensation of the directors and
board of government (the defendants constituted both the directors and the board of
government), to wit: Expenses of administration and the amount, if any, corresponding to
the legal reserve fund. On December 31, 1903, the legal reserve fund of P225,000 was
not only completed, but a voluntary reserve fund of P665,000, authorized by the charter,
had accumulated. From the various Exhibits, C-1 to C-9, inclusive, it is apparent that
nothing whatever was applied to this reserve fund, and, as the correctness of these
exhibits is not disputed, it is also apparent that nothing was due this fund at any time
during the period covered by the complaint. Unless, therefore, the items of industrial tax
(later internal-revenue tax) and the amounts set aside to cover bad debts that there is no
merit in the plaintiff's contention.

At the outset it may be said that the proper disposition of this case is rendered difficult by
the inaccurate language used in article 30. This article provides for a percentage of the
profits (utilidades y ganacias), and it may be at once said that these are not
necessarily net profits, as claimed by counsel for the plaintiff. Profits may be either gross
profits or net profits, and there are innumerable methods of computing each of these.
Likewise, "expenses of administration" may or may not include all amounts expended in
the conduct of business. Indeed, it is somewhat unusual that a provision of the bank's
charter, so difficult of exact definition, should be so lacking in precision. Hardly less
unusual, from an American point of view, is the incorporation into the bank's charter of
the measure of remuneration of the board of government. This, is America, has generally
been considered a detail in the internal management of a corporation to be controlled by
the shareholders themselves, who, in many instances, even delegate to the directors the
power of fixing their own salaries.
The remuneration received by the defendants is not even alleged to be excessive. The
two active managers of the bank received, during the period in question, sums amounting
to approximately P15,000 per year, while the other defendants, not participating in the
active management of the corporation, received sums amounting in no instance to a
salary of P2,500 per year. All of the defendants received, during the four and a half years,
P201,825.81, or an approximate yearly average of P45,000 per year Bearing in mind the
magnitude of the business and the fact that the bank prospered under the management
of the defendants, there is no wonder that no claim is made of excessive compensation.
During all these years the plaintiff, as well as the other shareholders of the bank,
remained silent, apparently content with the increased prosperity of the business,
although at the increased prosperity of the business, although at the end of each fiscal
year they had the opportunity to examine the books of the bank and inform themselves of
the method by which the defendants computed their compensation. And, furthermore, an
extraordinary meeting of the shareholders was duly convened on December 21, 1907, for
the express purpose, as we have indicated, of discussing the interpretation placed upon
article 30 by the defendants.
The industrial tax, which the appellant insists should be first deducted from the earnings
before computing the percentages, was fixed by law at 5 per cent of the dividends
distributed among the shareholders of the bank. In order to make the deduction of this
tax, its amount must first be a known quantity. Since its amount is a percentage of the
dividends, the amount of the latter must likewise by a known quantity before the
operation can be made. The amount available as dividends is dependent upon the amount
due and payable out of profits to the defendants for their services. Therefore, this amount
due the defendants from the profits must be known before the amount remaining for
dividends can be fixed. For example, if the remaining earnings, after deducting from the
gross earnings the general expenses, is the sum of P58,000, how much is to be deducted
therefrom as internal-revenue tax before computing the percentage of the defendants?
The law said that the amount of this tax should be 5 per cent of the dividends distributed.
The amount to be distributed depends upon how much may be left after the remuneraton
of the defendants is paid. It is no reply to this argument to point out that the total profits
may be or are usually sufficiently great to permit a declaration of the maximum dividend
of P60,000 and that in such cases t is simple matter to compute 5 per cent of P60,000, for
the rule of computation, established by article 30, is a general one, applicable alike in all
cases, whether the earnings of the bank be great in small. This article does not establish
two rules of computations, one which is only feasible or practicable when the earnings are
sufficiently large to warrant a dividend in the maximum amount and another and different
rule when the dividend falls below that amount.

Again, in our opinion the nature of the old industrial tax negatives the idea that it is one of
the items of "expenses of administration" referred to in article 30. This tax was levied by
law, not upon the earnings or profits of the bank, but only upon such earnings or profits as
were actually distributed among the shareholders as dividends. It was purely a dividend
tax, collected for convenience in a lump sum from the company, but levied solely and
exclusively upon the distributed dividends. To deduct this tax from the amount upon which
the remuneration of the defendants was computed would have made the defendants
contributors to the tax levied upon the company-shareholders. Article 30 does not require
the defendants as employees of the bank to contribute to the payment of the bank's
taxes. The discrimination made by article 30 between "expenses of administration" and
other disbursements is reasonable and in accordance with the principles of the contract
which existed between the bank and the defendants. That was a contract of employment
in which one of the contracting parties agreed to supply the capital and the other his
services, and to divide in a stipulated proportion the proceeds of the application of the
services of the one to the capital of the other. Since it was incumbent upon the bank to
furnish the capital, so it was incumbent upon it to maintain the same. Any tax which
tended directly to impair the amount of the capital should consequently have been paid
by the hirer of the services and not by the servant. There could be no real difference in
principle between the failure to furnish the capital in the first place and the failure to
replace any part of it which disappears by reason of a tax levied thereon. We, therefore,
conclude that the method employed by the defendants for the liquidation of the bank's
business, in so far as the industrial tax (internal-revenue tax) is concerned, was strictly in
accordance with article 30 of the by-laws.
DEDUCTION OF AMOUNTS TO COVER BAD ACCOUNTS
When the defendant Orozco took over the management of the bank, he reported to the
board of directors its financial situation, embracing among other thins a loss from bad
accounts for the past of over P500,000. It probably would have been possible to cover this
entire amount of losses from funds in the reserve, existing for just such purposes, but to
have done so would have left the bank without a present reserve. It was decided to
preserve the reserve fund intact, and carry the bad accounts as accounts in suspense
until the same could be gradually and conveniently wiped out. Consequently, in each half
yearly liquidation the dividends distributed to the shareholders were strictly limited to 4
per cent per semester, and the earnings after payment of the expenses of administration,
the remuneration of defendants, the taxes, and the said dividends were applied pro tanto
to the extinction of the ad accounts held in suspense. It does not clearly appear whether
these funds, which were used for that purpose, first went into the voluntary reserve fund
and were then applied to the extinction of the bad accounts in suspense or were applied
directly by the semiannual liquidation's from the profit and loss accounts. The process
followed is immaterial since the result must be the same. The important fact is that in
each semester there was an excess of net profits over and above the 4 per cent provided
in article 31 of the by-laws. This excess of net profits was divisible under that article, onehalf to the shareholders and one-half to the legal reserve, voluntary reserve, or additional
dividends as the case might be. Instead, the entire excess of net profits went to extinguish
bad accounts whose extinction would have exhausted the reserve fund and required its
replenishment. To the extent that one-half of the excess of net profits were not distributed
as dividends, but were put to the purposes of reserve, the shareholders made a sacrifice
for their own welfare. Whether this was validly done or not is of no importance of this time
for the reason that the remuneration of the defendants was not affected in any way
thereby. As to the remaining half of the excess net profits, the application made was in
direct accord with the by-laws, since the application of the funds to the purposes of the
reserve fund is exactly the same as if the reserve fund had been employed for the
purpose and then replenishment by these funds.

According to article 30, the net profits belonged to the shareholders. According to article
31, these not profits, belonging to the shareholders, should be partially divided among
them and partially kept intact in the bank, according to the amount thereof, to the status
of the legal reserve, and to the wishes of the board of government respecting a voluntary
reserve. From the fact that part of either the legal or voluntary reserve, it cannot be said
that such portion of the net profits had ceased to belong to the share-holders. these
excess net profits are, in a sense, still in the bank and still belong to the shareholders
within the meaning of article 30. to hold that the bad accounts of the bank should have
been extinguished by the gross earnings instead of the net profits, would, in effect,
compel the defendants, as employees, to contribute to the replenishing of the depleted
reserves of the bank.
It would be wholly unjust to include under "expenses of administration" during the time
the defendants were in charge, the losses previously sustained by the defendants'
predecessors in office. These defendants were in no wise connected with the bank no
were they in any way responsible for those losses. To interpret article 30 so would result in
the incoming manager becoming an heir to an insolvent inheritance. Under such
conditions no one would be found to accept the office and the bank would have to cease
its operations.
As to the responsibility of the defendants for the losses which occurred during the period
covered by the complaint, it might be said in the first place that the greater part of these
losses constitutes the third cause of action of appellant's complaint and was made the
subject of a separate appeal to this court. In the second place, it has not been shown that
any part of such losses were written off as bad debts during the period of time in
question. And it is upon this fact that we rest our holding on this point. Therefore, we are
not now called upon to decide whether the defendants could have treated these losses in
the same manner as they did those occurring prior to December 31, 1905.
The judgment appealed from is affirmed. 1 In this opinion it has been our intention to set
forth at some length our reasons for affirming this judgment at the close of the last
session.

G.R. No. L-31684 June 28, 1973

EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B. NAVARRO and
LEONARDA ATIENZA ABAD SABTOS, petitioners,
vs.
ESTRELLA ABAD SANTOS, respondent.
MAKALINTAL, J.:
On October 9, 1954 a co-partnership was formed under the name of "Evangelista & Co."
On June 7, 1955 the Articles of Co-partnership was amended as to include herein
respondent, Estrella Abad Santos, as industrial partner, with herein petitioners Domingo C.
Evangelista, Jr., Leonardo Atienza Abad Santos and Conchita P. Navarro, the original
capitalist partners, remaining in that capacity, with a contribution of P17,500 each. The
amended Articles provided, inter alia, that "the contribution of Estrella Abad Santos
consists of her industry being an industrial partner", and that the profits and losses "shall
be divided and distributed among the partners ... in the proportion of 70% for the first
three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and Leonardo Atienza
Abad Santos to be divided among them equally; and 30% for the fourth partner Estrella
Abad Santos."
On December 17, 1963 herein respondent filed suit against the three other partners in the
Court of First Instance of Manila, alleging that the partnership, which was also made a
party-defendant, had been paying dividends to the partners except to her; and that
notwithstanding her demands the defendants had refused and continued to refuse and let
her examine the partnership books or to give her information regarding the partnership
affairs to pay her any share in the dividends declared by the partnership. She therefore
prayed that the defendants be ordered to render accounting to her of the partnership
business and to pay her corresponding share in the partnership profits after such
accounting, plus attorney's fees and costs.
The defendants, in their answer, denied ever having declared dividends or distributed
profits of the partnership; denied likewise that the plaintiff ever demanded that she be
allowed to examine the partnership books; and byway of affirmative defense alleged that
the amended Articles of Co-partnership did not express the true agreement of the parties,
which was that the plaintiff was not an industrial partner; that she did not in fact
contribute industry to the partnership; and that her share of 30% was to be based on the
profits which might be realized by the partnership only until full payment of the loan
which it had obtained in December, 1955 from the Rehabilitation Finance Corporation in

the sum of P30,000, for which the plaintiff had signed a promisory note as co-maker and
mortgaged her property as security.
The parties are in agreement that the main issue in this case is "whether the plaintiffappellee (respondent here) is an industrial partner as claimed by her or merely a profit
sharer entitled to 30% of the net profits that may be realized by the partnership from June
7, 1955 until the mortgage loan from the Rehabilitation Finance Corporation shall be fully
paid, as claimed by appellants (herein petitioners)." On that issue the Court of First
Instance found for the plaintiff and rendered judgement "declaring her an industrial
partner of Evangelista & Co.; ordering the defendants to render an accounting of the
business operations of the (said) partnership ... from June 7, 1955; to pay the plaintiff such
amounts as may be due as her share in the partnership profits and/or dividends after such
an accounting has been properly made; to pay plaintiff attorney's fees in the sum of
P2,000.00 and the costs of this suit."
The defendants appealed to the Court of Appeals, which thereafter affirmed judgments of
the court a quo.
In the petition before Us the petitioners have assigned the following errors:
I. The Court of Appeals erred in the finding that the respondent is an
industrial partner of Evangelista & Co., notwithstanding the admitted
fact that since 1954 and until after promulgation of the decision of the
appellate court the said respondent was one of the judges of the City
Court of Manila, and despite its findings that respondent had been paid
for services allegedly contributed by her to the partnership. In this
connection the Court of Appeals erred:
(A) In finding that the "amended Articles of Copartnership," Exhibit "A" is conclusive evidence that
respondent was in fact made an industrial partner of
Evangelista & Co.
(B) In not finding that a portion of respondent's
testimony quoted in the decision proves that said
respondent did not bind herself to contribute her
industry, and she could not, and in fact did not,
because she was one of the judges of the City Court of
Manila since 1954.
(C) In finding that respondent did not in fact
contribute her industry, despite the appellate court's
own finding that she has been paid for the services
allegedly rendered by her, as well as for the loans of
money made by her to the partnership.
II. The lower court erred in not finding that in any event the respondent
was lawfully excluded from, and deprived of, her alleged share, interests
and participation, as an alleged industrial partner, in the partnership
Evangelista & Co., and its profits or net income.

III. The Court of Appeals erred in affirming in toto the decision of the trial
court whereby respondent was declared an industrial partner of the
petitioner, and petitioners were ordered to render an accounting of the
business operation of the partnership from June 7, 1955, and to pay the
respondent her alleged share in the net profits of the partnership plus
the sum of P2,000.00 as attorney's fees and the costs of the suit,
instead of dismissing respondent's complaint, with costs, against the
respondent.
It is quite obvious that the questions raised in the first assigned errors refer to the facts as
found by the Court of Appeals. The evidence presented by the parties as the trial in
support of their respective positions on the issue of whether or not the respondent was an
industrial partner was thoroughly analyzed by the Court of Appeals on its decision, to the
extent of reproducing verbatim therein the lengthy testimony of the witnesses.
It is not the function of the Supreme Court to analyze or weigh such evidence all over
again, its jurisdiction being limited to reviewing errors of law that might have been
commited by the lower court. It should be observed, in this regard, that the Court of
Appeals did not hold that the Articles of Co-partnership, identified in the record as Exhibit
"A", was conclusive evidence that the respondent was an industrial partner of the said
company, but considered it together with other factors, consisting of both testimonial and
documentary evidences, in arriving at the factual conclusion expressed in the decision.
The findings of the Court of Appeals on the various points raised in the first assignment of
error are hereunder reproduced if only to demonstrate that the same were made after a
through analysis of then evidence, and hence are beyond this Court's power of review.
The aforequoted findings of the lower Court are assailed under
Appellants' first assigned error, wherein it is pointed out that "Appellee's
documentary evidence does not conclusively prove that appellee was in
fact admitted by appellants as industrial partner of Evangelista & Co."
and that "The grounds relied upon by the lower Court are untenable"
(Pages 21 and 26, Appellant's Brief).
The first point refers to Exhibit A, B, C, K, K-1, J, N and S, appellants'
complaint being that "In finding that the appellee is an industrial partner
of appellant Evangelista & Co., herein referred to as the partnership
the lower court relied mainly on the appellee's documentary evidence,
entirely disregarding facts and circumstances established by appellants"
evidence which contradict the said finding' (Page 21, Appellants' Brief).
The lower court could not have done otherwise but rely on the exhibits
just mentioned, first, because appellants have admitted their
genuineness and due execution, hence they were admitted without
objection by the lower court when appellee rested her case and,
secondly the said exhibits indubitably show the appellee is an industrial
partner of appellant company. Appellants are virtually estopped from
attempting to detract from the probative force of the said exhibits
because they all bear the imprint of their knowledge and consent, and
there is no credible showing that they ever protested against or
opposed their contents prior of the filing of their answer to appellee's
complaint. As a matter of fact, all the appellant Evangelista, Jr., would
have us believe as against the cumulative force of appellee's
aforesaid documentary evidence is the appellee's Exhibit "A", as

confirmed and corroborated by the other exhibits already mentioned,

does not express the true intent and agreement of the parties thereto,
the real understanding between them being the appellee would be
merely a profit sharer entitled to 30% of the net profits that may be
realized between the partners from June 7, 1955, until the mortgage
loan of P30,000.00 to be obtained from the RFC shall have been fully
paid. This version, however, is discredited not only by the aforesaid
documentary evidence brought forward by the appellee, but also by the
fact that from June 7, 1955 up to the filing of their answer to the
complaint on February 8, 1964 or a period of over eight (8) years
appellants did nothing to correct the alleged false agreement of the
parties contained in Exhibit "A". It is thus reasonable to suppose that,
had appellee not filed the present action, appellants would not have
advanced this obvious afterthought that Exhibit "A" does not express
the true intent and agreement of the parties thereto.
At pages 32-33 of appellants' brief, they also make much of the
argument that 'there is an overriding fact which proves that the parties
to the Amended Articles of Partnership, Exhibit "A", did not contemplate
to make the appellee Estrella Abad Santos, an industrial partner of
Evangelista & Co. It is an admitted fact that since before the execution
of the amended articles of partnership, Exhibit "A", the appellee Estrella
Abad Santos has been, and up to the present time still is, one of the
judges of the City Court of Manila, devoting all her time to the
performance of the duties of her public office. This fact proves beyond
peradventure that it was never contemplated between the parties, for
she could not lawfully contribute her full time and industry which is the
obligation of an industrial partner pursuant to Art. 1789 of the Civil
Code.
The Court of Appeals then proceeded to consider appellee's testimony on this point,
quoting it in the decision, and then concluded as follows:
One cannot read appellee's testimony just quoted without gaining the
very definite impression that, even as she was and still is a Judge of the
City Court of Manila, she has rendered services for appellants without
which they would not have had the wherewithal to operate the business
for which appellant company was organized. Article 1767 of the New
Civil Code which provides that "By contract of partnership two or more
persons bind themselves, to contribute money, property, or industry to
a common fund, with the intention of dividing the profits among
themselves, 'does not specify the kind of industry that a partner may
thus contribute, hence the said services may legitimately be considered
as appellee's contribution to the common fund. Another article of the
same Code relied upon appellants reads:
'ART. 1789. An industrial partner cannot engage in
business for himself, unless the partnership expressly
permits him to do so; and if he should do so, the
capitalist partners may either exclude him from the
firm or avail themselves of the benefits which he may
have obtained in violation of this provision, with a
right to damages in either case.'

It is not disputed that the provision against the industrial partner

engaging in business for himself seeks to prevent any conflict of interest
between the industrial partner and the partnership, and to insure
faithful compliance by said partner with this prestation. There is no
pretense, however, even on the part of the appellee is engaged in any
business antagonistic to that of appellant company, since being a Judge
of one of the branches of the City Court of Manila can hardly be
characterized as a business. That appellee has faithfully complied with
her prestation with respect to appellants is clearly shown by the fact
that it was only after filing of the complaint in this case and the answer
thereto appellants exercised their right of exclusion under the codal art
just mentioned by alleging in their Supplemental Answer dated June 29,
1964 or after around nine (9) years from June 7, 1955 subsequent
to the filing of defendants' answer to the complaint, defendants reached
an agreement whereby the herein plaintiff been excluded from, and
deprived of, her alleged share, interests or participation, as an alleged
industrial partner, in the defendant partnership and/or in its net profits
or income, on the ground plaintiff has never contributed her industry to
the partnership, instead she has been and still is a judge of the City
Court (formerly Municipal Court) of the City of Manila, devoting her time
to performance of her duties as such judge and enjoying the privilege
and emoluments appertaining to the said office, aside from teaching in
law school in Manila, without the express consent of the herein
defendants' (Record On Appeal, pp. 24-25). Having always knows as a
appellee as a City judge even before she joined appellant company on
June 7, 1955 as an industrial partner, why did it take appellants many
yearn before excluding her from said company as aforequoted
allegations? And how can they reconcile such exclusive with their main
theory that appellee has never been such a partner because "The real
agreement evidenced by Exhibit "A" was to grant the appellee a share
of 30% of the net profits which the appellant partnership may realize
from June 7, 1955, until the mortgage of P30,000.00 obtained from the
Rehabilitation Finance Corporal shall have been fully paid." (Appellants
Brief, p. 38).
What has gone before persuades us to hold with the lower Court that
appellee is an industrial partner of appellant company, with the right to
demand for a formal accounting and to receive her share in the net
profit that may result from such an accounting, which right appellants
take exception under their second assigned error. Our said holding is
based on the following article of the New Civil Code:
'ART. 1899. Any partner shall have the right to a
formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or
possession of its property by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by article 1807;

(4) Whenever other circumstance render it just and reasonable.

We find no reason in this case to depart from the rule which limits this Court's appellate
jurisdiction to reviewing only errors of law, accepting as conclusive the factual findings of
the lower court upon its own assessment of the evidence.
The judgment appealed from is affirmed, with costs.

G.R. No. L-16982

September 30, 1961

CATALINA R. REYES, petitioner,

vs.
HON. BIENVENIDO A. TAN, as Judge of the Court of First Instance of Manila,
Branch XIII and FRANCISCA R. JUSTINIANI, respondents.
LABRADOR, J.:

This is a petition for certiorari to review and set aside an order of the Court of First
Instance of Manila, Hon. Bienvenido A. Tan, presiding, in Civil Case No. 42375, entitled
"Francisca R. Justiniani vs. Wadhumal Dalamal, et al.", appointing a receiver of the
corporation Roxas-Kalaw Textile Mills, Inc. In said action, plaintiff Justiniani asks the court
to order the directors of the corporation, jointly and severally, to repair the damage
caused to the corporation, of which all the plaintiff and defendants are members. The
action was filed about January of 1960 and the order for the appointment of the receiver
issued on February 15, 1960, while the designation of the receiver was made in an order
of the court dated April 30, 1960.
In the complaint in said Civil Case No. 42375, it is alleged that the corporation, RoxasKalaw Textile Mills, Inc., was organized on June 5, 1954 by defendants Cesar K. Roxas,
Adelia K. Roxas, Benjamin M. Roxas, Jose Ma. Barcelona and Morris Wilson, for and on
behalf of the following primary principals with the following shareholdings: Adelia K.
Roxas, 1200 Class A shares; I. Sherman, 900 Class A shares; Robert W. Born, 450 Class A
shares and Morris Wilson, 450 Class A shares; that the plaintiff holds both Class A and
Class B shares and number and value thereof are is follows: Class A 50 shares, Class B
1,250 shares; that on May 8, 1957, the Board of Directors approved a resolution
designating one Dayaram as co-manager with the specific understanding that he was to
act as defendant Wadhumal Dalamal's designee, Morris Wilson was likewise designated as
co-manager with responsibilities for the management of the factory only, that an office in
New York was opened for the purpose of supervising purchases, which purchases must
have the unanimous agreement of Cesar K. Roxas, New York resident member of the
board of directors, Robert Born and Wadhumal Dalamal or their respective
representatives; that several purchases aggregating $289,678.86 were made in New York
for raw materials such as greige cloth, rayon and grey goods for the textile mill and
shipped to the Philippines, which shipment were found out to consist not of raw materials
but already finished products, such as, West Point Khaki rayon suiting materials dyed in
the piece, finished rayon tafetta in cubes, cotton eyelets, etc., for which reasons the
Central Bank of the Philippines stopped all dollar allocations for raw materials for the
corporation which necessarily led to the paralyzation of the operation of the textile mill
and its business; that the supplier of the aforesaid finished goods was the United
Commercial Company of New York in which defendant Dalamal had interests and the
letter of credit for said goods were guaranteed by the Indian Commercial Company and
the Indian Traders in which firms defendant Dalamal likewise held interests; that the
resale of the finished goods was the business of the Indian Commercial Company of
Manila, which company could not obtain dollar allocations for importations of finished
goods under the Central Bank regulations; that plaintiff and some members of the board
of directors urged defendants to proceed against Dalamal, exposing his offense to the
Central Bank, and to initiate suit against Dalamal for his fraud against the corporation;
that defendants refused to proceed against Dalamal and instead continued to deal with
the Indian Commercial Company to the damage and prejudice of the corporation. The
prayer asks for the appointment of a receiver and a judgment marking defendants jointly
and severally liable for the damages.
After a denial of a motion to dismiss and the filing of an answer alleging that the
complaint states no cause of action, the motion for the appointment of a receiver was set

for hearing and subsequently the court entered the order for the appointment of a
receiver. The court found and held:
The second ground of the defendant's motion to dismiss and or deny the petition
is the allegedly want of a cause of action of the plaintiff's complaint. Philippine
jurisprudence is complete with authorities upholding the principle that this
ground for dismissal must appear in the face of the complaint itself; and that to
determine the sufficiency of the cause of action, only the facts alleged in the
complaint and no other, should be considered; in fine, the test of sufficiency of
cause of action is whether or not, admitting the facts alleged in the complaint,
the Court could render a valid judgment upon the same in accordance with the
prayer of the petition (e.g., Paminsan v. Costales, 29 Phil. 587, 489). The
complaint in the instant case abounds with arguments establishing and
supporting plaintiff's cause of action for and in behalf of the Roxas-Kalaw Textile
Mills, Inc. against all the defendants (See e.g. paragraphs 4, 5, 6 and 7 of the
Complaint). Taking these paragraphs of the complaint in context, it is clear that
the plaintiff has sufficient averred facts constituting a cause or basis for a
derivative suit for "injuries to the corporation, as by negligence, mismanagement
or fraud of its directors, are normally dealt with as wrong to the whole group of
share holders in their corporate capacity, to be redressed in a suit by or on behalf
of the corporation.1awphl.nt
Evident from the defendants' motion to dismiss and/or to deny the petition for
receivership is their complete failure to come up with a valid and substantial
defense against or denial of the complaint's allegations of mismanagement, if
not the actual commission of ultra vires and illegal acts. Invariably the props of
defendants' motion consist of the unconvincing countercharges of the plaintiff's
non-observance of the technicalities of our procedural law and disregard of
technical and evidently futile intracorporate remedies to redress the violations
charged against the defendants. It is clear that the controlling majority did
nothing for two years to protect the interests of corporation. (See pars. 5-7,
complaint.)
The defendants themselves having admitted in open court during the oral
discussion of their motion to dismiss and the plaintiff's motion for receivership
that the majority stockholders will under any condition entertain any suggestion
of the minority shareholders, the appointment of an independent third party in
the management of the corporation becomes imperative for the survival of the
company. (Order dated Feb. 15, 1960).
On April 30, 1960, the court issued mother order which reads as follows:
After this incident wherein it was clearly shown that the minority stockholders,
represented by the plaintiff, have no recourse whatsoever before the majority
stockholders of the company, and after it has been shown that the majority has
violated the law by importing into the Philippines finished goods instead of raw
materials as stipulated in their license, and since these acts are prejudicial to the

company because it might result in the cancellation of their license, the Court is
of the opinion and so holds that the appointment of a receiver is absolutely
necessary for the protection not only of the rights of the minority but also those
of the majority stockholders of the company.
In the first assignment of error, petitioner claims that respondent Justiniani neither alleged
nor proved the existence of an emergency requiring the immediate appoinment of a
receiver of the Roxas-Kalaw Textile Mill, Inc.; that the alleged fraudulent transaction took
place more than two years before the application for receivership, and so was the refusal
of the directors to sue or prosecute Dalamal. This contention is not well founded. At the
hearing of the petition for the appointment of a receiver held on January 30, 1960, various
records of shipments of finished textile goods on dollar allocations for raw materials were
exhibited. Publicity had also been given to the importations of textiles by the corporation,
in place of cotton raw materials. The record shows the list of the various documents
proving the purchase of letters of credit for textiles. These textiles were denied
importation and had to be re-exported. The fact of the importation of finished textiles on
dollar allocations for raw materials in violation of Central Bank regulations was, therefore,
conclusively shown.
It is also not denied by petitioner that the allocation of dollars to the corporation for the
importation of raw materials was suspended. In the eyes of the court below, as well as in
our own, the importation of textiles instead of raw materials, as well as the failure of the
Board of Directors to take action against those directly responsible for the misuse of dollar
allocations constitute fraud, or consent thereto on the part of the directors. Therefore, a
breach of trust was committed which justified the derivative suit by a minority stockholder
on behalf of the corporation.
It is well settled in this jurisdiction that where corporate directors are guilty of a
breach of trust not of mere error of judgment or abuse of discretion and
intracorporate remedy is futile or useless, a stockholder may institute a suit in
behalf of himself and other stockholders and for the benefit of the corporation, to
bring about a redress of the wrong inflicted directly upon the corporation and
indirectly upon the stockholders. An illustration of a suit of this kind is found in
the case of Pascual vs. Del Saz Orozco (19 Phil. 82), decided by this Court as
early as 1911. In that case, the Banco Espaol-Filipino suffered heavy losses due
to fraudulent connivance between a depositor and an employee of the bank,
which losses, it was contended, could have been avoided if the president and
directors had been more vigilant in the administration of the affairs of the bank.
The stockholders constituting the minority brought a suit in behalf of the bank
against the directors to recover damages, and this over the objection of the
majority of the stockholders and the directors. This court held that the suit could
properly be maintained. (64 Phil., Angeles vs. Santos [G.R. No. L-43413, prom.
August 31, 1937] p. 697).
The claim that respondent Justiniani did not take steps to remedy the illegal importation
for a period of two years is also without merit. During that period of time respondent had
the right to assume and expect that the directors would remedy the anomalous situation

of the corporation brought about by their own wrong doing. Only after such period of time
had elapsed could respondent conclude that the directors were remiss in their duty to
protect the corporation property and business.
Counsel for petitioner claims that respondent Justiniani was treasurer of the corporation
for sometime and had control of funds and this notwithstanding, she had not taken the
steps to remedy the situation. In answer we state that the fraud consisted in importing
finished textile instead of raw cotton for the textile mill; the fraud, therefore, was
committed by the manager of the business and was consented to by the directors,
evidently beyond reach of respondent.
The directors permitted the fraudulent transaction to go unpunished and nothing appears
to have been done to remove the erring purchasing managers. In a way the appointment
of a receiver may have been thought of by the court below so that the dollar allocation for
raw material may be revived and the textile mill placed on an operating basis. It is
possible that if a receiver in which the Central Bank may have confidence is appointed,
the dollar allocation for raw material may be restored. Claim is made that if a receiver is
appointed, the Philippine National Bank to which the corporation owes considerable sums
of money might be led to foreclose the mortgage. Precisely the appointment of a receiver
in whom the bank may have had confidence might rehabilitate the business and bring a
restoration of the dollar allocation much needed for raw material and an improvement in
the business and assets the corporation, thus insuring the collection of the bank's loan.
Considering the above circumstances we are led to agree with the judge below that the
appointment of a receiver was not only expedient but also necessary to restore the faith
and confidence of the Central Bank authorities in the administration of the affairs of the
corporation, thus ultimately leading to a restoration of the dollar allocation so essential to
the operation of the textile mills. The first assignment of error is, therefore, overruled.
In the second assignment of error, petitioner claims that the management has been
changed and the new management has not been afforded a chance to show what it can
do. This ground of the petition was not mentioned or raised as a ground of defense or
objection to the appointment of a receiver in the court below. It is only raised for the first
time before Us in the petition for certiorari. The principle has long ago been enunciated by
Us that an appellate court may not consider any ground of objection that was not raised in
the court below. (Tan Machan v. Trinidad, 3 Phil. 684; Ramiro v. Grao, 54 Phil. 744; Vda.
de Villaruel, et al. v. Manila Motor Co., Inc., et al., G.R. No. L-10394, Dec. 13, 1958;
Collector of Internal Revenue v. Estate of F. P. Buan, et al., G.R. Nos. L-11438-39, and L11542-46, July 31, 1958; S.V.S. Pictures, Inc., et al. v. The Court of Appeals, et al., G.R. No.
L-7075, January 29, 1960; Elena Peralta Vda. de Caina vs. Hon. Andres Reyes, et al., G.R.
No. L-15792, May 30, 1960).
The supposed new management, alleged as a ground for the reversal of the order of the
court below appointing a receiver, is not in itself a ground of objection to the appointment
of a receiver. The parties found to be guilty of the fraud, as a cause of which receivership
proceedings were instituted, were the Board of Directors, which took no action to stop the
anomalies being perpetrated by the management. But it appears that the management

must have acted directly under orders of the Board of Directors. The appointment of a
new management, therefore, would not remedy the anomalous situation in which the
corporation is found, because such situation was not due to the management alone but
principally because of direction of the Board of Directors.
The second ground for the petition is, therefore, also without merit.
WHEREFORE, the court finds that the court below did not commit an abuse of discretion in
appointing a receiver for the corporation and the petition to set aside the order for the
appointment of a receiver should be, as it is hereby, dismissed. With costs against the
petitioner.

G.R. No. L-22399

March 30, 1967

REPUBLIC BANK, represented in this action by DAMASO P. PEREZ, etc., plaintiffappellant,

vs.
MIGUEL CUADERNO, BIENVENIDO DIZON, PABLO ROMAN,
THE BOARD OF DIRECTORS OF THE REPUBLIC BANK AND THE MONETARY BOARD
OF THE CENTRAL BANK OF THE PHILIPPINES, defendants-appellees.
Crispin D. Baizas and Associates and Halili, Bolinao and Associates for plaintiffappellant.
REYES, J.B.L., J.:

Direct appeal from an order of the Court of First Instance of Manila, in its civil case No.
53936, dismissing the petitioner's complaint on the ground of failure to state cause of
action.
In the Court below, Damaso Perez, a stockholder of the Republic Bank, a Philippine
banking corporation domiciled in Manila, instituted a derivative suit for and in behalf of
said Bank, against Miguel Cuaderno, Bienvenido Dizon, the Board of Directors of the
Republic Bank, and the Monetary Board of the Central Bank of the Philippines. Paragraph 6
of the Complaint (Rec. on Appeal, p. 7) expressly pleaded the following: .
6. That the relator herein filed the present derivative suit without any further
demand on the Board of Directors of the Republic Bank for the reason that such
formal demand to institute the present complaint would be a futile formality
since the members of the board are personally chosen by defendant Pablo
Roman himself.
For a cause of action plaintiff alleged, inter alia, that Damaso Perez had complained to the
Monetary Board of the Central Bank against certain frauds allegedly committed by
defendant Pablo Roman, in that being chairman of the Board of Directors of the Republic
Bank, and of its Executive Loan Committee, in 1957 to 1959, "in grave abuse of his
fiduciary duty and taking advantage of his said positions and in connivance with other
officials of the Republic Bank", Roman had fraudulently granted or caused to be granted
loans to fictitious and non-existing persons and to their close friends, relatives and/or
employees, who were in reality their dummies, on the basis of fictitious and inflated
appraised values of real estate properties; that said loans amounted to almost 4 million
pesos; that acting upon the complaint, Miguel Cuaderno (then Governor of the Central
Bank) and the Monetary Board ordered an investigation, which was carried out by Bank
Examiners; that they and the Superintendent of Banks of the Central Bank reported that
certain mortgage loans amounting to P2,303,400.00 were granted in violation of sections
77, 78 and 88 of the General Banking Act; that acting on said reports, the Monetary
Board, of which defendant Cuaderno was a member, ordered a new Board of Directors of
the Republic Bank to be elected, which was done, and subsequently approved by the
Monetary Board; that on January 5, 1960, the latter accepted the offer of Pablo Roman to
put up adequate security for the questioned loans made by the Republic Bank, and such
security was made a condition for the resumption of the Bank's normal operations; that
subsequently, the Central Bank through its Governor, Miguel Cuaderno, referred to special
prosecutors of the Department of Justice on July 22, 1960, the banking frauds and
violations of the Banking Act, reported by the Superintendent of Banks, for investigation
and prosecution, but no information was filed up to the time of the retirement of Cuaderno
in 1961; that other similar frauds were subsequently discovered; that to neutralize the
impending action against him, Pablo Roman engaged Miguel Cuaderno as technical
consultant at a compensation of P12,500.00 per month, and selected Bienvenido Dizon as
chairman of the Board of Directors of the Republic Bank; that the Board of Directors
composed of individuals personally selected and chosen by Roman, connived and
confederated in approving the appointment and selection of Cuaderno and Dizon; that
such action was motivated by bad faith and without intention to protect the interest of the
Republic Bank but were prompted to protect Pablo Roman from criminal prosecution; that
the appointment of Cuaderno and his acceptance of the position of technical consultant
are immoral, anomalous and illegal, and his compensation highly unconscionable,
because court actions involving the actuations of Cuaderno as Governor and Member or
Chairman of the Monetary Board are still pending in court; that as member of the
Monetary Board from 1961 to 1962, Bienvenido Dizon exercised supervision over the
Republic Bank; that the selection of Dizon as chairman of the Board of the Republic Bank
after he was forced to resign from the presidency of the Philippine National Bank and from

membership of the Monetary Board and within one year thereafter is in violation of option
3, sub-paragraph (d) of the Anti-Graft and Corrupt Practices Act; that both Cuaderno and
Dizon were alter egos of Pablo Roman; that the Monetary Board was about to approve the
appointment of Cuaderno and Dizon and would do so unless enjoined.

court between practically the same parties", denied the petition for a writ of preliminary
injunction and dismissed the case. The court in effect suggested that the matter at issue
in the case may be presented in any of the pending eight cases by means of amended
and supplemental pleadings.

The complaint, therefore, prayed for a writ of preliminary injunction against the Monetary
Board to prevent its confirmation of the appointments of Dizon and Cuaderno; against the
Board of Directors of the Republic Bank from recognizing Cuaderno as technical consultant
and Dizon as Chairman of the Board; and against Pablo Roman from appointing or
selecting officers or directors of the Republic Bank, and against the recognition of any
such appointees until final determination of the action. And concluded by praying that
after due hearing, judgment be rendered,

Plaintiff Damaso Perez thereupon appealed to this Court.

a) making the writ of injunction permanent;

b) declaring the appointment of defendant Miguel Cuaderno as technical
consultant with monthly compensation of P12,500.00 unconscionable, immoral,
illegal and null and void;
c) declaring the selection of defendant Bienvenido Dizon as chairman of the
Board of Directors of the Republic Bank violative of Section 3, sub-paragraph (d)
of Republic Act No. 5019, otherwise known as the Anti-Graft and Corrupt
Practices Act, and therefore, illegal and null and void;
d) declaring that defendant Pablo Roman, in view of his criminal liability for the
fraudulent real estate mortgage loans in the Republic Bank amounting to P4
million, has no right to select or to be allowed to select person or persons who
are his alter egos to manage the Republic Bank, and enjoining the defendant
Board of Directors of the Republic Bank from recognizing any officers or directors
appointed or selected by defendant Pablo Roman;
e) ordering defendants Miguel Cuaderno and Bienvenido Dizon to return to the
Republic Bank all amounts they may have received either in the form of
compensation, remuneration or emolument, with an interest thereon at the rate
of 6%; or to order defendant Pablo Roman to refund the amounts paid to said
defendant Miguel Cuaderno and defendant Bienvenido Dizon, and to pay such
reasonable damages to the plaintiff Republic Bank;
f) ordering all the defendants to pay the sum of P25,000.00 as attorney's fees,
including all expenses of litigation and costs of this suit.
The Monetary Board filed an answer with denials, admissions and affirmative defenses;
but the other defendants filed separate motions to dismiss on practically the same
grounds: no valid cause of action against the individual movants; lack of legal capacity of
plaintiff-relator to sue; and non-exhaustion of intra-corporate remedies. These motions
were duly opposed by plaintiff Damaso Perez.1wph1.t
On October 24, 1963, the court, "taking into consideration the grounds alleged in the
motions to dismiss and the opposition for the issuance of a writ of preliminary injunction
and the affirmative defenses filed by the defendants and the arguments in support
thereof", and "that there are already eight cases pending in the different branches of this

The issue in this appeal, then, is whether or not the Court below erred in dismissing the
complaint. In this connection, it should be remembered that the defenses of the Monetary
Board of the Central Bank, being interposed in an answer and not in a motion to dismiss,
are not here at issue. Our sole concern is with the motions to dismiss of the other
defendants, Roman, Cuaderno, Dizon, and the Board of Directors of the Republic Bank.
They mainly controvert the right of plaintiff to question the appointment and selection of
defendants Cuaderno and Dizon, which they contend to be the result of corporate acts
with which plaintiff, as stockholder, cannot interfere. Normally, this is correct, but
Philippine jurisprudence is settled that an individual stockholder is permitted to institute a
derivative or representative suit on behalf of the corporation wherein he holds stock in
order to protect or vindicate corporate rights, whenever the officials of the corporation
refuse to sue, or are the ones to be sued or hold the control of the corporation. In such
actions, the suing stockholder is regarded as a nominal party, with the corporation as the
real party in interest (Pascual vs. Del Saz Orozco, 19 Phil. 82, 85; Everett vs. Asia Banking
Corp., 45 Phil. 518; Angeles vs. Santos, 64 Phil. 697; Evangelista vs. Santos, 86 Phil. 388).
Plaintiff-appellant's action here is precisely in conformity, with these principles. He is
neither alleging nor vindicating his own individual interest or prejudice, but the interest of
the Republic Bank and the damage caused to it. The action he has brought is a derivative
one, expressly manifested to be for and in behalf of the Republic Bank, because it was
futile to demand action by the corporation, since its Directors were nominees and
creatures of defendant Pablo Roman (Complaint, p. 6). The frauds charged by plaintiff are
frauds against the Bank that redounded to its prejudice.
The complaint expressly pleads that the appointment of Cuaderno as technical consultant,
and of Bienvenido Dizon to head the Board of Directors of the Republic Bank, were made
only to shield Pablo Roman from criminal prosecution and not to further the interests of
the Bank, and avers that both men are Roman's alter egos. There is no denying that the
facts thus pleaded in the complaint constitute a cause of action for the bank: if the
questioned appointments were made solely to protect Roman from criminal prosecution,
by a Board composed by Roman's creatures and nominees, then the moneys disbursed in
favor of Cuaderno and Dizon would be an unlawful wastage or diversion of corporate
funds, since the Republic Bank would have no interest in shielding Roman, and the
directors in approving the appointments would be committing a breach of trust; the Bank,
therefore, could sue to nullify the appointments, enjoin disbursement of its funds to pay
them, and recover those paid out for the purpose, as prayed for in the complaint in this
case (Angeles vs. Santos, supra.).
Facts pleaded in the complaint are to be deemed accepted by the defendants who file a
motion to dismiss the complaint for failure to state a cause of action. This is the cardinal
principle in the matter. And, it has been ruled that the test of sufficiency of the facts
alleged is whether or not the Court could render a valid judgment as prayed for, accepting
as true the exclusive facts set forth in the complaint.1So rigid is the norm prescribed that
if the Court should doubt the truth of the facts averred it must not dismiss the complaint
but require an answer and proceed to trial on the merits.2

Defendants urge that the action is improper because the plaintiff was not authorized by
the corporation to bring suit in its behalf. Any such authority could not be expected as the
suit is aimed to nullify the action taken by the manager and the board of directors of the
Republic Bank; and any demand for intra-corporate remedy would be futile, as expressly
pleaded in the complaint. These circumstances permit a stockholder to bring a derivative
suit (Evangelista vs. Santos, 86 Phil. 394). That no other stockholder has chosen to make
common cause with plaintiff Perez is irrelevant, since the smallness of plaintiff's holdings
is no ground for denying him relief (Ashwander vs. TVA, 80 L. Ed. 688). At any rate, it is
yet too early in the proceedings for the absence of other stockholders to be of any
significance, no issues having even been joined.
There remains the procedural question whether the corporation itself must be made party
defendant. The English practice is to make the corporation a party plaintiff, while in the
United States, the usage leans in favor of its being joined as party defendant (see Editorial
Note, 51 LRA [NS] 123). Objections can be raised against either method. Absence of
corporate authority would seem to militate against making the corporation a party
plaintiff, while joining it as defendant places the entity in the awkward position of resisting
an action instituted for its benefit. What is important is that the corporation' should be
made a party, in order to make the Court's judgment binding upon it, and thus bar future
relitigation of the issues. On what side the corporation appears loses importance when it
is considered that it lay within the power of the trial court to direct the making of such
amendments of the pleadings, by adding or dropping parties, as may be required in the
interest of justice (Revised Rule 3, sec. 11). Misjoinder of parties is not a ground to dismiss
an action. (Ibid.)
We see no reason to support the contention of defendant Bienvenido Dizon that the action
of plaintiff amounts to a quo warranto proceeding. Plaintiff Perez is not claiming title to
Dizon's position as head of the Republic Bank's board of directors. The suit is aimed at
preventing the waste or diversion of corporate funds in paying officers appointed solely to
protect Pablo Roman from criminal prosecution, and not to carry on the corporation's bank
business. Whether the complaint's allegations to such effect are true or not must be
determined after due hearing.
Independently of the grounds advanced by the defendants in their motions to dismiss, the
Court a quo gave as a further pretext for the dismissal of the action the pendency of eight
other lawsuits between practically the same parties; reasoning that the question at issue
in the present case could be incorporated in any one of the other actions by amended or
supplemental pleading. We fail to see that this justifies the dismissal of the case under
appeal. In the first place, there is no pretense that the cause of action here was already
included in any of the other pending cases. As a matter of fact, dismissal of the present
action was not sought on the ground of pendency of another action between the same
parties. Secondly, the amendment of a complaint after a responsive pleading is filed,
would rest upon the discretion of the party and the Court. Hence, this case cannot be
dismissed simply because of the possibility that the cause of action here can be
incorporated or introduced in any of those of the pending cases.
In view of the foregoing, the order dismissing the complaint is reversed and set aside. The
case is remanded to the court of origin with instructions to overrule the motions to dismiss
and require the defendants to answer the complaint. Thereafter, the case shall be tried
and decided on its merits. Costs against defendants-appellees. So ordered.

G.R. No. 137686

February 8, 2000

RURAL BANK OF MILAOR (CAMARINES SUR), petitioner,

vs.
FRANCISCA OCFEMIA, ROWENA BARROGO, MARIFE O. NIO, FELICISIMO
OCFEMIA, RENATO OCFEMIA JR, and WINSTON OCFEMIA, respondents.
PANGANIBAN, J.:
When a bank, by its acts and failure to act, has clearly clothed its manager with apparent
authority to sell an acquired asset in the normal course of business, it is legally obliged to
confirm the transaction by issuing a board resolution to enable the buyers to register the
property in their names. It has a duty to perform necessary and lawful acts to enable the
other parties to enjoy all benefits of the contract which it had authorized.
The Case
Before this Court is a Petition for Review on Certiorari challenging the December 18, 1998
Decision of the Court of Appeals 1 (CA) in CA-GR SP No. 46246, which affirmed the May 20,
1997 Decision 2 of the Regional Trial Court (RTC) of Naga City (Branch 28). The CA
disposed as follows:
Wherefore, premises considered, the Judgment appealed from is hereby
AFFIRMED. Costs against the respondent-appellant. 3
The dispositive portion of the judgment affirmed by the CA ruled in this wise:
WHEREFORE, in view of all the foregoing findings, decision is hereby rendered
whereby the [petitioner] Rural Bank of Milaor (Camarines Sur), Inc. through its
Board of Directors is hereby ordered to immediately issue a Board Resolution
confirming the Deed of Sale it executed in favor of Renato Ocfemia marked
Exhibits C, C-1 and C-2); to pay [respondents] the sum of FIVE HUNDRED
(P500.00) PESOS as actual damages; TEN THOUSAND (P10,000.00) PESOS as
attorney's fees; THIRTY THOUSAND (P30,000.00) PESOS as moral damages;
THIRTY THOUSAND (P30,000.00) PESOS as exemplary damages; and to pay the
costs. 4

Also assailed is the February 26, 1999 CA Resolution

Reconsideration.

which denied petitioner's Motion for

The Facts
The trial court's summary of the undisputed facts was reproduced in the CA Decision as
follows:
This is an action for mandamus with damages. On April 10, 1996, [herein
petitioner] was declared in default on motion of the [respondents] for failure to
file an answer within the reglementary-period after it was duly served with
summons. On April 26, 1996, [herein petitioner] filed a motion to set aside the
order of default with objection thereto filed by [herein respondents].
On June 17, 1996, an order was issued denying [petitioner's] motion to set aside
the order of default. On July 10, 1996, the defendant filed a motion for
reconsideration of the order of June 17, 1996 with objection thereto by
[respondents]. On July 12, 1996, an order was issued denying [petitioner's]
motion for reconsideration. On July 31, 1996, [respondents] filed a motion to set
case for hearing. A copy thereof was duly furnished the [petitioner] but the latter
did not file any opposition and so [respondents] were allowed to present their
evidence ex-parte. A certiorari case was filed by the [petitioner] with the Court of
Appeals docketed as CA GR No. 41497-SP but the petition was denied in a
decision rendered on March 31, 1997 and the same is now final.
The evidence presented by the [respondents] through the testimony of Marife O.
Nio, one of the [respondents] in this case, show[s] that she is the daughter of
Francisca Ocfemia, a co-[respondent] in this case, and the late Renato Ocfemia
who died on July 23, 1994. The parents of her father, Renato Ocfemia, were
Juanita Arellano Ocfemia and Felicisimo Ocfemia. Her other co-[respondents]
Rowena O. Barrogo, Felicisimo Ocfemia, Renato Ocfemia, Jr. and Winston Ocfemia
are her brothers and sisters.1wphi1.nt
Marife O. Nio knows the five (5) parcels of land described in paragraph 6 of the
petition which are located in Bombon, Camarines Sur and that they are the ones
possessing them which [were] originally owned by her grandparents, Juanita
Arellano Ocfemia and Felicisimo Ocfemia. During the lifetime of her
grandparents, [respondents] mortgaged the said five (5) parcels of land and two
(2) others to the [petitioner] Rural Bank of Milaor as shown by the Deed of Real
Estate Mortgage (Exhs. A and A-1) and the Promissory Note (Exh. B).
The spouses Felicisimo Ocfemia and Juanita Arellano Ocfemia were not able to
redeem the mortgaged properties consisting of seven (7) parcels of land and so
the mortgage was foreclosed and thereafter ownership thereof was transferred to
the [petitioner] bank. Out of the seven (7) parcels that were foreclosed, five (5)
of them are in the possession of the [respondents] because these five (5) parcels
of land described in paragraph 6 of the petition were sold by the [petitioner]
bank to the parents of Marife O. Nio as evidenced by a Deed of Sale executed in
January 1988 (Exhs. C, C-1 and C-2).

The aforementioned five (5) parcels of land subject of the deed of sale (Exh. C),
have not been, however transferred in the name of the parents of Merife O. Nio
after they were sold to her parents by the [petitioner] bank because according to
the Assessor's Office the five (5) parcels of land, subject of the sale, cannot be
transferred in the name of the buyers as there is a need to have the document of
sale registered with the Register of Deeds of Camarines Sur.
In view of the foregoing, Marife O. Nio went to the Register of Deeds of
Camarines Sur with the Deed of Sale (Exh. C) in order to have the same
registered. The Register of Deeds, however, informed her that the document of
sale cannot be registered without a board resolution of the [petitioner] Bank.
Marife Nio then went to the bank, showed to if the Deed of Sale (Exh. C), the tax
declaration and receipt of tax payments and requested the [petitioner] for a
board resolution so that the property can be transferred to the name of Renato
Ocfemia the husband of petitioner Francisca Ocfemia and the father of the other
[respondents] having died already.
The [petitioner] bank refused her request for a board resolution and made many
alibi[s]. She was told that the [petitioner] bank ha[d] a new manager and it had
no record of the sale. She was asked and she complied with the request of the
[petitioner] for a copy of the deed of sale and receipt of payment. The president
of the [petitioner] bank told her to get an authority from her parents and other
[respondents] and receipts evidencing payment of the consideration appearing in
the deed of sale. She complied with said requirements and after she gave all
these documents, Marife O. Nio was again told to wait for two (2) weeks
because the [petitioner] bank would still study the matter.
After two (2) weeks, Marife O. Nio returned to the [petitioner] bank and she was
told that the resolution of the board would not be released because the
[petitioner] bank ha[d] no records from the old manager. Because of this, Marife
O. Nio brought the matter to her lawyer and the latter wrote a letter on
December 22, 1995 to the [petitioner] bank inquiring why no action was taken by
the board of the request for the issuance of the resolution considering that the
bank was already fully paid [for] the consideration of the sale since January 1988
as shown by the deed of sale itself (Exh. D and D-1 ).
On January 15, 1996 the [petitioner] bank answered [respondents'] lawyer's
letter (Exh. D and D-1) informing the latter that the request for board resolution
ha[d] already been referred to the board of directors of the [petitioner] bank with
another request that the latter should be furnished with a certified machine copy
of the receipt of payment covering the sale between the [respondents] and the
[petitioner] (Exh. E). This request of the [petitioner] bank was already complied
[with] by Marife O. Nio even before she brought the matter to her lawyer.
On January 23, 1996 [respondents'] lawyer wrote back the branch manager of
the [petitioner] bank informing the latter that they were already furnished the
receipts the bank was asking [for] and that the [respondents] want[ed] already to
know the stand of the bank whether the board [would] issue the required board
resolution as the deed of sale itself already show[ed] that the [respondents were]
clearly entitled to the land subject of the sale (Exh. F). The manager of the
[petitioner] bank received the letter which was served personally to him and the
latter told Marife O. Nio that since he was the one himself who received the

letter he would not sign anymore a copy showing him as having already received
said letter (Exh. F).

This Court's Ruling

The present Petition has no merit.

After several days from receipt of the letter (Exh. F) when Marife O. Nio went to
the [petitioner] again and reiterated her request, the manager of the [petitioner]
bank told her that they could not issue the required board resolution as the
[petitioner] bank ha[d] no records of the sale. Because of this Merife O. Nio
already went to their lawyer and ha[d] this petition filed.
The [respondents] are interested in having the property described in paragraph 6
of the petition transferred to their names because their mother and co-petitioner,
Francisca Ocfemia, is very sickly and they want to mortgage the property for the
medical expenses of Francisca Ocfemia. The illness of Francisca Ocfemia beg[a]n
after her husband died and her suffering from arthritis and pulmonary disease
already became serious before December 1995.
Marife O. Nio declared that her mother is now in serious condition and they
could not have her hospitalized for treatment as they do not have any money
and this is causing the family sleepless nights and mental anguish, thinking that
their mother may die because they could not submit her for medication as they
do not have money. 6
The trial court granted the Petition. As noted earlier, the CA affirmed the RTC Decision.
Hence, this recourse. 7 In a Resolution dated June 23, 1999, this Court issued a Temporary
Restraining Order directing the trial court "to refrain and desist from executing [pending
appeal] the decision dated May 20, 1997 in Civil Case No. RTC-96-3513, effective
immediately until further orders from this Court." 8
Ruling of the Court of Appeals
The CA held that herein respondents were "able to prove their present cause of action"
against petitioner. It ruled that the RTC had jurisdiction over the case, because (1) the
Petition involved a matter incapable of pecuniary estimation; (2) mandamus fell within the
jurisdiction of RTC; and (3) assuming that the action was for specific performance as
argued by the petitioner, it was still cognizable by the said court.
Issues
In its Memorandum,

the bank posed the following questions:

1. Question of Jurisdiction of the Regional Trial Court. Has a Regional Trial

Court original jurisdiction over an action involving title to real property with a
total assessed value of less than P20,000.00?
2. Question of Law. May the board of directors of a rural banking corporation
be compelled to confirm a deed of absolute sale of real property owned by the
corporation which deed of sale was executed by the bank manager without prior
authority of the board of directors of the rural banking corporation? 10

First Issue:
Jurisdiction of the Regional Trial Court
Petitioner submits that the RTC had no jurisdiction over the case. Disputing the ruling of
the appellate court that the present action was incapable of pecuniary estimation,
petitioner argues that the matter in fact involved title to real property worth less than
P20,000. Thus, under RA 7691, the case should have been filed before a metropolitan trial
court, a municipal trial court or a municipal circuit trial court.
We disagree. The well-settled rule is that jurisdiction is determined by the allegations of
the complaint. 11 In the present case, the Petition for Mandamus filed by respondents
before the trial court prayed that petitioner-bank be compelled to issue a board resolution
confirming the Deed of Sale covering five parcels of unregistered land, which the bank
manager had executed in their favor. The RTC has jurisdiction over such action pursuant
to Section 21 of BP 129, which provides:
Sec. 21. Original jurisdiction in other cases. Regional Trial Courts shall exercise
original jurisdiction;
(1) in the issuance of writ of certiorari, prohibition, mandamus, quo
warranto, habeas corpus and injunction which may be enforced in any part of
their respective regions; and
(2) In actions affecting ambassadors and other public ministers and consuls.
A perusal of the Petition shows that the respondents did not raise any question involving
the title to the property, but merely asked that petitioner's board of directors be directed
to issue the subject resolution. Moreover, the bank did not controvert the allegations in
the said Petition. To repeat, the issue therein was not the title to the property; it was
respondents' right to compel the bank to issue a board resolution confirming the Deed of
Sale.
Second Issue:
Authority of the Bank Manager
Respondents initiated the present proceedings, so that they could transfer to their names
the subject five parcels of land; and subsequently, to mortgage said lots and to use the
loan proceeds for the medical expenses of their ailing mother. For the property to be
transferred in their names, however, the register of deeds required the submission of a
board resolution from the bank confirming both the Deed of Sale and the authority of the
bank manager, Fe S. Tena, to enter into such transaction. Petitioner refused. After being
given the runaround by the bank, respondents sued in exasperation.
Allegations in the Petition for Mandamus Deemed Admitted

Respondents based their action before the trial court on the Deed of Sale, the substance
of which was alleged in and a copy thereof was attached to the Petition for Mandamus.
The Deed named Fe S. Tena as the representative of the bank. Petitioner, however, failed
to specifically deny under oath the allegations in that contract. In fact, it filed no answer
at all, for which reason it was declared in default. Pertinent provisions of the Rules of Court
read:
Sec. 7. Action or defense based on document. Whenever an action or defense
is based upon a written instrument or document, the substance of such
instrument or document shall be set forth in the pleading, and the original or a
copy thereof shall be attached to the pleading as an exhibit, which shall be
deemed to be a part of the pleading, or said copy may with like effect be set
forth in the pleading.
Sec. 8. How to contest genuineness of such documents. When an action or
defense is founded upon a written instrument, copied in or attached to the
corresponding pleading as provided in the preceding section, the genuineness
and due execution of the instrument shall be deemed admitted unless the
adverse party, under oath, specifically denies them, and sets forth what he
claims to be the facts; but this provision does not apply when the adverse party
does not appear to be a party to the instrument or when compliance with an
order for an inspection of the original instrument is refused. 12
In failing to file its answer specifically denying under oath the Deed of Sale, the bank
admitted the due execution of the said contract. Such admission means that it
acknowledged that Tena was authorized to sign the Deed of Sale on its behalf. 13 Thus,
defenses that are inconsistent with the due execution and the genuineness of the written
instrument are cut off by an admission implied from a failure to make a verified specific
denial.
Other Acts of the Bank
In any event, the bank acknowledged, by its own acts or failure to act, the authority of Fe
S. Tena to enter into binding contracts. After the execution of the Deed of Sale,
respondents occupied the properties in dispute and paid the real estate taxes due
thereon. If the bank management believed that it had title to the property, it should have
taken some measures to prevent the infringement or invasion of its title thereto and
possession thereof.
Likewise, Tena had previously transacted business on behalf of the bank, and the latter
had acknowledged her authority. A bank is liable to innocent third persons where
representation is made in the course of its normal business by an agent like Manager
Tena, even though such agent is abusing her authority. 14 Clearly, persons dealing with her
could not be blamed for believing that she was authorized to transact business for and on
behalf of the bank. Thus, this Court has ruled in Board of Liquidators v. Kalaw: 15
Settled jurisprudence has it that where similar acts have been approved by the
directors as a matter of general practice, custom, and policy, the general
manager may bind the company without formal authorization of the board of
directors. In varying language, existence of such authority is established, by
proof of the course of business, the usages and practices of the company and by
the knowledge which the board of directors has, or must be presumed to have, of

acts and doings of its subordinates in and about the affairs of the corporation. So
also,
. . . authority to act for and bind a corporation may be presumed from acts of
recognition in other instances where the power was in fact exercised.
. . . Thus, when, in the usual course of business of a corporation, an officer has
been allowed in his official capacity to manage its affairs, his authority to
represent the corporation may be implied from the manner in which he has been
permitted by the directors to manage its business.
Notwithstanding the putative authority of the manager to bind the bank in the Deed of
Sale, petitioner has failed to file an answer to the Petition below within the reglementary
period, let alone present evidence controverting such authority. Indeed, when one of
herein respondents, Marife S. Nino, went to the bank to ask for the board resolution, she
was merely told to bring the receipts. The bank failed to categorically declare that Tena
had no authority. This Court stresses the following:
. . . Corporate transactions would speedily come to a standstill were every person
dealing with a corporation held duty-bound to disbelieve every act of its
responsible officers, no matter how regular they should appear on their face. This
Court has observed in Ramirez vs. Orientalist Co., 38 Phil. 634, 654-655, that
In passing upon the liability of a corporation in cases of this kind it is
always well to keep in mind the situation as it presents itself to the third
party with whom the contract is made. Naturally he can have little or no
information as to what occurs in corporate meetings; and he must
necessarily rely upon the external manifestation of corporate consent.
The integrity of commercial transactions can only be maintained by
holding the corporation strictly to the liability fixed upon it by its agents
in accordance with law; and we would be sorry to announce a doctrine
which would permit the property of man in the city of Paris to be
whisked out of his hands and carried into a remote quarter of the earth
without recourse against the corporation whose name and authority had
been used in the manner disclosed in this case. As already observed, it
is familiar doctrine that if a corporation knowingly permits one of its
officers, or any other agent, to do acts within the scope of an apparent
authority, and thus holds him out to the public as possessing power to
do those acts, the corporation will, as against any one who has in good
faith dealt with the corporation through such agent, be estopped from
denying his authority; and where it is said "if the corporation permits
this means the same as "if the thing is permitted by the directing power
of the corporation." 16
In this light, the bank is estopped from questioning the authority of the bank manager to
enter into the contract of sale. If a corporation knowingly permits one of its officers or any
other agent to act within the scope of an apparent authority, it holds the agent out to the
public as possessing the power to do those acts; thus, the corporation will, as against
anyone who has in good faith dealt with it through such agent, be estopped from denying
the agent's authority. 17

Unquestionably, petitioner has authorized Tena to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the board resolution sought by respondent's.
Having authorized her to sell the property, it behooves the bank to confirm the Deed of
Sale so that the buyers may enjoy its full use.
The board resolution is, in fact, mere paper work. Nonetheless, it is paper work necessary
in the orderly operations of the register of deeds and the full enjoyment of respondents'
rights. Petitioner-bank persistently and unjustifiably refused to perform its legal duty.
Worse, it was less than candid in dealing with respondents regarding this matter. In this
light, the Court finds it proper to assess the bank treble costs, in addition to the award of
damages.
WHEREFORE, the Petition is hereby DENIED and the assailed Decision and Resolution
AFFIRMED. The Temporary Restraining Order issued by this Court is hereby LIFTED. Treble
costs against petitioner.
SO ORDERED.

G.R. No. L-23428

November 29, 1968

DETECTIVE & PROTECTIVE BUREAU, INC., petitioner,

vs.
THE HONORABLE GAUDENCIO CLORIBEL, in his capacity as Presiding Judge of
Branch VI, Court of First Instance of Manila, and FAUSTINO S.
ALBERTO, respondents.
Crispin D. Biazas and Associates and Jose S. Sarte for petitioner.
Gaudencio T. Bocobo for respondents.
ZALDIVAR, J.:
The complaint, in Civil Case No. 56949 of the Court of First Instance of Manila, dated May
4, 1964, filed by Detective and Protective Bureau, Inc., therein plaintiff (petitioner herein)
against Fausto S. Alberto, therein defendant (respondent herein), for accounting with
preliminary injunction and receivership, alleged that plaintiff was a corporation duly
organized and existing under the laws of the Philippines; that defendant was managing
director of plaintiff corporation from 1952 until January 14, 1964; that in June, 1963,
defendant illegally seized and took control of all the assets as well as the books, records,
vouchers and receipts of the corporation from the accountant-cashier, concealed them
illegally and refused to allow any member of the corporation to see and examine the
same; that on January 14, 1964, the stockholders, in a meeting, removed defendant as
managing director and elected Jose de la Rosa in his stead; that defendant not only had
refused to vacate his office and to deliver the assets and books to Jose de la Rosa, but
also continued to perform unauthorized acts for and in behalf of plaintiff corporation; that
defendant had been required to submit a financial statement and to render an accounting
of his administration from 1952 but defendant has failed to do so; that defendant,
contrary to a resolution adopted by the Board of Directors on November 24, 1963, had
been illegally disposing of corporate funds; that defendant, unless immediately
restrained ex-parte, would continue discharging the functions of managing director; and
that it was necessary to appoint a receiver to take charge of the assets and receive the
income of the corporation. Plaintiff prayed that a preliminary injunction ex-parte be issued
restraining defendant from exercising the functions of managing director and from
disbursing and disposing of its funds; that Jose M. Barredo be appointed receiver; that,
after judgment, the injunction be made permanent and defendant be ordered to render an
accounting.
Herein respondent Judge, the Honorable Gaudencio Cloribel, set for hearing plaintiff's
prayer for ancillary relief and required the parties to submit their respective memoranda.
On June 18, 1964, respondent Judge granted the writ of preliminary injunction prayed for,
conditioned upon plaintiff's filing a bond of P5,000.00. Plaintiff filed the bond, but while
the same was pending approval defendant Fausto S. Alberto filed, on July 1, 1964, a
motion to admit a counter-bond for the purpose of lifting the order granting the writ of
preliminary injunction. Inspite of the opposition filed by plaintiff, respondent Judge issued,
on August 5, 1964, an order admitting the counterbond and setting aside the writ of
preliminary injunction.
On the belief that the order approving the counter-bond and lifting the writ of preliminary
injunction was contrary to law and the act of respondent Judge constituted a grave abuse
of discretion, and that there was no plain, speedy and adequate remedy available to it,
plaintiff filed with this Court the instant petition for certiorari, praying that a writ of
preliminary injunction enjoining defendant Fausto S. Albert from exercising the functions
of managing director be issued, and that the order dated August 5, 1964 of respondent
Judge approving the counter-bond and lifting the writ of preliminary injunction he had

previously issued be set aside and declared null and void. The Court gave due course to
the petition but did not issue a preliminary injunction.
In his answer, now respondent Fausto S. Alberto traversed the material allegations of the
petition, justified the order complained of, and prayed for the dismissal of the petition.
From the pleadings, it appears that the only issue to be resolved is whether the order of
respondent Judge dated August 5, 1964, admitting and approving the counter-bond of
P5,000 and setting aside the writ of preliminary injunction granted in his order dated June
18, 164, was issued contrary to law and with grave abuse of discretion.
Now petitioner contends that the setting aside of the order granting the writ was contrary
to law and was done with a grave abuse of discretion, because: (1) the motion to admit
defendant's counter-bond was not supported by affidavits showing why the counter-bond
should be admitted, as required by Section 6 of Rule 58; (2) the preliminary injunction was
not issued ex-parte but after hearing, and the admission of the counter-bond rendered
said writ ineffective; (3) the writ was granted in accordance with Rule 58 of the Rules of
Court and established precedents' (4) public interest required that the writ be not set
aside because respondent had arrogated unto himself all the powers of petitioning
corporation, to the irreparable damage of the corporation; and that (5) the counter-bond
could not compensate petitioner's damage.
1. The first reason given by petitioner in support of its contention that the dissolution of
the writ of preliminary injunction was contrary to law is that the motion to admit
respondent's counter-bond for the dissolution of the writ was not supported by affidavits
as required by section 6 of Rule 58 of the Rules of Court. The controverted motion,
however, does not appear in the record. However, the record shows that respondent
Alberto had filed a verified answer to the complaint and a verified opposition to the
issuance of the writ of preliminary injunction.
Regarding the necessity of verification of the motion for dissolution of a writ of preliminary
injunction, this Court has ruled that the requirement of verification is not absolute but is
dependent on the circumstances obtaining in a particular case. In the case of Sy Sam Bio,
et al. vs. Barrios and Buyson Lampa,1 the only question raised was whether the
respondent Judge exceeded his jurisdiction and abused his discretion in setting aside an
order directing the issuance of a writ of preliminary injunction. In maintaining the
affirmative, petitioners in that case alleged that the questioned order was issued in
violation of the provisions of Section 169 of Act 190(which is one of the sources of Sec. 6
of Rule 58 of the revised Rules of Court)inasmuch as the Judge set aside said order and
directed the dissolution of the preliminary injunction without any formal petition of the
parties and without having followed the procedure prescribed by the statute. There was,
however, a verbal application for the dissolution of the writ, based upon the ground of the
in suficiency of the complaint which was the basis of the application for the issuance of
said writ of preliminary injunction. This Court said:
Section 169 of Act 1909 does not prescribe the manner of filing the application to
annul or modify a writ of preliminary injunction. It simply states that if a
temporary injunction be granted without notice, the defendant, at any time
before trial, may apply, upon reasonable notice to the adverse party, to the judge
who granted the injunction, or to the judge of the court of which the action was
brought, to dissolve or modify the same.

On the strength of the decision in the above-cited case, this Court in Caluya, et al. vs.
Ramos, et al.,2 said;
Petitioners' criticism that the motion to dissolve filed by the defendants in Civil
Case No. 4634 was not verified, is also groundless inasmuch as even an indirect
verbal application for the dissolution of an ex parteorder of preliminary injunction
has been held to be a sufficient compliance with the provisions of Section 6 of
Rule 60 (Moran, Comments on the Rules of Court, Second Edition, Vol. II, p. 65,
citing the case of Sy Yam Bio v. Barrios, etc., 63 Phil. 206), the obvious reason
being that said rule does not prescribe the form by which an application for the
dissolution or modification of an order of preliminary injunction should be
presented.
If according to the above rulings, Section 6 of Rule 60 (now sec. 6, Rule 58) of the Rules of
Court did not require any form for the application for the dissolution of the writ of
preliminary injunction, then respondent Fausto Alberto's motion to lift the preliminary
injunction in the court below need not be verified, and much less must the motion be
supported by affidavits, as urged by petitioner.
However, in Canlas, et al. vs. Aquino, et al.,3 this Court ruled that a motion for the
dissolution of a writ of preliminary injunction should be verified. In that case, respondent
Tayag filed an unverified motion for the dissolution of a writ of preliminary injunction,
alleging that the same "would work great damage to the defendant who had already
spend a considerable sum of money" and that petitioners "can be fully compensated for
any damages that they may suffer." The court granted the motion and dissolved the
preliminary injunction. In an original action for a writ of certiorari filed with this Court to
annual said order, this Court remarked in part:
Petitioners herein are entitled to the writ prayed for. The motion of respondent
Tayag for the dissolution of the writ of preliminary injunction issued on October
22, 1959, was unverified....
From the precedents quoted above, as well as from the terminology of Section 6 of Rule
58 of the new Rules of Court, it is evident that whether the application for the dissolution
of the writ of preliminary injunction must be verified or not depends upon the ground upon
which such application is based. If the application is based on the insufficiency of the
complaint, the motion need not be verified. If the motion is based on the ground that the
injunction would cause great damage to defendant while the plaintiff can be fully
compensated for such damages as he may suffer, the motion should be verified.
In the instant case, it is alleged by petitioner that the motion for the dissolution of the writ
of preliminary injunction was not verified. This allegation was not denied in the answer.
But because said motion does not appear in the record of the case now before this Court,
We cannot determine what are the grounds for the dissolution that are alleged therein,
and so We cannot rule on whether the motion should have been verified or not. This
Court, therefore, has to rely on the order of respondent Judge, dated August 5, 1964,
which states that "the filing of the counter-bond is in accordance with law." Consequently,
the first ground alleged by petitioner must be brushed aside.
2. The second and third reasons alleged by petitioner in its petition for certiorari assume
that a preliminary injunction issued after hearing and in accordance with Rule 58 cannot
be set aside. This contention is untenable. The provision of Section 6 of Rule 58 that "the

injunction may be refused, or, if granted ex parte, may be dissolved" can not be construed
as putting beyond the reach of the court the dissolution of an injunction which was
granted after hearing. The reason is because a writ of preliminary injunction is an
interlocutory order, and as such it is always under the control of the court before final
judgment. Thus, in Caluya, et al. vs. Ramos, et al.,4this Court said:
The first contention of the petitioners is that, as said injunction was issued after a
hearing, the same cannot be dissolved, specially on the strength of an unverified
motion for dissolution and in the absence to support it. Reliance is placed on
Section 6 of Rule 60 of the Rules of Court which provides that "the injunction may
be reduced, or, if granted ex parte, maybe dissolved," thereby arguing that if an
injunction is not issued ex parte the same cannot be dissolved. The contention is
clearly erroneous. Although said section prescribes the grounds for objecting to,
or for moving the dissolution of, a preliminary injunction prior to its issuance or
after its granting ex parte, it does not thereby outlaw a dissolution if the
injunction has been issued after a hearing. This is to be so, because a writ of
preliminary injunction is an interlocutory order which is always under the control
of the court before final judgment. (Manila Electric Company vs. Artiaga and
Green, 50 Phil. 144, 147).
This Court has also ruled that the dissolution of a writ of preliminary injunction issued
after hearing, even if the dissolution is ordered without giving the other party an
opportunity to be heard, does not constitute an abuse of discretion and may be cured not
by certiorari but by appeal. In Clarke vs. Philippine Ready Mix Concrete Co., Inc., et
al.,5 one of the issues presented was whether a writ of preliminary injunction granted the
plaintiff by a trial court after hearing, might be dissolved upon an ex parte application by
the defendant, and this Court ruled that:
The action of a trial court in dissolving a writ of preliminary injunction already
issued after hearing, without giving petitioner an opportunity to be heard, does
not constitute lack or excess of jurisdiction or an abuse of discretion, and any
irregularity committed by the trial court on this score may be cured not by
certiorari but by appeal.
3. The fourth reason alleged by petitioner in support of its stand is that public interest
demanded that the writ enjoining respondent Fausto Alberto from exercising the functions
of managing director be maintained. Petitioner contended that respondent Alberto had
arrogated to himself the power of the Board of Directors of the corporation because he
refused to vacate the office and surrender the same to Jose de la Rosa who had been
elected managing director by the Board to succeed him. This assertion, however, was
disputed by respondent Alberto who stated that Jose de la Rosa could not be elected
managing director because he did not own any stock in the corporation.
There is in the record no showing that Jose de la Rosa owned a share of stock in the
corporation. If he did not own any share of stock, certainly he could not be a director
pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part
provides:
There is in the record no showing that Jose de la Rosa owned a share of stock in the
corporation. If he did not own any share of stock, certainly he could not be a director
pursuant to the mandatory provision of Section 30 of the Corporation Law, which in part
provides:

Sec. 30. Every director must own in his own right at least one share of the capital
stock of the stock corporation of which he is a director, which stock shall stand in
his name on the books of the corporations....
If he could not be a director, he could also not be a managing director of the corporation,
pursuant to Article V, Section 3 of the By-Laws of the Corporation which provides that:
The manager shall be elected by the Board of Directors from among its
members.... (Record, p. 48)
If the managing director-elect was not qualified to become managing director, respondent
Fausto Alberto could not be compelled to vacate his office and cede the same to the
managing director-elect because the by-laws of the corporation provides in Article IV,
Section 1 that "Directors shall serve until the election and qualification of their duly
qualified successor."
4. The fifth reason alleged by herein petitioner in support of its contention that respondent
Judge gravely abused his discretion when he lifted the preliminary injunction upon the
filing of the counter-bond was that said counter-bond could not compensate for the
irreparable damage that the corporation would suffer by reason of the continuance of
respondent Fausto Alberto as managing director of the corporation. Respondent Alberto,
on the contrary, contended that he really was the owner of the controlling interest in the
business carried on the name of the petitioner, having invested therein a total of
P57,727.29 as against the sum of P4,000 only invested by one other director, Jose M.
Barredo. We find that there was a question as to who own the controlling interest in the
corporation. Where ownership is in dispute, the party in control or possession of the
disputed interest is presumed to have the better right until the contrary is adjudged, and
hence that party should not be deprived of the control or possession until the court is
prepared to adjudicate the controverted right in favor of the other party. 6
Should it be the truth that respondent Alberto is the controlling stockholder, then the
damages said respondent would suffer would be the same, if not more, as the damages
that the corporation would suffer if the injunction were maintained. If the bond of P5,000
filed by petitioner for the injunction would be sufficient to answer for the damages that
would be suffered by respondent Alberto by reason of the injunction, there seems to be no
reason why the same amount would not be sufficient to answer for the damages that
might be suffered by the petitioning corporation by reason of the lifting of the injunction.
The following ruling of this Court has a persuasive application in this case:
The rule that a court should not, by means of a preliminary injunction, transfer
property in litigation from the possession of one party to another is more
particularly applicable where the legal title is in dispute and the party having
possession asserts ownership in himself.7
Let it be stated, in relation to all the reason given by petitioner, that it is a settled rule
that the issuance of the writ of preliminary injunction as an ancillary or preventive remedy
to secure the rights of a party in a pending case is entirely within the discretion of the
court taking cognizance of the case the only limitation being that this discretion should
be exercised based upon the grounds and in the manner provided by law, 8 and it is
equally well settled that a wide latitude is given under Section 7 of Rule 58 of the Rules of
Court to the trial court to modify or dissolve the injunction as justice may require. The
court which is to exercise that discretion is the trial court, not the appellate court. 9 The

exercise of sound judicial discretion by the lower court in injunctive matters should not be
interfered with except in cases of manifest abuse.10 In the instant case, We find that
petitioner failed to show manifest abuse of discretion by respondent Judge in setting aside
the writ of preliminary injunction.
There is, however, one vital reason why the instant petition for certiorari should be
denied. And it is, that from the order dissolving the writ of preliminary injunction, the
petitioner has gone directly to this Court without giving the respondent Judge (or trial
court) a chance or opportunity to correct his error, if any, in an appropriate motion for
reconsideration. An omission to comply with this procedural requirement justifies a denial
of the writ applied for.11
The instant case is not one of the exceptions in the application of this rule, which are:
where the questions of jurisdiction has been squarely raised, argued before, submitted to,
and met and decided by the respondent court; where the questioned order is a patent
nullity; and where there is a deprivation of the petitioner's fundamental right to due
process.12
It being our considered view that respondent Judge had not committed grave abuse of
discretion in issuing the order dated August 5, 1964 lifting the writ of preliminary
injunction which had previously been granted in the order dated June 18, 1964, and the
herein petition for certiorari having been filed without previously complying with a well
settled procedural requirement, there is no alternative for this Court but to order its
dismissal.
WHEREFORE, the instant petition for certiorari with preliminary injunction is dismissed,
with costs againsts the petitioner. It is so ordered.

1. The Petitioner herein has already acquired a vested right to a permanent seat in the
Board of Directors of Grace Village Association;
2. The amended By-laws of the Association drafted and promulgated by a Committee on
December 20, 1975 is valid and binding; and
3. The Practice of tolerating the automatic inclusion of petitioner as a permanent member
of the Board of Directors of the Association without the benefit of election is allowed under
the law.[1]
Briefly stated, the facts are as follows:
Petitioner Grace Christian High School is an educational institution offering
preparatory, kindergarten and secondary courses at the Grace Village in Quezon
City. Private respondent Grace Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees and residents at Grace Village, while
private respondents Alejandro G. Beltran and Ernesto L. Go were its president and
chairman of the committee on election, respectively, in 1990, when this suit was brought.
As adopted in 1968, the by-laws of the association provided in Article IV, as follows:
The annual meeting of the members of the Association shall be held on the first Sunday of
January in each calendar year at the principal office of the Association at 2:00 P.M. where
they shall elect by plurality vote and by secret balloting, the Board of Directors, composed
of eleven (11) members to serve for one (1) year until their successors are duly elected
and have qualified.[2]
It appears, that on December 20, 1975, a committee of the board of directors
prepared a draft of an amendment to the by-laws, reading as follows: [3]
GRACE CHRISTIAN HIGH SCHOOL, petitioner, vs. THE COURT OF APPEALS, GRACE
VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and ERNESTO L.
GO, respondents.
DECISION
MENDOZA, J.:
The question for decision in this case is the right of petitioners representative to sit
in the board of directors of respondent Grace Village Association, Inc. as a permanent
member thereof. For fifteen years from 1975 until 1989 petitioners representative had
been recognized as a permanent director of the association. But on February 13, 1990,
petitioner received notice from the associations committee on election that the latter was
reexamining (actually, reconsidering) the right of petitioners representative to continue as
an unelected member of the board. As the board denied petitioners request to be allowed
representation without election, petitioner brought an action for mandamus in the Home
Insurance and Guaranty Corporation.Its action was dismissed by the hearing officer whose
decision was subsequently affirmed by the appeals board. Petitioner appealed to the
Court of Appeals, which in turn upheld the decision of the HIGCs appeals board. Hence
this petition for review based on the following contentions:

VI. ANNUAL MEETING

The Annual Meeting of the members of the Association shall be held on the second
Thursday of January of each year. Each Charter or Associate Member of the Association is
entitled to vote. He shall be entitled to as many votes as he has acquired thru his monthly
membership fees only computed on a ratio of TEN (P10.00) PESOS for one vote.
The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN
HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
This
draft
was
never
presented
to
the
general
membership
for
approval. Nevertheless, from 1975, after it was presumably submitted to the board, up to
1990, petitioner was given a permanent seat in the board of directors of the
association. On February 13, 1990, the associations committee on election in a letter
informed James Tan, principal of the school, that it was the sentiment that all directors
should be elected by members of the association because to make a person or entity a
permanent Director would deprive the right of voters to vote for fifteen (15) members of

the Board, and it is undemocratic for a person or entity to hold office in perpetuity. [4] For
this reason, Tan was told that the proposal to make the Grace Christian High School
representative as a permanent director of the association, although previously tolerated in
the past elections should be reexamined. Following this advice, notices were sent to the
members of the association that the provision on election of directors of the 1968 by-laws
of the association would be observed.
Petitioner requested the chairman of the election committee to change the notice of
election by following the procedure in previous elections, claiming that the notice issued
for the 1990 elections ran counter to the practice in previous years and was in violation of
the by-laws (of 1975) and unlawfully deprive[d] Grace Christian High School of its vested
right [to] a permanent seat in the board.[5]
As the association denied its request, the school brought suit for mandamus in the
Home Insurance and Guaranty Corporation to compel the board of directors of the
association to recognize its right to a permanent seat in the board. Petitioner based its
claim on the following portion of the proposed amendment which, it contended, had
become part of the by-laws of the association as Article VI, paragraph 2, thereof:
The Charter and Associate Members shall elect the Directors of the Association. The
candidates receiving the first fourteen (14) highest number of votes shall be declared and
proclaimed elected until their successors are elected and qualified. GRACE CHRISTIAN
HIGH SCHOOL representative is a permanent Director of the ASSOCIATION.
It appears that the opinion of the Securities and Exchange Commission on the
validity of this provision was sought by the association and that in reply to the query, the
SEC rendered an opinion to the effect that the practice of allowing unelected members in
the board was contrary to the existing by-laws of the association and to 92 of the
Corporation Code (B.P. Blg. 68).
Private respondent association cited the SEC opinion in its answer. Additionally, the
association contended that the basis of the petition for mandamus was merely a proposed
by-laws which has not yet been approved by competent authority nor registered with the
SEC or HIGC. It argued that the by-laws which was registered with the SEC on January 16,
1969 should be the prevailing by-laws of the association and not the proposed amended
by-laws.[6]
In reply, petitioner maintained that the amended by-laws is valid and binding and
that the association was estopped from questioning the by-laws.[7]
A preliminary conference was held on March 29, 1990 but nothing substantial was
agreed upon. The parties merely agreed that the board of directors of the association
should meet on April 17, 1990 and April 24, 1990 for the purpose of discussing the
amendment of the by-laws and a possible amicable settlement of the case. A meeting was
held on April 17, 1990, but the parties failed to reach an agreement. Instead, the board
adopted a resolution declaring the 1975 provision null and void for lack of approval by
members of the association and the 1968 by-laws to be effective.
On June 20, 1990, the hearing officer of the HIGC rendered a decision dismissing
petitioners action. The hearing officer held that the amended by-laws, upon which
petitioner based its claim, [was] merely a proposed by-laws which, although implemented
in the past, had not yet been ratified by the members of the association nor approved by
competent authority; that, on the contrary, in the meeting held on April 17, 1990, the
directors of the association declared the proposed by-law dated December 20, 1975
prepared by the committee on by-laws . . . null and void and the by-laws of December 17,
1968 as the prevailing by-laws under which the association is to operate until such time

that the proposed amendments to the by-laws are approved and ratified by a majority of
the members of the association and duly filed and approved by the pertinent government
agency. The hearing officer rejected petitioners contention that it had acquired a vested
right to a permanent seat in the board of directors. He held that past practice in election
of directors could not give rise to a vested right and that departure from such practice
was justified because it deprived members of association of their right to elect or to be
voted in office, not to say that allowing the automatic inclusion of a member
representative of petitioner as permanent director [was] contrary to law and the
registered by-laws of respondent association. [8]
The appeals board of the HIGC affirmed the decision of the hearing officer in its
resolution dated September 13, 1990. It cited the opinion of the SEC based on 92 of the
Corporation Code which reads:
92. Election and term of trustees. - Unless otherwise provided in the articles of
incorporation or the by-laws, the board of trustees of non-stock corporations, which may
be more than fifteen (15) in number as may be fixed in their articles of incorporation or
by-laws, shall, as soon as organized, so classify themselves that the term of office of onethird (1/3) of the number shall expire every year; and subsequent elections of trustees
comprising one-third (1/3) of the board of trustees shall be held annually and trustees so
elected shall have a term of three (3) years. Trustees thereafter elected to fill vacancies
occurring before the expiration of a particular term shall hold office only for the unexpired
period.
The HIGC appeals board denied claims that the school [was] being deprived of its right to
be a member of the Board of Directors of respondent association, because the fact was
that it may nominate as many representatives to the Associations Board as it may deem
appropriate. It said that what is merely being upheld is the act of the incumbent directors
of the Board of correcting a long standing practice which is not anchored upon any legal
basis.[9]
Petitioner appealed to the Court of Appeals but petitioner again lost as the appellate
court on February 9, 1993, affirmed the decision of the HIGC. The Court of Appeals held
that there was no valid amendment of the associations by-laws because of failure to
comply with the requirement of its existing by-laws, prescribing the affirmative vote of the
majority of the members of the association at a regular or special meeting called for the
adoption of amendment to the by-laws. Article XIX of the by-laws provides: [10]
The members of the Association by an affirmative vote of the majority at any regular or
special meeting called for the purpose, may alter, amend, change or adopt any new bylaws.
This provision of the by-laws actually implements 22 of the Corporation Law (Act No.
1459) which provides:
22. The owners of a majority of the subscribed capital stock, or a majority of the members
if there be no capital stock, may, at a regular or special meeting duly called for the
purpose, amend or repeal any by-law or adopt new by-laws. The owners of two-thirds of
the subscribed capital stock, or two-thirds of the members if there be no capital stock,
may delegate to the board of directors the power to amend or repeal any by-law or to
adopt new by-laws: Provided, however, That any power delegated to the board of
directors to amend or repeal any by-law or adopt new by-laws shall be considered as
revoked whenever a majority of the stockholders or of the members of the corporation

shall so vote at a regular or special meeting. And provided, further, That the Director of
the Bureau of Commerce and Industry shall not hereafter file an amendment to the bylaws of any bank, banking institution or building and loan association, unless accompanied
by certificate of the Bank Commissioner to the effect that such amendments are in
accordance with law.

Even a careful perusal of the above provision of the Corporation Code would not show that
it prohibits a non-stock corporation or association from granting one of its members a
permanent seat in its board of directors or trustees. If there is no such legal prohibition
then it is allowable provided it is so provided in the Articles of Incorporation or in the bylaws as in the instant case.

The proposed amendment to the by-laws was never approved by the majority of the
members of the association as required by these provisions of the law and by-laws. But
petitioner contends that the members of the committee which prepared the proposed
amendment were duly authorized to do so and that because the members of the
association thereafter implemented the provision for fifteen years, the proposed
amendment for all intents and purposes should be considered to have been ratified by
them. Petitioner contends:[11]

....

Considering, therefore, that the agents or committee were duly authorized to draft the
amended by-laws and the acts done by the agents were in accordance with such
authority, the acts of the agents from the very beginning were lawful and binding on the
homeowners (the principals) per se without need of any ratification or adoption. The more
has the amended by-laws become binding on the homeowners when the homeowners
followed and implemented the provisions of the amended by-laws. This is not merely
tantamount to tacit ratification of the acts done by duly authorized agents but express
approval and confirmation of what the agents did pursuant to the authority granted to
them.
Corollarily, petitioner claims that it has acquired a vested right to a permanent seat
in the board. Says petitioner:
The right of the petitioner to an automatic membership in the board of the Association
was granted by the members of the Association themselves and this grant has been
implemented by members of the board themselves all through the years. Outside the
present membership of the board, not a single member of the Association has registered
any desire to remove the right of herein petitioner to an automatic membership in the
board. If there is anybody who has the right to take away such right of the petitioner, it
would be the individual members of the Association through a referendum and not the
present board some of the members of which are motivated by personal interest.
Petitioner disputes the ruling that the provision in question, giving petitioners
representative a permanent seat in the board of the association, is contrary to
law. Petitioner claims that that is not so because there is really no provision of law
prohibiting unelected members of boards of directors of corporations. Referring to 92 of
the present Corporation Code, petitioner says:
It is clear that the above provision of the Corporation Code only provides for the manner
of election of the members of the board of trustees of non-stock corporations which may
be more than fifteen in number and which manner of election is even subject to what is
provided in the articles of incorporation or by-laws of the association thus showing that
the above provisions [are] not even mandatory.

If fact, the truth is that this is allowed and is being practiced by some corporations duly
organized and existing under the laws of the Philippines.
One example is the Pius XII Catholic Center, Inc. Under the by-laws of this corporation,
that whoever is the Archbishop of Manila is considered a member of the board of trustees
without benefit of election.And not only that. He also automatically sits as the Chairman of
the Board of Trustees, again without need of any election.
Another concrete example is the Cardinal Santos Memorial Hospital, Inc. It is also provided
in the by-laws of this corporation that whoever is the Archbishop of Manila is considered a
member of the board of trustees year after year without benefit of any election and he
also sits automatically as the Chairman of the Board of Trustees.
It is actually 28 and 29 of the Corporation Law not 92 of the present law or 29 of the
former one which require members of the boards of directors of corporations to be
elected. These provisions read:
28. Unless otherwise provided in this Act, the corporate powers of all corporations formed
under this Act shall be exercised, all business conducted and all property of such
corporations controlled and held by a board of not less than five nor more than eleven
directors to be elected from among the holders of stock or, where there is no stock, from
the members of the corporation: Provided, however, That in corporations, other than
banks, in which the United States has or may have a vested interest, pursuant to the
powers granted or delegated by the Trading with the Enemy Act, as amended, and similar
Acts of Congress of the United States relating to the same subject, or by Executive Order
No. 9095 of the President of the United States, as heretofore or hereafter amended, or
both, the directors need not be elected from among the holders of the stock, or, where
there is no stock from the members of the corporation. (emphasis added)
29. At the meeting for the adoption of the original by-laws, or at such subsequent meeting
as may be then determined, directors shall be elected to hold their offices for one year
and until their successors are elected and qualified. Thereafter the directors of the
corporation shall be elected annually by the stockholders if it be a stock corporation or by
the members if it be a nonstock corporation, and if no provision is made in the by-laws for
the time of election the same shall be held on the first Tuesday after the first Monday in
January. Unless otherwise provided in the by-laws, two weeks notice of the election of
directors must be given by publication in some newspaper of general circulation devoted
to the publication of general news at the place where the principal office of the
corporation is established or located, and by written notice deposited in the post-office,
postage pre-paid, addressed to each stockholder, or, if there be no stockholders, then to
each member, at his last known place of residence. If there be no newspaper published at
the place where the principal office of the corporation is established or located, a notice of
the election of directors shall be posted for a period of three weeks immediately

preceding the election in at least three public places, in the place where the principal
office of the corporation is established or located. (Emphasis added)

[12]

SO ORDERED.

The present Corporation Code (B.P. Blg. 68), which took effect on May 1, 1980,
similarly provides:

23. The Board of Directors or Trustees. - Unless otherwise provided in this Code, the
corporate powers of all corporations formed under this Code shall be exercised, all
business conducted and all property of such corporations controlled and held by the board
of directors or trustees to be elected from among the holders of stocks, or where there is
no stock, from among the members of the corporation, who shall hold office for one (1)
year and until their successors are elected and qualified. (Emphasis added)
These provisions of the former and present corporation law leave no room for doubt
as to their meaning: the board of directors of corporations must be elected from among
the stockholders or members. There may be corporations in which there are unelected
members in the board but it is clear that in the examples cited by petitioner the unelected
members sit asex officio members, i.e., by virtue of and for as long as they hold a
particular office. But in the case of petitioner, there is no reason at all for its
representative to be given a seat in the board.Nor does petitioner claim a right to such
seat by virtue of an office held. In fact it was not given such seat in the beginning. It was
only in 1975 that a proposed amendment to the by-laws sought to give it one.
Since the provision in question is contrary to law, the fact that for fifteen years it has
not been questioned or challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later challenge to its
validity. Neither can it attain validity through acquiescence because, if it is contrary to
law, it is beyond the power of the members of the association to waive its invalidity. For
that matter the members of the association may have formally adopted the provision in
question, but their action would be of no avail because no provision of the by-laws can be
adopted if it is contrary to law.[13]
It is probable that, in allowing petitioners representative to sit on the board, the
members of the association were not aware that this was contrary to law. It should be
noted that they did not actually implement the provision in question except perhaps
insofar as it increased the number of directors from 11 to 15, but certainly not the
allowance of petitioners representative as an unelected member of the board of
directors. It is more accurate to say that the members merely tolerated petitioners
representative and tolerance cannot be considered ratification.
Nor can petitioner claim a vested right to sit in the board on the basis of
practice. Practice, no matter how long continued, cannot give rise to any vested right if it
is contrary to law. Even less tenable is petitioners claim that its right is coterminus with
the existence of the association.[14]
Finally, petitioner questions the authority of the SEC to render an opinion on the
validity of the provision in question. It contends that jurisdiction over this case is
exclusively vested in the HIGC.
But this case was not decided by the SEC but by the HIGC. The HIGC merely cited as
authority for its ruling the opinion of the SEC chairman. The HIGC could have cited any
other authority for the view that under the law members of the board of directors of a
corporation must be elected and it would be none the worse for doing so.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED.

G.R. No. L-5883

November 28, 1953

DOMINGO PONCE AND BUHAY L. PONCE, petitioners,

vs.
DEMETRIO B. ENCARNACION, Judge of the Court of First Instance of Manila,
Branch I, and POTENCIANO GAPOL, respondents.
Marcelino Lontok for petitioners.
Zavalla, Bautista and Nuevas for respondents.
PADILLA, J.:
This is a petition for a writ of certiorari to annul an order of the respondent court granting
Potenciano Gapol authority, pursuant to section 26, Act No. 1459, otherwise known as the
Corporation Law, to call a meeting of the stockholders of the Dagunoy Enterprises, Inc.
and to preside at such meeting by giving proper notice to the stockholders, as required by
law or by laws of the corporation, until after the majority of the stockholders present and
qualified to vote shall have chosen one of them to act as presiding officer of the meeting;
another order denying a motion of the petitioners to have the previous order set aside;
and a third order denying a motion to the same effect as the one previously filed.
The petitioners aver that the Daguhoy Enterprises, Inc., was duly registered as such on 24
June 1948; that on 16 April 1951 at a meeting duly called, the voluntary dissolution of the
corporation and the appointment of Potenciano Gapol as receiver were agreed upon and
to that end a petitioner Domingo Ponce; that instead of filing the petition for voluntary
dissolution of the of the corporation as agreed upon, the respondent Potenciano Gapol,
who is the largest stockholder, charged his mind and filed a complaint in the Court of First
Instance of Manila (civil No. 13753) to compel the petitioners to render an accounting of
the funds and assets of the corporation, to reimburse it, jointly and severally, in the sum
of P4,500, the purchase price of a parcel of land acquired by the corporation; P6,190
loaned to the wife of petitioner Domingo Ponce; and P8,000 spent by the latter in his trip
to the United States, or a total sum of P18,690, plus interest, or such sum as may be
found after the accounting shall have been rendered to have been misspent, misapplied,

missappropriated and converted by the petitioner Domingo Ponce to his own use and
benefit; that on 18 May 1951 the plaintiff in that case, the respondent Potenciano Gapol in
this case, filed a motion praying that the petitioners be removed as members of the board
of directors which was denied by the court; that on 3 January 1952 respondent Potenciano
Gapol filed a petition (civil No. 15445, Exhibit L), praying for an order directing him to a
call a meeting of the stockholders of the corporation and to preside at such meeting in
accordance with section 26 of the Corporation law; that two days later, without notice to
the petitioners and to the other members of the board of directors and in violation of the
Rules of Court which require that the adverse parties be notified of the hearing of the
motion three days in advance, the respondent court issued the order as prayed for
(Exhibit M); that the petitioners learned only of this order of the court on 27 February,
when the Bank of America refused to recognize the new board of directors elected at such
meeting and returned the checks drawn upon it by the said board of directors; that the
election of Juanito R. Tianzon as member of the board of directors of the corporation he
must be a member of theLegionarios del Trabajo, as required and provided for in article 7
of the by-laws of the corporation; that on 5 March the petitioners filed a petition in the
respondent court to have the order of 5 January set aside but on April, the date set for the
hearing of the petition, as the respondent judge was on leave vacation judge directed its
transfer to the branch of the respondent judge; that without having set the motion for
hearing, the respondent court denied the motion of 5 March in its order of 7 May; that on
14 May the petitioners filed another motion inviting the attention of the respondent court
to the irregularity and illegality of its procedure and setting the motion for hearing on 21
May, but the court denied the motion by its order of 13 June.
The only question to determine in this case is whether under and pursuant to section 26
of Act No. 1459, known as the Corporation law, the respondent court may issue the order
complained of. Said section provides:
Whenever, from any cause, there is no person authorized to call a meeting, or
when the officer authorized to do so refuses, fails or neglects to call a meeting,
any judge of a Court of First Instance on the showing of good cause therefor, may
issue an order to any stockholder or member of a corporation, directing him to
call a meeting of the corporation by giving the proper notice required by this Act
or by-laws; and if there be no person legally authorized to preside at such
meeting, the judge of the Court of First Instance may direct the person calling the
meeting to preside at the same until a majority of the members or stockholders
representing a majority of the stock members or stockholders presenting a
majority of the stock present and permitted by law to be voted have chosen one
of their number to act as presiding officer for the purposes of the meeting.
On the showing of good cause therefor, the court may authorize a stockholder to call a
meeting and to preside threat until the majority stockholders representing a majority
strockholders representing a majority of the stock present and permitted to be voted shall
have chosen one among them to preside it. And this showing of good cause therefor
exists when the court is apprised of the fact that the by-laws of the corporation require
the calling of a general meeting of the stockholders to elect the board of directors but call
for such meeting has not been done.
Article 9 of the by-laws of the Daguhoy Enterprises, Inc., provides:
The Board of Directors shall compose of five (5) members who shall be elected
by the stockholders in a general meeting called for that purpose which shall be
held every even year during the month of January.

Article 20 of the by-laws in part provides:

. . . Regular general meetings are those which shall be called for every even
year, . . . .
The requirement that "on the showing of good cause therefor," the court may grant to a
stockholder the authority to call such meeting and to preside thereat does not mean that
the petition must be set for hearing with notice served upon the board of directors. The
respondent court was satisfied that there was a showing of good cause for authorizing the
respondent Potenciano Gapol to call a meeting of the stockholders for the purpose of
electing the board of directors as required and provided for in the by-laws, because the
chairman of the board of directors called upon to do so had failed, neglected, or refused to
perform his duty. It may be likened to a writ of preliminary injunction or of attachment
which may be issued ex-parte upon compliance with the requirements of the rules and
upon the court being satisfied that the same should be issue. Such provisional reliefs have
not been deemed and held as violative of the due process of law clause of the
Constitution.
In several state of the Union1 the remedy which may be availed of our resorted to in a
situation such as the one brought about in this case is mandamus to compel the officer or
incumbent board of directors to perform a duties specifically enjoined by law or by-laws,
to wit: to call a meeting of the stockholders. Dela ware is the estate that has a law similar
to ours and there the chancellor of a chancery court may summarily issue or enter an
order authorizing a stockholder to call a meeting of the stockholders of the corporation
and preside thereat.2 It means that the chancellor may issue such order without notice
and hearing.
That the relief granted by the respondent court lies within its jurisdiction is not disputed.
Having the authority to grant the relief, the respondent court did not exceed its
jurisdiction; nor did it abuse its discretion in granting it.
With persistency petitioners claim that they have been deprived of their right without due
process of law. They had no right to continue as directors of the corporation unless
reflected by the stockholders in a meeting called for that purpose every even year. They
had no right to a hold-over brought about by the failure to perform the duty incumbent
upon one of them. If they felt that they were sure to be reelected, why did they fail,
neglect, or refuse to call the meeting to elect the members of the board? Or, why did they
not seek their reelection at the meeting called to elect the directors pursuant to the order
of the respondent court.
The alleged illegality of the election of one member of the board of directors at the
meeting called by the respondent Potenciano Gapol as authorized by the court being
subsequent to the order complained of cannot affect the validity and legality of the order.
If it be true that one of the directors elected at the meting called by the respondent
Potenciano Gapol, as authorized by the order of the court complained of, was not qualified
in accordance with the provisions of the by-laws, the remedy of an aggrieved party would
be quo a warranto. Also, the alleged previous agreement to dissolve the corporation does
not affect or render illegal the order issued by the respondent court.
The petition is denied, with costs against the petitioners.

G.R. No. L-26555

November 16, 1926

BALDOMERO ROXAS, ENRIQUE ECHAUS and ROMAN J. LACSON, petitioners,

vs.
Honorable MARIANO DE LA ROSA, Auxiliary Judge of First Instance of Occidental
Negros, AGUSTIN CORUNA, MAURO LEDESMA and BINALBAGAN ESTATE,
INC., respondents.
STREET, J.:
This is an original petition for the writ of certiorari whereby the petitioners, Baldomeo
Roxas, Enrique Echaus, and Roman J. Lacson, seek to procure the abrogation of an order
of the respondent judge granting a preliminary injunction in an action in the Court of First
Instance of Occidental Negros, instituted by Agustin Coruna and Mauro Ledesma against
the petitioners and the Binalbagan Estate, Inc. The cause is now before us upon the issues
made by the answers filed by the respondents.
It appears that the Binalbagan Estate, Inc., is a corporation having its principal plant in
Occidental Negros where it is engaged in the manufacture of raw sugar from canes grown
upon farms accessible to its central. In July, 1924, the possessors of a majority of the
shares of the Binalbagan Estate, Inc., formed a voting trust composed of three members,

namely, Salvador Laguna, Segunda Monteblanco, and Arthur F. Fisher, as trustee. By the
document constituting this voting trust the trustees were authorized to represent and vote
the shares pertaining to their constituents, and to this end the shareholders undertook to
assign their shares to the trustees on the books of the company. The total number of
outstanding shares of the corporation is somewhat over 5,500, while the number of
shares controlled by the voting trust is less than 3,000.
On February 1, 1926, the general annual meeting of the shareholders of the Binalbagan
Estate, Inc., took place, at which Mr. J. P. Heilbronn appeared as representative of the
voting trust, his authority being recognized by the holders of all the other shares present
at this meeting. Upon said occasion Heilbronn, by virtue of controlling the majority of the
shares, was able to nominate and elect a board of directors to his own liking, without
opposition from the minority. After the board of directors had been thus elected and had
qualified, they chose a set of officers constituting of Jose M. Yusay, president, Timoteo
Unson, vice-president, Jose G. Montalvo, secretary-treasurer, and H. W. Corp and Agustin
Coruna, as members. Said officials immediately entered upon the discharged of their
duties and have continued in possession of their respective offices until the present time.
Since the creation of the voting trust there have been a number of vacancies caused by
resignation or the absence of members from the Philippine Islands, with the result that
various substitutions have been made in the personnel of the voting trust. At the present
time the petitioners Roxas, Echaus, and Lacson presumably constitute its membership. We
say presumably, because in the present proceedings an issue of fact is made by the
respondents upon the point whether the three individuals named have been regularly
substituted for their several predecessors. In the view we take of the case it is not
necessary to determine this issue; and we shall assume provisionally that the three
petitioners are the lawful components of the voting trust.
Although the present officers of the Binalbagan Estate, Inc., were elected by the
representative of the voting trust, the present trustee are apparently desirous of ousting
said officers, without awaiting the termination of their official terms at the expiration of
one year from the date of their election. In other to effect this purpose the petitioners in
their character as members of the voting trust, on August 2, 1926, caused the secretary
of the Binalbagan Estate, Inc., to issue to the shareholders a notice calling for a special
general meeting of shareholders to be held at 10 a. m., on August 16, 1926, "for the
election of the board of directors, for the amendment of the By-Laws, and for any other
business that can be dealt with in said meeting."
Within a few days after said notice was issued Agustin Corua, as member of the existing
board, and Mauro Ledesma, as a simple shareholder of the corporation, instituted a civil
action (No. 3840) in the Court of First Instance of Occidental Negros against the trustees
and the Binalbagan Estate, Inc., for the purpose of enjoining the meeting completed in the
notice above-mentioned.
In response to a proper for a preliminary injunction, in connection with said action, the
respondent judge issued the restraining order, or preliminary injunction, which gave rise
to the present petition for the writ of certiorari. In the dispositive part of said order the
Binalbagan Estate, Inc., its lawyers, agents, representatives, and all others who may be
assisting or corroborating with them, are restrained from holding the general
shareholders' meeting called for the date mentioned and from electing new directors for
the company in substitution of the present incumbents, said injunction to be effective
until further order of the court. it is now asserted here by the petitioners that the making

of this order was beyond the legitimate powers of the respondent judge, and it is
accordingly prayed that said order be set aside.
We are of the opinion that this contention is untenable and that the respondent judge
acted within his legitimate powers in making the order against which relief is sought. In
order to expose the true inwardness of the situation before us it is necessary to take not
of the fact that under the law the directors of a corporation can only be removed from
office by a vote of the stockholders representing at least two-thirds of the subscribed
capital stock entitled to vote (Act No. 1459, sec. 34); while vacancies in the board, when
they exist, can be filled by mere majority vote, (Act No. 1459, sec. 25). Moreover, the law
requires that when action is to be taken at a special meeting to remove the directors, such
purpose shall be indicated in the call (Act No. 1459, sec. 34).
Now, upon examining into the number of shares controlled by the voting trust, it will be
seen that, while the trust controls a majority of the stock, it does not have a clear twothirds majority. It was therefore impolitic for the petitioners, in forcing the call for the
meeting of August 16, to come out frankly and say in the notice that one of the purpose of
the meeting was to removed the directors of the corporation from office. Instead, the call
was limited to the election of the board of directors, it being the evident intention of the
voting trust to elect a new board as if the directorate had been then vacant.
But the complaint in civil No. 3840 directly asserts that the members of the present
directorate were regularly elected at the general annual meeting held in February, 1926;
and if that assertion be true, the proposal to elect, another directorate, as per the call of
August 2, if carried into effect, would result in the election of a rival set of directors, who
would probably need the assistance of judgment of court in an independent action of quo
warrantoto get them installed into office, even supposing that their title to the office could
be maintained. That the trial judge had jurisdiction to forestall that step and enjoin the
contemplated election is a matter about which there cannot be the slightest doubt. The
law contemplates and intends that there will be one of directors at a time and that new
directors shall be elected only as vacancies occur in the directorate by death, resignation,
removal, or otherwise. lawphil.net
It is instituted that there was some irregularity or another in the election of the present
directorate. We see nothing upon which this suggestion can be safely planted; And at any
rate the present board of directors are de factoincumbents of the office whose acts will be
valid until they shall be lawfully removed from the office or cease from the discharge of
their functions. In this case it is not necessary for us to agitate ourselves over the
question whether the respondent judge properly exercised his judicial discretion in
granting the order complained of. If suffices to know that in making the order he was
acting within the limits of his judicial powers.
It will be noted that the order in question enjoins the defendants from holding the meeting
called for August 16; and said order must not be understood as constituting any obstacle
for the holding of the regular meeting at the time appointed in the by-laws of the
corporation. For the reasons stated the petition will be denied, and it is so ordered, with
costs.
XPERTRAVEL & TOURS, INC., petitioner, vs. COURT OF APPEALS and KOREAN
AIRLINES, respondents.
DECISION

CALLEJO, SR., J.:

Directors indeed conducted a teleconference on June 25, 1999, during which it approved a
resolution as quoted in the submitted affidavit.

Before us is a petition for review on certiorari of the Decision[1] of the Court of

Appeals
(CA)
in
CA-G.R.
SP
No.
61000
dismissing
the
petition
for certiorari and mandamus filed by Expertravel and Tours, Inc. (ETI).

ETI filed a motion for the reconsideration of the Order, contending that it was
inappropriate for the court to take judicial notice of the said teleconference without any
prior hearing. The trial court denied the motion in its Order [5] dated August 8, 2000.

The Antecedents
Korean Airlines (KAL) is a corporation established and registered in the Republic of
South Korea and licensed to do business in the Philippines. Its general manager in the
Philippines is Suk Kyoo Kim, while its appointed counsel was Atty. Mario Aguinaldo and his
law firm.
On September 6, 1999, KAL, through Atty. Aguinaldo, filed a Complaint [2] against ETI
with the Regional Trial Court (RTC) of Manila, for the collection of the principal amount
ofP260,150.00, plus attorneys fees and exemplary damages. The verification and
certification against forum shopping was signed by Atty. Aguinaldo, who indicated therein
that he was the resident agent and legal counsel of KAL and had caused the preparation
of the complaint.
ETI filed a motion to dismiss the complaint on the ground that Atty. Aguinaldo was
not authorized to execute the verification and certificate of non-forum shopping as
required by Section 5, Rule 7 of the Rules of Court. KAL opposed the motion, contending
that Atty. Aguinaldo was its resident agent and was registered as such with the Securities
and Exchange Commission (SEC) as required by the Corporation Code of the Philippines. It
was further alleged that Atty. Aguinaldo was also the corporate secretary of KAL.
Appended to the said opposition was the identification card of Atty. Aguinaldo, showing
that he was the lawyer of KAL.
During the hearing of January 28, 2000, Atty. Aguinaldo claimed that he had been
authorized to file the complaint through a resolution of the KAL Board of Directors
approved during a special meeting held on June 25, 1999. Upon his motion, KAL was given
a period of 10 days within which to submit a copy of the said resolution. The trial court
granted the motion. Atty. Aguinaldo subsequently filed other similar motions, which the
trial court granted.
Finally, KAL submitted on March 6, 2000 an Affidavit [3] of even date, executed by its
general manager Suk Kyoo Kim, alleging that the board of directors conducted a special
teleconference on June 25, 1999, which he and Atty. Aguinaldo attended. It was also
averred that in that same teleconference, the board of directors approved a resolution
authorizing Atty. Aguinaldo to execute the certificate of non-forum shopping and to file the
complaint. Suk Kyoo Kim also alleged, however, that the corporation had no written copy
of the aforesaid resolution.
On April 12, 2000, the trial court issued an Order [4] denying the motion to dismiss,
giving credence to the claims of Atty. Aguinaldo and Suk Kyoo Kim that the KAL Board of

ETI then filed a petition for certiorari and mandamus, assailing the orders of the RTC.
In its comment on the petition, KAL appended a certificate signed by Atty. Aguinaldo dated
January 10, 2000, worded as follows:
SECRETARYS/RESIDENT AGENTS CERTIFICATE
KNOW ALL MEN BY THESE PRESENTS:
I, Mario A. Aguinaldo, of legal age, Filipino, and duly elected and appointed Corporate
Secretary and Resident Agent of KOREAN AIRLINES, a foreign corporation duly organized
and existing under and by virtue of the laws of the Republic of Korea and also duly
registered and authorized to do business in the Philippines, with office address at Ground
Floor, LPL Plaza Building, 124 Alfaro St., Salcedo Village, Makati City, HEREBY CERTIFY that
during a special meeting of the Board of Directors of the Corporation held on June 25,
1999 at which a quorum was present, the said Board unanimously passed, voted upon
and approved the following resolution which is now in full force and effect, to wit:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of
its lawyers are hereby appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim in Court, attend
the Pre-Trial Proceedings and enter into a compromise agreement relative to the abovementioned claim.
IN WITNESS WHEREOF, I have hereunto affixed my signature this 10 th day of January,
1999, in the City of Manila, Philippines.
(Sgd.)
MARIO A. AGUINALDO
Resident Agent
SUBSCRIBED AND SWORN to before me this 10th day of January, 1999, Atty. Mario A.
Aguinaldo exhibiting to me his Community Tax Certificate No. 14914545, issued on
January 7, 2000 at Manila, Philippines.

(Sgd.)
Doc. No. 119; ATTY. HENRY D. ADASA
Page No. 25; Notary Public
Book No. XXIV Until December 31, 2000
Series of 2000. PTR #889583/MLA 1/3/2000[6]
On December 18, 2001, the CA rendered judgment dismissing the petition, ruling
that the verification and certificate of non-forum shopping executed by Atty. Aguinaldo
was sufficient compliance with the Rules of Court. According to the appellate court, Atty.
Aguinaldo had been duly authorized by the board resolution approved on June 25, 1999,
and was the resident agent of KAL. As such, the RTC could not be faulted for taking judicial
notice of the said teleconference of the KAL Board of Directors.
ETI filed a motion for reconsideration of the said decision, which the CA denied.
Thus, ETI, now the petitioner, comes to the Court by way of petition for review
on certiorari and raises the following issue:
DID PUBLIC RESPONDENT COURT OF APPEALS DEPART FROM THE ACCEPTED AND USUAL
COURSE OF JUDICIAL PROCEEDINGS WHEN IT RENDERED ITS QUESTIONED DECISION AND
WHEN IT ISSUED ITS QUESTIONED RESOLUTION, ANNEXES A AND B OF THE INSTANT
PETITION?[7]
The petitioner asserts that compliance with Section 5, Rule 7, of the Rules of Court
can be determined only from the contents of the complaint and not by documents or
pleadings outside thereof. Hence, the trial court committed grave abuse of discretion
amounting to excess of jurisdiction, and the CA erred in considering the affidavit of the
respondents general manager, as well as the Secretarys/Resident Agents Certification and
the resolution of the board of directors contained therein, as proof of compliance with the
requirements of Section 5, Rule 7 of the Rules of Court. The petitioner also maintains that
the RTC cannot take judicial notice of the said teleconference without prior hearing, nor
any motion therefor. The petitioner reiterates its submission that the teleconference and
the resolution adverted to by the respondent was a mere fabrication.
The respondent, for its part, avers that the issue of whether modern technology is
used in the field of business is a factual issue; hence, cannot be raised in a petition for
review oncertiorari under Rule 45 of the Rules of Court. On the merits of the petition, it
insists that Atty. Aguinaldo, as the resident agent and corporate secretary, is authorized to
sign and execute the certificate of non-forum shopping required by Section 5, Rule 7 of
the Rules of Court, on top of the board resolution approved during the teleconference of
June 25, 1999. The respondent insists that technological advances in this time and age
are as commonplace as daybreak. Hence, the courts may take judicial notice that the

Philippine Long Distance Telephone Company, Inc. had provided a record of corporate
conferences and meetings through FiberNet using fiber-optic transmission technology, and
that such technology facilitates voice and image transmission with ease; this makes
constant communication between a foreign-based office and its Philippine-based branches
faster and easier, allowing for cost-cutting in terms of travel concerns. It points out that
even the E-Commerce Law has recognized this modern technology. The respondent posits
that the courts are aware of this development in technology; hence, may take judicial
notice thereof without need of hearings. Even if such hearing is required, the requirement
is nevertheless satisfied if a party is allowed to file pleadings by way of comment or
opposition thereto.
In its reply, the petitioner pointed out that there are no rulings on the matter of
teleconferencing as a means of conducting meetings of board of directors for purposes of
passing a resolution; until and after teleconferencing is recognized as a legitimate means
of gathering a quorum of board of directors, such cannot be taken judicial notice of by the
court. It asserts that safeguards must first be set up to prevent any mischief on the public
or to protect the general public from any possible fraud. It further proposes possible
amendments to the Corporation Code to give recognition to such manner of board
meetings to transact business for the corporation, or other related corporate matters;
until then, the petitioner asserts, teleconferencing cannot be the subject of judicial notice.
The petitioner further avers that the supposed holding of a special meeting on June
25, 1999 through teleconferencing where Atty. Aguinaldo was supposedly given such an
authority is a farce, considering that there was no mention of where it was held, whether
in this country or elsewhere. It insists that the Corporation Code requires board resolutions
of corporations to be submitted to the SEC. Even assuming that there was such a
teleconference, it would be against the provisions of the Corporation Code not to have any
record thereof.
The petitioner insists that the teleconference and resolution adverted to by the
respondent
in
its
pleadings
were
mere
fabrications
foisted
by
the
respondent and its counsel on the RTC, the CA and this Court.
The petition is meritorious.
Section 5, Rule 7 of the Rules of Court provides:
SEC. 5. Certification against forum shopping. The plaintiff or principal party shall certify
under oath in the complaint or other initiatory pleading asserting a claim for relief, or in a
sworn certification annexed thereto and simultaneously filed therewith: (a) that he has not
theretofore commenced any action or filed any claim involving the same issues in any
court, tribunal or quasi-judicial agency and, to the best of his knowledge, no such other
action or claim is pending therein; (b) if there is such other pending action or claim, a
complete statement of the present status thereof; and (c) if he should thereafter learn
that the same or similar action or claim has been filed or is pending, he shall report that

fact within five (5) days therefrom to the court wherein his aforesaid complaint or
initiatory pleading has been filed.
Failure to comply with the foregoing requirements shall not be curable by mere
amendment of the complaint or other initiatory pleading but shall be cause for the
dismissal of the case without prejudice, unless otherwise provided, upon motion and after
hearing. The submission of a false certification or non-compliance with any of the
undertakings therein shall constitute indirect contempt of court, without prejudice to the
corresponding administrative and criminal actions. If the acts of the party or his counsel
clearly constitute willful and deliberate forum shopping, the same shall be ground for
summary dismissal with prejudice and shall constitute direct contempt, as well as a cause
for administrative sanctions.
It is settled that the requirement to file a certificate of non-forum shopping is
mandatory[8] and that the failure to comply with this requirement cannot be excused. The
certification is a peculiar and personal responsibility of the party, an assurance given to
the court or other tribunal that there are no other pending cases involving basically the
same parties, issues and causes of action. Hence, the certification must be accomplished
by the party himself because he has actual knowledge of whether or not he has initiated
similar actions or proceedings in different courts or tribunals. Even his counsel may be
unaware of such facts.[9] Hence, the requisite certification executed by the plaintiffs
counsel will not suffice.[10]
In a case where the plaintiff is a private corporation, the certification may be signed,
for and on behalf of the said corporation, by a specifically authorized person, including its
retained counsel, who has personal knowledge of the facts required to be established by
the documents. The reason was explained by the Court in National Steel Corporation v.
Court of Appeals,[11]as follows:
Unlike natural persons, corporations may perform physical actions only through properly
delegated individuals; namely, its officers and/or agents.
The corporation, such as the petitioner, has no powers except those expressly conferred
on it by the Corporation Code and those that are implied by or are incidental to its
existence. In turn, a corporation exercises said powers through its board of directors
and/or its duly-authorized officers and agents. Physical acts, like the signing of
documents, can be performed only by natural persons duly-authorized for the purpose by
corporate by-laws or by specific act of the board of directors. All acts within the powers of
a corporation may be performed by agents of its selection; and except so far as limitations
or restrictions which may be imposed by special charter, by-law, or statutory provisions,
the same general principles of law which govern the relation of agency for a natural
person govern the officer or agent of a corporation, of whatever status or rank, in respect
to his power to act for the corporation; and agents once appointed, or members acting in
their stead, are subject to the same rules, liabilities and incapacities as are agents of
individuals and private persons.

For who else knows of the circumstances required in the Certificate but its own retained
counsel. Its regular officers, like its board chairman and president, may not even know the
details required therein.
Indeed, the certificate of non-forum shopping may be incorporated in the complaint
or appended thereto as an integral part of the complaint. The rule is that compliance with
the rule after the filing of the complaint, or the dismissal of a complaint based on its noncompliance with the rule, is impermissible. However, in exceptional circumstances, the
court may allow subsequent compliance with the rule. [12] If the authority of a partys
counsel to execute a certificate of non-forum shopping is disputed by the adverse party,
the former is required to show proof of such authority or representation.
In this case, the petitioner, as the defendant in the RTC, assailed the authority of
Atty. Aguinaldo to execute the requisite verification and certificate of non-forum shopping
as the resident agent and counsel of the respondent. It was, thus, incumbent upon the
respondent, as the plaintiff, to allege and establish that Atty. Aguinaldo had such authority
to execute the requisite verification and certification for and in its behalf. The respondent,
however, failed to do so.
The verification and certificate of non-forum shopping which was incorporated in the
complaint and signed by Atty. Aguinaldo reads:
I, Mario A. Aguinaldo of legal age, Filipino, with office address at Suite 210 Gedisco Centre,
1564 A. Mabini cor. P. Gil Sts., Ermita, Manila, after having sworn to in accordance with law
hereby deposes and say: THAT 1. I am the Resident Agent and Legal Counsel of the plaintiff in the above entitled case
and have caused the preparation of the above complaint;
2. I have read the complaint and that all the allegations contained therein are true and
correct based on the records on files;
3. I hereby further certify that I have not commenced any other action or proceeding
involving the same issues in the Supreme Court, the Court of Appeals, or different
divisions thereof, or any other tribunal or agency. If I subsequently learned that a similar
action or proceeding has been filed or is pending before the Supreme Court, the Court of
Appeals, or different divisions thereof, or any tribunal or agency, I will notify the court,
tribunal or agency within five (5) days from such notice/knowledge.
(Sgd.)
MARIO A. AGUINALDO
Affiant

CITY OF MANILA
SUBSCRIBED AND SWORN TO before me this 30th day of August, 1999, affiant exhibiting to
me his Community Tax Certificate No. 00671047 issued on January 7, 1999 at Manila,
Philippines.
(Sgd.)
Doc. No. 1005; ATTY. HENRY D. ADASA
Page No. 198; Notary Public
Book No. XXI Until December 31, 2000
Series of 1999. PTR No. 320501 Mla. 1/4/99[13]
As gleaned from the aforequoted certification, there was no allegation that Atty.
Aguinaldo had been authorized to execute the certificate of non-forum shopping by the
respondents Board of Directors; moreover, no such board resolution was appended
thereto or incorporated therein.
While Atty. Aguinaldo is the resident agent of the respondent in the Philippines, this
does not mean that he is authorized to execute the requisite certification against forum
shopping. Under Section 127, in relation to Section 128 of the Corporation Code, the
authority of the resident agent of a foreign corporation with license to do business in the
Philippines is to receive, for and in behalf of the foreign corporation, services and other
legal processes in all actions and other legal proceedings against such corporation, thus:
SEC. 127. Who may be a resident agent. A resident agent may either be an individual
residing in the Philippines or a domestic corporation lawfully transacting business in the
Philippines: Provided, That in the case of an individual, he must be of good moral
character and of sound financial standing.
SEC. 128. Resident agent; service of process. The Securities and Exchange Commission
shall require as a condition precedent to the issuance of the license to transact business
in the Philippines by any foreign corporation that such corporation file with the Securities
and Exchange Commission a written power of attorney designating some persons who
must be a resident of the Philippines, on whom any summons and other legal processes
may be served in all actions or other legal proceedings against such corporation, and
consenting that service upon such resident agent shall be admitted and held as valid as if
served upon the duly-authorized officers of the foreign corporation as its home office. [14]
Under the law, Atty. Aguinaldo was not specifically authorized to execute a certificate
of non-forum shopping as required by Section 5, Rule 7 of the Rules of Court. This is
because while a resident agent may be aware of actions filed against his principal (a

foreign corporation doing business in the Philippines), such resident may not be aware of
actions initiated by its principal, whether in the Philippines against a domestic corporation
or private individual, or in the country where such corporation was organized and
registered, against a Philippine registered corporation or a Filipino citizen.
The respondent knew that its counsel, Atty. Aguinaldo, as its resident agent, was not
specifically authorized to execute the said certification. It attempted to show its
compliance with the rule subsequent to the filing of its complaint by submitting, on March
6, 2000, a resolution purporting to have been approved by its Board of Directors during a
teleconference held on June 25, 1999, allegedly with Atty. Aguinaldo and Suk Kyoo Kim in
attendance. However, such attempt of the respondent casts veritable doubt not only on
its claim that such a teleconference was held, but also on the approval by the Board of
Directors of the resolution authorizing Atty. Aguinaldo to execute the certificate of nonforum shopping.
In its April 12, 2000 Order, the RTC took judicial notice that because of the onset of
modern technology, persons in one location may confer with other persons in other
places, and, based on the said premise, concluded that Suk Kyoo Kim and Atty. Aguinaldo
had a teleconference with the respondents Board of Directors in South Korea on June 25,
1999. The CA, likewise, gave credence to the respondents claim that such a
teleconference took place, as contained in the affidavit of Suk Kyoo Kim, as well as Atty.
Aguinaldos certification.
Generally speaking, matters of judicial notice have three material requisites: (1) the
matter must be one of common and general knowledge; (2) it must be well and
authoritatively settled and not doubtful or uncertain; and (3) it must be known to be
within the limits of the jurisdiction of the court. The principal guide in determining what
facts may be assumed to be judicially known is that of notoriety. Hence, it can be said that
judicial notice is limited to facts evidenced by public records and facts of general
notoriety.[15] Moreover, a judicially noticed fact must be one not subject to a reasonable
dispute in that it is either: (1) generally known within the territorial jurisdiction of the trial
court; or (2) capable of accurate and ready determination by resorting to sources whose
accuracy cannot reasonably be questionable. [16]
Things of common knowledge, of which courts take judicial matters coming to the
knowledge of men generally in the course of the ordinary experiences of life, or they may
be matters which are generally accepted by mankind as true and are capable of ready
and unquestioned demonstration. Thus, facts which are universally known, and which may
be found in encyclopedias, dictionaries or other publications, are judicially noticed,
provided, they are of such universal notoriety and so generally understood that they may
be regarded as forming part of the common knowledge of every person. As the common
knowledge of man ranges far and wide, a wide variety of particular facts have been
judicially noticed as being matters of common knowledge. But a court cannot take judicial
notice of any fact which, in part, is dependent on the existence or non-existence of a fact
of which the court has no constructive knowledge.[17]

In this age of modern technology, the courts may take judicial notice that business
transactions may be made by individuals through teleconferencing. Teleconferencing is
interactive group communication (three or more people in two or more locations) through
an electronic medium. In general terms, teleconferencing can bring people together under
one roof even though they are separated by hundreds of miles. [18] This type of group
communication may be used in a number of ways, and have three basic types: (1) video
conferencing - television-like communication augmented with sound; (2) computer
conferencing - printed communication through keyboard terminals, and (3) audioconferencing-verbal communication via the telephone with optional capacity for
telewriting or telecopying.[19]

1. Technical failures with equipment, including connections that arent made.

A teleconference represents a unique alternative to face-to-face (FTF) meetings. It

was first introduced in the 1960s with American Telephone and Telegraphs Picturephone.
At that time, however, no demand existed for the new technology. Travel costs were
reasonable and consumers were unwilling to pay the monthly service charge for using the
picturephone, which was regarded as more of a novelty than as an actual means for
everyday communication.[20] In time, people found it advantageous to hold
teleconferencing in the course of business and corporate governance, because of the
money saved, among other advantages include:

5. Acoustical problems within the teleconferencing rooms.

1. People (including outside guest speakers) who wouldnt normally attend a distant FTF
meeting can participate.
2. Follow-up to earlier meetings can be done with relative ease and little expense.
3. Socializing is minimal compared to an FTF meeting; therefore, meetings are shorter and
more oriented to the primary purpose of the meeting.
4. Some routine meetings are more effective since one can audio-conference from any
location equipped with a telephone.
5. Communication between the home office and field staffs is maximized.
6. Severe climate and/or unreliable transportation may necessitate teleconferencing.
7. Participants are generally better prepared than for FTF meetings.
8. It is particularly satisfactory for simple problem-solving, information exchange, and
procedural tasks.
9. Group members participate more equally in well-moderated teleconferences than an
FTF meeting.[21]
On the other hand, other private corporations opt not to hold teleconferences
because of the following disadvantages:

2. Unsatisfactory for complex interpersonal communication, such as negotiation or

bargaining.
3. Impersonal, less easy to create an atmosphere of group rapport.
4. Lack of participant familiarity with the equipment, the medium itself, and meeting
skills.

6. Difficulty in determining participant speaking order; frequently one person monopolizes

the meeting.
7. Greater participant preparation time needed.
8. Informal, one-to-one, social interaction not possible. [22]
Indeed, teleconferencing can only facilitate the linking of people; it does not alter the
complexity
of
group
communication.
Although
it
may
be
easier
to
communicate viateleconferencing, it may also be easier to miscommunicate.
Teleconferencing cannot satisfy the individual needs of every type of meeting. [23]
In the Philippines, teleconferencing and videoconferencing of members of board of
directors of private corporations is a reality, in light of Republic Act No. 8792. The
Securities and Exchange Commission issued SEC Memorandum Circular No. 15, on
November 30, 2001, providing the guidelines to be complied with related to such
conferences.[24] Thus, the Court agrees with the RTC that persons in the Philippines may
have a teleconference with a group of persons in South Korea relating to business
transactions or corporate governance.
Even given the possibility that Atty. Aguinaldo and Suk Kyoo Kim participated in a
teleconference along with the respondents Board of Directors, the Court is not convinced
that one was conducted; even if there had been one, the Court is not inclined to believe
that a board resolution was duly passed specifically authorizing Atty. Aguinaldo to file the
complaint and execute the required certification against forum shopping.
The records show that the petitioner filed a motion to dismiss the complaint on the
ground that the respondent failed to comply with Section 5, Rule 7 of the Rules of Court.
The respondent opposed the motion on December 1, 1999, on its contention that Atty.
Aguinaldo, its resident agent, was duly authorized to sue in its behalf. The respondent,
however, failed to establish its claim that Atty. Aguinaldo was its resident agent in the
Philippines. Even the identification card [25] of Atty. Aguinaldo which the respondent

appended to its pleading merely showed that he is the company lawyer of the
respondents Manila Regional Office.
The respondent, through Atty. Aguinaldo, announced the holding of the
teleconference only during the hearing of January 28, 2000; Atty. Aguinaldo then prayed
for ten days, or until February 8, 2000, within which to submit the board resolution
purportedly authorizing him to file the complaint and execute the required certification
against forum shopping. The court granted the motion. [26] The respondent, however, failed
to comply, and instead prayed for 15 more days to submit the said resolution, contending
that it was with its main office in Korea. The court granted the motion per its
Order[27] dated February 11, 2000. The respondent again prayed for an extension within
which to submit the said resolution, until March 6, 2000. [28] It was on the said date that the
respondent submitted an affidavit of its general manager Suk Kyoo Kim, stating, inter
alia, that he and Atty. Aguinaldo attended the said teleconference on June 25, 1999, where
the Board of Directors supposedly approved the following resolution:
RESOLVED, that Mario A. Aguinaldo and his law firm M.A. Aguinaldo & Associates or any of
its lawyers are hereby appointed and authorized to take with whatever legal action
necessary to effect the collection of the unpaid account of Expert Travel & Tours. They are
hereby specifically authorized to prosecute, litigate, defend, sign and execute any
document or paper necessary to the filing and prosecution of said claim in Court, attend
the Pre-trial Proceedings and enter into a compromise agreement relative to the abovementioned claim.[29]
But then, in the same affidavit, Suk Kyoo Kim declared that the respondent do[es]
not keep a written copy of the aforesaid Resolution because no records of board
resolutions approved during teleconferences were kept. This belied the respondents
earlier allegation in its February 10, 2000 motion for extension of time to submit the
questioned resolution that it was in the custody of its main office in Korea. The respondent
gave the trial court the impression that it needed time to secure a copy of the resolution
kept in Korea, only to allege later (via the affidavit of Suk Kyoo Kim) that it had no such
written copy. Moreover, Suk Kyoo Kim stated in his affidavit that the resolution was
embodied in the Secretarys/Resident Agents Certificate signed by Atty. Aguinaldo.
However, no such resolution was appended to the said certificate.
The respondents allegation that its board of directors conducted a teleconference on
June 25, 1999 and approved the said resolution (with Atty. Aguinaldo in attendance) is
incredible, given the additional fact that no such allegation was made in the complaint. If
the resolution had indeed been approved on June 25, 1999, long before the complaint was
filed, the respondent should have incorporated it in its complaint, or at least appended a
copy thereof. The respondent failed to do so. It was only on January 28, 2000 that the
respondent claimed, for the first time, that there was such a meeting of the Board of
Directors held on June 25, 1999; it even represented to the Court that a copy of its
resolution was with its main office in Korea, only to allege later that no written copy
existed. It was only on March 6, 2000 that the respondent alleged, for the first time, that
the meeting of the Board of Directors where the resolution was approved was
held via teleconference.

Worse still, it appears that as early as January 10, 1999, Atty. Aguinaldo had signed a
Secretarys/Resident Agents Certificate alleging that the board of directors held a
teleconference on June 25, 1999. No such certificate was appended to the complaint,
which was filed on September 6, 1999. More importantly, the respondent did not explain
why the said certificate was signed by Atty. Aguinaldo as early as January 9, 1999, and yet
was notarized one year later (on January 10, 2000); it also did not explain its failure to
append the said certificate to the complaint, as well as to its Compliance dated March 6,
2000. It was only on January 26, 2001 when the respondent filed its comment in the CA
that it submitted the Secretarys/Resident Agents Certificate [30] dated January 10, 2000.
The Court is, thus, more inclined to believe that the alleged teleconference on June
25, 1999 never took place, and that the resolution allegedly approved by the respondents
Board of Directors during the said teleconference was a mere concoction purposefully
foisted on the RTC, the CA and this Court, to avert the dismissal of its complaint against
the petitioner.
IN LIGHT OF ALL THE FOREGOING, the petition is GRANTED. The Decision of the
Court of Appeals in CA-G.R. SP No. 61000 is REVERSED and SET ASIDE. The Regional Trial
Court of Manila is hereby ORDERED to dismiss, without prejudice, the complaint of the
respondent.
SO ORDERED.

WESTERN INSTITUTE OF TECHNOLOGY, INC., HOMERO L. VILLASIS, DIMAS

ENRIQUEZ, PRESTON F. VILLASIS & REGINALD F. VILLASIS, petitioner,
vs.
RICARDO T. SALAS, SALVADOR T. SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO
S. SALAS, RICHARD S. SALAS & HON. JUDGE PORFIRIO PARIAN, respondents.

HERMOSISIMA, JR., J.:

Up for review on certiorari are: (1) the Decision dated September 6, 1993 and (2) the
Order dated November 23, 1993 of Branch 33 of the Regional Trial Court of Iloilo City in
Criminal Cases Nos. 37097 and 37098 for estafa and falsification of a public document,
respectively. The judgment acquitted the private respondents of both charges, but
petitioners seek to hold them civilly liable.
Private respondents Ricardo T. Salas, Salvador T. Salas, Soledad Salas-Tubilleja, Antonio S.
Salas, and Richard S. Salas, belonging to the same family, are the majority and controlling
members of the Board of Trustees of Western Institute of Technology, Inc. (WIT, for short),
a stock corporation engaged in the operation, among others, of an educational institution.
According to petitioners, the minority stockholders of WIT, sometime on June 1, 1986 in
the principal office of WIT at La Paz, Iloilo City, a Special Board Meeting was held. In
attendance were other members of the Board including one of the petitioners Reginald
Villasis. Prior to aforesaid Special Board Meeting, copies of notice thereof, dated May 24,
1986, were distributed to all Board Members. The notice allegedly indicated that the
meeting to be held on June 1, 1986 included Item No. 6 which states:
Possible implementation of Art. III, Sec. 6 of the Amended By-Laws of Western
Institute of Technology, Inc. on compensation of all officers of the corporation. 1
In said meeting, the Board of Trustees passed Resolution No. 48, s. 1986, granting
monthly compensation to the private respondents as corporate officers retroactive June 1,
1985, viz.:
Resolution No. 48 s. 1986
On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad
Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly
compensation for services rendered as follows: Chairman
P9,000.00/month, Vice Chairman P3,500.00/month,
Corporate Treasurer P3,500.00/month and Corporate
Secretary P3,500.00/month, retroactive June 1, 1985 and the
ten per centum of the net profits shall be distributed equally
among the ten members of the Board of Trustees. This shall
amend and superceed (sic) any previous resolution.
G.R. No. 113032 August 21, 1997

There were no other business.

The Chairman declared the meeting adjourned at 5:11 P.M.

This is to certify that the foregoing minutes of the regular meeting of the Board
of Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true
and correct to the best of my knowledge and belief.
A few years later, that is, on March 13, 1991, petitioners Homero Villasis, Prestod Villasis,
Reginald Villasis and Dimas Enriquez filed an affidavit-complaint against private
respondents before the Office of the City Prosecutor of Iloilo, as a result of which two (2)
separate criminal informations, one for falsification of a public document under Article 171
of the Revised Penal Code and the other for estafa under Article 315, par. 1(b) of the RPC,
were filed before Branch 33 of the Regional Trial Court of Iloilo City. The charge for
falsification of public document was anchored on the private respondents' submission of
WIT's income statement for the fiscal year 1985-1986 with the Securities and Exchange
Commission (SEC) reflecting therein the disbursement of corporate funds for the
compensation of private respondents based on Resolution No. 4, series of 1986, making it
appear that the same was passed by the board on March 30, 1986, when in truth, the
same was actually passed on June 1, 1986, a date not covered by the corporation's fiscal
year 1985-1986 (beginning May 1, 1985 and ending April 30, 1986). The Information for
falsification of a public document states:
The undersigned City Prosecutor accuses RICARDO T. SALAS, SALVADOR T.
SALAS, SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS and RICHARD S. SALAS
(whose dates and places of birth cannot be ascertained) of the crime of
FALSIFICATION OF A PUBLIC DOCUMENT, Art. 171 of the Revised Penal Code,
committed as follows:
That on or about the 10th day of June, 1986, in the City of
Iloilo, Philippines and within the jurisdiction of this Honorable
Court, the above-named accused, being then the Chairman,
Vice-Chairman, Treasurer, Secretary, and Trustee (who later
became Secretary), respectively, of the board of trustees of the
Western Institute of Technology, Inc., a corporation duly
organized and existing under the laws of the Republic of the
Philippines, conspiring and confederating together and
mutually helping one another, to better realized (sic) their
purpose, did then and there wilfully, unlawfully and criminally
prepare and execute and subsequently cause to be submitted
to the Securities and Exchange Commission an income
statement of the corporation for the fiscal year 1985-1986, the
same being required to be submitted every end of the
corporation fiscal year by the aforesaid Commission, and
therefore, a public document, including therein the
disbursement of the retroactive compensation of accused
corporate officers in the amount of P186,470.70, by then and
there making it appear that the basis thereof Resolution No. 4,
Series of 1986 was passed by the board of trustees on March
30, 1986, a date covered by the corporation's fiscal year 19851986 (i.e., from May 1, 1985 to April 30, 1986), when in truth
and in fact, as said accused well knew, no such Resolution No.
48, Series of 1986 was passed on March 30, 1986.
CONTRARY TO LAW.

Iloilo City, Philippines, November 22, 1991. 3 [Emphasis ours].

The Information, on the other hand, for estafa reads:
The undersigned City Prosecutor accuses RICARDO SALAS, SALVADOR T. SALAS,
SOLEDAD SALAS-TUBILLEJA, ANTONIO S. SALAS, RICHARD S. SALAS (whose dates
and places of birth cannot be ascertained) of the crime of ESTAFA, Art. 315, par. 1
(b) of the Revised Penal Code, committed as follows:
That on or about the 1st day of June, 1986, in the City of Iloilo,
Philippines, and within the jurisdiction of this Honorable Court,
the above-named accused, being then the Chairman, ViceChairman, Treasurer, Secretary, and Trustee (who later became
Secretary), respectively; of the Board of Trustees of Western
Institute of Technology, Inc., a corporation duly organized and
existing under the laws of the Republic of the Philippines,
conspiring and confederating together and mutually helping
one another to better realize their purpose, did then and there
wilfully, unlawfully and feloniously defraud the said corporation
(and its stockholders) in the following manner, to wit: herein
accused, knowing fully well that they have no sufficient, lawful
authority to disburse let alone violation of applicable laws
and jurisprudence, disbursed the funds of the corporation by
effecting payment of their retroactive salaries in the amount of
P186,470.00 and subsequently paying themselves every 15th
and 30th of the month starting June 15, 1986 until the present,
in the amount of P19,500.00 per month, as if the same were
their own, and when herein accused were informed of the
illegality of these disbursements by the minority stockholders
by way of objections made in an annual stockholders' meeting
held on June 14, 1986 and every year thereafter, they refused,
and still refuse, to rectify the same to the damage and
prejudice of the corporation (and its stockholders) in the total
sum of P1,453,970.79 as of November 15, 1991.
CONTRARY TO LAW.
Iloilo City, Philippines, November 22, 1991. 4 [Emphasis ours]
Thereafter, trial for the two criminal cases, docketed as Criminal Cases Nos. 37097 and
37098, was consolidated. After a full-blown hearing, Judge Porfirio Parian handed down a
verdict of acquittal on both counts 5 dated September 6, 1993 without imposing any civil
liability against the accused therein.
Petitioners filed a Motion for Reconsideration 6 of the civil aspect of the RTC Decision which
was, however, denied in an Order dated November 23, 1993. 7
Hence, the instant petition.
Significantly on December 8, 1994, a Motion for Intervention, dated December 2, 1994,
was filed before this Court by Western Institute of Technology, Inc., supposedly one of the

petitioners herein, disowning its inclusion in the petition and submitting that Atty.
Tranquilino R. Gale, counsel for the other petitioners, had no authority whatsoever to
represent the corporation in filing the petition. Intervenor likewise prayed for the dismissal
of the petition for being utterly without merit. The Motion for Intervention was granted on
January 16, 1995. 8

Resolution No. 48 s. 1986

On the motion of Mr. Richard Salas (accused), duly seconded by Mrs. Soledad
Tubilleja (accused), it was unanimously resolved that:
The Officers of the Corporation be granted monthly
compensation for services rendered as follows: Chairman
P9,000.00/month, Vice Chairman P3,500.00/month,
Corporate Treasurer P3,500.00/month and Corporate
Secretary P3,500.00/month, retroactive June 1, 1985 and the
ten per centum of the net profits shall be distributed equally
among the ten members of the Board of Trustees. This shall
amend and superceed (sic) any previous resolution.

Petitioners would like us to hold private respondents civilly liable despite their acquittal in
Criminal Cases Nos. 37097 and 37098. They base their claim on the alleged illegal
issuance by private respondents of Resolution No. 48, series of 1986 ordering the
disbursement of corporate funds in the amount of P186,470.70 representing retroactive
compensation as of June 1, 1985 in favor of private respondents, board members of WIT,
plus P1,453,970.79 for the subsequent collective salaries of private respondents every
15th and 30th of the month until the filing of the criminal complaints against them on
March 1991. Petitioners maintain that this grant of compensation to private respondents is
proscribed under Section 30 of the Corporation Code. Thus, private respondents are
obliged to return these amounts to the corporation with interest.

There were no other business.

We cannot sustain the petitioners. The pertinent section of the Corporation Code provides:

The Chairman declared the meeting adjourned at 5:11 P.M.

Sec. 30. Compensation of directors In the absence of any provision in the bylaws fixing their compensation, the directors shall not receive any
compensation, as such directors, except for reasonable per diems: Provided,
however, That any such compensation (other than per diems) may be granted to
directors by the vote of the stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders' meeting. In no
case shall the total yearly compensation of directors, as such directors, exceed
ten (10%) percent of the net income before income tax of the corporation during
the preceding year. [Emphasis ours]
There is no argument that directors or trustees, as the case may be, are not entitled to
salary or other compensation when they perform nothing more than the usual and
ordinary duties of their office. This rule is founded upon a presumption that
directors/trustees render service gratuitously, and that the return upon their shares
adequately furnishes the motives for service, without compensation. 9 Under the foregoing
section, there are only two (2) ways by which members of the board can be granted
compensation apart from reasonable per diems: (1) when there is a provision in the bylaws fixing their compensation; and (2) when the stockholders representing a majority of
the outstanding capital stock at a regular or special stockholders' meeting agree to give it
to them.
This proscription, however, against granting compensation to directors/trustees of a
corporation is not a sweeping rule. Worthy of note is the clear phraseology of Section 30
which states: ". . . [T]he directors shall not receive any compensation, as such directors, . .
. ." The phrase as such directors is not without significance for it delimits the scope of the
prohibition to compensation given to them for services performed purely in their capacity
as directors or trustees. The unambiguous implication is that members of the board may
receive compensation, in addition to reasonable per diems, when they render services to
the corporation in a capacity other than as directors/trustees.10 In the case at bench,
Resolution No. 48, s. 1986 granted monthly compensation to private respondents not in
their capacity as members of the board, but rather as officers of the corporation, more
particularly as Chairman, Vice-Chairman, Treasurer and Secretary of Western Institute of
Technology. We quote once more Resolution No. 48, s. 1986 for easy reference, viz.:

This is to certify that the foregoing minutes of the regular meeting of the Board
of Trustees of Western Institute of Technology, Inc. held on March 30, 1986 is true
and correct to the best of my knowledge and belief.
(Sgd) ANTONIO S. SALAS
Corporate
Secretary 11 [Emphasis
ours]
Clearly, therefore, the prohibition with respect to granting compensation to corporate
directors/trustees as suchunder Section 30 is not violated in this particular case.
Consequently, the last sentence of Section 30 which provides:
. . . . . . . In no case shall the total yearly compensation of directors, as such
directors, exceed ten (10%) percent of the net income before income tax of the
corporation during the preceding year. (Emphasis ours]
does not likewise find application in this case since the compensation is being given to
private respondents in their capacity as officers of WIT and not as board members.
Petitioners assert that the instant case is a derivative suit brought by them as minority
shareholders of WIT for and on behalf of the corporation to annul Resolution No. 48, s.
1986 which is prejudicial to the corporation.
We are unpersuaded. A derivative suit is an action brought by minority shareholders in the
name of the corporation to redress wrongs committed against it, for which the directors
refuse to sue. 12 It is a remedy designed by equity and has been the principal defense of
the minority shareholders against abuses by the majority. 13 Here, however, the case is not
a derivative suit but is merely an appeal on the civil aspect of Criminal Cases Nos. 37097
and 37098 filed with the RTC of Iloilo for estafa and falsification of public document.
Among the basic requirements for a derivative suit to prosper is that the minority
shareholder who is suing for and on behalf of the corporation must allege in his complaint

before the proper forum that he is suing on a derivative cause of action on behalf of the
corporation and all other shareholders similarly situated who wish to join. 14 This is
necessary to vest jurisdiction upon the tribunal in line with the rule that it is the
allegations in the complaint that vests jurisdiction upon the court or quasi-judicial body
concerned over the subject matter and nature of the action. 15 This was not complied with
by the petitioners either in their complaint before the court a quo nor in the instant
petition which, in part, merely states that "this is a petition for review on certiorari on pure
questions of law to set aside a portion of the RTC decision in Criminal Cases Nos. 37097
and 37098" 16 since the trial court's judgment of acquittal failed to impose any civil liability
against the private respondents. By no amount of equity considerations, if at all deserved,
can a mere appeal on the civil aspect of a criminal case be treated as a derivative suit.
Granting, for purposes of discussion, that this is a derivative suit as insisted by
petitioners, which it is not, the same is outrightly dismissible for having been wrongfully
filed in the regular court devoid of any jurisdiction to entertain the complaint. The ease
should have been filed with the Securities and Exchange Commission (SEC) which
exercises original and exclusive jurisdiction over derivative suits, they being intracorporate disputes, per Section 5 (b) of P.D. No. 902-A:
In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of
associations registered with it as expressly granted under existing laws and
decrees, it shall have original and exclusive jurisdiction to hear and decide cases
involving:
xxx xxx xxx
b) Controversies arising out of intra-corporate or partnership relations, between
and among stockholders, members, or associates; between any or all of them
and the corporation, partnership or association of which they are stockholders,
members or associates, respectively; and between such corporation, partnership
or association and the State insofar as it concerns their individual franchise or
right to exist as such entity;
xxx xxx xxx
[Emphasis ours]
Once the case is decided by the SEC, the losing party may file a petition for review before
the Court of Appeals raising questions of fact, of law, or mixed questions of fact and
law. 17 It is only after the case has ran this course, and not earlier, can it be brought to
us via a petition for review on certiorari under Rule 45 raising only pure questions of
law.18 Petitioners, in pleading that we treat the instant petition as a derivative suit, are
trying to short-circuit the entire process which we cannot here sanction.
As an appeal on the civil aspect of Criminal Cases Nos. 37097 and 37098 for falsification
of public document and estafa, which this petition truly is, we have to deny the petition
just the same. It will be well to quote the respondent court's ratiocinations acquitting the
private respondents on both counts:

The prosecution wants this Court to believe and agree that there is falsification of
public document because, as claimed by the prosecution, Resolution No. 48,
Series of 1986 (Exh. "1-E-1") was not taken up and passed during the Regular
Meeting of the Board of Trustees of the Western Institute of Technology (WIT), Inc.
on March 30, 1986, but on June 1, 1986 special meeting of the same board of
trustees.
This Court is reluctant to accept this claim of falsification. The prosecution
omitted to submit the complete minutes of the regular meeting of the Board of
Trustees on March 30, 1986. It only presented in evidence Exh. "C", which is page
5 or the last page of the said minutes. Had the complete minutes (Exh. "1")
consisting of five (5) pages, been submitted, it can be readily seen and
understood that Resolution No. 48, Series of 1986 (Exh. "1-E-1") giving
compensation to corporate officers, was indeed included in Other Business, No. 6
of the Agenda, and was taken up and passed on March 30, 1986. The mere fact
of existence of Exh. "C" also proves that it was passed on March 30, 1986 for
Exh. "C" is part and parcel of the whole minutes of the Board of Trustees Regular
Meeting on March 30, 1986. No better and more credible proof can be considered
other than the Minutes (Exh. "1") itself of the Regular Meeting of the Board of
Trustees on March 30, 1986. The imputation that said Resolution No. 48 was
neither taken up nor passed on March 30, 1986 because the matter regarding
compensation was not specifically stated or written in the Agenda and that the
words "possible implementation of said Resolution No. 48, was expressly written
in the Agenda for the Special Meeting of the Board on June 1, 1986, is simply an
implication. This evidence by implication to the mind of the court cannot prevail
over the Minutes (Exh. "1") and cannot ripen into proof beyond reasonable doubt
which is demanded in all criminal prosecutions.
This Court finds that under the Eleventh Article (Exh. "3-D-1") of the Articles of
Incorporation (Exh. "3-B") of the Panay Educational Institution, Inc., now the
Western Institute of Technology, Inc., the officers of the corporation shall receive
such compensation as the Board of Directors may provide. These Articles of
Incorporation was adopted on May 17, 1957 (Exh. "3-E"). The Officers of the
corporation and their corresponding duties are enumerated and stated in
Sections 1, 2, 3 and 4 of Art. III of the Amended By-Laws of the Corporation (Exh.
"4-A") which was adopted on May 31, 1957. According to Sec. 6, Art. III of the
same By-Laws, all officers shall receive such compensation as may be fixed by
the Board of Directors.
It is the perception of this Court that the grant of compensation or salary to the
accused in their capacity as officers of the corporation, through Resolution No.
48, enacted on March 30, 1986 by the Board of Trustees, is authorized by both
the Articles of Incorporation and the By-Laws of the corporation. To state
otherwise is to depart from the clear terms of the said articles and by-laws. In
their defense the accused have properly and rightly asserted that the grant of
salary is not for directors, but for their being officers of the corporation who
oversee the day to day activities and operations of the school.
xxx xxx xxx
. . .[O]n the question of whether or not the accused can be held liable for estafa
under Sec. 1 (b) of Art. 315 of the Revised Penal Code, it is perceived by this
Court that the receipt and the holding of the money by the accused as salary on

basis of the authority granted by the Articles and By-Laws of the corporation are
not tainted with abuse of confidence. The money they received belongs to them
and cannot be said to have been converted and/or misappropriated by them.
xxx xxx xxx

19

[Emphasis ours]
From the foregoing factual findings, which we find to be amply substantiated by the
records, it is evident that there is simply no basis to hold the accused, private respondents
herein, civilly liable. Section 2(b) of Rule 111 on the New Rules on Criminal Procedure
provides:
Sec. 2. Institution of separate civil action.
xxx xxx xxx
(b) Extinction of the penal action does not carry with it extinction of the civil,
unless the extinction proceeds from a declaration in a final judgment that the
fact from which the civil might arise did not exist. [Emphasis ours]
Likewise, the last paragraph of Section 2, Rule 120 reads:
Sec. 2. Form and contents of judgment.
xxx xxx xxx
In case of acquittal, unless there is a clear showing that the act from which the
civil liability might arise did not exist, the judgment shall make a finding on the
civil liability of the accused in favor of the offended party. [Emphasis ours]
The acquittal in Criminal Cases Nos. 37097 and 37098 is not merely based on reasonable
doubt but rather on a finding that the accused-private respondents did not commit the
criminal acts complained of. Thus, pursuant to the above rule and settled jurisprudence,
any civil action ex delicto cannot prosper. Acquittal in a criminal action bars the civil
action arising therefrom where the judgment of acquittal holds that the accused did not
commit the criminal acts imputed to them. 20
WHEREFORE, the instant petition is hereby DENIED with costs against petitioners.
SO ORDERED.

BIENVENIDO ONGKINGCO, as President and GALERIA DE MAGALLANES

CONDOMINIUM ASSOCIATION, INC., petitioners, vs. NATIONAL LABOR
RELATIONS COMMISSION and FEDERICO B. GUILAS, respondents.
DECISION
KAPUNAN, J.:
At fore, once again, is the jurisdictional tug of war between the National Labor
Relations Commission (NLRC) and the Securities & Exchange Commission (SEC) in this
special civil action for certiorari under Rule 65 of the Revised Rules of Court. It seeks to
set aside the Resolutions of the NLRC in NLRC NCR Case No. 00-05-02780-92 (NLRC CA No.
004329-93) dated 9 March 1995 and 4 April 1995 which reversed the decision of Labor
Arbiter Oswald Lorenzo and denied petitioners' motion for reconsideration, respectively.
Petitioner Galeria de Magallanes Condominium Association, Inc. (Galeria for brevity)
is a non-stock, non-profit corporation formed in accordance with R.A. No. 4726, otherwise
known as the Condominium Act. "Its primary purpose is to hold title to the common areas
of the Galeria de Magallanes Condominium Project and to manage and administer the
same for the use and convenience of the residents and/or owners." [1] Petitioner Bienvenido
Ongkingco was the president of Galeria at the time private respondent filed his complaint.

On 1 September 1990, Galeria's Board of Directors appointed private respondent

Federico B. Guilas as Administrator/Superintendent. He was given a "monthly salary
of P10,000 subject to review after five (5) months and subsequently thereafter as
Galeria's finances improved." [2]
As Administrator, private respondent was tasked with the maintenance of the
"performance and elegance of the common areas of the condominium and external
appearance of the compound thereof for the convenience and comfort of the residents as
well as to keep up the quality image, and hence the value of the investment for the
owners thereof."[3]
However, on 17 March 1992, through a resolution passed by the Board of Directors
of Galeria, private respondent was not re-appointed as Administrator.
As a result, on 15 May 1992, private respondent instituted a complaint against
petitioners for illegal dismissal and non-payment of salaries with the NLRC.
In response, on 22 July 1992, petitioners filed a motion to dismiss alleging that it is
the SEC, and not the labor arbiter, which has jurisdiction over the subject matter of the
complaint.
Labor Arbiter Lorenzo granted the aforestated motion to dismiss in his order dated
29 December 1992. He ruled, thus:
A judicious calibration of the position taken by the contending parties preponderate
clearly in favor of respondents, that this case is within the jurisdiction of the Securities
and Exchange Commission and not this Office (Labor Arbiter).
Our reasons are as follows:
ONE. The Position of Administrator or Superintendent is a corporate position, whose
appointment depended on the Board of Directors. As such, the position of the
administrator is a corporate creation.
TWO. Clearly from the respondent corporation's Articles of Incorporation, Art. V, Sec. 6
thereof, the appointment and removal of the administrator is a prerogative that belongs to
the Board, and thereby involves the exercise of deliberate choice and faculty of
discriminative selection.

The NLRC, however, reversed the Labor Arbiter's order in its resolution dated 9
March 1995. It ruled in this wise:
We find merit in the appeal. It cannot be gainsaid that the complainant's cause of action
in his complaint is illegal dismissal which issue falls four square within the jurisdiction of
the NLRC. This is so, because while it may be true that the termination of the complainant
was effected allegedly by a resolution of the Board of Directors of the respondent
association, this did not make the dispute intracorporate in nature. Moreover, We have
taken note of the fact that the complainant is neither a member of the association nor an
officer thereof. Hence, We are more convinced that he is an employee of the respondent
association occupying the position of administrator who is in (sic) charged with the
function of managing and administering the building or condominium owned by the
members. Indeed, there is a whale of difference between a member of the association
who is a part owner of the building and a mere employee performing managerial and
administrative functions which are necessary in the usual undertaking of the respondent
Association. The complainant falls under the second category.
And, to the point of being repetitious, it needs to be stressed that the fact that the
complainant was removed by the Board of Directors did not change the issue from an
illegal dismissal case to an intracorporate one. For, what remains to be resolved here is
whether or not the complainant's removal from his position as Administrator was for a just
and valid cause and in compliance with due process. And, as the facts now stand, the
issue is within the scope of authority of the National Labor Relations Commission to
resolve.
We simply could not agree with the conclusions of law made by the Arbiter a quo on the
applicability of the provisions of P.D. 902. Our view finds basis in the case of Gregorio
Araneta University Foundation vs. Antonio J. Teodoro and NLRC (167 SCRA 79) wherein the
Supreme Court had the occasion to clarify the jurisdiction of the Securities and Exchange
Commission and that of the NLRC. It (Supreme Court) held, thus
"x x x Relying on Philippine School of Business Administration, et al., (127 SCRA 778) and
Dy, et al., vs. National Labor Relations Commission, et al., (145 SCRA 211), Petitioner
theorizes that since private respondent was a corporate officer, the present controversy is
within the jurisdiction of the Securities and Exchange Commission, pursuant to P.D. 902-A,
and not in the public respondent.

THIRD. Thus, we find lacking of merit the argument of complainant that since he is not a
member of the condominium association where he was formerly administrator, or is not a
unit holder thereof, since a person's relationship to a corporation is not determinative of
the services performed but by the incidents of the relationship as they exist. (PSBA vs.
LEANO, 127 SCRA 778.)

Without need of applying the rule on estoppel by laches against petitioner, its contention
must fail on the ground of misplaced reliance. As explained in Dy, the same is true with
Philippine Business Administration, the controversies therein were intra corporate in
nature and squarely within the purview of Section 5(c), PD. 902-A since the real question
was the invalidity of the board of director's meeting wherein corporate officers involved
were not re-elected, resulting in the termination of their services." (Underscoring ours.)

The resolution, therefore, of the other pending incident, which is the MOTION FOR
SUBSTITUTION OF PARTIES is hereby deferred for action by the SEC.

As obtaining in this case, no intracorporate controversy exists, hence, the jurisdiction of

the NLRC should be sustained.

WHEREFORE, in view of all the foregoing considerations, this Office hereby orders the
dismissal of the instant action for reason of lack of jurisdiction. The complainant, if he is
mindful should file this case with the Securities and Exchange Commission.

WHEREFORE, finding merit on the appeal, the same is hereby, given due course.
Accordingly, the Order appealed from is declared Null and Void and is hereby, VACATED
and SET ASIDE. Accordingly, let the records of the case be remanded to the Arbitration
Branch of origin for further proceedings. With the directive that the instant case be given
priority in the calendar of the Labor Arbiter for the speedy disposition hereon.

SO ORDERED.[4]

Concomitant hereto, the respondents are hereby directed to submit their position paper
within ten (10) days from receipt hereof.
SO ORDERED.[5]
Petitioners filed a motion for reconsideration but the same was denied in the NLRC's
resolution dated 4 April 1995.[6] Hence, the present recourse.

the nomenclature or title given to one's job which determines one's status in a
corporation."[7]
The contentions of public respondent lack merit. That private respondent is an
officer of petitioner corporation and not its mere employee cannot be questioned. The bylaws of the Galeria de Magallanes Condominium Association specifically includes the
Superintendent/Administrator in its roster of corporate officers:
ARTICLE IV

The petitioners raised a single issue:

THE PRIVATE RESPONDENT ACTED WITHOUT OR IN EXCESS OF ITS JURISDICTION OR
COMMITTED GRAVE ABUSE OF DISCRETION IN TAKING COGNIZANCE OF A SUBJECT
MATTER THAT FELL WITHIN THE ORIGINAL AND EXCLUSIVE JURISDICTION OF THE
SEC.
The petition is granted.
Specifically delineated in P.D. 902-A are the cases over which the SEC exercises
exclusive jurisdiction:

OFFICERS
Section 1. Executive Officers The Executive officers of the corporation shall be a President,
a Vice President, a Treasurer, all of whom shall be elected by the Board of Directors. They
may be removed with or without cause at any meeting by the concurrence of four
directors. The Board of Directors may appoint a Superintendent or Administrator and such
other officers and employees and delineate their powers and duties as the Board shall find
necessary to manage the affairs of the corporation.[8] (Underscoring ours.)
xxx.

SECTION 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
a) Devices or schemes employed by or any acts of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or of the stockholders, partners, members
of associations or organizations registered with the Commission.
b) Controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the State insofar as it concerns their individual franchise or right to exist as such entity;
c) Controversies in the election or appointment of directors, trustees, officers, or
managers of such corporations, partnerships or associations.
d) Petitions of corporations, partnerships or associations to be declared in the state of
suspension of payments in cases where the corporation, partnership or association
possesses property to cover all of its debts but foresees the impossibility of meeting them
when they respectively fall due or in cases where the corporation, partnership or
association has no sufficient assets to cover its liabilities, but is under the Management
Committee created pursuant to this Decree. (Underscoring ours.)
The Solicitor General contends that the case at bar falls outside the purview of the
aforequoted provision. He insists that private respondent was a mere employee of
petitioner corporation being tasked mainly, as administrator/superintendent, with the
upkeep of the condominium's common areas. He, thus, maintains that private respondent
cannot be deemed a corporate officer because "it is the nature of one's functions and not

Section 6. The Superintendent or Administrator The Board of Directors may appoint a

Superintendent or Administrator for the condominium project if the activities and financial
condition of the Association so warrant. If one is so appointed, he shall be the principal
administrative officer of the Association. He shall attend to routinary and day-to-day
business and activities of the Association and shall keep regular officer hours for the
purpose. He shall have such other duties and powers as may be conferred upon him by
the Board of Directors or delegated by the President of the Association.
At the discretion of the Board of Directors, the work and duties of Superintendent or
Administrator may be entrusted to a juridical entity which is qualified and competent to
perform such work.[9]

[10]

Closely approximating the dispute at bar is the recent case of Tabang v. NLRC.
This Court, through Justice Florenz D. Regalado, ruled that:

Contrary to the contention of petitioner, a medical director and a hospital administrator

are considered as corporate officers under the by-laws of respondent corporation. Section
2(i), Article I thereof states that one of the powers of the Board of Trustees is "(t)o appoint
a Medical Director, Comptroller/Administrator, Chiefs of Services and such other officers
as it may deem necessary and prescribe their powers and duties."
The president, vice-president, secretary and treasurer are commonly regarded as the
principal or executive officers of a corporation, and modern corporation statutes usually
designate them as the officers of the corporation. However, other offices are sometimes
created by the charter or by-laws of a corporation, or the board of directors may be
empowered under the by-laws of a corporation to create additional offices as may be
necessary.
It has been held that an "office" is created by the charter of the corporation and the
officer is elected by the directors or stockholders. On the other hand, an "employee"

usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee.
In the case at bar, considering that herein petitioner, unlike an ordinary employee, was
appointed by respondent corporation's Board of Trustees in its memorandum of October
30, 1990, she is deemed an officer of the corporation. Perforce, Section 5(c) of Presidential
Decree No. 902-A, which provides that the SEC exercises exclusive jurisdiction over
controversies in the election or appointment of directors, trustees, officers or managers of
corporations, partnerships or associations, applies in the present dispute. Accordingly,
jurisdiction over the same is vested in the SEC, and not in the Labor Arbiter or the NLRC.

[12]

Supplementing the afore-quoted ruling, in Lozon v. NLRC[11] and Espino v. NLRC,

citing Fortune Cement Corp. v. NLRC,[13] we declared that:

A corporate officer's dismissal is always a corporate act and/or an intra-corporate

controversy and that nature is not altered by the reason or wisdom which the Board of
Directors may have in taking such action.
Based on the foregoing, we must rule that private respondent was indeed a
corporate officer. He was appointed directly by the Board of Directors not by any
managing officer of the corporation and his salary was, likewise, set by the same Board.
Having thus determined, his dismissal or non-appointment is clearly an intra-corporate
matter and jurisdiction, therefore, properly belongs to the SEC and not the NLRC.
The respondents also attack the SEC's jurisdiction over the instant case on grounds
that Guilas was not elected by the Board of Directors but was merely appointed.
This particular argument baffles us. P.D. 902-A cannot be any clearer. Sec. 5(c) of
said law expressly covers both election and appointment of corporate directors, trustees,
officers and managers.[14]
It is of no consequence, likewise, that the complaint of private respondent for illegal
dismissal includes money claims, jurisdiction remains with the SEC as ruled in the case
of Cagayan de Oro Coliseum, Inc. v. Office of the MOLE:[15]
Although the reliefs sought by Chaves appear to fall under the jurisdiction of the labor
arbiter as they are claims for unpaid salaries and other remunerations for services
rendered, a close scrutiny thereof shows that said claims are actually part of the
perquisites of his position in, and therefore interlinked with his relations with the
corporation. In Dy vs. NLRC, the Court said: "(t)he question of remuneration involving as it
does, a person who is not a mere employee but a stockholder and officer, an integral part,
it might be said, of the corporation, is not a simple labor problem but a matter that comes
within the area of corporate affairs and, management, and is in fact a corporate
controversy in contemplation of the Corporation Code."
WHEREFORE, the petition for certiorari is given DUE COURSE, the assailed
resolutions of the NLRC are hereby REVERSED and the Order of the Labor Arbiter dated 29
December 1992 REINSTATED.
SO ORDERED.

PURIFICACION G. TABANG, petitioner, vs. NATIONAL

COMMISSION
and
PAMANA
GOLDEN
CARE
FOUNDATION, INC., respondents.

LABOR
RELATIONS
MEDICAL
CENTER

DECISION
REGALADO, J.:
This is a petition for certiorari which seeks to annul the resolution of the National
Labor Relations Commission (NLRC), dated June 26, 1995, affirming in toto the order of the
labor arbiter, dated April 26, 1994, which dismissed petitioners complaint for illegal
dismissal with money claims for lack of jurisdiction.
The records show that petitioner Purificacion Tabang was a founding member, a
member of the Board of Trustees, and the corporate secretary of private respondent
Pamana Golden Care Medical Center Foundation, Inc., a non-stock corporation engaged in
extending medical and surgical services.
On October 30, 1990, the Board of Trustees issued a memorandum appointing
petitioner as Medical Director and Hospital Administrator of private respondents Pamana
Golden Care Medical Center in Calamba, Laguna.
Although the memorandum was silent as to the amount of remuneration for the
position, petitioner claims that she received a monthly retainer fee of five thousand pesos
(P5,000.00) from private respondent, but the payment thereof was allegedly stopped in
November, 1991.
As medical director and hospital administrator, petitioner was tasked to run the
affairs of the aforesaid medical center and perform all acts of administration relative to its
daily operations.
On May 1, 1993, petitioner was allegedly informed personally by Dr. Ernesto Naval
that in a special meeting held on April 30, 1993, the Board of Trustees passed a resolution
relieving her of her position as Medical Director and Hospital Administrator, and
appointing the latter and Dr. Benjamin Donasco as acting Medical Director and acting
Hospital Administrator, respectively. Petitioner averred that she thereafter received a copy
of said board resolution.
On June 6, 1993, petitioner filed a complaint for illegal dismissal and non-payment of
wages, allowances and 13th month pay before the labor arbiter.
Respondent corporation moved for the dismissal of the complaint on the ground of
lack of jurisdiction over the subject matter. It argued that petitioners position as Medical
Director and Hospital Administrator was interlinked with her position as member of the
Board of Trustees, hence, her dismissal is an intra-corporate controversy which falls within
the exclusive jurisdiction of the Securities and Exchange Commission (SEC).
Petitioner opposed the motion to dismiss, contending that her position as Medical
Director and Hospital Administrator was separate and distinct from her position as
member of the Board of Trustees. She claimed that there is no intra-corporate controversy
involved since she filed the complaint in her capacity as Medical Director and Hospital
Administrator, or as an employee of private respondent.
On April 26, 1994, the labor arbiter issued an order dismissing the complaint for lack
of jurisdiction. He ruled that the case falls within the jurisdiction of the SEC, pursuant to
Section 5 of Presidential Decree No. 902-A. [1]

Petitioners motion for reconsideration was treated as an appeal by the labor arbiter
who consequently ordered the elevation of the entire records of the case to public
respondent NLRC for appellate review. [2]
On appeal, respondent NLRC affirmed the dismissal of the case on the additional
ground that the position of a Medical Director and Hospital Administrator is akin to that of
an executive position in a corporate ladder structure, hence, petitioners removal from the
said position was an intra-corporate controversy within the original and exclusive
jurisdiction of the SEC. [3]
Aggrieved by the decision, petitioner filed the instant petition which we find,
however, to be without merit.
We agree with the findings of the NLRC that it is the SEC which has jurisdiction over
the case at bar. The charges against herein private respondent partake of the nature of an
intra-corporate controversy. Similarly, the determination of the rights of petitioner and the
concomitant liability of private respondent arising from her ouster as a medical director
and/or hospital administrator, which are corporate offices, is an intra-corporate
controversy subject to the jurisdiction of the SEC.
Contrary to the contention of petitioner, a medical director and a hospital
administrator are considered as corporate officers under the by-laws of respondent
corporation. Section 2(i), Article I thereof states that one of the powers of the Board of
Trustees is (t)o appoint a Medical Director, Comptroller/Administrator, Chiefs of Services
and such other officers as it may deem necessary and prescribe their powers and
duties. [4]
The president, vice-president, secretary and treasurer are commonly regarded as the
principal or executive officers of a corporation, and modern corporation statutes usually
designate them as the officers of the corporation.[5] However, other offices are sometimes
created by the charter or by-laws of a corporation, or the board of directors may be
empowered under the by-laws of a corporation to create additional offices as may be
necessary.[6]
It has been held that an office is created by the charter of the corporation and the
officer is elected by the directors or stockholders. [7] On the other hand, an employee
usually occupies no office and generally is employed not by action of the directors or
stockholders but by the managing officer of the corporation who also determines the
compensation to be paid to such employee. [8]
In the case at bar, considering that herein petitioner, unlike an ordinary employee,
was appointed by respondent corporations Board of Trustees in its memorandum of
October 30, 1990,[9] she is deemed an officer of the corporation. Perforce, Section 5(c) of
Presidential Decree No. 902-A, which provides that the SEC exercises exclusive jurisdiction
over controversies in the election or appointment of directors, trustees, officers or
managers of corporations, partnerships or associations, applies in the present
dispute. Accordingly, jurisdiction over the same is vested in the SEC, and not in the Labor
Arbiter or the NLRC.
Moreover, the allegation of petitioner that her being a member of the Board of
Trustees was not one of the considerations for her appointment is belied by the tenor of
the memorandum itself. It states: We hope that you will uphold and promote the mission
of our foundation,[10] and this cannot be construed other than in reference to her position
or capacity as a corporate trustee.
A corporate officers dismissal is always a corporate act, or an intra-corporate
controversy, and the nature is not altered by the reason or wisdom with which the Board

of Directors may have in taking such action. [11] Also, an intra-corporate controversy is one
which arises between a stockholder and the corporation. There is no distinction,
qualification, nor any exemption whatsoever. The provision is broad and covers all kinds of
controversies between stockholders and corporations. [12]
With regard to the amount of P5,000.00 formerly received by herein petitioner every
month, the same cannot be considered as compensation for her services rendered as
Medical Director and Hospital Administrator. The vouchers[13] submitted by petitioner show
that the said amount was paid to her by PAMANA, Inc., a stock corporation which is
separate and distinct from herein private respondent. Although the payments were
considered advances to Pamana Golden Care, Calamba branch, there is no evidence to
show that the Pamana Golden Care stated in the vouchers refers to herein respondent
Pamana Golden Care Medical Center Foundation, Inc.
Pamana Golden Care is a division of Pamana, Inc., while respondent Pamana Golden
Care Medical Center Foundation, Inc. is a non-stock, non-profit corporation. It is stated in
the memorandum of petitioner that Pamana, Inc. is a stock and profit corporation selling
pre-need plan for education, pension and health care. The health care plan is called
Pamana Golden Care Plan and the holders are called Pamana Golden Care Card Holders
or, simply, Pamana Members. [14]
It is an admitted fact that herein petitioner is a retained physician of Pamana, Inc.,
whose patients are holders of the Pamana Golden Care Card. In fact, in her
complaint[15] filed before the Regional Trial Court of Calamba, herein petitioner is asking,
among others, for professional fees and/or retainer fees earned for her treatment of
Pamana Golden Care card holders.[16]Thus, at most, said vouchers can only be considered
as proof of payment of retainer fees made by Pamana, Inc. to herein petitioner as a
retained physician of Pamana Golden Care.
Moreover, even assuming that the monthly payment of P5,000.00 was a valid claim
against respondent corporation, this would not operate to effectively remove this case
from the jurisdiction of the SEC. In the case of Cagayan de Oro Coliseum, Inc. vs. Office of
the Minister of Labor and Employment, etc., et al.,[17] we ruled that (a)lthough the reliefs
sought by Chavez appear to fall under the jurisdiction of the labor arbiter as they are
claims for unpaid salaries and other remunerations for services rendered, a close scrutiny
thereof shows that said claims are actually part of the perquisites of his position in, and
therefore interlinked with, his relations with the corporation. In Dy, et al., vs. NLRC, et al.,
the Court said: (t)he question of remuneration involving as it does, a person who is not a
mere employee but a stockholder and officer, an integral part, it might be said, of the
corporation, is not a simple labor problem but a matter that comes within the area of
corporate affairs and management and is in fact a corporate controversy in contemplation
of the Corporation Code.
WHEREFORE, the questioned resolution of the NLRC is hereby AFFIRMED, without
prejudice to petitioners taking recourse to and seeking relief through the appropriate
remedy in the proper forum.
SO ORDERED.

passing upon this legal point, the trial court held that the removal of plaintiff was legal
and dismissed the complaint without pronouncement as to costs. Plaintiff appealed to the
Court of Appeals but finding that the question at issue is one of law, the latter certified the
case to us for decision.
Section 33 of the Corporation Law provides: "Immediately after the election, the directors
of a corporation must organize by the election of a president, who must be one of their
number, a secretary or clerk who shall be a resident of the Philippines . . . and such other
officers as may be provided for in the by-laws." The by-laws of the instant corporation in
turn provide that in the board of directors there shall be a president, a vice-president, a
secretary and a treasurer. These are the only ones mentioned therein as officers of the
corporation. The manager is not included although the latter is mentioned as the person
in whom the administration of the corporation is vested, and with the exception of the
president, the by-laws provide that the officers of the corporation may be removed or
suspended by the affirmative vote of 2/3 of the corporation (Exhibit A).

G.R. No. L-10556

April 30, 1958

RICARDO GURREA, plaintiff-appellant,

vs.
JOSE MANUEL LEZAMA, ET AL., defendants-appellees.
Fulgencio Vega and Felix D. Bacabac for appellant.
Jose Manuel Lezama for appellees.
Jose Manuel Lezama and Genivera F. de Lezama. Domingo B. Lauren for the other
appellees.
BAUTISTA ANGELO, J.:
Plaintiff instituted this action in the Court of First Instance of Iloilo to have Resolution No.
65 of the Board of Directors of the La Paz Ice Plant and Cold Storage Co., Inc., removing
him from his position of manager of said corporation declared null and void and to recover
damages incident thereto. The action is predicated on the ground that said resolution was
adopted in contravention of the provisions of the by-laws of the corporation, of the
Corporation Law and of the understanding, intention and agreement reached among its
stockholders.
Defendant answered the complaint setting up as defense that plaintiff had been removed
by virtue of a valid resolution.
In connection with this complaint, plaintiff moved for the issuance of a writ of preliminary
injunction to restrain defendant Jose Manuel Lezama from managing the corporation
pending the determination of this case, but after hearing where parties presented
testimonial and documentary evidence, the court denied the motion. Thereafter, by
agreement of the parties and without any trial on the merits, the case was submitted for
judgment on the sole legal question of whether plaintiff could be legally removed as
manager of the corporation merely by resolution of the board of directors or whether the
affirmative vote of 2/3 of the paid shares of stocks was necessary for that purpose. And

From the above the following conclusion is clear: that we can only regard as officers of a
corporation those who are given that character either by the Corporation Law or by its bylaws. The rest can be considered merely as employees or subordinate officials. And
considering that plaintiff has been appointed manager by the board of directors and as
such does not have the character of an officer, the conclusion is inescapable that he can
be suspended or removed by said board of directors under such terms as it may see fit
and not as provided for in the by-laws. Evidently, the power to appoint carries with it the
power to remove, and it would be incongruous to hold that having been appointed by the
board of directors he could only be removed by the stockholders.
The above interpretation finds also support in the American authorities. Fletcher, in his
treatise, states the rule in the following wise: "It is sometimes important to determine
whether a person representing a corporation is to be classed as an officer of the company
or merely as an agent or employee, especially in construing statutes renting only to
'officers' of corporations. Generally the officers of a corporation are enumerated in its
charter or by-laws, and include a president, vice-president, secretary, treasurer and
sometimes others. The statutes in most of the states expressly provide for the election of
a president, secretary and treasurer, and then provide, that there shall be such other
officers, agents and factors as the corporation shall authorize for that purpose. If the
charter expressly enumerates who shall be officers of the company, a person whose
position is not enumerated is not an officer as to members of the corporation, since the
charter is conclusive upon them" (Fletcher, Cyclopedia of the Law of Private Corporations,
Vol. II, p. 19). It has been likewise held "that the offices pertaining to a private corporation
are defined in its charter and by-laws, and that no other positions in the service of the
corporation are offices" (Ann. 53 A.L.R., 599).
Indeed, there are authorities galore that hold that a general manager is not an officer of a
corporation, even if his powers and influence may be as great as those of any officer in
said organization.
Officers Distinguished from Mere Employees. As already stated, both officers
and employees are agents of the corporation and the difference between them is
largely one of degree; the officers are the most important employees exercising
greater authority or power in the management of the business. Ordinarily, too,
the principal offices are designated by statute, charter or by-law provisions, and
specific duties are imposed upon certain officers. Thus the state statute or a bylaw may provide that stock certificates shall be signed by the president and

countersigned by the secretary or treasurer. The general manager of a

corporation is not ordinarily classed as an officer, but his powers and influence
may be quite as great as those of any person in the organization. (Grange,
Corporation Law for Officers and Directors, p. 432; Emphasis supplied.)
One distinction between officers and agents of a corporation lies in the manner
of their creation. An officer is created by the charter of the corporation, and the
officer is elected by the directors or the stockholders. An agency is usually
created by the officers, or one or more of them, and the agent is appointed by
the same authority. It is clear that the two terms officers and agents are by no
means interchangeable. One, deriving its existence from the other, and being
dependent upon that other for its continuation, is necessarily restricted in its
powers and duties, and such powers and duties, are not necessarily the same as
those pertaining to the authority creating it. The officers, as such, are the
corporation. An agent is an employee. "A mere employment, however liberally
compensated, does not rise to the dignity of an office."21 Am and Eng. Enc. Law
(2d Ed.) 836. In Wheeler and Wilson Mfg. Co. vs. Lawson, 57 Wis. 400, 15 N. W.
398, it was held that under a statute requiring an affidavit to be made by an
officer of a corporation, the general agent or managing agent, within the state, of
a foreign corporation is not an officer. In Farmers' Loan and Trust Co. vs. Warring,
20 Wis. 305, service was made upon the "principal agent" of a corporation
holding in trust a railroad, when the statute required service upon a "principal
officer." In answering the question whether or not the agent was a principal
officer the court said: "It is evident he was not, and must be regarded only as an
agent not an officer of any kind, much less a principal officer." A ruling that a
"general manager" of a corporation was not authorized to verify pleadings, under
a statute requiring verification by "an officer" was made in Meton vs. Isham
Wagon Co. (Sup.) 4 N. Y. Supp. 215. In Raleigh, etc. R. Co. vs. Pullman Co., 122
Ga. 704, 5O S.E. 1008 (4), it was held that the term "general manager." as
applied to one representing a corporation, and especially a railroad corporation,
imported an agent of a very extensive authority; but it was not ruled that even
the term "general manager" would import that the person holding that position
was necessarily an officer of the company. One distinction between an officer
and an agent suggested in Commonwealth vs. Christian, 9 Phila. (Pa.) 558, is that
on officer of a corporation, if illegally excluded from his office, may by mandamus
compel the corporation, to reinstate him; while an agent may be dismissed
without cause, and his only remedy would be compensation in damages. It would
not be contended that the "general agent of the defendant at Columbus," in the
event of his discharge, could be reinstated by mandamus. We do not think the
general agent at Columbus was an officer of the defendant company. Therefore
his alleged waiver of a condition in the policy was not binding upon the company.
(Vardeman vs. Penn. Mut. Life Ins. Co. 125 Ga. 117, 54 S.E. P. 66; Emphasis
supplied.)
The plaintiff-predicates this action on said contract, and claims that the same
being signed by the defendant through its "general manager" if admitted
evidence, would show sufficient authority prima facie to do any act which the
directors could authorize or ratify. The instrument in question being signed by
James W. Codle, "General Manager" and no evidence in the trial being produced
showing the duties of said manager or what kind of an office he was general
manager of, the "general manager" without proof as to the nature of services
performed by the persons called "general manager", have no meaning in law,
excepting that the persons bearing the title is an employee who has been
designated with a title. It does not make him an officer of the company

employing him. (Studerbaker Bros. Co. vs. R. M. Rose Co., 119 N.Y.S pp. 970, 97;
Emphasis supplied.)
We therefore hold that plaintiff has been properly removed when the board of directors of
the instant corporation approved its Resolution No. 65 on June 3, 1948.
We will now clarify some of the points raised by the distinguished dissenter in his
dissenting opinion.
The fact that the "manager" of the corporation in the several statutes enacted by
Congress is held criminally liable for violation of any of the penal provisions therein
prescribed does not make him an "officer" of the corporation. This liability flows from the
nature of his duties which are delegated to him by the board of directors. He is paid for
them. Hence, he has to answer for them should he use it in violation of law. In the case of
Robinson vs. Moark-Nemo Consol Mining Co., et al., 163 S. W. 889, in connection with the
liability of the manager, the court said:
Common justice and common sense demand that, where those in charge and
control of the management of a corporation direct it along paths of wrongdoing,
they should be held accountable by law. . . . This doctrine will prevent many
wrongs, and have a salutary influence in bringing about the lawful and orderly
management of corporations.
It is claimed that the cases of Meton vs. Isham Wagon, 4 N.Y.S., 215 and State vs. Bergs,
217 N. W., 736, supporting the theory that a manager is not necessarily an officer, are in
illo tempore.1 It is submitted that we do not adopt a rule just because it is new nor reject
another just because it is old. We adopt a rule because it is a good and sound rule. The
fact however is that they are not the only authorities supporting that theory. Additional
cases are cited by Fletcher in support thereof, such as the cases of Vardeman vs. Penn.
Mut. Life Ins. Co., supraStudebaker Bros. Co. vs. R. M. Rose Co., supra.
The dissenting opinion quotes from Thompson and Fletcher to support the theory that the
general manager of a corporation may be considered as its principal officer even though
not so mentioned in its charter or bylaws. We have examined the cast cited in support of
that theory but we have found that they are not in point. Thus, we have found (1) that the
parties involved are mostly outsiders who press their transactions against the corporation;
(2) that the point raised is whether the acts of the manager bind the corporation; (3) that
the tendency of the courts is to hold the corporation liable for the acts of the manager so
long as they are within the powers granted, hence, the courts emphasized the importance
of the position of manager; and (4) the position of manager was discussed from the point
of view of an outsider and not from the internal organization of the corporation, or in
accordance with its charter or by-laws. In the present case, however, the parties are the
manager and the corporation. And the solution of the problem hinges on the internal
government of the corporation where the charter and the by-laws are necessarily involved
in the determination of the rights of the parties. Indeed, it has been held: "But it is urged
that a corporation may have officers not recognized by the charter and by-laws. It is
possible this may be as to matters arising between strangers and the corporation."
[Com. vs. Christian, 9 Phila. (Pa.) 556; emphasis supplied].
The cases on all fours with the present are those of State ex rel Blackwood vs. Brast, et
al., 127 S. E. 507 and Denton Milling Co. vs. Blewitt, 254 S. W. 236, 238, where the parties
involved are the manager and the corporation. The issue raised is the relation of the

manager towards the corporation. The position of the manager is discussed from the point
of view of its internal government. And the holding of the court is that the manager is the
creation of the board of directors and the agent through whom the corporate duties of the
board are performed. Hence, the manager holds his position at the pleasure of the board.
This stipulation is well expressed in the following words of Thompson:
The word "manager" implies agency, control, and presumptively sufficient
authority to bind a corporation in a case in which the corporation was an actual
party. It has been said that such agent must have the same general supervision
of the corporation as is associated with the office of cashier or secretary. By
whatever name he may be called, such, managing agent is a mere employee of
the board of directors and holds his position subject to the particular contract of
employment; and unless the contract of employment fixes his term of office, it
may be terminated at the pleasure of the board. . . . The manager, like any other
appointed agent, is subject to removal when his term expires and on the request
of the proper officer he should turn over his business to the corporation and,
where he refuses to comply, he may be restrained from the further performance
of work for the corporation. (Thompson on Corporations, Vol. III, 3rd., pp. 209210; Emphasis supplied.)
It is not correct to hold that the theory that a manager is not classed as an officer of a
corporation is only the minority view. If we consider the states that hold that managers
are merely agents or employees as among those that hold the theory that managers are
not necessarily officers, then our theory is supported by the majority view. Indeed, this
view is upheld by nine states,2 whereas only six states adopt the view that managers are
considered principal officers of the corporation.3
The dissenting opinion quotes the provision of the bylaws relative to the administration of
the affairs of the instant corporation. It is there provided that the affairs of the corporation
shall be successively administered by (1) the stockholders; (2) the board of directors;
and(3) the manager. From this it concludes that the manager should be considered an
officer.
The above enumeration only emphasizes the different organs through which the affairs of
the corporation should be administered and the order in which the powers should be
exercised. The stockholders are the entity, composing the whole corporation. The board of
directors is the entity elected by the stockholders to manage the affairs of the
corporation. And the manager is the individual appointed by the board of directors to
carry out the powers delegated to him. In other words, the manager is the creation of the
board of directors. He is an alter egoof the board. As our law provides that only those
enumerated in the charter or in the by-laws are considered officers, the manager who has
not been so enumerated therein, but only incidentally mentioned in the order of
management, cannot be considered an officer of the corporation within their purview.
The mere fact that the directors are not mentioned in the by-laws as officers does not
deprive them of their category as such for their character as officer is secured in the
charter. The same is not true with the manager. Customs and corporate usages cannot
prevail over the express provisions of the charter and the by-laws.
There is no comparison between an appointee of the President, especially one in the
judiciary, and the appointee of the board of directors of a corporation. In the first case,
removal is especially provided for by law and in the second, the appointee holds office at

the pleasure of the board. And with regard to the powers of the board of director, to
remove a manager of the corporation, Thompson has the following to say:
. . . Below the grade of director and such other officers as are elected by the
corporation at large, the general rule is that the officers of private corporations
hold their offices during the will of the directors, and are hence removable by the
directors without assigning any cause for the removal, except so far as their
power may be restrained by contract with the particular officer, just as any
other employer may discharge his employee. Speaking generally, it may be said
that the power to appoint carries with it the power to remove. . . . the directors
who appoint a ministerial officer may undoubtedly remove him at pleasure, and
he has no remedy other than an action for damages against the corporation for a
breach of contract. . . . The ordinary ministerial and other lesser officers,
however, hold their offices during the pleasure of the directors and may be
removed at will, without assigned cause. Of this class of officers and agents are
the secretary and treasurer of the corporation, the general manager, the
assistant manager, the field manager, the attorney of the company, an assistant
horticulturist, and the bookkeepers. (Thompson on Corporations, Vol. III, 521523.)
Wherefore, the decision appealed from is affirmed, with costs against appellant.

[G.R. No. L-58468. February 24, 1984.]

PHILIPPINE SCHOOL OF BUSINESS ADMINISTRATION, MANILA, ANTONIO M.
MAGTALAS, JOSE ARANAS, JUAN D. LIM, JOSE F. PERALTA and BENJAMIN P.
PAULINO, Petitioners, v. LABOR ARBITER LACANDOLA S. LEANO of the National
Labor Relations Commission and RUFINO R. TAN, Respondents.
De Santos, Balgos and Perez Law Office, for Petitioners.
The Solicitor General for respondent Arbiter.
Caparas, Ilagan, Alcantara & Gatmaytan Law Office for Private Respondent.

SYLLABUS

1. COMMERCIAL LAW; CORPORATION LAW; SECURITIES AND EXCHANGE COMMISSION;

JURISDICTION THEREOF VIS-A-VIS THE NATIONAL LABOR RELATIONS COMMISSION; CASE
AT BAR. The jurisdiction of the Securities and Exchange Commission (SEC) vis-a-vis the
National Labor Relations Commission (NLRC) is in issue. An intracorporate controversy
would call for SEC jurisdiction. A labor dispute, that of the NLRC.
2. ID.; ID.; INTRA-CORPORATE CONTROVERSIES; LEGALITY OF ELECTION OF CORPORATE
DIRECTORS, IN THE NATURE OF; CASE AT BAR. Basically, therefore, the question is
whether the election of directors on August 1, 1981 and the election of officers on
September 5, 1981, which resulted in TANs failure to be re-elected, were validly held. This
is the crux of the question that TAN has raised before the SEC. Even in his position paper
before the NLRC, TAN alleged that the election on August 1, 1981 of the three directors
was in contravention of the PSBA By-Laws providing that any vacancy in the Board shall
be filled by a majority vote of the stockholders at a meeting specially called for the
purpose. Thus, he concludes, the Board meeting on September 5, 1981 was tainted with
irregularity on account of the presence of illegally elected directors without whom the
results could have been different. TAN invoked the same allegations in his complaint filed
with the SEC. So much so, that on December 17, 1981, the SEC (Case No. 2145) rendered
a Partial Decision annulling the election of the three directors and ordered the convening
of a stockholders meeting for the purpose of electing new members of the Board. 9 The
correctness of said conclusion is not for us to pass upon in this case. TAN was present at
said meeting and again sought the issuance of injunctive relief from the SEC. The
foregoing indubitably show that, fundamentally, the controversy is intra-corporate in
nature.
3. ID.; ID.; SECURITIES AND EXCHANGE COMMISSION; JURISDICTION; ORIGINAL AND
EXCLUSIVE OVER INTRA-CORPORATE CONTROVERSIES UNDER PRESIDENTIAL DECREE NO.
902-A; CASE AT BAR. Presidential Decree No. 902-A vests in the Securities and
Exchange Commission original and exclusive jurisdiction to hear and decide controversies
involving the election of directors, officers, or managers of corporations registered with
the Commission, the relation between and among its stockholders, and between them and
the corporation. The instant case is not a case of dismissal. The situation is that of a
corporate office having been declared vacant, and of TANs not having been elected
thereafter. The matter of whom to elect is a prerogative that belongs to the Board, and
involves the exercise of deliberate choice and the faculty of discriminative selection.

Generally speaking, the relationship of a person to a corporation, whether as officer or as

agent or employee, is not determined by the nature of the services performed, but by the
incidents of the relationship as they actually exist. (Bruce v. Travelers Ins. Co., 266 F2d
781, cited in 19 Am. Jur. 2d 526).

DECISION

MELENCIO-HERRERA, J.:

This Petition for Certiorari questions the jurisdiction of respondent Labor Arbiter over the
present controversy (No. NCR-9-20-81) involving private respondent-complainant, Rufino
R. Tan (TAN), and petitioners, the Philippine School of Business Administration (PSBA), a
domestic corporation, and majority of its Directors.chanrobles lawlibrary : rednad

"1. The respondent labor arbiter illegally assumed jurisdiction over the complaint for
Illegal Dismissal because the failure of the private respondent to be re-elected to the
corporate position of Executive Vice-President was an intra-corporate question over which
the Securities and Exchange Commission had already assumed jurisdiction.
"2. The issuance by the respondent labor arbiter of a subpoena duces tecum was likewise
without jurisdiction especially if considered in the light of procedural and substantial
requirements therefor such that it is imperative that the supervising authority of this
Honorable Court should be exercised to prevent a substantial wrong and to do substantial
justice." 4
TAN counter-argues that his sole and exclusive cause of action is illegal dismissal, falling
within the jurisdiction of the NLRC, for he was dismissed suddenly and summarily without
cause in violation of his constitutional rights to due process and security of tenure. He
prays that his dismissal be declared illegal and that his reinstatement be ordered with full
backwages and without loss of other benefits.chanroblesvirtualawlibrary

TAN is one of the principal stockholders of PSBA. Before September 5, 1981, he was a
Director and the Executive Vice President enjoying salaries and allowances.

We issued a Temporary Restraining Order, enjoining respondent Labor Arbiter from

proceeding in any manner with the Labor Case, and subsequently gave due course to the
Petition.

On August 1, 1981, at the PSBA Board of Directors regular meeting, three members were
elected to fill vacancies in the seven-man body.

The jurisdiction of the SEC vis-a-vis the NLRC is in issue. An intracorporate controversy
would call for SEC jurisdiction. A labor dispute, that of the NLRC.

On September 5, 1981, also during a regular meeting, the Board declared all corporate
positions vacant except those of the Chairman and President, and at the same time
elected a new set of officers. TAN was not re-elected as Executive Vice-President. 1

Relevant and pertinent it is to note that the PSBA is a domestic corporation duly organized
and existing under our laws. General management is vested in a Board of seven directors
elected annually by the stockholders entitled to vote, who serve until the election and
qualification of their successors. Any vacancy in the Board of Directors is filled by a
majority vote of the subscribed capital stock entitled to vote at a meeting specially called
for the purpose, and the director or directors so chosen hold office for the unexpired term.
5 Corporate officers are provided for, among them, the Executive Vice-President, who is
elected by the Board of Directors from their own number. 6 The officers receive such
salaries or compensation as the Board of Directors may fix. 7 The By-Laws likewise
provide that should the position of any officer of the corporation become vacant by reason
of death, resignation, disqualification, or otherwise, the Board of Directors, by a majority
vote, may choose a successor or successors who shall hold office for the expired term of
his predecessor. 8

On September 16, 1981, TAN filed with the National Labor Relations Commission (NLRC)
(National Capital Region) a complaint for Illegal Dismissal against petitioners alleging that
he was "summarily, illegally, irregularly and improperly removed from his position as
Executive Vice-President . . . without cause, investigation or notice" (NLRC Case No. NCR9-20-81) (the Labor Case, in brief).
On September 21, 1981, TAN also filed a one-million-peso damage suit against petitioners
before the then Court of First Instance of Rizal, Quezon City, for illegal and oppressive
removal (Civil Case No. Q-33444).
And, on September 28, 1981, TAN lodged before the Securities and Exchange Commission
(SEC) another complaint against petitioners essentially questioning the validity of the
PSBA elections of August 1, 1981 and September 5, 1981, and of his "ouster" as Executive
Vice-President (SEC Case No. 2145).chanrobles lawlibrary : rednad
On October 13, 1981, SEC issued a subpoena duces tecum commanding the production of
corporate documents, books and records. 2
On October 15, 1981, respondent Labor Arbiter also issued a subpoena duces tecum to
submit the same books and documents. 3
Before the NLRC, petitioners moved for the dismissal of TANs complaint, invoking the
principle against split jurisdiction.
On October 22, 1981, petitioners availed of this Petition contending mainly
that:jgc:chanrobles.com.ph

It was at a board regular monthly meeting held on August 1, 1981, that three directors
were elected to fill vacancies. And, it was at the regular Board Meeting of September 5,
1981 that all corporate positions were declared vacant in order to effect a reorganization,
and at the ensuing election of officers, TAN was not re-elected as Executive VicePresident.
Basically, therefore, the question is whether the election of directors on August 1, 1981
and the election of officers on September 5, 1981, which resulted in TANs failure to be reelected, were validly held. This is the crux of the question that TAN has raised before the
SEC. Even in his position paper before the NLRC, TAN alleged that the election on August
1, 1981 of the three directors was in contravention of the PSBA By-Laws providing that
any vacancy in the Board shall be filled by a majority vote of the stockholders at a
meeting specially called for the purpose. Thus, he concludes, the Board meeting on
September 5, 1981 was tainted with irregularity on account of the presence of illegally
elected directors without whom the results could have been different.
TAN invoked the same allegations in his complaint filed with the SEC. So much so, that on

December 17, 1981, the SEC (Case No. 2145) rendered a Partial Decision annulling the
election of the three directors and ordered the convening of a stockholders meeting for
the purpose of electing new members of the Board. 9 The correctness of said conclusion is
not for us to pass upon in this case. TAN was present at said meeting and again sought
the issuance of injunctive relief from the SEC.
The foregoing indubitably show that, fundamentally, the controversy is intra-corporate in
nature. It revolves around the election of directors, officers or managers of the PSBA, the
relation between and among its stockholders, and between them and the corporation.
Private respondent also contends that his "ouster" was a scheme to intimidate him into
selling his shares and to deprive him of his just and fair return on his investment as a
stockholder received through his salary and allowances as Executive Vice-President. Vis-avis the NLRC, these matters fall within the jurisdiction of the SEC. Presidential Decree No.
902-A vests in the Securities and Exchange Commission:jgc:chanrobles.com.ph
". . . original and exclusive jurisdiction to hear and decide cases
involving:jgc:chanrobles.com.ph
"a) Devices or schemes employed by or any acts, of the board of directors, business
associates, its officers or partners, amounting to fraud and misrepresentation which may
be detrimental to the interest of the public and/or stockholders, partners, members of
associations or organizations registered with the Commission.
"b) Controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such entity;

PEARSON & GEORGE, (S.E. ASIA), INC. petitioner, vs. NATIONAL LABOR
RELATIONS COMMISSION and LEOPOLDO LLORENTE, respondents.
DECISION

"c) Controversies in the election or appointments of directors, trustees, officers or

managers of such corporations, partnerships or associations. 10

DAVIDE, JR., J.:

This is not a case of dismissal. The situation is that of a corporate office having been
declared vacant, and of TANs not having been elected thereafter. The matter of whom to
elect is a prerogative that belongs to the Board, and involves the exercise of deliberate
choice and the faculty of discriminative selection. Generally speaking, the relationship of a
person to a corporation, whether as officer or as agent or employee, is not determined by
the nature of the services performed, but by the incidents of the relationship as they
actually exist. 11

In this special civil action for certiorari under Rule 65 of the Rules of Court, the
petitioner seeks the annulment of the decision of 22 April 1993 [1] and order of 25
November 1993[2] of public respondent National Labor Relations Commission (NLRC) in
NLRC CA No. 0034-07-92 which, respectively, dismissed the petitioners appeal from the
decision of the Labor Arbiter in NLRC NCR Case No. 00-04-02127-90 and denied the
petitioners motion for reconsideration.

With the foregoing conclusion, it follows that the issuance of a subpoena duces tecum by
the Labor Arbiter will have to be set aside.
WHEREFORE, judgment is hereby rendered (1) ordering respondent Labor Arbiter to
dismiss the complaint in NLRC Case No. NCR-9-20-81 for lack of jurisdiction; (2) nullifying
the subpoena duces tecum issued by him in said case; and (3) declaring the Temporary
Restraining Order heretofore issued permanent.
No costs.
SO ORDERED.

The petitioner insists that the Labor Arbiter and the NLRC do not have jurisdiction
over the private respondents complaint for illegal dismissal arising out of his removal as
Managing Director of the petitioner due to his non-reelection and the abolition of the said
position. It claims that the matter is intra-corporate and thus falls within the exclusive
jurisdiction of the Securities and Exchange Commission (SEC) pursuant to Section 5(c) of
P.D. No. 902-A.
In a Manifestation submitted in lieu of the required comment on the petition, the
Office of the Solicitor General agrees with the petitioner that the NLRC has no jurisdiction
over the private respondents complaint for illegal dismissal and prays that the NLRC be
granted a new period within which to file its own comment should it desire to do so.
The NLRC filed its own comment contending that it has jurisdiction over the case
because the private respondent was not just an incorporator but also a Managing Director
and a line officer or an employee of the petitioner with a salary of P33,000.00 a

month; hence, his complaint for illegal dismissal as such employee is within the
jurisdiction of the NLRC.
The private respondent does not meet the substantive issues raised by the petitioner
but merely sets up the following defenses: (1) the petition was filed long after the lapse
often days provided for in Article 223 of the Labor Code; (2) a special civil action
for certiorari under Rule 65 is not the proper remedy because of the aforementioned
provision; (3) the petition is defective because it does not allege when the petitioner
received the NLRC decision; and (4) the petition raises factual issues.
In its Reply, the petitioner refutes the foregoing arguments of the private respondent
by stating that (1) this Court may take cognizance of petitions questioning the decisions
of the NLRC on the ground of lack or excess of jurisdiction or grave abuse of discretion
inspite of Article 223 of the Labor Code making final the said decisions after ten calendar
days from receipt thereof; (2) the only way by which a labor case may reach this Court is
through a petition for certiorari, which must be filed within a reasonable time from receipt
of the resolution denying the motion for reconsideration of the decision of the
Commission; (3) for purposes of showing the timeliness of the petition, the petitioner has
only to state, as it did, the date the order denying the motion for reconsideration was
received; and (4) in order to resolve the main issue raised in this petition, viz., whether
the NLRC has jurisdiction over this case, it was necessary to state the factual
circumstances of the case.
After deliberating on the pleadings submitted by the parties, we resolved to give due
course to this petition and to require the parties to submit their respective memoranda.
The factual antecedents as culled from the pleadings are not in dispute:
Private respondent Leopoldo Llorente (hereinafter Llorente) was a member of the
Board of Directors of the petitioner. In its organizational meeting on 12 January 1989, the
Board of Directors elected among themselves the corporate officers. Llorente was elected
as Vice-Chairman of the Board and as Managing Director for a term of one year and until
his successor should have been duly elected pursuant to the petitioners by-laws.
On 29 January 1990, Llorente was preventively suspended, with pay, by reason of
alleged anomalous transactions entered by him, which were prejudicial to the interest of
the petitioner.
In a letter dated 1 February 1990, Llorente demanded from the petitioner access to
his room which the latter allegedly sealed; compensation for his suspension or
termination; and delivery of his stock certificates for 9,998 shares.
On 17 February 1990, the petitioner sent Llorente a letter requiring him to explain
the acts enumerated therein which he allegedly committed.
On 27 February 1990, Llorente, through his counsel, protested his suspension and
requested an examination of the supporting documents to enable him to explain the
accusations leveled against him, but to no avail.
At the regular stockholders meeting on 5 March 1990, the stockholders of the
petitioner elected a new set of directors. Llorente was not reelected. On the same day, the
new Board of Directors held a meeting wherein it elected a new set of officers and
abolished the position of Managing Director.
On 12 March 1990, the petitioners counsel informed Llorente of his non-reelection,
the abolition of the position of Managing Director, and his termination for cause.

On 11 April 1990, Llorente filed with the Labor Arbiter a complaint for unfair labor
practice, illegal dismissal, and illegal suspension alleging therein that he was dismissed
without due process of law. The case was docketed as NLRC-NCR Case No. 00-04-0212790.
Upon receipt of the summons, the petitioner filed a Motion to Dismiss alleging
therein that the case falls within the jurisdiction of the SEC and not of the NLRC.
In his order of 1 March 1991, the Labor Arbiter denied the said motion on the ground
that Llorente was not merely acting as a Director but was likewise doing the functions of a
manager or line officer of the corporation.
The parties thereafter filed their respective position papers.
In a decision dated 18 May 1992, the Labor Arbiter found for Llorente, ruled that he
was illegally terminated from employment, and disposed as follows:
WHEREFORE, premises considered, judgment is hereby rendered finding the suspension
and the eventual dismissal as illegal and ordering respondent to:
1. Pay the complainant his full backwages from January 29, 1990 to date or in the amount
of Nine Hundred Twelve Thousand Seven Hundred Eighty (P912,780.00) Pesos;
2. To pay complainant attorneys fees equivalent to ten (10%) percent of his backwages;
3. This Office is cognizant of the fact that due to the instant case, the relations between
the parties is so strained that the reinstatement may no longer be feasible. Besides, there
may be no equivalent positionas the Office of the Managing Director had been
abolished; and
4. To pay complainant moral damages in the amount of Fifty Thousand (P50,000.00)
Pesos.
The petitioner appealed to the NLRC from the said decision.
Relying on our decision in LEP International Philippines, Inc. vs. National Labor
Relations Commission,[3] the NLRC dismissed the petitioners appeal and affirmed the
decision of the Labor Arbiter. It likewise denied the petitioners motion for reconsideration.
Hence, this petition for certiorari in support of which the petitioner asserts as
follows:
THE NLRC ACTED WITHOUT JURISDICTION AND WITH GRAVE ABUSE OF DISCRETION IN
ASSUMING JURISDICTION OVER THE PRESENT CONTROVERSY BETWEEN PETITIONER AND
PRIVATE RESPONDENT WHO IS ADMITTEDLY ONE OF ITS INCORPORATORS/STOCKHOLDERS
AND A CORPORATE OFFICER.
II. THE NLRC COMMITTED SERIOUS ERRORS AND ACTED WITH GRAVE ABUSE OF
DISCRETION IN FINDING THAT THE REMOVAL FROM OFFICE BY NON-REELECTION OF
PRIVATE RESPONDENT IS ONE OF ILLEGAL DISMISSAL CASE WHEREIN IT HAS JURISDICTION
TO TRY AND DECIDE.

III. THE NLRC COMMITTED SERIOUS ERROR AND ACTED WITH GRAVE ABUSE OF
DISCRETION, ASSUMING WITHOUT CONCEDING THAT IT HAS JURISDICTION OVER THE
PRESENT CONTROVERSY, THAT PRIVATE RESPONDENT WAS ILLEGALLY DISMISSED FROM
SERVICE.
The pith issue thus raised is whether it is the SEC or the NLRC which has jurisdiction
over the complaint for illegal dismissal which the private respondent had filed with the
NLRC.
We agree with both the petitioner and the Office of the Solicitor General that the
removal of Llorente as Managing Director is purely an intra-corporate dispute which falls
within the exclusive jurisdiction of the SEC and not of the NLRC.
In reality, Llorente was not dismissed. If he lost the position of Managing Director, it
was primarily because he was not reelected as Director during the regular stockholders
meeting on5 March 1990. The office of Managing Director presupposes that its occupant is
a Director; hence, one who is not a Director of the petitioner or who has ceased to be a
Director cannot be elected or appointed as a Managing Director. Elsewise stated, the
holding of the position of Director is a prerequisite for the election, appointment, or
designation of Managing Director. If a Managing Director should lose his position because
he ceased to be a Director for any reason, such as non-reelection as in the case of
Liorente, such loss is not dismissal but failure to qualify or to maintain a prerequisite for
that position. Then too, the position of Managing Director was abolished.
Any question relating or incident to the election of the new Board of Directors, the
non-reelection of Liorente as a Director, his loss of the position of Managing Director, or
the abolition of the said office are intra-corporate matters. Disputes arising therefrom are
intra-corporate disputes which, if unresolved within the corporate structure of the
petitioner, may be resolved in an appropriate action only by the SEC pursuant to its
authority under paragraphs (b) and (c), Section 5 of P.D. No. 902-A, [4] which provide as
follows:
SEC. 5. In addition to the regulatory and adjudicative functions of the Securities and
Exchange Commission over corporations, partnerships and other forms of associations
registered with it as expressly granted under existing laws and decrees, it shall have
original and exclusive jurisdiction to hear and decide cases involving:
xxx xxx xxx
(b) Controversies arising out of intra-corporate or partnership relations, between and
among stockholders, members, or associates; between any or all of them and the
corporation, partnership or association of which they are stockholders, members or
associates, respectively; and between such corporation, partnership or association and
the state insofar as it concerns their individual franchise or right to exist as such entity;
(c) Controversies in the election or appointments of directors, trustees, officers or
managers of such corporations, partnership or associations.
Thus, in Philippine School of Business Administration vs. Leano, [5] we ruled that a
complaint for illegal dismissal arising from a Board of Directors action declaring vacant all
corporate positions except that of Chairman and President, and from the non-reelection of
the former Executive Vice-President during the ensuing election of officers is not
cognizable by the NLRC.Pertinent portions of our opinion therein read as follows:

Basically, therefore, the question is whether the election of directors on August 1,

1981 and the election of officers on September 5, 1981, which resulted in TANs failure to
be re-elected, were validly held. This is the crux of the question that TAN has raised before
the SEC. Even in his position paper before the NLRC, TAN alleged that the election
on August 1, 1981of the three directors was in contravention of the PSBA By-Laws
providing that any vacancy in the Board shall be filled by a majority vote of the
stockholders at a meeting specially called for the purpose. Thus, he concludes, the Board
meeting on September 5, 1981 was tainted with irregularity on account of the presence of
illegally elected directors without whom the results could have been different.
TAN invoked the same allegations in his complaint filed with the SEC. So much so,
that on December 17, 1981, the SEC (Case No. 2145) rendered a Partial Decision annulling
the election of the three directors and ordered the convening of a stockholders
meeting for the purpose of electing new members of the Board. The correctness of said
conclusion is not for us to pass upon in this case. TAN was present at said meeting and
again sought the issuance of injunctive relief from the SEC.
The foregoing indubitably show that, fundamentally, the controversy is intracorporate in nature. It revolves around the election of directors, officers or managers of
the PSBA, the relation between and among its stockholders, and between them and the
corporation. Private respondent also contends that his ouster was a scheme to intimidate
him into selling his shares and to deprive him of his just and fair return on his investment
as a stockholder received through his salary and allowances as Executive VicePresident. Vis-a-vis the NLRC, these matters fall within the jurisdiction of the SEC.
xxx x x x xxx
This is not a case of dismissal. The situation is that of a corporate office having been
declared vacant, and of TANs not having been elected thereafter. The matter of whom to
elect is a prerogative that belongs to the Board, and involves the exercise of deliberate
choice and the faculty of discriminative selection. Generally speaking, the relationship of a
person to a corporation, whether as officer or as agent or employee, is not determined by
the nature of the services performed, but by the incidents of the relationship as they
actually exist.
We reiterated this rule in Dy vs. National Labor Relation Commission, [6] which
involved an action for illegal dismissal filed by a bank manager who was not reelected as
such, and in Fortune Cement Corporation vs. National Labor Relations Commission,
[7]
which involved a complaint for illegal dismissal instituted by an Executive Vice-President
of the corporation who lost that position when he was dismissed as such by the Board of
Directors for loss of trust and confidence.
The reliance by the NLRC on LEP International Philippines, Inc. vs. National Labor
Relations Commission is misplaced. What was challenged in that case was not the
jurisdiction of the respondent Commission but its act of upholding the validity of the
dismissal of LEPs Chief Executive, who was not a stockholder, much less a director, of LEP
but was merely a managerial employee of the said company.
WHEREFORE, the instant petition is GRANTED. The challenged decision of 22 April
1993 and order of 25 November 1993 of public respondent National Labor Relations
Commission in NLRC Case No. 0034-07-92 and the decision of 18 May 1992 of the Labor
Arbiter in NLRC NCR Case No. 00-04-02 127-90 are hereby ANNULLED and SET ASIDE for
having been rendered without jurisdiction. No pronouncement as to costs. SO ORDERED.

REAHS

CORPORATION, SEVERO CASTULO, ROMEO PASCUA, and DANIEL

VALENZUELA, petitioners,
vs. NATIONAL
LABOR
RELATIONS
COMMISSION, BONIFACIO RED, VICTORIA PADILLA, MA. SUSAN R.
CALWIT, SONIA DELA CRUZ, SUSAN DE LA CRUZ, EDNA WAHINGON,
NANCY B. CENITA and BENEDICTO A. TULABING, respondents.
DECISION

PADILLA, J.:
This is a petition for certiorari under Rule 65 of the Rules of Court to annul and set
aside the decision dated 29 April 1994 rendered by the National Labor Relations
Commission (NLRC) in NLRC Case No. 005024-93 entitled "Bonifacio Red, et al., v. Reah's
Corporation, et. al.", which affirmed the decision of the Labor arbiter holding individual
petitioners jointly and severally liable with petitioner Reah's Corporation to pay private
respondents' claims for underpayment of wages, holiday pay, 13th month pay and
separation pay.
The facts, as culled by the labor arbiter from the position papers of both parties, are
as follows:
"Complainant Bonifacio Red alleges that he started working as a supervisor at the health
and sauna parlor of respondents from September 5, 1977 to November 6, 1990, with a
salary of P50.00, that the said establishment was closed by respondents on November 6,
1990, without any notice and without paying his wages, separation pay and other benefits
under the law; and that he works a minimum of twelve (12) hours a day without being
paid overtime.
Complainant Benedicto Tulabing alleges that he started on December 16, 1986 up to
November 6, 1990 in the same establishment with a salary of P26.00 a day; that he works
thirteen (13) hours a day without payment of overtime pay.
Complainant Nancy Cenita and Susan Calwit alleges [sic] that they were hired as
waitresses on May 20, 1990 up to November 6, 1990 and paid on commission basis
at P0.25 per bottle of beer sold to or consumed by the customers and that they work ten
(10) hours a day without being paid overtime.
Complainants Edna Wahingon, Susan dela Cruz, Sonia dela Cruz and Victoria Padilla claims
[sic] working as attendants and were hired on different dates until November 6, 1990. All
were paid on commission basis at the rate of twenty (20%) percent of the service fee paid
by the customers, P90.00 and P110.00 respectively, for ordinary and VIP service; that
they render(ed) eleven (11) hours of work a day without being paid overtime; and that the
closure of the health parlor was illegal as they were not notified.
On the other hand, respondents allege that sometime in 1986, a certain Ms. Soledad
Domingo, the sole proprietress and operator of Rainbow Sauna located at 316 Araneta
Avenue, Quezon City, offered to sell her business to respondent Reah's Corporation. After
the sale, all the assets of Ms. Domingo were turned over to respondent Reah's, which put
a sing-along coffee shop and massage clinic; that complainant Red started his
employment on the first week of December 1988 as a roomboy at P50.00/day and was
given living quarters inside the premises as he requested; that sometime in March 1989,
complainant Red asked permission to go to Bicol for a period of ten (10) days, which was

granted, and was given an advance money of P1,200.00 to bring some girls from the
province to work as attendants at the respondent's massage clinic; that it was only on
January 1, 1990 that complainant Red returned and was re-hired under the same terms
and conditions of his previous employment with the understanding that he will have to
refund the P1,200.00 cash advance given to him; that due to poor business, increase in
the rental cost and the failure of Meralco to reconnect the electrical services in the
establishment, it suffered losses leading to its closure." [1]
On 6 May 1993, the labor arbiter rendered judgment dismissing private respondents'
complaints for unfair labor practice and illegal dismissal but upholding the claims for
separation pay, underpayment of wages, holiday pay and 13th month pay. All eight (8)
private respondents were awarded separation pay. However, only Bonifacio Red and
Benedicto Tulabing were declared entitled to the claimed labor standard benefits as the
rest were found to have been employed on commission basis. The labor arbiter further
awarded attorney's fees to private respondents Bonifacio Red and Benedicto Tulabing
amounting to ten (10%) percent of their adjudged money claims.
Petitioners appealed the labor arbiter's decision to the NLRC, contending mainly that
Article 283 of the Labor Code, "exempts establishment(s) from payment of termination
pay when the closure of business is due to serious business losses or financial reverses";
that petitioners Castulo, Pascua and Valenzuela, while admittedly the acting chairman of
the board, board member and accountant acting manager respectively of Reah's
Corporation, cannot be held jointly and severally liable with Reah's "unless there is
evidence to show that the cause of the closure of the business was due to the criminal
negligence of the [respondent] officers."
The NLRC dismissed the appeal based on the following dispositions:
"Anent the issue on separation pay, Article 283 of the Labor Code provides that '[T]he
employer may x x x terminate the employment of any employee due to x x x the closing
or cessation of operation of the establishment or undertaking x x x by serving a written
notice on the workers and the Ministry of Labor and Employment at least one (1) month
before the intended date thereof. x x x.' This, respondents failed to comply. Neither did
respondents present any evidence to prove that Reah's closure was really due to SERIOUS
business losses or financial reverses. We only have respondents' mere say-so on the
matter.
The Supreme Court held in Basilio Balasbas vs. NLRC, et. al. (G.R. No. 85286, August 24,
1992, 3rd Division, Romero, J.) that 'Under Article 283 of the Labor Code, the closure of a business establishment or reduction
of personnel is a ground for the termination of the services of any employee unless the
closing or retrenching is for the purpose of circumventing the provision of the law. But
while business reverses can be a just cause for terminating employees, these must be
sufficiently proved by the employer. (Indino vs. NLRC, G.R. No. 80352, September 29,
1989, 178 SCRA 168).'
Thus, we cannot but agree that complainants are entitled to the payment of separation
pay."[2]
Petitioners filed a motion for reconsideration but this was denied by the NLRC on 30
August 1994. In the present petition, petitioners raise three (3) issues which, for brevity
and clarity, may be simplified as follows:

I.
WHETHER OR NOT PETITIONERS-OFFICERS CAN BE HELD JOINTLY AND SEVERALLY LIABLE
WITH THE CORPORATION IN THE PAYMENT OF SEPARATION PAY TO PRIVATE RESPONDENTS
UNDER ARTICLE 283 OF THE LABOR CODE.
II.
WHETHER OR NOT THE OFFICERS OF REAH'S CORPORATION CAN BE HELD JOINTLY AND
SEVERALLY LIABLE WITH THE CORPORATION IN PAYMENT OF THE MONETARY CLAIMS
AWARDED PRIVATE RESPONDENTS IN THE ABSENCE OF ANY FINDING OF UNFAIR LABOR
PRACTICES OR ILLEGAL DISMISSAL.
III.
WHETHER OR NOT THERE IS LEGAL BASIS FOR THE NLRC TO AFFIRM THE AWARD OF 10%
ATTORNEY'S FEES TO PRIVATE RESPONDENTS.
Petitioners argue that since the charges of illegal dismissal and unfair labor practices
were dismissed by the labor arbiter, they cannot be held solidarily liable with the
corporation for the payment of separation pay and labor standard benefits to private
respondents, when they used their business judgment to close the establishment because
of serious business losses.They contend that even if they were the top corporate officers
of Reah's corporation at the time they closed the business, the corporation has a
personality that is separate and distinct from its officers and stockholders. Since there
was no finding that they violated Sec. 31 of the Corporation Code [3] they cannot be held
solidarily liable with the corporation. Petitioners further maintain that the corporation also
cannot be held liable because Article 283 of the Labor Code "orders payment of
separation pay only when the closure of the business is due to causes other than serious
business losses or financial reverses".
Petitioners have obviously resorted to a misreading of the last sentence of Article
283 which provides that " x x x In case of retrenchment to prevent losses and in cases of closures or cessation of
operations of establishment or undertaking not due to serious business losses or financial
reverses, the separation pay shall be equivalent to one (1) month pay or at least () month
pay for every year of service, whichever is higher. A fraction of at least six (6) months
shall be considered as one (1) whole year."
It is not the function of the law nor its intent to supplant the prerogative of
management in running its business, such as, to compel the latter to operate at a
continuing loss. Thus, Article 283 provides as an authorized cause in the termination of
employment the "closing or cessation of operation of the establishment or
undertaking". However, the burden of proving that the termination was for a valid or
authorized cause shall rest on the employer. [4] If the business closure is due to serious
losses or financial reverses, the employer must present sufficient proof of its actual or
imminent losses; it must show proof that the cessation of or withdrawal from business
operations was bona fide in character.[5]
The grant of separation pay, as an incidence of termination of employment under
Article 283, is a statutory obligation on the part of the employer and a demandable right

on the part of the employee, except only where the closure or cessation of operations was
due to serious business losses or financial reverses and there is sufficient proof of this fact
or condition. In the absence of such proof of serious business losses or financial reverses,
the employer closing his business is obligated to pay his employees and workers their
separation pay.
The rule, therefore, is that in all cases of business closure or cessation of operation
or undertaking of the employer, the affected employee is entitled to separation pay. This
is consistent with the state policy of treating labor as a primary social economic force,
affording full protection to its rights as well as its welfare. [6] The exception is when the
closure of business or cessation of operations is due to serious business losses or financial
reverses; duly proved, in which case, the right of affected employees to separation pay is
lost for obvious reasons. In the case at bar, the corporation's alleged serious business
losses and financial reverses were not amply shown or proved.
We now proceed to rule on the corollary issue of whether or not individual petitioners
Castulo, Pascua and Valenzuela should be held liable in solidum with the corporation
(REAH's) in the payment to private respondents of separation pay and labor standard
benefits.
As a general rule established by legal fiction, the corporation has a personality
separate and distinct from its officers, stockholders and members. Hence, officers of a
corporation are not personally liable for their official acts unless it is shown that they have
exceeded their authority. This fictional veil, however, can be pierced by the very same law
which created it when "the notion of the legal entity is used as a means to perpetrate
fraud, an illegal act, as a vehicle for the evasion of an existing obligation, and to confuse
legitimate issues". Under the Labor Code, for instance, when a corporation violates a
provision declared to be penal in nature, the penalty shall be imposed upon the guilty
officer or officers of the corporation.[7]
The Solicitor General, in behalf of private respondents, argues that the doctrine laid
down in the case of A.C. Ransom Labor Union - CCLU v. NLRC [8] should be applied to the
case at bar. In that case, a judgment against a corporation (A.C. Ransom) to reinstate its
dismissed employees with back wages was declared to be a continuing solidary liability of
the company president and all who may have thereafter succeeded to said office after the
records failed to identify the officer or agents directly responsible for failure to pay the
back wages of its employees. The Court noted Ransom's subterfuge in organizing another
family corporation while the case was on litigation with the intent to phase out the
existing corporation in case of an adverse decision, as what actually happened when it
ceased operations a few months after the labor arbiter ruled in favor of Ransom's
employees.
The basis, said the Court, is found in Article 212(c) of the Labor Code which provides
that "an employer includes any person acting in the interest of an employer, directly or
indirectly.""Since Ransom is an artificial person, it must have an officer who can be
presumed to be the employer, x x x. The corporation only in the technical sense is the
employer."
This ruling was eventually applied by the Court in the following cases: Maglutac v.
NLRC[9] an illegal dismissal case, where the most ranking officer of Commart, petitioner
therein, was held solidarily liable with the corporation which thereafter became insolvent
and suspended operations; Chua v. NLRC,[10] also an illegal dismissal case, where the vicepresident of a corporation was held solidarily liable with the corporation for the payment
of the unpaid salaries of its president; and in Gudez v. NLRC,[11] where the president and
treasurer were held solidarily liable with the corporation which had ceased operations but
failed to pay the wage and money claims of its employees.

These cases, however, should be construed still as exceptions to the doctrine of

separate personality of a corporation which should remain as the guiding rule in
determining corporate liability to its employees. At the very least, as what we held
in Pabalan v. NLRC,[12] to justify solidary liability, "there must be an allegation or showing
that the officers of the corporation deliberately or maliciously designed to evade the
financial obligation of the corporation to its employees", or a showing that the officers
indiscriminately stopped its business to perpetrate an illegal act, as a vehicle for the
evasion of existing obligations, in circumvention of statutes, and to confuse legitimate
issues.
In the case at bar, the thrust of petitioners' arguments was aimed at confining
liability solely to the corporation, as if the entity were an automaton designed to perform
functions at the push of a button. The issue, however, is not limited to payment of
separation pay under Article 283 but also payment of labor standard benefits such as
underpayment of wages, holiday pay and 13th month pay to two of the private
respondents. While there is no sufficient evidence to conclude that petitioners have
indiscriminately stopped the entity's business, at the same time, petitioners have opted to
abstain from presenting sufficient evidence to establish the serious and adverse financial
condition of the company.
As the NLRC aptly stated:
"Neither did respondents (petitioners) present any evidence to prove that Reah's closure
was really due to SERIOUS business losses or financial reverses. We only have
respondents mere say-so on the matter."[13]
This uncaring attitude on the part of the officers of Reah's gives credence to the
supposition that they simply ignored the side of the workers who, more or less, were only
demanding what is due them in accordance with law. In fine, these officers were conscious
that the corporation was violating labor standard provisions but they did not act to correct
these violations; instead, they abruptly closed business. Neither did they offer separation
pay to the employees as they conveniently resorted to a lame excuse that they suffered
serious business losses, knowing fully well that they had no substantial proof in their
hands to prove such losses.
The findings of the NLRC did not indicate whether or not Reah's Corporation has
continued its personality after it had stopped operations when it closed its sing-along,
coffee shop, and massage clinic in November 1990. But in its petition, petitioners aver,
among others, that the "company totally folded for lack of patrons, (disconnection of) light
and discontinuance of the leased premises [sic] for failure to pay the increased monthly
rentals from P8,000 to P20,000."[14] Under the Rules of Evidence, petitioners are bound by
the allegations contained in their pleading. Since petitioners themselves have admitted
that they have dissolved the corporation de facto, the Court presumes that Reah's
Corporation had become insolvent and therefore would be unable to satisfy the judgment
in favor of its employees. Under these circumstances, we cannot allow labor to go home
with an empty victory. Neither would it be oppressive to capital to hold petitioners
Castulo, Pascua and Valenzuela solidarily liable with Reah's Corporation because the law
presumes that they have acted in the latter's interest when they obstinately refused to
grant the labor standard benefits and separation pay due private respondent-employees.
The last issue raised by petitioners is whether there is legal basis for the payment of
10% attorney's fees out of the total amount awarded to private respondents Red and
Tulabing. The Court finds this portion of the assailed decision to have been rendered with
grave abuse of discretion as both the labor arbiter and the NLRC failed to make an
express finding of fact and cite the applicable law to justify the grant of such award. Under

Article 111 of the Labor Code, 10% attorneys fees may be assessed only in cases where
there is an unlawful withholding of wages, [15] or under Article 222 those arising from
collective bargaining negotiations that may be charged against union funds in an amount
to be agreed upon by the parties. None of these situations exists in the case at bar.
WHEREFORE, the decision of respondent National Labor Relations Commission is
hereby AFFIRMED in so far as it holds petitioners Castulo, Pascua, and Valenzuela jointly
and severally liable with Reah's Corporation to pay all private respondents separation pay
and private respondents Red and Tulabing other monetary benefits but the award of ten
percent (10%) attorneys fees is hereby DELETED for lack of factual and legal basis.
SO ORDERED.

a printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of
Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No.
11, Acuerdo No. 1) granting further concessions to the planters over and above those
contained in the printed Amended Milling Contract. The bone of contention is paragraph 9
of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en

consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx

G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.
Taada, Teehankee and Carreon for plaintiffs-appellants.
Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel
the defendant Milling Company to increase plaintiff's share in the sugar produced from
their cane, from 60% to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and
the Limited co-partnership Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee's sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting product should be divided
in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was
proposed to execute amended milling contracts, increasing the planters' share to 60% of
the manufactured sugar and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to 45 years. To this effect,

xxx

xxx

9.a Que si durante la vigencia de este contrato de Molienda

Enmendado, lascentrales azucareras, de Negros Occidental, cuya
produccion anual de azucar centrifugado sea mas de una tercera parte
de la produccion total de todas lascentrales azucareras de Negros
Occidental, concedieren a sus plantadores mejores condiciones que la
estipuladas en el presente contrato, entonces esas mejores condiciones
se concederan y por el presente se entenderan concedidas a los
platadores que hayan otorgado este Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation

Las enmiendas arriba transcritas forman parte del contrato de molienda

enmendado, otorgado por y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that
the stipulations contained in the resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio, being in effect a donation
that was ultra vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this
Court.

We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that when the Milling Contract
was executed, the concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the face of such
concessions, the appellants should reject them or consider them as separate and apart
from the main amended milling contract, specially taking into account that appellant
Alfredo Montelibano was, at the time, the President of the Planters Association (Exhibit 4,
p. 11) that had agitated for the concessions embodied in the resolution of August 20,
1936. That the resolution formed an integral part of the amended milling contract, signed
on September 10, and not a separate bargain, is further shown by the fact that a copy of
the resolution was simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court
below that the resolution constituted gratuitous concessions not supported by any
consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after the appellants had
already bound themselves to the terms of the printed milling contract. But this was not
the case. When the resolution was adopted and the additional concessions were made by
the company, the appellants were not yet obligated by the terms of the printed contract,
since they admittedly did not sign it until twenty-one days later, on September 10, 1936.
Before that date, the printed form was no more than a proposal that either party could
modify at its pleasure, and the appellee actually modified it by adopting the resolution in
question. So that by September 10, 1936 defendant corporation already understood that
the printed terms were not controlling, save as modified by its resolution of August 20,
1936; and we are satisfied that such was also the understanding of appellants herein, and
that the minds of the parties met upon that basis. Otherwise there would have been no
consent or "meeting of the minds", and no binding contract at all. But the conduct of the
parties indicates that they assumed, and they do not now deny, that the signing of the
contract on September 10, 1936, did give rise to a binding agreement. That agreement
had to exist on the basis of the printed terms as modified by the resolution of August 20,
1936, or not at all. Since there is no rational explanation for the company's assenting to
the further concessions asked by the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension of the contract period, to
allow the company now to retract such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be
no novation unless two distinct and successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory
forms or solemn agreements (and it is not claimed that this is one), it is the assent and
concurrence (the "meeting of the minds") of the parties, and not the setting down of its
terms, that constitutes a binding contract. And the fact that the addendum is only signed
by the General Manager of the milling company emphasizes that the addition was made
solely in order that the memorial of the terms of the agreement should be full and
complete.
Much is made of the circumstance that the report submitted by the Board of Directors of
the appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed
"amended milling contracts", and did not make any reference at all to the terms of the
resolution of August 20, 1936. But a reading of this report shows that it was not intended
to inventory all the details of the amended contract; numerous provisions of the printed
terms are alao glossed over. The Directors of the appellee Milling Company had no reason
at the time to call attention to the provisions of the resolution in question, since it
contained mostly modifications in detail of the printed terms, and the only major change
was paragraph 9 heretofore quoted; but when the report was made, that paragraph was
not yet in effect, since it was conditioned on other centrals granting better concessions to
their planters, and that did not happen until after 1950. There was no reason in 1936 to
emphasize a concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in
itself, and not otherwise prohibited, is done for the purpose of serving corporate
ends, and is reasonably tributary to the promotion of those ends, in a substantial,
and not in a remote and fanciful sense, it may fairly be considered within charter
powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so, the corporation
has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950,
pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central,
the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according
to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or close down at a
smaller loss, is a purely business and economic problem to be determined by the
directors of the corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to the honest decision
of officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of
62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance with paragraph 9 of the
appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the
printed Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;
2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional
increases as they may be entitled to for the crop years subsequent to those herein
adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

G.R. No. L-15092

May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.
BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

Taada, Teehankee and Carreon for plaintiffs-appellants.

Hilado and Hilado for defendant-appellee.
REYES, J.B.L., J.:
Appeal on points of law from a judgment of the Court of First Instance of Occidental
Negros, in its Civil Case No. 2603, dismissing plaintiff's complaint that sought to compel
the defendant Milling Company to increase plaintiff's share in the sugar produced from
their cane, from 60% to 62.33%, starting from the 1951-1952 crop year.1wph1.t
It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and
the Limited co-partnership Gonzaga and Company, had been and are sugar planters
adhered to the defendant-appellee's sugar central mill under identical milling contracts.
Originally executed in 1919, said contracts were stipulated to be in force for 30 years
starting with the 1920-21 crop, and provided that the resulting product should be divided
in the ratio of 45% for the mill and 55% for the planters. Sometime in 1936, it was
proposed to execute amended milling contracts, increasing the planters' share to 60% of
the manufactured sugar and resulting molasses, besides other concessions, but extending
the operation of the milling contract from the original 30 years to 45 years. To this effect,
a printed Amended Milling Contract form was drawn up. On August 20, 1936, the Board of
Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a resolution (Acts No.
11, Acuerdo No. 1) granting further concessions to the planters over and above those
contained in the printed Amended Milling Contract. The bone of contention is paragraph 9
of this resolution, that reads as follows:
ACTA No. 11
SESSION DE LA JUNTA DIRECTIVA
AGOSTO 20, 1936
xxx

xxx

xxx

Acuerdo No. 1. Previa mocion debidamente secundada, la Junta en

consideracion a una peticion de los plantadores hecha por un comite
nombrado por los mismos, acuerda enmendar el contrato de molienda
enmendado medientelas siguentes:
xxx

xxx

xxx

9.a Que si durante la vigencia de este contrato de Molienda

Enmendado, lascentrales azucareras, de Negros Occidental, cuya
produccion anual de azucar centrifugado sea mas de una tercera parte
de la produccion total de todas lascentrales azucareras de Negros
Occidental, concedieren a sus plantadores mejores condiciones que la
estipuladas en el presente contrato, entonces esas mejores condiciones
se concederan y por el presente se entenderan concedidas a los
platadores que hayan otorgado este Contrato de Molienda Enmendado.
Appellants signed and executed the printed Amended Milling Contract on September 10,
1936, but a copy of the resolution of August 10, 1936, signed by the Central's General
Manager, was not attached to the printed contract until April 17, 1937; with the notation

Las enmiendas arriba transcritas forman parte del contrato de molienda

enmendado, otorgado por y la Bacolod-Murcia Milling Co., Inc.
In 1953, the appellants initiated the present action, contending that three Negros sugar
centrals (La Carlota, Binalbagan-Isabela and San Carlos), with a total annual production
exceeding one-third of the production of all the sugar central mills in the province, had
already granted increased participation (of 62.5%) to their planters, and that under
paragraph 9 of the resolution of August 20, 1936, heretofore quoted, the appellee had
become obligated to grant similar concessions to the plaintiffs (appellants herein). The
appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging that
the stipulations contained in the resolution were made without consideration; that the
resolution in question was, therefore, null and void ab initio, being in effect a donation
that was ultra vires and beyond the powers of the corporate directors to adopt.
After trial, the court below rendered judgment upholding the stand of the defendant
Milling company, and dismissed the complaint. Thereupon, plaintiffs duly appealed to this
Court.
We agree with appellants that the appealed decisions can not stand. It must be
remembered that the controverted resolution was adopted by appellee corporation as a
supplement to, or further amendment of, the proposed milling contract, and that it was
approved on August 20, 1936, twenty-one days prior to the signing by appellants on
September 10, of the Amended Milling Contract itself; so that when the Milling Contract
was executed, the concessions granted by the disputed resolution had been already
incorporated into its terms. No reason appears of record why, in the face of such
concessions, the appellants should reject them or consider them as separate and apart
from the main amended milling contract, specially taking into account that appellant
Alfredo Montelibano was, at the time, the President of the Planters Association (Exhibit 4,
p. 11) that had agitated for the concessions embodied in the resolution of August 20,
1936. That the resolution formed an integral part of the amended milling contract, signed
on September 10, and not a separate bargain, is further shown by the fact that a copy of
the resolution was simply attached to the printed contract without special negotiations or
agreement between the parties.
It follows from the foregoing that the terms embodied in the resolution of August 20, 1936
were supported by the same causa or consideration underlying the main amended milling
contract; i.e., the promises and obligations undertaken thereunder by the planters, and,
particularly, the extension of its operative period for an additional 15 years over and
beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court
below that the resolution constituted gratuitous concessions not supported by any
consideration is legally untenable.
All disquisition concerning donations and the lack of power of the directors of the
respondent sugar milling company to make a gift to the planters would be relevant if the
resolution in question had embodied a separate agreement after the appellants had
already bound themselves to the terms of the printed milling contract. But this was not
the case. When the resolution was adopted and the additional concessions were made by
the company, the appellants were not yet obligated by the terms of the printed contract,
since they admittedly did not sign it until twenty-one days later, on September 10, 1936.
Before that date, the printed form was no more than a proposal that either party could
modify at its pleasure, and the appellee actually modified it by adopting the resolution in
question. So that by September 10, 1936 defendant corporation already understood that
the printed terms were not controlling, save as modified by its resolution of August 20,

1936; and we are satisfied that such was also the understanding of appellants herein, and
that the minds of the parties met upon that basis. Otherwise there would have been no
consent or "meeting of the minds", and no binding contract at all. But the conduct of the
parties indicates that they assumed, and they do not now deny, that the signing of the
contract on September 10, 1936, did give rise to a binding agreement. That agreement
had to exist on the basis of the printed terms as modified by the resolution of August 20,
1936, or not at all. Since there is no rational explanation for the company's assenting to
the further concessions asked by the planters before the contracts were signed, except as
further inducement for the planters to agree to the extension of the contract period, to
allow the company now to retract such concessions would be to sanction a fraud upon the
planters who relied on such additional stipulations.
The same considerations apply to the "void innovation" theory of appellees. There can be
no novation unless two distinct and successive binding contracts take place, with the later
designed to replace the preceding convention. Modifications introduced before a bargain
becomes obligatory can in no sense constitute novation in law.
Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not
attached to the printed contract until April 17, 1937. But, except in the case of statutory
forms or solemn agreements (and it is not claimed that this is one), it is the assent and
concurrence (the "meeting of the minds") of the parties, and not the setting down of its
terms, that constitutes a binding contract. And the fact that the addendum is only signed
by the General Manager of the milling company emphasizes that the addition was made
solely in order that the memorial of the terms of the agreement should be full and
complete.
Much is made of the circumstance that the report submitted by the Board of Directors of
the appellee company in November 19, 1936 (Exhibit 4) only made mention of 90%, the
planters having agreed to the 60-40 sharing of the sugar set forth in the printed
"amended milling contracts", and did not make any reference at all to the terms of the
resolution of August 20, 1936. But a reading of this report shows that it was not intended
to inventory all the details of the amended contract; numerous provisions of the printed
terms are alao glossed over. The Directors of the appellee Milling Company had no reason
at the time to call attention to the provisions of the resolution in question, since it
contained mostly modifications in detail of the printed terms, and the only major change
was paragraph 9 heretofore quoted; but when the report was made, that paragraph was
not yet in effect, since it was conditioned on other centrals granting better concessions to
their planters, and that did not happen until after 1950. There was no reason in 1936 to
emphasize a concession that was not yet, and might never be, in effective operation.
There can be no doubt that the directors of the appellee company had authority to modify
the proposed terms of the Amended Milling Contract for the purpose of making its terms
more acceptable to the other contracting parties. The rule is that
It is a question, therefore, in each case of the logical relation of the act to the
corporate purpose expressed in the charter. If that act is one which is lawful in
itself, and not otherwise prohibited, is done for the purpose of serving corporate
ends, and is reasonably tributary to the promotion of those ends, in a substantial,
and not in a remote and fanciful sense, it may fairly be considered within charter
powers. The test to be applied is whether the act in question is in direct and
immediate furtherance of the corporation's business, fairly incident to the
express powers and reasonably necessary to their exercise. If so, the corporation

has the power to do it; otherwise, not. (Fletcher Cyc. Corp., Vol. 6, Rev. Ed. 1950,
pp. 266-268)
As the resolution in question was passed in good faith by the board of directors, it is valid
and binding, and whether or not it will cause losses or decrease the profits of the central,
the court has no authority to review them.
They hold such office charged with the duty to act for the corporation according
to their best judgment, and in so doing they cannot be controlled in the
reasonable exercise and performance of such duty. Whether the business of a
corporation should be operated at a loss during depression, or close down at a
smaller loss, is a purely business and economic problem to be determined by the
directors of the corporation and not by the court. It is a well-known rule of law
that questions of policy or of management are left solely to the honest decision
of officers and directors of a corporation, and the court is without authority to
substitute its judgment of the board of directors; the board is the business
manager of the corporation, and so long as it acts in good faith its orders are not
reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).
And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian
Philippines, San Carlos and Binalbagan (which produce over one-third of the entire annual
sugar production in Occidental Negros) have granted progressively increasing
participations to their adhered planter at an average rate of

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all
appellants thereafter
4.2% for the 1952-1953 crop year;
4.3% for the 1953-1954 crop year;
4.5% for the 1954-1955 crop year;
3.5% for the 1955-1956 crop year;
with interest at the legal rate on the value of such differential during the time they were
withheld; and the right is reserved to plaintiffs-appellants to sue for such additional
increases as they may be entitled to for the crop years subsequent to those herein
adjudged.
Costs against appellee, Bacolod-Murcia Milling Co.

G.R. No. L-68555 March 19, 1993

PRIME WHITE CEMENT CORPORATION, petitioner,
vs.
HONORABLE INTERMEDIATE APPELLATE COURT and ALEJANDRO TE, respondents.
CAMPOS, JR., J.:

62.333%

for the 1951-52 crop year;

64.2%

for 1952-53;

64.3%

for 1953-54;

64.5%

for 1954-55; and

63.5%

for 1955-56,

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of
August 20, 1936, duty bound to grant similar increases to plaintiffs-appellants herein.
WHEREFORE, the decision under appeal is reversed and set aside; and judgment is
decreed sentencing the defendant-appellee to pay plaintiffs-appellants the differential or
increase of participation in the milled sugar in accordance with paragraph 9 of the
appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the
printed Amended Milling Contract, or the value thereof when due, as follows:
0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants
having received an additional 2% corresponding to said year in October, 1953;

Before Us is a Petition for Review on Certiorari filed by petitioner Prime White Cement
Corporation seeking the reversal of the decision * of the then Intermediate Appellate
Court, the dispositive portion of which reads as follows:
WHEREFORE, in view of the foregoing, the judgment appealed from is
hereby affirmed in toto. 1
The facts, as found by the trial court and as adopted by the respondent Court are hereby
quoted, to wit:
On or about the 16th day of July, 1969, plaintiff and defendant
corporation thru its President, Mr. Zosimo Falcon and Justo C. Trazo, as
Chairman of the Board, entered into a dealership agreement (Exhibit A)
whereby said plaintiff was obligated to act as the exclusive dealer
and/or distributor of the said defendant corporation of its cement
products in the entire Mindanao area for a term of five (5) years and
proving (sic) among others that:
a. The corporation shall, commencing September,
1970, sell to and supply the plaintiff, as dealer with
20,000 bags (94 lbs/bag) of white cement per month;
b. The plaintiff shall pay the defendant corporation
P9.70, Philippine Currency, per bag of white cement,
FOB Davao and Cagayan de Oro ports;

c. The plaintiff shall, every time the defendant

corporation is ready to deliver the good, open with
any bank or banking institution a confirmed,
unconditional, and irrevocable letter of credit in favor
of the corporation and that upon certification by the
boat captain on the bill of lading that the goods have
been loaded on board the vessel bound for Davao the
said bank or banking institution shall release the
corresponding amount as payment of the goods so
shipped.
Right after the plaintiff entered into the aforesaid dealership agreement,
he placed an advertisement in a national, circulating newspaper the fact
of his being the exclusive dealer of the defendant corporation's white
cement products in Mindanao area, more particularly, in the Manila
Chronicle dated August 16, 1969 (Exhibits R and R-1) and was even
congratulated by his business associates, so much so, he was asked by
some of his businessmen friends and close associates if they can be his
sub-dealer in the Mindanao area.
Relying heavily on the dealership agreement, plaintiff sometime in the
months of September, October, and December, 1969, entered into a
written agreement with several hardware stores dealing in buying and
selling white cement in the Cities of Davao and Cagayan de Oro which
would thus enable him to sell his allocation of 20,000 bags regular
supply of the said commodity, by September, 1970 (Exhibits O, O-1, O2, P, P-1, P-2, Q, Q-1 and Q-2). After the plaintiff was assured by his
supposed buyer that his allocation of 20,000 bags of white cement can
be disposed of, he informed the defendant corporation in his letter
dated August 18, 1970 that he is making the necessary preparation for
the opening of the requisite letter of credit to cover the price of the due
initial delivery for the month of September, 1970 (Exhibit B), looking
forward to the defendant corporation's duty to comply with the
dealership agreement. In reply to the aforesaid letter of the plaintiff, the
defendant corporation thru its corporate secretary, replied that the
board of directors of the said defendant decided to impose the following
conditions:
a. Delivery of white cement shall commence at the
end of November, 1970;
b. Only 8,000 bags of white cement per month for only
a period of three (3) months will be delivered;
c. The price of white cement was priced at P13.30 per
bag;
d. The price of white cement is subject to
readjustment unilaterally on the part of the defendant;
e. The place of delivery of white cement shall be
Austurias (sic);

f. The letter of credit may be opened only with the

Prudential Bank, Makati Branch;
g. Payment of white cement shall be made in advance
and which payment shall be used by the defendant as
guaranty in the opening of a foreign letter of credit to
cover costs and expenses in the procurement of
materials in the manufacture of white cement. (Exhibit
C).
xxx xxx xxx
Several demands to comply with the dealership agreement (Exhibits D,
E, G, I, R, L, and N) were made by the plaintiff to the defendant,
however, defendant refused to comply with the same, and plaintiff by
force of circumstances was constrained to cancel his agreement for the
supply of white cement with third parties, which were concluded in
anticipation of, and pursuant to the said dealership agreement.
Notwithstanding that the dealership agreement between the plaintiff
and defendant was in force and subsisting, the defendant corporation, in
violation of, and with evident intention not to be bound by the terms
and conditions thereof, entered into an exclusive dealership agreement
with a certain Napoleon Co for the marketing of white cement in
Mindanao (Exhibit T) hence, this suit. (Plaintiff's Record on Appeal, pp.
86-90). 2
After trial, the trial court adjudged the corporation liable to Alejandro Te in the amount of
P3,302,400.00 as actual damages, P100,000.00 as moral damages, and P10,000.00 as
and for attorney's fees and costs. The appellate court affirmed the said decision mainly on
the following basis, and We quote:
There is no dispute that when Zosimo R. Falcon and Justo B. Trazo
signed the dealership agreement Exhibit "A", they were the President
and Chairman of the Board, respectively, of defendant-appellant
corporation. Neither is the genuineness of the said agreement
contested. As a matter of fact, it appears on the face of the contract
itself that both officers were duly authorized to enter into the said
agreement and signed the same for and in behalf of the corporation.
When they, therefore, entered into the said transaction they created the
impression that they were duly clothed with the authority to do so. It
cannot now be said that the disputed agreement which possesses all
the essential requisites of a valid contract was never intended to bind
the corporation as this avoidance is barred by the principle of estoppel. 3
In this petition for review, petitioner Prime White Cement Corporation made the following
assignment of errors. 4
I

THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE

COURT ARE UNPRECEDENTED DEPARTURES FROM THE CODIFIED
PRINCIPLE THAT CORPORATE OFFICERS COULD ENTER INTO CONTRACTS
IN BEHALF OF THE CORPORATION ONLY WITH PRIOR APPROVAL OF THE
BOARD OF DIRECTORS.
II
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT ARE CONTRARY TO THE ESTABLISHED JURISPRUDENCE,
PRINCIPLE AND RULE ON FIDUCIARY DUTY OF DIRECTORS AND
OFFICERS OF THE CORPORATION.
III
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE, PRINCIPLE
AND RULE ON UNENFORCEABLE CONTRACTS AS PROVIDED IN ARTICLE
1317 OF THE NEW CIVIL CODE.
IV
THE DECISION AND RESOLUTION OF THE INTERMEDIATE APPELLATE
COURT DISREGARDED THE PRINCIPLE AND JURISPRUDENCE AS TO
WHEN AWARD OF ACTUAL AND MORAL DAMAGES IS PROPER.
V
IN NOT AWARDING PETITIONER'S CAUSE OF ACTION AS STATED IN ITS
ANSWER WITH SPECIAL AND AFFIRMATIVE DEFENSES WITH
COUNTERCLAIM THE INTERMEDIATE APPELLATE COURT HAS CLEARLY
DEPARTED FROM THE ACCEPTED USUAL, COURSE OF JUDICIAL
PROCEEDINGS.

corporation by a contract in the ordinary course of business, provided the same is

reasonable under the circumstances. 8 These rules are basic, but are all general and thus
quite flexible. They apply where the President or other officer, purportedly acting for the
corporation, is dealing with a third person, i. e., a person outside the corporation.
The situation is quite different where a director or officer is dealing with his own
corporation. In the instant case respondent Te was not an ordinary stockholder; he was a
member of the Board of Directors and Auditor of the corporation as well. He was what is
often referred to as a "self-dealing" director.
A director of a corporation holds a position of trust and as such, he owes a duty of loyalty
to his corporation. 9 In case his interests conflict with those of the corporation, he cannot
sacrifice the latter to his own advantage and benefit. As corporate managers, directors
are committed to seek the maximum amount of profits for the corporation. This trust
relationship "is not a matter of statutory or technical law. It springs from the fact that
directors have the control and guidance of corporate affairs and property and hence of the
property interests of the stockholders." 10 In the case ofGokongwei v. Securities and
Exchange Commission, this Court quoted with favor from Pepper v. Litton, 11 thus:
. . . He cannot by the intervention of a corporate entity violate the
ancient precept against serving two masters. . . . He cannot utilize his
inside information and his strategic position for his own preferment. He
cannot violate rules of fair play by doing indirectly through the
corporation what he could not do directly. He cannot use his power for
his personal advantage and to the detriment of the stockholders and
creditors no matter how absolute in terms that power may be and no
matter how meticulous he is to satisfy technical requirements. For that
power is at all times subject to the equitable limitation that it may not
be exercised for the aggrandizement, preference, or advantage of the
fiduciary to the exclusion or detriment of the cestuis. . . . .
On the other hand, a director's contract with his corporation is not in all instances void or
voidable. If the contract is fair and reasonable under the circumstances, it may be ratified
by the stockholders provided a full disclosure of his adverse interest is made. Section 32
of the Corporation Code provides, thus:

There is only one legal issue to be resolved by this Court: whether or not the "dealership
agreement" referred by the President and Chairman of the Board of petitioner corporation
is a valid and enforceable contract. We do not agree with the conclusion of the respondent
Court that it is.

Sec. 32. Dealings of directors, trustees or officers with the corporation.

A contract of the corporation with one or more of its directors or
trustees or officers is voidable, at the option of such corporation, unless
all the following conditions are present:

Under the Corporation Law, which was then in force at the time this case arose, 5 as well
as under the present Corporation Code, all corporate powers shall be exercised by the
Board of Directors, except as otherwise provided by law. 6Although it cannot completely
abdicate its power and responsibility to act for the juridical entity, the Board may
expressly delegate specific powers to its President or any of its officers. In the absence of
such express delegation, a contract entered into by its President, on behalf of the
corporation, may still bind the corporation if the board should ratify the same expressly or
impliedly. Implied ratification may take various forms like silence or acquiescence; by
acts showing approval or adoption of the contract; or by acceptance and retention of
benefits flowing therefrom. 7 Furthermore, even in the absence of express or implied
authority by ratification, the President as such may, as a general rule, bind the

1. That the presence of such director or trustee in the board meeting in

which the contract was approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not necessary for the
approval of the contract;
3. That the contract is fair and reasonable under the circumstances; and

4. That in the case of an officer, the contract with the officer has been
previously authorized by the Board of Directors.
Where any of the first two conditions set forth in the preceding
paragraph is absent, in the case of a contract with a director or trustee,
such contract may be ratified by the vote of the stockholders
representing at least two-thirds (2/3) of the outstanding capital stock or
of two-thirds (2/3) of the members in a meeting called for the purpose:
Provided, That full disclosure of the adverse interest of the directors or
trustees involved is made at such meeting: Provided, however, That the
contract is fair and reasonable under the circumstances.
Although the old Corporation Law which governs the instant case did not contain a similar
provision, yet the cited provision substantially incorporates well-settled principles in
corporate law. 12
Granting arguendo that the "dealership agreement" involved here would be valid and
enforceable if entered into with a person other than a director or officer of the corporation,
the fact that the other party to the contract was a Director and Auditor of the petitioner
corporation changes the whole situation. First of all, We believe that the contract was
neither fair nor reasonable. The "dealership agreement" entered into in July, 1969, was to
sell and supply to respondent Te 20,000 bags of white cement per month, for five years
starting September, 1970, at thefixed price of P9.70 per bag. Respondent Te is a
businessman himself and must have known, or at least must be presumed to know, that
at that time, prices of commodities in general, and white cement in particular, were not
stable and were expected to rise. At the time of the contract, petitioner corporation had
not even commenced the manufacture of white cement, the reason why delivery was not
to begin until 14 months later. He must have known that within that period of six years,
there would be a considerable rise in the price of white cement. In fact, respondent Te's
own Memorandum shows that in September, 1970, the price per bag was P14.50, and by
the middle of 1975, it was already P37.50 per bag. Despite this, no provision was made in
the "dealership agreement" to allow for an increase in price mutually acceptable to the
parties. Instead, the price was pegged at P9.70 per bag for the whole five years of the
contract. Fairness on his part as a director of the corporation from whom he was to buy
the cement, would require such a provision. In fact, this unfairness in the contract is also a
basis which renders a contract entered into by the President, without authority from the
Board of Directors, void or voidable, although it may have been in the ordinary course of
business. We believe that the fixed price of P9.70 per bag for a period of five years was

not fair and reasonable. Respondent Te, himself, when he subsequently entered into
contracts to resell the cement to his "new dealers" Henry Wee 13 and Gaudencio
Galang 14 stipulated as follows:
The price of white cement shall be mutually determined by us but in no
case shall the same be less than P14.00 per bag (94 lbs).
The contract with Henry Wee was on September 15, 1969, and that with Gaudencio
Galang, on October 13, 1967. A similar contract with Prudencio Lim was made on
December 29, 1969. 15 All of these contracts were entered into soon after his "dealership
agreement" with petitioner corporation, and in each one of them he protected himself
from any increase in the market price of white cement. Yet, except for the contract with
Henry Wee, the contracts were for only two years from October, 1970. Why did he not
protect the corporation in the same manner when he entered into the "dealership
agreement"? For that matter, why did the President and the Chairman of the Board not do
so either? As director, specially since he was the other party in interest, respondent Te's
bounden duty was to act in such manner as not to unduly prejudice the corporation. In the
light of the circumstances of this case, it is to Us quite clear that he was guilty of
disloyalty to the corporation; he was attempting in effect, to enrich himself at the expense
of the corporation. There is no showing that the stockholders ratified the "dealership
agreement" or that they were fully aware of its provisions. The contract was therefore not
valid and this Court cannot allow him to reap the fruits of his disloyalty.
As a result of this action which has been proven to be without legal basis, petitioner
corporation's reputation and goodwill have been prejudiced. However, there can be no
award for moral damages under Article 2217 and succeeding articles on Section 1 of
Chapter 3 of Title XVIII of the Civil Code in favor of a corporation.
In view of the foregoing, the Decision and Resolution of the Intermediate Appellate Court
dated March 30, 1984 and August 6, 1984, respectively, are hereby SET ASIDE. Private
respondent Alejandro Te is hereby ordered to pay petitioner corporation the sum of
P20,000.00 for attorney's fees, plus the cost of suit and expenses of litigation.
SO ORDERED.