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2.

ULTRA VIRES ACT


Section 45. Ultra vires acts of corporations. - No
corporation under this Code shall possess or
exercise any corporate powers except those
conferred by this Code or by its articles of
incorporation and except such as are necessary
or incidental to the exercise of the powers so
conferred. (n)
Firstly, the ultra vires doctrine stems in part
from the principle that a corporation is a creature
of law, and has only such powers and privileges
as are granted by the State.
Secondly, the doctrine upholds the duty of
trust and obedience owed by the corporations
directors and officers to the stockholders or
members.
a. Types of Ultra Vires Acts
1. Acts done beyond the powers of the
corporation as provided for in the law
or its articles of incorporation;
2. Acts or contracts entered into in behalf
of the corporation by persons who
have no corporate authority; and
3. Acts or contracts which are per se
illegal as being contrary to law.
b. Test to Determine Ultra Vires
in the case of Montelibano, the test
uses the rather stringent terms direct and
immediate only with reference to the
business of the corporation; whereas, it
uses the rather liberal terms of fairly
incident and reasonably necessary with
reference to powers of the corporation
MONTELIBANO V. BACOLOD-MURCIA
18 MAY 1962
FACTS: Plaintiff-appellants Alfredo Montlibano,
Alejandro Montelibano & the Limited copratnership Gonzaga & Co, had been and are
sugar planters of defendant-appellee, BacolodMurcia Milling Co., Inc. under a milling contracts
execeuted in 1919. Said contracts stipulates that
it will remain in force for 30 years starting with
the 1920-1921 crop and provided for a 45% and
55% ratio in favor of the planters. Sometime in
1936, the Board of Directors of defendantappellee adopted a resolution increasing the
planters share to 60% of the manufactured sugar
and extended the contract from 30 years to 45

Montaos, Heidi Jean I.

years. Appellants filed the present action


demanding defendant-appellee to grant the
increased participation in accordance with
paragraph 9 of the Amended Milling Contract.
Defendant-appellee denies the claim and
contends 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.
ISSUE: WON the amended milling contract were
ultra vires acts of the defendant-appellee and
beyond the powers of the BOD.
RULING: The SC upheld the authority of the Board
acting for the corporation to modify the terms of
the amended milling contract for the purpose of
making its terms more acceptable to the other
contracting parties. It gave the formula for
determining the applicability of the ultra vires
doctrine.
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, is 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 corporations
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.
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.

Policies Supervening in Ultra Vires Issues


o

as the Montelibano case showed, the


attitude of courts toward corporate
acts and contracts which are not per
se illegal or prohibited, is quite liberal

firstly, if contracts of corporations


could be set aside by the mere

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showing that they do not fall within the


language of the purpose clause of the
articles of incorporation, then the
public dealing with corporations would
be wary of entering into contracts with
corporate entities

she is entitled as stockholder of the defendant


corporation. Defendant denied the claim on
the ground that plaintiff is indebted to the
corporation since the latter incurred damages
for commencement of suit against her. The
Court dismissed the complaint. Plaintiff filed
an appeal.

secondly,
under
the
business
judgment rule - the courts will not
sit in judgment to substitute their
business judgment for that of the
directors; and that as much as
possible, directors , in the exercise of
their business judgment, should be
given leeway to adopt corporate
policies and to engage in transactions
as they deem best for the corporation

Accdg. to the plaintiff, she made cash


advances for her personal expenses and for
the education and support of her children.
Such were assumed by Esteban de la Rama.
The money was debited to the other
corporation (Hijos de I. de la Rama & Co.,
Inc.), also owned by Esteban. Plaintiff also
contended that the only amount which can be
deducted from her shares was those not
assumed by Esteban.

lastly, the demands of business are


such tat it is impossible to anticipate
all possible contingencies at the time
the articles of incorporation are drawn
if the doctrine is strictly applied,
corporations would continually revise
and amend their charters

Distinguishing from acts which are Per Se


Illegal
o

An act which is per se illegal cannot be


given much latitude and is generally
void; whereas an act or contract of a
corporation which is not per se illegal
is subjected to a test to determine
whether it is intra vires or ultra vires.
Illegal acts are void ab initio for they
are contrary to law, morals, public
order, policy, etc. and cannot acquire
validity thru performance, ratification,
estoppel; whereas ultra vires act are
merely voidable and may become
binding and enforceable when ratified
by stockholders.

c. Cases
Estefania R. Pirovano vs. Dela Rama
Steamship Co., Inc.
Facts: Plaintiff Pirovano seeks to recover the
balance of the amount of dividends to which

Montaos, Heidi Jean I.

The corporation denied the plaintiff's claim on


the ground that the assumption made by
Esteban was never consented by them, hence
not binding upon it. In addition, it stated that
the act of Esteban was in violation of the
provision in the deed of trust.
Issue: W/N the assumption made by the late
Esteban de la Rama in his lifetime is binding
upon the corporation and thus constitute
novation.
Held: SC held that Express consent by the
creditor is necessary to substitute another for
the debtor. Such consent was not given by the
corporation's BOD nor does it appear in the
books or records of the same.
Plaintiff-appellant must answer for the
personal advances made to her by the
corporation and the latter may set off the
total sum of such advances against the
amount of dividends to which she is entitled.
LUNETA MOTOR COMPANY vs. A.D.
SANTOS, INC., ET AL
G.R. No. L-17716
July 31, 1962
FACTS:
Concepcion executed a chattel
mortgage in favor of petitioner, Luneta Motor
Co. covering certificates of public convenience
of a taxicab service of 27 units. To secure a
subsequent loan obtained by Concepcion from
the Rehabilitation Finance Corporation (now
Development Bank of the Philippines) he

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constituted a second mortgage on the same


certificate. This second mortgage was
approved by the respondent Commission,
subject to the mortgage lien in favor of
petitioner. The certificate was later sold to
Francisco Benitez, Jr., who resold it to Rodi
Taxicab Company. Both sales were made with
assumption of the mortgage in favor of the
RFC, and were also approved provisionally by
the Commission, subject to petitioner's lien.

incorporation, it can acquire by purchase the


certificate of public convenience in question,
maintaining inferentially that, after acquiring
said certificate, it could make use of it by
operating a taxicab business or operate is a
common carrier by land.

Petitioner filed an action to foreclose the


chattel mortgage executed in its favor by
Concepcion in view of the failure of the latter
and his guarantor to pay their overdue
account. The RFC also instituted foreclosure
proceedings on its second chattel mortgage,
and as a result of the decision in its favor
therein rendered, the certificate of public
convenience was sold at public auction in
favor of Amador D. Santos, who immediately
applied with the Commission for the approval
of the sale, and the same was approved
subject to the mortgage lien in favor of
petitioner.

HELD:
SC find nothing in the legal
provision and the provisions of petitioner's
articles of incorporation relied upon that could
justify petitioner's contention in this case. To
the contrary, they are precisely the best
evidence that it has no authority at all to
engage in the business of land transportation
and operate a taxicab service. That it may
operate and otherwise deal in automobiles
and automobile accessories; that it may
engage in the transportation of persons by
water does not mean that it may engage in
the business of land transportation an
entirely different line of business. If it could
not thus engage in the line of business, it
follows that it may not acquire a certificate of
public convenience to operate a taxicab
service, such as the one in question, because
such acquisition would be without purpose
and would have no necessary connection with
petitioner's legitimate business.

CFI of Manila rendered judgment, adjudging


Concepcion indebted to petitioner and
ordered that the certificate of public
convenience subject matter of the chattel
mortgage be sold at public auction.
Accordingly, said certificate was sold at public
auction to petitioner, and six days thereafter
the Sheriff of the City of Manila issued in its
favor the corresponding certificate of sale.
Thereupon petitioner filed the application
mentioned heretofore for the approval of the
sale. In the meantime and before his death,
Amador D. Santos sold and transferred all his
rights and interests in the certificate of public
convenience in question in favor of the now
respondent A.D. Santos, Inc., who opposed
petitioner's application.
Respondent Commission, after considering
the memoranda submitted by the parties,
rendered the appealed decision sustaining the
ground relied upon in support thereof,
namely, that under petitioner's articles of
incorporation it had no authority to engage in
the taxicab business or operate as a common
carrier, and that, is a result, it could not
acquire by purchase the certificate of public
convenience referred to above. Hence, the
present appeal interposed by petitioner who
claims that, in accordance with the
Corporation
Law
and
its
articles
of

Montaos, Heidi Jean I.

ISSUE:
W/N petitioner is authorized to
engage in the taxicab business or operate as
a common carrier.

REPUBLIC OF THE PHILIPPINES, vs. ACOJE


MINING COMPANY, INC.
FACTS:
The Acoje Mining Company, Inc. wrote the
Director of Posts requesting the opening of a
post, telegraph and money order offices at its
mining camp at Sta. Cruz, Zambales, to service
its employees and their families that were living
in said camp. Acting on the request, the Director
of Posts wrote in reply stating that if aside from
free quarters the company would provide for all
essential equipment and assign a responsible
employee to perform the duties of a postmaster
without compensation from his office until such
time as funds therefor may be available he would
agree to put up the offices requested. The
company in turn replied signifying its willingness
to comply with all the requirements outlined in
the letter of the Director of Posts requesting at
the same time that it be furnished with the

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necessary forms for the early establishment of a


post office branch.

fact that the loss claimed by the plaintiff is not


supported by the office record.

The Director of Posts again wrote a letter to the


company stating among other things that "In
cases where a post office will be opened under
circumstances similar to the present, it is the
policy of this office to have the company assume
direct responsibility for whatever pecuniary loss
may be suffered by the Bureau of Posts by
reason of any act of dishonesty, carelessness or
negligence on the part of the employee of the
company who is assigned to take charge of the
post office," thereby suggesting that a resolution
be adopted by the board of directors of the
company expressing conformity to the above
condition relative to the responsibility to be
assumed buy it in the event a post office branch
is opened as requested. The company informed
the Director of Posts of the passage by its board
of directors of a resolution of the following tenor:
"That the requirement of the Bureau of Posts that
the Company should accept full responsibility for
all cash received by the Postmaster be complied
with, and that a copy of this resolution be
forwarded to the Bureau of Posts." The letter
further states that the company feels that that
resolution fulfills the last condition imposed by
the Director of Posts and that, therefore, it would
request that an inspector be sent to the camp for
the purpose of acquainting the postmaster with
the details of the operation of the branch office.

After trial, found that, of the amount claimed by


plaintiff totalling P13,867.24, only the sum of
P9,515.25 was supported by the evidence, and so
it rendered judgment for the plaintiff only for the
amount last mentioned. The court rejected the
contention that the resolution adopted by
the company is ultra vires and that the
obligation it has assumed is merely that of
a guarantor.

The post office branch was opened at the camp


with Hilario M. Sanchez as postmaster. He is an
employee of the company. The postmaster went
on a three-day leave but never returned. The
company immediately informed the officials of
the Manila Post Office and the provincial auditor
of Zambales of Sanchez' disappearance with the
result that the accounts of the postmaster were
checked and a shortage was found in the amount
of P13,867.24.
The several demands made upon the company
for the payment of the shortage in line with the
liability it has assumed having failed, the
government commenced the present action
before the CFI of Manila seeking to recover the
said amount. The company in its answer denied
liability for said amount contending that the
resolution of the board of directors wherein it
assumed responsibility for the act of the
postmaster is ultra vires, and in any event its
liability under said resolution is only that of a
guarantor who answers only after the exhaustion
of the properties of the principal, aside from the

Montaos, Heidi Jean I.

ISSUE:
W/N the resolution adopted by the company is
ultra vires.
HELD:
The contention that the resolution adopted by the
company dated August 31, 1949 is ultra vires in
the sense that it has no authority to act on a
matter which may render the company liable as a
guarantor has no factual or legal basis.
In the first place, it should be noted that the
opening of a post office branch at the mining
camp of appellant corporation was undertaken
because of a request submitted by it to promote
the convenience and benefit of its employees.
The idea did not come from the government, and
the Director of Posts was prevailed upon to agree
to the request only after studying the necessity
for its establishment and after imposing upon the
company certain requirements intended to
safeguard and protect the interest of the
government. Thus, after the company had
signified its willingness to comply with the
requirement of the government that it furnish
free quarters and all the essential equipment that
may be necessary for the operation of the office
including the assignment of an employee who will
perform the duties of a postmaster, the Director
of Posts agreed to the opening of the post office
stating that "In cases where a post office will be
opened under circumstances similar to the
present, it is the policy of this office to have the
company assume direct responsibility for
whatever pecuniary loss may be suffered by the
Bureau of Posts by reason of any act of
dishonesty, carelessness or negligence on the
part of the employee of the company who is
assigned to take charge of the post office," and
accepting this condition, the company, thru its
board of directors, adopted forthwith a resolution

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of the following tenor: "That the requirement of


the Bureau of Posts that the company should
accept full responsibility for all cash received by
the Postmaster, be complied with, and that a
copy of this resolution be forwarded to the
Bureau of Posts." On the basis of the foregoing
facts, it is evident that the company cannot
now be heard to complain that it is not
liable for the irregularity committed by its
employee upon the technical plea that the
resolution approved by its board of
directors is ultra vires.
The claim that the resolution adopted by the
board of directors of appellant company is
an
ultra
vires
act
cannot
also
be
entertained it appearing that the same
covers a subject which concerns the benefit,
convenience and welfare of its employees
and their families. While as a rule an ultra vires
act is one committed outside the object for which
a corporation is created as defined by the law of
its organization and therefore beyond the powers
conferred upon it by law (19 C.J.S., Section 965,
p. 419), there are however certain corporate acts
that may be performed outside of the scope of
the powers expressly conferred if they are
necessary to promote the interest or welfare of
the corporation. Thus, it has been held that
"although not expressly authorized to do so a
corporation may become a surety where the
particular transaction is reasonably necessary or
proper to the conduct of its business," 1 and here
it is undisputed that the establishment of the
local post office is a reasonable and proper
adjunct to the conduct of the business of
appellant company. Indeed, such post office is a
vital improvement in the living condition of its
employees and laborers who came to settle in its
mining camp which is far removed from the
postal facilities or means of communication
accorded to people living in a city or
municipality..
Even assuming arguendo that the resolution
in question constitutes an ultra vires act,
the same however is not void for it was
approved not in contravention of law,
customs, public order or public policy. The
term ultra vires should be distinguished from an
illegal act for the former is merely voidable which
may be enforced by performance, ratification, or
estoppel, while the latter is void and cannot be
validated.2 It being merely voidable, an ultra vires
act can be enforced or validated if there are
equitable grounds for taking such action. Here it

Montaos, Heidi Jean I.

is fair that the resolution be upheld at least on


the ground of estoppel.
The current of modern authorities favors the rule
that where the ultra vires transaction has
been executed by the other party and the
corporation has received the benefit of it,
the law interposes an estoppel, and will not
permit the validity of the transaction or contract
to be questioned, and this is especially true
where there is nothing in the circumstances to
put the other party to the transaction on notice
that the corporation has exceeded its powers in
entering into it and has in so doing overstepped
the line of corporate privileges.
CRISOOGO-JOSE v. COURT OF APPEALS; 177
SCRA 594
Facts: Atty. Benares was the President of Movers
Enterprise while Ricardo Santos Jr. was the VicePresident. On April 1980 Atty. Benares in
accommodation of his clients, the spouses Jaime
and Clarita Ong issued a check drawn against
Traders Royal Bank in the amount of 45,000
payable to Crisologo- Jose. Since the check was
under the account of the corporation, the
president and the treasurer should sign the
check. But since the treasurer was not available,
Benares asked Santos to be the alternate
signatory. The check was issued to Crisologo-Jose
in consideration of the waiver of Crisologo over a
certain property which the GAIA agreed to sell to
the clients of Benares (spouses Ong) with the
understanding that upon approval of the
compromise agreement with the spouses Ong,
the check will be encashed accordingly. However,
the compromise agreement was not approved
within the expected period. So Benares replaced
the check with another one with the same
amount also payable to Jose. When petitioner
deposited the check, it was dishonored for
insufficiency of fund. Petitioner filed criminal
complaint for violation of BP 22. Meanwhile,
during the preliminary investigation, Santos
tendered cashiers check in payment of the
dishonored check but petitioner refused to accept
it. Santos then encashed the check and deposited
the money to the Clerk of Court. Incidentally,
Benares purchased the cashiers check and gave
it to the plaintiff to be applied as payment of the

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dishonored check. RTC held that it was not


persuaded to believe that consignation is
applicable here. So the complaint was dismissed.
CA reversed and set aside such decision.
Petitioner contends that the accommodation
party in this case is Mover Enterprises and not
private respondent who merely signed the check
in a representative capacity.
Issue: Assuming that Mover Enterprises is the
accommodation party, WON it may be held liable
on the accommodation instrument.
Held:
No. Corporation is not liable. The
provisions
of
the
NIL
which
holds
an
accommodation party liable on the instrument to
a holder for value, although such holder at the
time of taking the instrument knew him to be
only an accommodation party, it does not apply
to corporations which are accommodation parties
This is because issue or endorsement of
negotiable paper by a corporation without
consideration and for the accommodation is an
ultra vires act.
By way of a corporation, an officer or agent may
do so ONLY IF specifically authorized to do so. But
where the facts show that the accommodation
involved was for their personal account,
undertaking or purpose and the creditor was
aware thereof.

NOTE: That while the public is not required to


know that one is authorized or not to bind the
corporation for a certain obligation and that while
the contract may be enforced even without
authority because the public dealing in good faith
has the right to expect that the obligation
entered into shall be complied with, such
doctrine does not apply when the dealing public
in the first place is in bad faith, as in this case;
that is why the corporation was not bound to
such accommodation agreement.
Harden vs Benguet Consolidated Mining
(Ulta vires acts)
Facts:
Benguet Mining (as a sociedad
anonima) in an agreement with Balatoc Mining (a
corporation) undertook to build a milling plant

Montaos, Heidi Jean I.

and a power plant for the latter. In consideration


thereof, Balatoc in turn, delivered six hundred
thousand shares of stock of the company in favor
of Benguet Mining. When the project became
successful and the value of the shares of Balatoc
Mining appreciated, plaintiff Harden, being an
owner of thousands of shares in Balatoc mining
sought to annul the transactions entered by the
two mining entities because the law prohibits
mining companies like Benguet Mining to hold
any interest in a mining corporation like Balatoc
Mining. It is the contention of Benguet Mining that
it is not prohibited from doing so because it is a
sociedad anonima and not a corporation.
Issues:
(1) whether the plaintiffs has a right of action
against defendant corporation..
(2)

Assuming the first question to be


answered in the affirmative, the Benguet
Company, which was organized as a
sociedad anonima, is a corporation
prohibited a mining corporation from
becoming interested in another mining
corporation.

Ruling:
(1) The defendant Benguet Company has
committed no civil wrong against the
plaintiffs, and if a public wrong has been
committed, the directors of the Balatoc
Company, and the plaintiff Harden himself,
were
the
active
inducers
of
the
commission of that wrong. The contract,
supposing it to have been unlawful in fact,
has been performed on both sides, by the
building of the Balatoc plant by the
Benguet Company and the delivery to the
latter of the certificate of 600,000 shares
of the Balatoc Company. There is no
possibility of really undoing what has been
done.
Nobody
would
suggest
the
demolition of the mill. The Balatoc
Company is secure in the possession of
that improvement, and talk about putting
the parties in status quo ante by restoring
the consideration with interest, while the
Balatoc Company remains in possession of

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what it obtained by the use of that money,


does not quite meet the case. Also, to
mulct the Benguet Company in many
millions of dollars in favor of individuals
who have not the slightest equitable right
to that money in a proposition to which no
court can give a ready assent.
(2) Having shown that the plaintiffs in this
case have no right of action against the
Benguet Company for the infraction of law
supposed to have been committed, we
forego cny discussion of the further
question whether a sociedad anonima
created under Spanish law, such as the
Benguet Company, is a corporation within
the meaning of the prohibitory provision
already so many times mentioned. That
important question should, in our opinion,
be left until it is raised in an action
brought by the Government.

In order to secure payment, defendant Tapnio


executed a lease agreement with Jacobo Tuazon,
whereby she had leased her unused sugar quota.
Since the quota was mortgaged to PNB, the
contract of lease had to be approved by the Bank.
The initial price agreed upon by defendant and
Jacobo was P2.50 per picul, for the 1,000 picul
(P2,500.00). However, the Bank raised the rate to
P2.80 per picul in which Tuazon agreed upon.
When the bank manager recommended its
approval to the board of directors, the latter
required that the rate be raised to P3.00 which
was the prevailing rate at that time.
Tuazon asked for reconsideration but the board
refused to grant it. As a result, Tuazon became
disinterested to lease the sugar quota allotment
in favour of defendant. Thus, the defendant lost
the sum of P2,800 which she should have
received from Tuazon and which she could have
paid the Bank to cancel off her indebtedness.

d. Ratification of Ultra Vires Acts


Doctrine of Estoppel or Ratification

Even in the case of ultra vires acts which


are not per se illegal, a corporation cannot
be heard to complain that it is not liable
for the acts of its board, because of
estoppels by representation.
Even when the contract entered into is
outside the usual powers of the corporate
officer, the corporations ratification of the
contract and acceptance of the benefits
therefrom have made such contract
binding upon the corporation.
Ratification
that
would
bind
the
corporation would have to come from the
Board of Directors or a properly authorized
representative.

3. Liability for Torts or Crimes


PNB vs. CA (83 SCRA 237) for torts
FACTS: Plaintiff executed its Bond with defendant
Rita Gueco Tapnio as principal, in favour of PNB to
guarantee the payment of defendant Rita Gueco
Tapnios account with said bank amounting to
P2,000.

Montaos, Heidi Jean I.

ISSUE: Whether or not petitioner Bank is liable


for damage caused?

HELD: YES. A corporation is liable whenever a


tortuitous act is committed by an officer or agent
under express direction or authority from the
stockholders or members acting as a body, or,
generally, from the directors as the governing
body.
Time is of the essence in the approval of the
lease sugar quota allotments, since the same
must be utilized during the milling season. There
was unreasonableness in the acts of the Board of
Directors.
In failing to exercise the degree of care and
vigilance
which
surrounding
circumstances
reasonably impose, petitioner is consequently
liable for the damages caused on private
respondents. Under Art. 21 on the Civil Code,
any person who wilfully causes loss or injury to
another in a manner that is contrary to morals,
good customs, or public policy shall compensate
the latter for damage.

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The law makes it imperative that every person


must in the exercise of his rights and in the
performance of his duties act with justice, give
everyone his due, and observe honesty and good
faith.

PEOPLE V. TAN BOON KONG


liability

- criminal

FACTS: The defendant Tan Boon Kong was


charged with the violation of section 1458 of Act
No. 2711 as amended for making a false return
for tax purposes. The trial court ruled in favor of
Tan Boon Kong, basing its ruling on the ground
that the offense charged must be regarded as
committed by the corporation and not by its
officials or agents. It recognized and applied the
separate juridical personality of the corporation in
the application of the criminal statute for acts
done for and in behalf of the corporation.

ISSUE: Whether or not the defendant, as


manager of the corporation criminally liable
under section 2723 of Act No. 2711 for violation
of section 1458 of the same act for the benefit of
said corporation?

HELD: YES. The courts reasoning was in line with


the piercing doctrine: that the veil of corporate
fiction cannot be used to avoid the penalty
imposable for committing a criminal offense. A
corporation can act only through its officers and
agents, and where the business itself involves a
violation of the law, the correct rule is that all
who participate in it are liable. In the present
case the information or complaint alleges that the
defendant was the manager of a corporation
which was engaged in business as a merchant,
and as such manager, he made a false return, for
purposes of taxation, of the total amount of sale
made by said false return constitutes a violation
of law, the defendant, as the author of the illegal
act,
must
necessarily
answer
for
its
consequences, provided that the allegation are
proven.

Montaos, Heidi Jean I.

SEC. 1458. Payment of percentage taxes


Quarterly reports of earnings. The percentage
taxes on business shall be payable at the end of
each calendar quarter in the amount lawfully due
on the business transacted during each quarter;
and it shall be on the duty of every person
conducting a business subject to such tax, within
the same period as is allowed for the payment of
the quarterly installments of the fixed taxes
without penalty, to make a true and complete
return of the amount of the receipts or earnings
of his business during the preceeding quarter and
pay the tax due thereon. . . .
SEC. 2723. Failure to make true return of receipts
and sales. Any person who, being required by
law to make a return of the amount of his
receipts, sales, or business, shall fail or neglect to
make such return within the time required, shall
be punished by a fine not exceeding two
thousand pesos or by imprisonment for a term
not exceeding one year, or both.
And any such person who shall make a false or
fraudulent return shall be punished by a fine not
exceeding
ten
thousand
pesos
or
by
imprisonment for a term not exceeding two
years, or both.
JOSE O. SIA, vs. PEOPLE OF THE
PHILIPPINES, G.R. No. L-30896 April 28,
1983 - criminal liability
Facts: Petitioner was the president and general
manager of the Metal Manufacturing of the
Philippines, Inc. (MEMAP). His company was in
need of raw materials to be imported from
abroad, so he applied for a letter of credit to
import steel sheets from Mitsui Bussan Kaisha,
Ltd. of Tokyo, Japan, the application being
directed to the Continental Bank, herein
complainant. He obtained delivery of 150 M/T
Cold Rolled Steel Sheets valued at P 71,023.60
under a trust receipt agreement under L/C No.
63/109, which cold rolled steel sheets were
consigned to the Continental Bank, under the
express obligation on the part of the Petitioner
that the said steel sheets in trust and selling
them and turning over the proceeds of the sale to
the Continental Bank. He failed to return the said
cold rolled sheets or settled his unpaid accounts
thereof despite demands. He was convicted of
estafa for defrauding the Continental Bank, a
banking institution duly organized and doing
business in the City of Manila, hence, this appeal.

Page 8

Petitioner seeks to avoid liability on his theory


that the Bank knew all along that he was dealing
with him only as an officer of the Metal Company
which was the true and actual applicant for the
letter of credit and which, accordingly, assumed
sole obligation under the trust receipt.
The trial court, Solicitor General and Court of
Appeals disputed the theory of the Petitioner
following the general principle enunciated by the
SC in People vs. Tan Boon Kong, 54 Phil. 607, that
for crimes committed by a corporation, the
responsible officers thereof would personally bear
the criminal liability.

imposed by agreement of parties, as a practice


observed in the usual pursuit of a business or a
commercial transaction. The offense may arise, if
at all, from the peculiar terms and condition
agreed upon by the parties to the transaction, not
by direct provision of the law. The intention of the
parties, therefore, is a factor determinant of
whether a crime was committed or whether a
civil obligation alone intended by the parties.
With this explanation, the distinction adverted to
between the Tan Boon Kong case and the case at
bar should come out clear and meaningful.

Issue: Whether petitioner Jose O. Sia, having only


acted for and in behalf of the Metal
Manufacturing Company of the Philippines as
President thereof in dealing with the complainant,
the Continental Bank, he may be liable for the
crime charged.

In the absence of an express provision of law


making the petitioner liable for the criminal
offense committed by the corporation of which he
is a president as in fact there is no such
provisions in the Revised Penal Code under which
petitioner is being prosecuted, the existence of a
criminal liability on his part may not be said to be
beyond any doubt.

Held: No. The Tan Boon Kong case may not be


squarely applicable to the instant case.

ABS-CBN vs. COURT OF APPEALS


G.R. 128690 Moral Damages

Tan Boon Kong Case

FACTS:
Viva films and ABS CBN executed a
film exhibition agreement. Wherein ABS SCBN has
the right to broadcast in their network the films
made by viva. Viva films represented by Del
Rosario, offered ABS CBN 52 original movies and
52 re-runs worth 60M. However, out of this 52
films, Charo Santos-Concio representing ABS CBN
tick off said films.

Tan was the manager of a corporation which was


engaged in business as a merchant, and as such
manager, he made a false return, for purposes of
taxation, of the total amount of sale made by said
false return constitutes a violation of law. As the
author of the illegal act, must necessarily answer
for its consequences provided that the allegations
are proven.
Tan as compared to the SIA case, the Tan case is
where corporation was directly required by law to
do an act in a given manner, and the same law
makes the person who fails to perform the act in
the prescribed manner expressly liable criminally.
The performance of the act is an obligation
directly imposed by the law on the corporation.
Since it is a responsible officer or officers of the
corporation who actually perform the act for the
corporation, they must of necessity be the ones
to assume the criminal liability; otherwise this
liability as created by the law would be illusory,
and the deterrent effect of the law, negated.

SIA Case
The act alleged to be a crime is not in the
performance of an act directly ordained by law to
be performed by the corporation. The act is

Montaos, Heidi Jean I.

Del Rosario met up with Eugenio Lopez III and the


latter told the former that ABS CBN is only willing
to get 14 films for P36M. An offer was made by
the ABS CBN however this offer was refused by
Viva Films board of directors; instead, they sold
the whole package to the RBS Corp (channel 7).
ABS-CBN sued RBS and Viva films, contending
that the contract between ABS CBN and RBS was
valid and that RBS has no right over the film. The
RTC ruled in favour of the defendants and as an
additional liability for the ABS CBN, they required
it to pay RBS moral damages because RBS
suffered from the acts of ABS-CBN like
advertisement and publication for the airing of
Maging Sino Ka Man.
Issue:
1. Whether or not there was a valid
contract between ABS CNB and Viva films.

Page 9

2. Whether or not the granting of Moral Damages


in favour of RBS corporation is valid.

Held: 1. There was no valid contract between


ABS CBN and Viva Films, since the acceptance of
the offer of the ABS CBN by Del Rosario was
made without the necessary approval of the
Board of Directors of Viva Films. The act of the
agent outside his authorize acts cannot make the
principal binding.
2. Moral damages are in the category of an award
designed to compensate the claimant for actual
injury suffered and not to impose a penalty on the
wrongdoer. The award is not meant to enrich the
complainant at the expense of the defendant, but
to enable the injured party to obtain means,
diversion, or amusements that will serve to
obviate then moral suffering he has undergone. It
is aimed at the restoration, within the limits of
the possible, of the spiritual status quo ante, and
should be proportionate to the suffering inflicted.
Trial courts must then guard against the award of
exorbitant damages; they should exercise
balanced restrained and measured objectivity to
avoid suspicion that it was due to passion,
prejudice, or corruption on the part of the trial
court.
The award of moral damages cannot be
granted in favor of a corporation because,
being an artificial person and having
existence only in legal contemplation, it has
no feelings, no emotions, no senses, It
cannot, therefore, experience physical
suffering and mental anguish, which call be
experienced only by one having a nervous
system. The statement in People v. Manero and
Mambulao Lumber Co. v. PNB that a corporation
may recover moral damages if it "has a good
reputation that is debased, resulting in social
humiliation" is an obiter dictum. On this score
alone the award for damages must be set aside,
since RBS is a corporation.
FILIPINAS BROADCASTING V. AMEC-BCCM
G.R. No. 141994; Jan. 17, 2005 Moral
Damages

Montaos, Heidi Jean I.

FACTS:
Expose is a radio program hosted
by Carmelo Rima and Hermogenes Alegre aired
every morning over DZRC-AM which is owned by
petitioner Filipinas Broadcasting Network, Inc. The
hosts exposed various alleged complaints from
students,
teachers
and
parents
against
respondents Agro Medical and Educational
Center-Bicol Christian College of Medicine
(AMEC) and its administrators. Claiming that
the broadcasts were defamatory, AMEC and
Angelita Ago, as Dean of respondents College of
Medicine, filed a complaint for damages against
petitioner FBNI and its hosts. The lower court
granted the award of moral damages which was
affirmed by the Court of Appeals. Hence, this
appeal.
ISSUE:
Whether or not AMEC is entitled to
moral damages.
RULING: The SC held that a juridical person is
generally not entitled to moral damages because,
unlike a natural person, it cannot experience
physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral
shock.40 The Court of Appeals cites Mambulao
Lumber Co. v. PNB, et al.41 to justify the award of
moral damages. However, the Courts statement
in Mambulao that "a corporation may have a
good reputation which, if besmirched, may also
be a ground for the award of moral damages" is
an obiter dictum.
Nevertheless, AMECs claim for moral damages
falls under item 7 of Article 2219 of the Civil
Code. This provision expressly authorizes the
recovery of moral damages in cases of libel,
slander or any other form of defamation. Article
2219(7) does not qualify whether the plaintiff is a
natural or juridical person. Therefore, a juridical
person such as a corporation can validly complain
for libel or any other form of defamation and
claim for moral damages.
Moreover, where the broadcast is libelous per se,
the law implies damages.45 In such a case,
evidence of an honest mistake or the want of
character or reputation of the party libeled goes
only in mitigation of damages. Neither in such a
case is the plaintiff required to introduce
evidence of actual damages as a condition
precedent to the recovery of some damages. In
this case, the broadcasts are libelous per se.
Thus, AMEC is entitled to moral damages.

Page 10

II. FINANCIAL STRUCTURE


A. DEBT SECURITIES - generally
Lirag Textile Mills, Inc. vs. SSS
Facts: SSS and Lirag Textile Mills, Inc. and Basilio
Lirag entered in to a purchase agreement
wherein, SSS agreed to purchase preferred shares
of stock of the corporation. Their agreement also
provided that said shares of stock will be
repurchased by the corporation as scheduled. To
guarantee performance of said obligation, Basilio
Lirag not only signed as president of the
corporation but also signed as a suretty.
The corporation failed to redeem stocks as
provided for in the purhcase agreement.
Demands of SSS remained unheeded so it filed an
action for specific performance and damages.
The corporation and Lirag denied the existence of
said obligation contending that SSS became and
still a preferred stockholder of the corporation so
that redemption of the shares purchased depends
upon the financial ability of said corporation.
Lower court ruled in favor of SSS.
Issue: W/N the purchase agreement was a debt
instrument.
Held: SC affirmed the lower court's decision
holding that the terms and conditions of the
agreement showed that the parties intended the
repurchase of the shares on the respective
schedule dates to be an absolute obligation (an
obligation to pay money at some fixed future
time) which does not depend upon the financial
ability of the corporation. Said obligation was
manifested by the fact that Basilio Lirag signed as
a surety.
Therefore, Lirag cannot deny liability to SSS.

1. Authority to Issue Debt Securities


Section 38. Power to increase or decrease
capital stock; incur, create or increase bonded
indebtedness. - No corporation shall increase or
decrease its capital stock or incur, create or
increase any bonded indebtedness unless
approved by a majority vote of the board of
directors and, at a stockholder's meeting duly
called for the purpose, two-thirds (2/3) of the
outstanding capital stock shall favor the increase
or diminution of the capital stock, or the
incurring, creating or increasing of any bonded
indebtedness. Written notice of the proposed
increase or diminution of the capital stock or of
the incurring, creating, or increasing of any
bonded indebtedness and of the time and place
of the stockholder's meeting at which the
proposed increase or diminution of the capital
stock or the incurring or increasing of any bonded
indebtedness is to be considered, must be
addressed to each stockholder 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.
A certificate in duplicate must be signed by a
majority of the directors of the corporation and
countersigned by the chairman and the secretary
of the stockholders' meeting, setting forth:
(1) That the requirements of this section have
been complied with;
(2) The amount of the increase or diminution
of the capital stock;
(3) If an increase of the capital stock, the
amount of capital stock or number of shares
of no-par stock thereof actually subscribed,
the names, nationalities and residences of the
persons subscribing, the amount of capital
stock or number of no-par stock subscribed by
each, and the amount paid by each on his
subscription in cash or property, or the

Montaos, Heidi Jean I.

Page 11

amount of capital stock or number of shares


of no-par stock allotted to each stock-holder if
such increase is for the purpose of making
effective stock dividend therefor authorized;
(4) Any bonded indebtedness to be incurred,
created or increased;
(5) The actual indebtedness of the corporation
on the day of the meeting;
(6) The amount of stock represented at the
meeting; and
(7) The vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness.

trustees and of at least two-thirds (2/3) of the


members in a meeting duly called for the
purpose.
Bonds issued by a corporation shall be registered
with the Securities and Exchange Commission,
which shall have the authority to determine the
sufficiency of the terms thereof. (17a)
2. Types of Debt Securities

Unsecured bonds

Secured Bonds

Income Bonds

Convertible Bonds

Callable Bonds

Any increase or decrease in the capital stock or


the incurring, creating or increasing of any
bonded indebtedness shall require prior approval
of the Securities and Exchange Commission.
One of the duplicate certificates shall be kept on
file in the office of the corporation and the other
shall be filed with the Securities and Exchange
Commission and attached to the original articles
of incorporation. From and after approval by the
Securities and Exchange Commission and the
issuance by the Commission of its certificate of
filing, the capital stock shall stand increased or
decreased and the incurring, creating or
increasing
of
any
bonded
indebtedness
authorized, as the certificate of filing may
declare: Provided, That the Securities and
Exchange Commission shall not accept for filing
any certificate of increase of capital stock unless
accompanied by the sworn statement of the
treasurer of the corporation lawfully holding office
at the time of the filing of the certificate, showing
that at least twenty-five (25%) percent of such
increased capital stock has been subscribed and
that at least twenty-five (25%) percent of the
amount subscribed has been paid either in actual
cash to the corporation or that there has been
transferred to the corporation property the
valuation of which is equal to twenty-five (25%)
percent of the subscription: Provided, further,
That no decrease of the capital stock shall be
approved by the Commission if its effect shall
prejudice the rights of corporate creditors.
Non-stock corporations may incur or create
bonded indebtedness, or increase the same, with
the approval by a majority vote of the board of

Montaos, Heidi Jean I.

B. EQUITY SHARES
TIRSO GARCIA (receiver of Mercantile Bank
of China) vs. LIM CHU SING
FACTS: Lim Chu Sing executed and delivered to
the Mercantile Bank of China a promissory note.
One of the conditions stipulated therein is that in
case of defendants default in the payment of any
of the monthly instalments, as they become due,
the entire amount or the unpaid balance thereof
together with the interest shall become due and
demandable.

Page 12

Defendant defaulted in the payment of several


instalments by reason of which the unpaid
balance of P9,105.17 on the promissory note
became due and demandable.
On the other hand, the facts alleged in the
answer states that: The debt which is the subject
matter of the complaint was not really an
indebtedness of the defendant but of Lim Cuan
Sy who had an account with the plaintiff bank in
the form of trust receipts guaranteed by the
defendant as surety and with chattel mortgage
securities.
Inasmuch as Lim Cuan Sy failed to comply with
his obligations, the plaintiff required the
defendant, as surety, to sign a promissory note.
The defendant is the owner of shares of stock of
the plaintiff Mercantile Bank of China amounting
to P10,000 and the plaintiff Bank is now under
liquidation.

Section 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.
No shares of stock against which the corporation
holds any unpaid claim shall be transferable in
the books of the corporation. (35)

b. Pre-emptive Rights
ISSUE: Whether or not it is proper to compensate
the
defendant-appellants
indebtedness
of
P9,105.17 with the sum of P10,000 representing
the value of his shares of stock with the plaintiff
entity, the Mercantile Bank of China.

HELD: NO. Stockholders are not creditors of the


corporation. The capital stock of a corporation is
a trust fund to be more used particularly for the
security of the creditors of the corporation, who
presumably deal with it on the credit of its capital
stock. Therefore, defendant-appellant Lim Chu
sing not being a creditor of the Mercantile Bank of
China, although the latter is the creditor of the
former, there is no sufficient basis to justify a
compensation.
The indebtedness of a shareholder to a banking
corporation cannot be compensated with the
amount of his shares therein, there being no
relation of creditor and debtor with respect to
such shares.
1. Issuance of Shares

Section 39. Power to deny pre-emptive right. All stockholders of a stock corporation shall enjoy
pre-emptive right to subscribe to all issues or
disposition of shares of any class, in proportion to
their respective shareholdings, unless such right
is denied by the articles of incorporation or an
amendment thereto: Provided, That such preemptive right shall not extend to shares to be
issued in compliance with laws requiring stock
offerings or minimum stock ownership by the
public; or to shares to be issued in good faith with
the approval of the stockholders representing
two-thirds (2/3) of the outstanding capital stock,
in exchange for property needed for corporate
purposes or in payment of a previously
contracted debt.
c. Consideration

Par Value: Shares with a value fixed in


the certificates of stock and the articles of
incorporation.
No Par Value: Shares having no par
value but have issued value stated in the
certificate or articles of incorporation.
Limitations:

a. Certificate of Stock

Montaos, Heidi Jean I.

Page 13

a.
No par value
shares cannot have an issued price of less than
P5.00;
b.
The
entire
consideration for its issuance constitutes
capital so that no part of it should be
distributed as dividends;
c.
They cannot
be issued as preferred stocks;
d.
They cannot
be issued by banks, trust companies,
insurance companies, public utilities and
building and loan association;
e.
The articles
of incorporation must state the fact that it
issued no par value shares as well as the
number of said shares;
f.
Once issued,
they are deemed fully paid and

NATIONAL EXCHANGE CO., INC. vs. I. B.


DEXTER
FACTS: The defendant, I. B. Dexter, signed a
written subscription to the corporate stock of C.
S. Salmon & Co. in the following form:
I hereby subscribe for three hundred (300)
shares of the capital stock of C. S. Salmon
and Company, payable from the first
dividends declared on any and all shares of
said company owned by me at the time
dividends are declared, until the full amount
of this subscription has been paid.
Upon this subscription the sum of P15,000 was
paid, from a dividend declared at about that time
by the company, supplemented by money
supplied personally by the subscriber. Beyond
this nothing has been paid on the shares and no
further dividend has been declared by the
corporation. There is therefore a balance of
P15,000 still paid upon the subscription.
As the case reaches this court the sole question
here presented for consideration is one of law,
namely, whether the stipulation contained in the
subscription to the effect that the subscription is
payable from the first dividends declared on the

Montaos, Heidi Jean I.

shares has the effect of relieving the subscriber


from personal liability in an action to recover the
value of the shares. The trial court held, in effect,
that the stipulation mentioned is invalid.
This action was instituted in the CFI of Manila by
the National Exchange Co., Inc., as assignee
(through the Philippine National Bank) of C. S.
Salmon & Co., for the purpose of recovering from
I. B. Dexter a balance of P15,000, the par value of
one hundred fifty shares of the capital stock of C.
S. Salmon & co., with interest and costs. Upon
hearing the cause the trial judge gave judgment
for the plaintiff to recover the amount claimed,
with lawful interest and with costs. From this
judgment the defendant appealed.

ISSUE:
W/N the stipulation contained in
the subscription to the effect that the
subscription is payable from the first dividends
declared on the shares has the effect of relieving
the subscriber from personal liability in an action
to recover the value of the shares.

HELD: Under the American regime corporate


franchises in the Philippine Islands are granted
subject to the provisions of section 74 of the
Organic Act. In the Organic Act it is among other
things, declared: "That all franchises, privileges,
or concessions granted under this Act shall forbid
the issue of stock or bonds except in exchange
for actual cash or for property at a fair valuation
equal to the par value of the stock or bonds so
issued; . . . ."
Pursuant to this provision we find that the
Philippine Commission inserted in the Corporation
Law, the following provision: ". . . no corporation
shall issue stock or bonds except in exchange for
actual cash paid to the corporation or for property
actually received by it at a fair valuation equal to
the par value of the stock or bonds so issued."
(Act No. 1459, sec. 16 as amended by Act No.
2792, sec. 2.)
The prohibition against the issuance of shares by
corporations except for actual cash to the par
value of the stock to its full equivalent in property
is thus enshrined in both the organic and

Page 14

statutory law of the Philippine Islands; and it


would seem that our lawmakers could scarely
have chosen language more directly suited to
secure absolute equality stockholders with
respect to their liability upon stock subscriptions.
Now, if it is unlawful to issue stock otherwise than
as stated it is self-evident that a stipulation such
as that now under consideration, in a stock
subcription, is illegal, for this stipulation obligates
the subcriber to pay nothing for the shares
except as dividends may accrue upon the stock.
In the contingency that dividends are not paid,
there is no liability at all. This is a discrimination
in favor of the particular subcriber, and hence the
stipulation is unlawful.
The general doctrine of corporation law is in
conformity with this conclusion:
Nor has a corporation the power to receive a
subscription upon such terms as will operate
as a fraud upon the other subscribers or
stockholders by subjecting the particular
subcriber to lighter burdens, or by giving
him greater rights and privileges, or as a
fraud upon creditors of the corporation by
withdrawing or decreasing the capital. It is
well settled therefore, as a general rule, that
an agreement between a corporation and a
particular
subscriber,
by
which
the
subscription is not to be payable, or is to be
payable in part only, whether it is for the
purpose of pretending that the stock is
really greater than it is, or for the purpose of
preventing the predominance of certain
stockholders, or for any other purpose, is
illegal and void as in fraud of other
stockholders or creditors, or both, and
cannot be either enforced by the subcriber
or interposed as a defense in an action on
the subcription. (14 C. J., p. 570.)
We may add that the law in force in this
jurisdiction makes no distinction, in respect to the
liability of the subcriber, between shares
subscribed before incorporation is effected and
shares subscribed thereafter. All like are bound to
pay full value in cash or its equivalent, and any
attempt to discriminate in favor of one subscriber
by relieving him of this liability wholly or in part is
forbidden. In what is here said we have reference

Montaos, Heidi Jean I.

of course primarily to subcriptions to shares that


have not been previously issued. It is conceivable
that the power of the corporation to make terms
with the purchaser would be greater where the
shares which are the subject of the transaction
have been acquired by the corporation in course
of commerce, after they have already been once
issued. But the shares with which are here
concerned are not of this sort.
d. Payment
Subscription

of

the

Balance

of

the

Section 66. Interest on unpaid subscriptions. Subscribers for stock shall pay to the corporation
interest on all unpaid subscriptions from the date
of subscription, if so required by, and at the rate
of interest fixed in the by-laws. If no rate of
interest is fixed in the by-laws, such rate shall be
deemed to be the legal rate. (37)
Section 67. Payment of balance of subscription.
- Subject to the provisions of the contract of
subscription, the board of directors of any stock
corporation may at any time declare due and
payable to the corporation unpaid subscriptions
to the capital stock and may collect the same or
such percentage thereof, in either case with
accrued interest, if any, as it may deem
necessary.
Payment of any unpaid subscription or any
percentage thereof, together with the interest
accrued, if any, shall be made on the date
specified in the contract of subscription or on the
date stated in the call made by the board. Failure
to pay on such date shall render the entire
balance due and payable and shall make the
stockholder liable for interest at the legal rate on
such balance, unless a different rate of interest is
provided in the by-laws, computed from such
date until full payment. If within thirty (30) days
from the said date no payment is made, all stocks
covered by said subscription shall thereupon
become delinquent and shall be subject to sale as
hereinafter provided, unless the board of
directors orders otherwise. (38)
Lingayen Gulf vs. Baltazar
Facts: The plaintiff, Lingayen Gulf Electric Power
Company is a domestic corporation, while the
defendant Irineo Baltazar subscribed for 600
shares leaving a balance. Later, majority of the

Page 15

stockholders held a meeting and adopted


stockholders' resolution No. 17, wherein they
agreed to call the balance of all unpaidsubscribed
capital stock. The resolution also provided that all
unpaid subscription after the due dates of calls
would be subject to 12 per cent interest per
annum and upon expiration of the grace period
all subscribed stocks remaining unpaid would
revert to the corporation.

This is clear from the provisions of section 40 of


the Corporation Law, Act No. 1459, as amended.
It will be noted that section 40 is mandatory as
regards publication, using the word "must". As
correctly stated by the trial court, the reason for
the mandatory provision is not only to assure
notice to all subscribers, but also to assure
equality and uniformity in the assessment on
stockholders.

After the corporation reminded the defendant of


his unpaid subscription, the latter requested for
an extension of payment and if in case he could
not pay the balance, his subscription would be
reverted to the corporation. Then he wrote again
to the corporation offering to withdraw
completely his subscription by selling out to the
corporation all his shares of stock which was left
unacted.

Going to the claim of defendant and appellant


that Resolution No. 17 of 1946 released him from
the obligation to pay for his unpaid subscription;
the authorities are generally agreed that in order
to effect the release, there must be unanimous
consent of the stockholders of the corporation.
The release attempted in Resolution No. 17 of
1946 was not valid for lack of a unanimous vote.
If found that at least seven stockholders were
absent from the meeting when said resolution
was approved.

Resolution No. 4 was adopted by the stockholders


wherein they agreed to revalue the stocks and
assets of the company so as to attract outside
investors to put in money for the rehabilitation of
the company
It was admitted by the defendant that he
received notice, demanding payment of the
unpaid balance of his subscription. It was agreed
by the parties that the call of the Board of
Directors was not published in a newspaper of
general circulation as required by section 40 of
the Corporation Law. The corporation demanded
again the defendant for the payment of his
unpaid subscription which the latter disclaims
liability on the grounds of absence of valid call,
and even if there is a valid call he was released
from the obligation of the balance of his
subscription by stockholders' resolution No. 17
and No. 4.
Issues: 1. Whether or not there is a valid call?
2. Whether or not the defendant released from
the obligation of the unpaid balance of his
subscription by virtue of stockholders' resolution
Nos. 17 and 4?

Ruling: The law requires that notice of any call


for the payment of unpaid subscription should be
made not only personally but also by publication.

Montaos, Heidi Jean I.

In conclusion we hold that under the Corporation


Law, notice of call for payment for unpaid
subscribed stock must be published, except when
the corporation is insolvent, in which case,
payment is immediately demandable. We also
rule that release from such payment must be
made by all the stockholders.
e. Liability for Unpaid Subscriptions
EDWARD A. KELLER & CO. LTD. Vs. COB
MKTG, INC.; GR No. L-68097; Jan. 16, 1986
FACTS: Edward A. Keller appointed COB Mktg. as
exclusive distributor of its household products.
Under the agreement, Keller sold on credit its
product to COB. As security for COBs credit
purchases, one Asuncion Maanahan mortgaged
her land to Keller. Manahan assumed solidarily
with COB the faithful performance of all terms
and conditions of the sales agreement.
The parties executed a second sales agreement
whereby COBs territory was extended to
Northern and Southern Luzon. As security for the
credit purchase for that area, Tomas C. Lorenzo,
Jr. and his father executed a mortgaged on their
land in Nueva Ecija. Like Manhan, the Lorenzos
were solidarily liable with COB for its obligations
under the sales agreement.

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On May, the Board of Directors of COB ware


apprised by Jose E. Bax the firms President and
Gen. Manager, that the firm owed Keller about
P179,000. Bax was authorized to negotiate with
Keller for the settlement of his firms liability.
COB through Bax executed 2 second chattel
mortgages over its 12 trucks (already mortgaged
to Norther Motors, Inc.) as security for its
obligation to Keller. However, the second
mortgages did not become effective because the
first mortgagee, Northern Motors, did not give its
consent. But the second mortgages served the
purpose of being admissions of the liability of
COB to Keller.
These pieces of documentary evidence are
sufficient to prove the liability of COB Group
Mktg. and to justify the foreclosure of the two
mortgages executed by Manahan and the
Lorenzos.
Bax although not an accountant, presented his
own reconciliation statements wherein he showed
that
COB
overpaid
Keller.
He
claimed
overpayment although in his answer he did not
allege at all that there was overpayment to Keller.
Keller sued COB Group Mktg., its stockholders and
the mortgagors, Manahan and Lorenzo.

ISSUE:

WHEREFORE, the decisions of the trial court and


the Appellate Court are reversed and set aside.
COB Group marketing, Inc. is ordered to pay
Edward A. Keller & Co., Ltd. the sum of
P182,994.60 with 12% interest per annum from
August 1, 1971 up to the date of payment plus
P20,000 as attorney's fees.
Asuncion Manahan and Tomas C. Lorenzo, Jr. are
ordered to pay solidarity with COB Group
Marketing the sums of P35,000 and P25,000,
respectively.
The following respondents are solidarity liable
with COB Group Marketing up to the amounts of
their unpaid subscription to be applied to the
company's liability herein: Jose E. Bax P36,000;
Francisco C. de Castro, P36,000; Johnny de la
Fuente, P12,000; Sergio C. Ordonez, P12,000;
Trinidad C. Ordonez, P3,000; Magno C. Ordonez,
P3,000; Adoracion C. Ordonez P3,000; Tomas C.
Lorenzo, Jr., P3,000 and Luz M. Aguilar-Adao,
P6,000.
If after ninety (90) days from notice of the finality
of the judgment in this case the judgment against
COB Group Marketing has not been satisfied fully,
then the mortgages executed by Manahan and
Lorenzo should be foreclosed and the proceeds of
the sales applied to the obligation of COB Group
Marketing. Said mortgage obligations should bear
six percent legal interest per annum after the
expiration of the said 90-day period. Costs
against the private respondents.
SO ORDERED.

HELD: As to the liability of the stockholders, it is


settled that a stockholder is personally liable for
the financial obligations of a corporation to the
extent of his unpaid subscription.
While the evidence shows that the amount due
from COB Group Marketing is P184,509.60 as of
July 31, 1971 or P186,354.70 as of August 31,
1971 (Exh. JJ), the amount prayed for in Keller's
complaint is P182,994.60 as of July 31, 1971 (1819 Record on Appeal). This latter amount should
be the one awarded to Keller because a judgment
entered against a party in default cannot exceed
the amount prayed for (Sec. 5, Rule 18, Rules of
Court).

Montaos, Heidi Jean I.

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