You are on page 1of 43

Topic: General Principles, Attributes of Corporation which includes a discussion on the Doctrine of

Limited Liability

Case No. 8
[G.R. No. 113176. July 30, 2001]
ENGINEERS, INC., respondents.
In the early seventies, the Ministry of Public Works and Highways (MPWH for brevity)
awarded petitioner Hanil Development Co., Ltd. (Hanil for brevity) the contract to construct the 200-
kilometer Iligan-Cagayan de Oro-Butuan Highway Project. Hanil sub-let the rock-blasting work
portion of the contract to private respondent M.R. Escobar Explosive Engineers, Inc. (Escobar for
brevity). By express stipulation of the parties, Escobar will be compensated thus:

9. For the services performed by Sub-Contractor (Escobar) in accordance with the terms and
conditions herein described, Hanil will pay twenty pesos (P20.00) per cubic meter on the
following basis:

If the rocks are solid in nature, quantity will be assessed as shown on the cross-section. If the
nature of the rock is soft and can be removed by using ripper, quantity may be assessed on
the actual blasted amount surveyed by both Company and Sub-Contractors engineers.

In 1977, Escobar commenced its blasting works. It continued its services until terminated by
Hanil in 1978. For the duration of the contract, it worked on the segments of the construction
undertaking designated in the agreement as A-2, B-2, B-3, B-4, and C-1. It was fully paid for the areas
A-2 and B-4. It claimed, however, that Hanil still partially owes it P1,341,727.40 for blastings done in
the B-2, B-3 and C-1 areas. The claim was predicated on the theory that the rocks it caused to explode
in the contested areas were solid in nature, and therefore the volume should be computed using the
cross-section approach pursuant to the above-quoted paragraph 9(a).
Consequently, Escobar instituted a Civil Case for recovery of a sum of money with damages
against Hanil before the CFI. Hanil filed its answer with counterclaim for damages.
The CFI handed down a Decision ordering Hanil to pay P1,341,727.40 for the value of rocks
blasted by Escobar; 10% of the amount due for attorneys fees; and the costs of suit. The CA reversed
the ruling of the CFI. Escobar was order to pay Hanil attorney’s fees and nominal damages.

What damages is Hanil entitled to?
Temperate damages- Escobar procured a writ of attachment against Hanil in bad faith.
Thereby, the goodwill and business transactions of Hanil were prejudiced due to the
execution of the writ of attachment.

Exemplary Damages- to set an example to the public that there are consequences in filing
groundless petitions in Court. Exemplary damages may be awarded when a case is maliciously
filed against another.
Apropos the Application for Judgment on the Attachment Bond, Escobar claims in its petition that
the award of attorneys fees and injunction bond premium in favor of Hanil is to law and
jurisprudence. It contends that no malice or bad faith may be imputed to it in procuring the writ.

Escobar’s protestation is now too late in the day. The question of the illegality of the attachment and
Escobar’s bad faith in obtaining it has long been settled in one of the earlier incidents of this case.
The Court of Appeals, in its decision, voided the challenged writ, having been issued with grave
abuse of discretion. Escobars bad faith in procuring the writ cannot be doubted. Its Petition for the
Issuance of Preliminary Attachment made such damning allegations that:
Hanil was already able to secure a complete release of its final collection from the MPWH; it
has moved out some of its heavy equipments for unknown destination, and it may leave the
country anytime. Worse, its Ex Parte Motion to Resolve Petition alleged that after personal
verification by (Escobar) of (Hanils) equipment in Cagayan de Oro City, it appears that the
equipments were no longer existing from their compound.

All these allegations of Escobar were found to be totally baseless and untrue. So manifest was their
baselessness that Escobar did not even submit a reply to refute the assertions Hanil made in its
Opposition to the Petition for the Issuance of Preliminary Attachment.

We therefore hold that on the basis of the evidence presented, Hanil is entitled to temperate
damages in the amount of P500,000.00. As a consequence of the illegal writ, Hanil suffered the
following damages:
 some of the checks it issued were dishonored after its bank accounts were garnished;
 its operation stopped temporarily for five days because it was prevented from using its
equipment and machineries; and
 its goodwill, reputation and commercial standing as one of the top multi-national
construction firms in Asia was tarnished.

In light of Escobars bad faith in procuring the attachment and garnishment orders, we grant the
additional award of exemplary damages in the amount of P1,000,000.00 by way of example or
correction for public good. This should deter parties in litigations from resorting to baseless and
preposterous allegations to obtain writs of attachments from gullible judges.

The misuse of our legal processes cannot be tolerated especially if they victimize persons and
institutions of foreign nationality doing legitimate business in our jurisdiction.

We, however, delete the award of attorney’s fees for the litigation of the application for damages
against the bond since we have already included the same in our grant of attorney’s fees in the main
action concerning the appeal.

Topic: Nationality of a Corporation
Case No. 27
G.R. NOS. 174457-59
BAYANTEL), Respondents.
Respondent Bayantel is a duly organized domestic corporation engaged in the business of providing
telecommunication services. It is 98.6% owned by Bayan Telecommunications Holdings Corporation
(BTHC), which in turn is 85.4% owned by the Lopez Group of Companies and Benpres Holdings

On various dates between the years 1995 and 2001, Bayantel entered into several credit agreements with
several Filipino and foreign entities.

To secure said loans, Bayantel executed an Omnibus Agreement dated September 19, 1995 and an
EVTELCO Mortgage Trust Indenture dated December 12, 1997.

Pursuant to the Omnibus Agreement, Bayantel executed an Assignment Agreement in favor of the
lenders under the Omnibus Agreement (hereinafter, Omnibus Creditors, Bank Creditors, or secured
creditors). In the Assignment Agreement, Bayantel bound itself to assign, convey and transfer to the
Collateral Agent, certain properties as collateral security for the prompt and complete payment of its
obligations to the Omnibus Creditors.

In July 1999, Bayantel issued US$200 million worth of 13.5% Senior Notes pursuant to an
Indenture dated July 22, 1999 that it entered into with The Bank of New York as trustee for the
holders of said notes. Pursuant to the said Indenture, the notes are due in 2006 and Bayantel shall
pay interest on them semi-annually. Bayantel managed to make two interest payments before it
defaulted on its obligation.

Foreseeing the impossibility of further meeting its obligations, Bayantel sent, a proposal for the
restructuring of its debts to the Bank Creditors and the Holders of Notes. To facilitate the
negotiations between Bayantel and its creditors, an Informal Steering Committee was formed. The
Informal Steering Committee accepted Bayantel’s proposal to pay the restructured debt, pari passu
(at the same rate), out of its cash flow. This pari passu or equal treatment of debts, however, was
opposed by the Bank Creditors who invoked their security interest under the Assignment

Bayantel continued to pay reduced interest on its debt to the Bank Creditors but stopped paying the
Holders of Notes. Bayantel’s total indebtedness had reached US$674 million or P35.928 billion in
unpaid principal and interest, based on the prevailing conversion rate of US$1 = P53.282. Out of its
total liabilities, Bayantel allegedly owes 43.2% or US$291 million (P15.539 billion) to the Holders of the
On July 25, 2003, The Bank of New York, as trustee for the Holders of the Notes, wrote Bayantel an
Acceleration Letter declaring immediately due and payable the principal, premium interest, and
other monetary obligations on all outstanding Notes. Then, The Bank of New York filed a petition for
the corporate rehabilitation of Bayantel upon the instructions of the Informal Steering Committee.

Pasig RTC placed Bayantel under rehabilitation. It also ruled, among others, that the pari passu
treatment of creditors shall extend to all payment terms and treatment of past due interest and that
all provisions relating to equity in the rehabilitation plan, must strictly conform to the requirements
of the Constitution limiting foreign ownership to 40%.

Dissatisfied, The Bank of New York filed a Petition for Review with the CA.

The Rehabilitation Court’s Decision was questioned for, among others, fixing the level of Bayantel’s
sustainable debt at US$325 million to be paid in 19 years. The CA upheld the RTC.

Does the conversion of Debt-to-equity of 40% of the outstanding capital stock in favor of the
creditors violate the constitutional limit on foreign ownership of a public utility? (YES.)

Petitioners fault the Court of Appeals for ruling that the debt-to-equity conversion rate of 77.7%, as
proposed by The Bank of New York, violates the Filipinization provision of the Constitution.
Petitioners explain that the acquisition of shares by foreign Omnibus and Financial Creditors shall be
done, both directly and indirectly in order to meet the control test principle under RA 7042 (FIA).

Under the proposed structure, said creditors shall own 40% of the outstanding capital stock of the
telecommunications company on a direct basis, while the remaining 40% of shares shall be registered
to a holding company that shall retain, on a direct basis, the other 60% equity reserved for Filipino

The Constitution explicitly reserves to Filipino citizens control over public utilities, pursuant to an
overriding economic goal of the 1987 Constitution: to "conserve and develop our patrimony" and
ensure "a self-reliant and independent national economy effectively controlled by Filipinos."

In the recent case of Gamboa v. Teves, the Court settled once and for all the meaning of "capital" in
the above-quoted Constitutional provision limiting foreign ownership in public utilities. In said case,
we held that considering that common shares have voting rights which translate to control as
opposed to preferred shares which usually have no voting rights, the term "capital" in Section 11,
Article XII of the Constitution refers only to common shares. However, if the preferred shares also
have the right to vote in the election of directors, then the term "capital" shall include such preferred
shares because the right to participate in the control or management of the corporation is exercised
through the right to vote in the election of directors. In short, the term "capital" in Section 11, Article
XII of the Constitution refers only to shares of stock that can vote in the election of directors.
Applying this, two steps must be followed in order to determine whether the conversion of debt to
equity in excess of 40% of the outstanding capital stock violates the constitutional limit on foreign
ownership of a public utility:
 First, identify into which class of shares the debt shall be converted, whether common
shares, preferred shares that have the right to vote in the election of directors or non-voting
preferred shares;
 Second, determine the number of shares with voting right held by foreign entities prior to
If upon conversion, the total number of shares held by foreign entities exceeds 40% of the capital stock
with voting rights, the constitutional limit on foreign ownership is violated. Otherwise, the conversion
shall be respected.

In its Rehabilitation Plan, among the material financial commitments made by respondent Bayantel is
that its shareholders shall "relinquish the agreed-upon amount of common stocks as payment to
Unsecured Creditors as per the Term Sheet." Evidently, the parties intend to convert the unsustainable
portion of respondent's debt into common stocks, which have voting rights. If we indulge petitioners on
their proposal, the Omnibus Creditors which are foreign corporations, shall have control over 77.7% of
Bayantel, a public utility company. This is precisely the scenario proscribed by the Filipinization provision
of the Constitution.

Therefore, the Court of Appeals acted correctly in sustaining the 40% debt-to-equity ceiling on

Topic: Liability for Torts
Case No.46
G.R. No. L-27155 May 18, 1978
It has been established during the trial that Mrs. Tapnio had an export sugar quota of 1,000 piculs for
the agricultural year 1956-1957 which she did not need. She agreed to allow Mr. Jacobo C. Tuazon to
use said quota for the consideration of P2,500.00. This agreement was called a contract of lease of
sugar allotment.

At the time of the agreement, Mrs. Tapnio was indebted to the Philippine National Bank at San
Fernando, Pampanga. Her indebtedness was known as a crop loan and was secured by a mortgage
on her standing crop including her sugar quota allocation for the agricultural year corresponding to
said standing crop. This arrangement was necessary in order that when Mrs. Tapnio harvests, the
P.N.B., having a lien on the crop, may effectively enforce collection against her.

Since the quota was mortgaged to the P.N.B., the contract of lease between Tapnio and Tuazon had
to be approved by said Bank. Initially, Tapnio and Tuazon agreed at an of P2.50 per picul of sugar.
However, the Bank Manager asked them to increase the amount to P2.80 per picul. Tapnio and
Tuazon agreed. Mr. Tuazon further informed the manager that he was ready to pay said amount as
the funds were in his folder which was kept in the bank. However, when the lease agreement
reached the Board of Directors of PNB, they wanted to raise the amount to 13.00 per picul. Mr.
Tuazon moved for the reconsideration of the Board’s decision but to no avail. Therefore, Tuazon
subsequently wrote the bank informing it that he is no longer interested to continue the deal,
referring to the lease of sugar quota allotment in favor of defendant Rita Gueco Tapnio. The result is
that the latter lost the sum of P2,800.00 which she should have received from Tuazon and which she
could have paid the Bank to cancel off her indebtedness.

At that time, Rita Gueco Tapnio has an entered into an indemnity agreement with Philamgen.
Pursuant to this, Philamgen executed a Bond (with Rita Gueco Tapnio as the principal) in favor of
PNB San Fernando Pampanga to guarantee the payment of defendant Rita Gueco Tapnio's account
with said Bank. In turn, to guarantee the payment of whatever amount Philamgen would pay to PNB,
Rita Gueco Tapnio and Cecilio Gueco executed the indemnity agreement.

Hence, upon failure of Tapnio to pay her indebtedness in the amount of P2,000.00 plus accumulated
interest, PNB demanded from Philamgen. In turn, Philamgen paid the PNB, the full amount due and
owing in the sum of P2,379.91, for and on account of defendant Rita Gueco's obligation. Philamgen,
in turn, made several demands, both verbal and written, upon Tapnio and Gueco, but to no avail.

Tapnio however claims that she is no longer indebted to PNB since it was PNB’s fault why the lease
agreement between her and Tuazon was not consummated. Tapnio filed her counterclaim against
The trial court ruled in favor of Rita Tapnio. It reason that it was PNB’s fault that the lease of the
sugar quota allocation was not consummated. The acts of PNB prevented Tapnio to realize an
income of P2,800.00 which was more than sufficient to pay off her indebtedness to the Bank.

Can a Corporation be held liable for torts committed by its agents? (YES.)

There is no question that Tapnio's failure to utilize her sugar quota for the crop year 1956-1957 was
due to the disapproval of the lease by the Board of Directors of petitioner. The issue, therefore, is
whether or not PNB is liable for the damage caused

Petitioner PNB argued that as an assignee of the sugar quota of Tapnio, it has the right, both under
its own Charter and under the Corporation Law, to safeguard and protect its rights and interests
under the deed of assignment, which include the right to approve or disapprove the said lease of
sugar quota and in the exercise of that authority, its Board of Directors necessarily had authority to
determine and fix the rental price per picul of the sugar quota subject of the lease between private
respondents and Jacobo C. Tuazon.

However, the unreasonableness of the position adopted by the petitioner's Board of Directors is
shown by the fact that the difference between the amount of P2.80 per picul offered by Tuazon and
the P3.00 per picul demanded by the Board amounted only to a total sum of P200.00. Considering
that all the accounts of Rita Gueco Tapnio with the Bank were secured by chattel mortgage on
standing crops, assignment of leasehold rights and interests on her properties, and surety bonds and
that she had apparently "the means to pay her obligation to the Bank, as shown by the fact that she
has been granted several sugar crop loans of the total value of almost P80,000.00 for the
agricultural years from 1952 to 1956", there was no reasonable basis for the Board of Directors of
petitioner to have rejected the lease agreement because of a measly sum of P200.00.

While petitioner had the ultimate authority of approving or disapproving the proposed lease since the
quota was mortgaged to the Bank, the latter certainly cannot escape its responsibility of observing, for
the protection of the interest of private respondents, that degree of care, precaution and vigilance
which the circumstances justly demand in approving or disapproving the lease of said sugar quota. 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. This
petitioner failed to do. Certainly, it knew that the agricultural year was about to expire, that by its
disapproval of the lease private respondents would be unable to utilize the sugar quota in question.
In failing to observe the reasonable degree of care and vigilance which the surrounding
circumstances reasonably impose, petitioner is consequently liable for the damages caused on
private respondents. Under Article 21 of the New 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 the damage." The afore-cited provisions on human relations were
intended to expand the concept of torts in this jurisdiction by granting adequate legal remedy for
the untold number of moral wrongs which is impossible for human foresight to specifically provide in
the statutes.
A corporation is civilly liable in the same manner as natural persons for torts, because "generally
speaking, the rules governing the liability of a principal or master for a tort committed by an agent or
servant are the same whether the principal or master be a natural person or a corporation, and
whether the servant or agent be a natural or artificial person. All of the authorities agree that a
principal or master is liable for every tort which he expressly directs or authorizes, and this is just as
true of a corporation as of a natural person, A corporation is liable, therefore, whenever a tortious
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."

WHEREFORE, in view of the foregoing, the decision of the Court of Appeals is hereby AFFIRMED.
Topic: Doctrine of Separate Personality (Alter Ego/Instrumentality)
Case No. 65
G.R. No. 130998. August 10, 2001

Marubeni Corporation is a foreign corporation organized under the laws of Japan. It was doing
business in the Philippines through its duly licensed, wholly owned subsidiary, Marubeni Philippines
Corporation. Petitioners Ryoichi Tanaka, Ryohei Kimura and Shoichi One were officers of Marubeni
assigned to its Philippine branch.

On January 27, 1989, Lirag filed with the RTC of Makati a complaint for specific performance and
damages in the sum of P6M as commission pursuant to an oral consultancy agreement with
Marubeni for obtaining government contracts of various projects. Lirag claimed that on February 2,
1987, petitioner Ryohei Kimura hired his consultancy group for the purpose of obtaining government
contracts of various projects. The agreement was merely oral because of the mutual trust between
Marubeni and the Lirag family which dates back to the 1960s. One of the projects handled by
respondent Lirag, the Bureau of Post project, amounting to P100,000,000.00 was awarded to the
“Marubeni-Sanritsu tandem. Despite repeated demands of his 6% commission was never paid.

Marubeni claimed that Ryohei Kimura did not have the authority to enter into such agreement in
their behalf. Only the general manager, upon issuance of a SPA by the principal office in Tokyo,
Japan, could enter into any contract in behalf of the corporation. They also claimed that Marubeni
never participated in the Bureau of Post project nor benefited from such project.

Whether or not there was a consultancy agreement to make Lirag entitled to commission. (NO.)

The only basis of Lirag in claiming from Marubeni was because he claims that they are sister
companies since Marubeni was the supplier and contractor of the Sanritsu. Not because two foreign
companies came from the same country and closely worked together on certain projects would the
conclusion arise that one was the conduit of the other, thus piercing the veil of corporate fiction.
The separate personality of the corporation may be disregarded only when the corporation is used
as a cloak or cover for fraud or illegality, or to work injustice, or where necessary for the protection
of creditors. Aside from the self-serving testimony of respondent regarding the existence of a close
working relationship between Marubeni and Sanritsu, there was nothing that would support the
conclusion that Sanritsu was an agent of Marubeni.

Any agreement entered into because of the actual or supposed influence which the party has,
engaging him to influence executive officials in the discharge of their duties, which contemplates the
use of personal influence and solicitation rather than an appeal to the judgment of the official on the
merits of the object sought is contrary to public policy. Consequently, the agreement, assuming that
the parties agreed to the consultancy, is null and void as against public policy. Therefore, it is
unenforceable before a court of justice.
Topic: Doctrine of Piercing the Veil of Corporate Fiction (Alter Ego/ Instrumentality)
Case No. 84
Adm. Matter No. R-181-P July 31, 1987
ADELIO C. CRUZ, complainant,
QUITERIO L. DALISAY, Deputy Sheriff, RTC, Manila, respondents.
In a sworn complaint, Adelio C. Cruz charged Quiterio L. Dalisay, Senior Deputy Sheriff of Manila,
with "malfeasance in office, corrupt practices and serious irregularities" allegedly committed as
 Respondent sheriff attached and/or levied the money belonging to complainant Cruz when he
was not himself the judgment debtor in the final judgment of NLRC sought to be enforced but
rather the company known as "Qualitrans Limousine Service, Inc.,a duly registered corporation;
and xxx

Respondent Dalisay explained that when he garnished complainant's cash deposit at the Philtrust
bank, he was merely performing a ministerial duty. While it is true that said writ was addressed to
Qualitrans Limousine Service, Inc., yet it is also a fact that complainant had executed an affidavit
before the Pasay City assistant fiscal stating that he is the owner/president of said corporation and,
because of that declaration, the counsel for the plaintiff in the labor case advised him to serve notice
of garnishment on the Philtrust bank.

Was the Respondernt Sherriff justified in levying Cruz’ money in the bank despite Quilitrans, a
corporation, being the judgement debtor?
NO. The power to pierce the veil of corporate fiction belongs to the court. The sheriff cannot
unilaterally disregard the separate personalities of the corporation and its stockholders.

We hold that respondent's actuation in enforcing a judgment against complainant who is not the
judgment debtor in the case calls for disciplinary action. Considering the ministerial nature of his duty
in enforcing writs of execution, what is incumbent upon him is to ensure that only that portion of a
decision ordained or decreed in the dispositive part should be the subject of execution. No more, no

The tenor of the NLRC judgment and the implementing writ is clear enough. It directed Qualitrans
Limousine Service, Inc. to reinstate the discharged employees and pay them full backwages.
Respondent, however, chose to "pierce the veil of corporate entity" usurping a power belonging to
the court and assumed improvidently that since the complainant is the owner/president of
Qualitrans Limousine Service, Inc., they are one and the same.

It is a well-settled doctrine both in law and in equity that as a legal entity, a corporation has a
personality distinct and separate from its individual stockholders or members. The mere fact that
one is president of a corporation does not render the property he owns or possesses the property of
the corporation, since the president, as individual, and the corporation are separate entities.

Topic: Test of Determining Applicability of the Doctrine of Piercing the Veil of Corporate Fiction
Case No. 103
[G.R. No. 108734. May 29, 1996]
Division); and Norberto Marabe, Rodolfo Raquel, Cristobal Riego, Manuel Gillego, Palcronio
Giducos, Pedro Aboigar, Norberto Comendador, Rogello Salut, Emilio Garcia, Jr., Mariano Rio,
Paulina Basea, Aifredo Albera, Paquito Salut, Domingo Guarino, Romeo Galve, Dominador Sabina,
Felipe Radiana, Gavino Sualibio, Moreno Escares, Ferdinand Torres, Felipe Basilan, and Ruben
Robalos, respondents.

The corporate mask may be lifted and the corporate veil may be pierced when a corporation is just but
the alter ego of a person or of another corporation. Where badges of fraud exist; where public
convenience is defeated; where a wrong is sought to be justified thereby, the corporate fiction or the
notion of legal entity should come to naught. The law in these instances will regard the corporation as a
mere association of persons and, in case of two corporations, merge them into one.

Thus, where a sister corporation is used as a shield to evade a corporations subsidiary liability for
damages, the corporation may not be heard to say that it has a personality separate and distinct from
the other corporation. The piercing of the corporate veil comes into play.
Private respondents were employed by said company as laborers, carpenters and riggers. In a labor
case Petitioner Concept Builders, Inc., The Labor Arbiter ordered Concept Builders to reinstate
private respondents and to pay them back wages equivalent to one year or three hundred working

Labor Arbiter issued a writ of execution directing the sheriff to execute the Decision which has
already become final and executory. The writ was partially satisfied through garnishment of sums
from Concept Builder’s debtor, the Metropolitan Waterworks and Sewerage Authority.

An Alias Writ of Execution was issued by the Labor Arbiter directing the sheriff to collect from herein
Concept Builders the sum of P117,414.76, representing the balance of the judgment award, and to
reinstate private respondents to their former positions. The writ was not served on Concept Builders
because the security guard refused to accept on the ground that Concept Builders no longer
occupied it’s former office.

A second alias writ of execution was issued but was not enforced just the same. The sheriff report
1. All the employees inside petitioners premises at 355 Maysan Road, Valenzuela, Metro
Manila, claimed that they were employees of Hydro Pipes Philippines, Inc. (HPPI) and not
by respondent;
2. Levy was made upon personal properties he found in the premises;
3. Security guards with high-powered guns prevented him from removing the properties he
had levied upon.
4. The said special sheriff recommended that a break-open order be issued to enable him to
enter petitioners premises so that he could proceed with the public auction sale of the
aforesaid personal properties.
A certain Dennis Cuyegkeng filed a third-party claim with the Labor Arbiter alleging that the
properties sought to be levied upon by the sheriff were owned by Hydro (Phils.), Inc. (HPPI) of which
he is the Vice-President.

Private respondents filed a Motion for Issuance of a Break-Open Order, alleging that HPPI and
petitioner corporation were owned by the same incorporator/ stockholders. They also alleged that
petitioner temporarily suspended its business operations in order to evade its legal obligations to
them and that private respondents were willing to post an indemnity bond to answer for any
damages which petitioner and HPPI may suffer because of the issuance of the break-open order.

In support of their claim against HPPI, private respondents presented duly certified copies of the
General Informations Sheets submitted by HPPI to the Securities and Exchange Commission. The
General Information Sheet submitted revealed that the two companies have the same people
seating as Stockholders, Board of Directors and Officers. Moreover the two corporations share the
same address.

The Labor Arbiter issued an Order which denied private respondents motion for break-open order. The
NLRC set aside the order of the Labor Arbiter, issued a break-open order and directed private
respondents to file a bond. Hence, the resort to the present petition.

Are HPPI and Concept Builders one and the same company? (YES).

We find petitioners contention to be unmeritorious. It is a fundamental principle of corporation law
that a corporation is an entity separate and distinct from its stockholders and from other
corporations to which it may be connected. But, this separate and distinct personality of a
corporation is merely a fiction created by law for convenience and to promote justice.

The conditions under which the juridical entity may be disregarded vary according to the peculiar
facts and circumstances of each case. No hard and fast rule can be accurately laid down, but
certainly, there are some probative factors of identity that will justify the application of the doctrine of
piercing the corporate veil, to wit:
1. Stock ownership by one or common ownership of both corporations.
2. Identity of directors and officers.
3. The manner of keeping corporate books and records.
4. Methods of conducting the business.
In this connection, case law lays down a three-pronged test to determine the application of the alter
ego theory, which is also known as the instrumentality theory, namely:
1. Control, not mere majority or complete stock control, but complete domination, not only of
finances but of policy and business practice in respect to the transaction attacked so that the
corporate entity as to this transaction had at the time no separate mind, will or existence of
its own; (CONTROL TEST)
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiff’s legal right; and (FRAUD TEST)
3. The aforesaid control and breach of duty must have proximately caused the injury or unjust
loss complained of. (HARM TEST)


Thus, the question of whether a corporation is a mere alter ego, a mere sheet or paper corporation,
a sham or a subterfuge is purely one of fact.

In this case, the NLRC noted that, while petitioner claimed that it ceased its business operations
on April 29, 1986, it filed an Information Sheet with the SEC on May 15, 1987, stating that its office
address is at 355 Maysan Road, Valenzuela, Metro Manila. On the other hand, HPPI, the third-party
claimant, submitted on the same day, a similar information sheet stating that its office address is
at 355 Maysan Road, Valenzuela, Metro Manila.
Furthermore, the NLRC stated that:
Both information sheets were filed by the same Virgilio O. Casino as the corporate secretary of both
corporations. It would also not be amiss to note that both corporations had the same president, the
same board of directors, the same corporate officers, and substantially the same subscribers.

From the foregoing, it appears that, among other things, the respondent (herein petitioner) and the
third-party claimant shared the same address and/or premises. Under this circumstances, (sic) it cannot
be said that the property levied upon by the sheriff were not of respondents.

Clearly, petitioner ceased its business operations in order to evade the payment to private
respondents of backwages and to bar their reinstatement to their former positions. HPPI is obviously
a business conduit of petitioner corporation and its emergence was skillfully orchestrated to avoid
the financial liability that already attached to petitioner corporation.

It is very obvious that the second corporation seeks the protective shield of a corporate fiction
whose veil in the present case could, and should, be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its employees.

Hence, the NLRC did not commit any grave abuse of discretion when it affirmed the break-open
order issued by the Labor Arbiter.

Topic: Corporate Name
Case No.122

[G.R. No. 139371. April 4, 2001]

(CHED), respondent.

The act of the Commission on Higher Education enjoining petitioner from using the word university in its
corporate name and ordering it to revert to its authorized name does not violate its proprietary rights
or constitute irreparable damage to the school. Indeed, petitioner has no vested right to misrepresent
itself to the public. An injunction is a remedy in equity and should not be used to perpetuate a

TPRAM: Technical Panel for Engineering, Architecture, and Maritime Education

TPRAME: Technical Committee for Aeronautical Engineering

Dr. Reynaldo B. Vera, Chairman (TPRAM of CHED), received a letter from Douglas R. Macias,
Chairman, Board of Aeronautical Engineering, PRC and Chairman of TPRAME inquiring whether
Petitioner Inidiana Aerospace University had already acquired university status in view of the latters
advertisement in the Manila Bulletin.

Thereafter, the matter was referred to the CHED Regional Director in Cebu City, requesting said
office to conduct an investigation and submit its report. The Report stated that there was a violation
committed by his institution when it used the term university unless the school had complied with
the basic requirement of being a university as prescribed in CHED Memorandum Order No. 48, s.

As a consequence of said Report, CHED directed Indiana to desist from using the term University,
including the use of the same in any of its alleged branches. In the course of its investigation, CHED
was able to verify from the SEC that Indiana filed a proposal to amend its corporate name from
Indiana School of Aeronautics to Indiana Aerospace University, which was supposedly favorably
recommended by the DECS per its Indorsement, and on that basis, SEC issued to petitioner a
Certificate of Registration. Surprisingly, however, it ought to be noted, that SEC Chairman Perfecto
R. Yasay, Jr. wrote the following letter to the Chairman of CHED stating that Indiana did not file any
amendment to its Articles of Incorporation.

CHED issued a formal Cease and Desist Order directing petitioner to stop using the word university in its
corporate name. The CHED also published an announcement in an issue of Freeman, a local newspaper in
Cebu City, that there was no institution of learning by that name.

May Indiana legally use the word “university” in its corporate name? (NO.)
Indiana failed to show any evidence that it had been granted university status by respondent as
required under existing law and CHED rules and regulations. A certificate of incorporation under an
Unauthorized name does not confer upon petitioner the right to use the word university in its name.

Petitioner failed to establish a clear right to continue representing itself to the public as a
university. Indeed, it has no vested right to misrepresent itself.

The establishment and the operation of schools are subject to prior authorization from the
government. No school may claim to be a university unless it has first complied with the
prerequisites provided in Section 34 of the Manual of Regulations for Private Schools. Section 3, Rule
58 of the Rules of Court, limits the grant of preliminary injunction to cases in which the plaintiff is
clearly entitled to the relief prayed for.

Moreover, the Chairman of the SEC in his letter to the CHED expressly said that Indiana never filed
any Amended Articles of Incorporation so as to have a change of corporate name to include the term
university. Worse, the records officer of DECS issued a Certification to the effect that there was no
Indorsement made by that office addressed to the SEC or the Proposed Amended Article of
Incorporation of Indiana Aeronautics.

Under such clear pattern of deceitful maneuvering to circumvent the requirement for acquiring
University Status, it is a]patently reversible error for the trial court to hold that Indiana has a right to
use the word University which must be protected.

We also agree with the finding of the CA that the act sought to be enjoined by petitioner is not
violative of the latter’s rights. Respondents Cease and Desist Order merely restrained petitioner from
using the term university in its name. It was not ordered to close, but merely to revert to its
authorized name; hence, its proprietary rights were not violated.

Topic: Minimum Capital Stock/ Authorized Capital Stock and Subscription Requirements/ Subscribed and
Paid-up Capital
Case No. 141
MSCI-NACUSIP Local Chapter
G.R. No. 125198. March 3, 1997
On January 11, 1990, Asturias Sugar Central, Inc. (ASCI), executed a Memorandum of Agreement with
Monomer Trading Industries, Inc. (MTII), whereby MTII shall acquire the assets of ASCI by way of a
Deed of Assignment provided that an entirely new organization in place of MTII shall be organized,
which new corporation shall be the assignee of the assets of ASCI.

By virtue of this Agreement, a new corporation was organized and incorporated on February 15, 1990
under the corporate name Monomer Sugar Central, Inc. or MSCI, the private respondent herein. On
January 16, 1991, MSCI applied for exemption from the coverage of Wage Order No. RO VI-01 issued
by the Board on the ground that it is a distressed employer.

On January 16, 1991, MSCI applied for exemption from the coverage of Wage Order No. RO VI-01
issued by the Board on the ground that it is a distressed employer. In support thereto, MSCI
submitted its audited financial statements and income tax returns duly stamped "received" by the
Bureau of Internal Revenue (BIR) and the Securities and Exchange Commission (SEC) for the period
beginning February 15, 1990 and ending August 31, 1990, including the quarterly financial statements
and income tax returns for the two quarters ending November 30, 1990 and February 28, 1991.

Is the correct paid-up capital of MSCI for the pertinent period covered by the application for
exemption P5 million, not P64,688,528.00? (YES)
It is P5 million. The Supreme Court held that in the case under consideration, there is no dispute, and
the Board even mentioned in its August 17, 1993 Decision, that MSCI was organized and incorporated
on February 15, 1990 with an authorized capital stock of P60 million, P20 million of which was
subscribed. Of the P20 million subscribed capital stock, P5 million was paid-up. This fact is only too
glaring for the Board to have been misled into believing that MSCI'S paid-up capital stock was P64
million plus and not P5 million.

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 stockholders'
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

The above requirements, which are condition precedents before the capital stock of a corporation
may be increased, were unquestionably not observed in this case. Henceforth, the paid-up capital
stock of MSCI for the period covered by the application for exemption still stood at P5 million. The
losses, therefore, amounting to P3,400,738.00 for the period February 15, 1990 to August 31, 1990
impaired MSCI's paid-up capital of P5 million by as much as 68%. Likewise, the losses incurred by
MSCI for the interim period from September 1, 1990 to November 30, 1990, as found by the
Commission, per MSCI's quarterly income statements, amounting to P13,554,337.33 impaired the
company's paid-up capital of P5 million by a whopping 271.08%, more than enough to qualify MSCI as
a distressed employer.
Topic: Amendment and/or Rejection of By-laws
Case No. 160
[G.R. No. 121791. December 23, 1998]
COMMISSION (NLRC), respondents.
Petitioner Enrique Salafranca worked with the private respondent Philamlife Village Homeowners
Association as administrative officer for a period of six months. After petitioners term of
employment expired, he still continued to work in the same capacity, albeit, without the benefit of a
renewed contract.

Sometime in 1987, Philmlife decided to amend its by-laws. Included therein was a provision regarding
officers, specifically, the position of administrative officer under which said officer shall hold office at
the pleasure of the Board of Directors. In view of this development, Philamlife, informed Salafranca
that his term of office shall be co-terminus with the Board of Directors which appointed him to his
position. Furthermore, until he submits a medical certificate showing his state of health, his
employment shall be on a month-to-month basis. Oddly, notwithstanding the failure of herein
petitioner to submit his medical certificate, he continued working until his termination in 1992.

Claiming that his services had been unlawfully and unceremoniously dispensed with, Salafranca filed
a complaint for illegal dismissal with money claims and for damages. The Labor Arbiter ruled in favor
of Salafranca. The LA ruled that the amendment of the Philamlife’s Bylaws should have not applied
to Salafranca because he was hired prior to such amendment. The NLRC reversed the decision of the
Labor Arbiter. The NLRC viewed the dismissal of the Salafranca as a valid act by Philamlife.

Notwithstanding the amendment in the bylaws of Philamlife, was Salafranca illegally dismissed?

Having reviewed the records of this case carefully, we conclude that private respondent utterly failed
to substantiate petitioner’s dismissal, rendering the latter’s termination illegal.

Viewed in this light, while private respondent has the right to terminate the services of petitioner,
this is subject to both substantive and procedural grounds.

As regards the issue of procedural due process, private respondent justifies its non-compliance
therewith in this wise:
The Association Officers, being his peers and friends had a problem however in terminating his
services. He had been found to have committed infractions as previously enumerated. PVHA
could have proceeded with a full-blown investigation to hear these charges, but the ordeal
might break the old man’s heart as this will surely affect his standing in the community. So they
decided to make their move as discreetly (but legally) as possible to save the petitioners
reputation. Terminating him in accordance with the provision of the by-laws of the Association
without pointing out his numerous faults and malfeasance in office and with one-half month
pay for every year of service in accordance with the Retirement Law was the best and only
We are not impressed. The reasoning advanced by the private respondent is as puerile as it
is preposterous.

The essence of due process is to afford the party an opportunity to be heard and defend himself, to
cleanse his name and reputation from any taint. It includes the twin requirements of notice and
hearing. In light of the foregoing, private respondents arguments are clearly baseless and without
merit. It is stating the obvious that dismissal, being the ultimate penalty that can be meted out to an
employee, should be based on a clear or convincing ground. As such, a decision to terminate an
employee without fully apprising him of the facts, on the pretext that the twin requirements of
notice and hearing are unnecessary or useless, is an invalid and obnoxious exercise of management

Furthermore, private respondent, in an effort to validate the dismissal of the petitioner, posits the
theory that the latter’s position is co-terminus with that of the Villages Board of Directors, as
provided for in its amended by-laws.

Admittedly, the right to amend the by-laws lies solely in the discretion of the employer, this being in
the exercise of management prerogative or business judgment. However this right, extensive as it
may be, cannot impair the obligation of existing contracts or rights.

Prescinding from these premises, private respondent’s insistence that it can legally dismiss petitioner
on the ground that his tenure has expired is untenable. Petitioner, being a regular employee, is
entitled to security of tenure; hence, his services may only be terminated for causes provided by law.
A contrary interpretation would not find justification in the laws or the Constitution. If we were to
rule otherwise, it would enable an employer to remove any employee from his employment by the
simple expediency of amending its by-laws and providing that his/her position shall cease to exist
upon the occurrence of a specified event.

If private respondent wanted to make the petitioners position co-terminus with that of the Board of
Directors, then the amendment must be effective after petitioners stay with the private respondent,
not during his term. Obviously, the measure taken by the private respondent in amending its by-laws
is nothing but a devious, but crude, attempt to circumvent petitioner’s right to security of tenure as a
regular employee guaranteed under the Labor Code.

Topic: Powers of a Corporation (Other Powers)
Case No. 179
G.R. No. 102300. March 17, 1993.
LEONARDO B. CANARES, Judge of Regional, Trial Court of Cebu, Branch 10, and SPOUSES
Petitioner Citi Bank is a foreign commercial banking corporation duly licensed to do business in the
Philippines. Private respondents, spouses Cresencio and Zenaida Velez, were good clients of
petitioner bank's branch in Cebu until they filed a complaint for specific performance and damages
against it before the RTC.

Private respondents alleged in their complaint that the petitioner bank extended to them credit lines
sufficiently secured with real estate and chattel mortgages on equipment. They claim that petitioner
offered them special additional accommodation of Five Million Pesos (P5,000,000.00) to be availed
of in the following manner:
a. Defendant (Citibank) would and did purchase check or checks from the plaintiffs (Sps. Velez)
by exchanging it with defendant's manager's check on a regular daily basis as reflected in the
defendant's own ledger furnished to plaintiffs; x x x

When private respondents tried to exchange with petitioner bank six checks amounting to
P3,095,000.00 but petitioner bank allegedly refused to continue with the arrangement even after
repeated demands. Instead, petitioner bank suggested to private respondents that the total amount
covered by the "arrangement be restructured to thirty (30) months with prevailing interest rate on
the diminishing balance". Private respondents agreed to such a proposal. Then as a sign of good
faith, they issued and delivered a check for P75,000.00 in favor of petitioner bank which was refused
by the latter demanding instead full payment of the entire amount. For the failure of petitioner bank
to comply with this restructuring agreement private respondents sued for specific performance and

Subsequently, petitioner bank filed a criminal complaint against private respondents for violation of
Batas Pambansa Blg. 22 (Bouncing Checks Law) and estafa (six counts) under Article 315 par. 2(d) of
the Revised Penal Code.

At pre-trial conference, counsel for petitioner bank appeared, presenting a special power of attorney
executed by Citibank officer Florencia Tarriela in favor of petitioner bank's counsel, the J.P. Garcia &
Associates, to represent and bind petitioner bank at the pre-trial conference of the case at bar.

Inspite of this special power of attorney, counsel for private respondents orally moved to declare
petitioner bank as in default on the ground that the special power of attorney was not executed by
the Board of Directors of Citibank.

The RTC issued an order declaring petitioner bank as in default because the defendant-bank has no
proper representation during the pre-trial conference.
Petitioner bank then filed a petition for certiorari, prohibition and mandamus with preliminary
injunction and/or temporary restraining order with the Court of Appeals. The Court of Appeals
dismissed the petition.

Hence, this instant petition.

Is a resolution of the board of directors of a corporation always necessary for granting authority to
an agent to represent the corporation in court cases? (NO.)

In the corporate hierarchy, there are three levels of control:
1. the board of directors, which is responsible for corporate policies and the general
management of the business affairs of the corporation;
2. the officers, who in theory execute the policies laid down by the board, but in practice often
have wide latitude in determining the course of business operations; and
3. the stockholders who have the residual power over fundamental corporate changes, like
amendments of the articles of incorporation.

However, just as a natural person may authorize another to do certain acts in his behalf, so may the
board of directors of a corporation validly delegate some of its functions to individual officers or
agents appointed by it.

Thus, although as a general rule, all corporate powers are to be exercised by the board of directors,
exceptions are made where the Code provides otherwise.

Corporate powers may be directly conferred upon corporate officers or agents by statute, the
articles of incorporation, the by-laws or by resolution or other act of the board of directors. In
addition, an officer who is not a director may also appoint other agents when so authorized by the
by-laws or by the board of directors. Such are referred to as express powers.

There are also powers incidental to express powers conferred. It is a fundamental principle in the law
of agency that every delegation of authority, whether general or special, carries with it, unless the
contrary be expressed, implied authority to do all of those acts, naturally and ordinarily done in such
cases, which are reasonably necessary and proper to be done in order to carry into effect the main
authority conferred.

Since the by-laws are a source of authority for corporate officers and agents of the corporation, a
resolution of the Board of Directors of Citibank appointing an attorney in fact to represent and bind
it during the pre-trial conference of the case at bar is not necessary because its by-laws allow its
officers, the Executing Officer and the Secretary Pro-Tem, ** to execute a power of attorney to a
designated bank officer, William W. Ferguson in this case, clothing him with authority to direct and
manage corporate affairs.
The relevant provision in the general power of attorney granted to him are as follows:
…in favor of WILLIAM W. FERGUSON (hereinafter referred to as the "Attorney-in-fact"), …
hereby authorize and empower the Attorney-in-fact, acting in the name or on behalf of the
Bank, or any of its Branches, or any interest it or they may have or represent, said revocation
and authorization to be effective as of this date as follows:

XVII. To represent and defend the Bank and its interest before any and all judges and
courts, of all classes and jurisdictions, in any action, suit or proceeding in which the
Bank may be a party or may be interested in administrative, civil, criminal,
contentious or contentious-administrative matters, and in all kinds of lawsuits,
recourses or proceedings of any kind or nature, with complete and absolute
representation of the Bank, whether as plaintiff or defendant, or as an interested
party for any reason whatsoever . . .

XXI. To substitute or delegate this Power of Attorney in whole or in part in favor of

such one or more employees of the Bank, as he may deem advisable, but without
divesting himself of any of the powers granted to him by this Power of Attorney; and
to grant and execute in favor of any one or more such employees, powers of
attorney containing all or such authorizations, as he may deem advisable. . . "

Since paragraph XXI above specifically allows Ferguson to delegate his powers in whole or in part,
there can be no doubt that the special power of attorney in favor, first, of J.P. Garcia & Associates
and later, of the bank's employees, constitutes a valid delegation of Ferguson's express power
(under paragraph XVII above) to represent petitioner bank in the pre-trial conference in the lower

Topic: Powers to enter into a Management Contract
Case No. 217
G.R. No. L-16510. January 9, 1922
The plaintiff is a corporation organized under the banking laws of the Philippine while defendant is a
domestic corporation doing a general warehouse business and the Philippine Fiber and Produce
Company, to which hereafter refer as the Produce Company, is another domestic corporation.

In May, 1916, the defendant, as party of the first part, entered into a written contract with the
Produce Company, as party of the second part, in and by which "the above-named party of the
second part is hereby named, constituted, and appointed as the general manager of the business of
the party of the first part, in all of the branches thereof, with the duties, powers, authority and
compensation hereinafter provided." It shall exercise a general and complete supervision over and
management of the business of the party of the first part," and "shall direct, manage, promote and
advance the said business, subject only to the control and instructions of the board of directors of
the party of the first part."

It is also alleged that in January, 1919, with the consent of the plaintiff, the Produce Company
removed from the warehouse of the defendant 1,112.15 piculs of copra described in receipt No. 1255,
of the declared value of P18,350.

Does the corporation have the power to enter into management contract? (Yes.)

Under the written contract between them, the Produce Company was the general manager of the
defendant's warehouse business, and that it had authority to issue quedans in its name, and as its
corporate act and deed. That the quedans in question are duly authenticated, and were duly issued
by the defendant to, and in the name of, the Produce Company, and when issued were duly
endorsed, and delivered to the plaintiff for value. For aught that appears in the record, the bank was
acting in good faith, and the quedans were duly issued, endorsed and delivered to it as collateral in
the ordinary course of business. Although there may have been fraud, there is no allegation or proof
that the bank was a party to it, or had any knowledge of it, and this court has no right to assume that
the bank was a party to a fraud. Giving to the quedans their legal force and effect, it must follow that
at the time the demand was made; the bank was the owner and entitled to the possession of the
copra therein described. The receipts call for 15,699.34 piculs of copra, but plaintiff admits that, with
its consent, 1,112.15 piculs of copra, of the declared value of P18,350, were delivered to the Produce
Company from and out of receipt No. 1255. This would leave 14,587.19 piculs of copra evidenced by
the quedans.
Topic: Board of Directors and Trstees (Qualifications/ Qualifying Shares)
Case No. 236
G.R. No. 186566, October 2, 2009

As a result of the Tokyo Communique, which unified the feuding Basketball Association of the
Philippines ("BAP") and the newly formed Pilipinas Basketbol ("PB"), the Samahang Basketbol ng
Pilipinas, Inc. ("SBP") was established and its constitutive documents consisting of the Articles of
Incorporation were signed by the five (5) incorporators, which include petitioner Pangilinan. On the
same day, the incorporators likewise passed and signed its by-laws. Subsequently, the three-man
panel met in Bangkok, Thailand where it forged and executed a Memorandum of Agreement
("Bangkok Agreement") integrating therein the final terms and conditions of the unity and merger of
BAP and PB. Then came the nomination and election of its transitory officers for the years 2007-2008
the results of which had led to the proclamation of respondent Villafuerte as Chairman. Petitioner
raised its opposition and did not recognize the election of respondent Villafuerte as Chairman of
BAP-SBP on account of the alleged failure of the latter to qualify for the said position. As a result of
this, two elections were held by the different factions for the positions in the Board of Trustees.
Petitioners filed before the Regional Trial Court of Manila a petition5 for declaration of nullity of the
election of respondents as members of the Board of Trustees and Officers of BAP-SBP. The trial court
rendered decision in favor of the petitioners.

Is Villafuerte qualified to be a Director? (No.)

Respondents asserted that Villafuerte never assumed the position of Chairman of the BAP-SBP
because he failed to qualify for the same; that before Villafuerte could legally assume the
Chairmanship of BAP-SBP, he must first be elected a member of the Board of Trustees.

As correctly pointed out by CA, petitioner Villafuerte’s nomination must of necessity be understood
as being subject to or in accordance with the qualifications set forth in the By-Laws of the BAP-SBP.
Since the said by-laws require the Chairman of the Board of Trustees to be a trustee himself,
petitioner Villafuerte was not qualified since he had neither been elected nor appointed as one of the
trustees of BAP-SBP. In other words, petitioner Villafuerte never validly assumed the position of
Chairman because he failed in the first place to qualify therefore.
Topic: Authority of the Directors
Case No. 255
G.R. No. 127882 December 1, 2004
VICTOR O. RAMOS, DENR Secretary; HORACIO RAMOS, Director, Mines and Geosciences Bureau
(MGB-DENR); RUBEN TORRES, Executive Secretary; and WMC (PHILIPPINES), INC., respondents.

The Petition for Prohibition and Mandamus before the Court challenges the constitutionality of:

1. Republic Act No. RA 7942 (The Philippine Mining Act of 1995);

2. its Implementing Rules and Regulations (DENR Administrative Order No. [DAO] 96-40); and
3. the Financial Technical Assistance Agreement (March 30, 1995), executed by the government
with Western Mining Corporation (Philippines), Inc. (WMCP).

Respondents: Western Mining Corporation Philippines (WMCP), at the time it entered into the FTAA,
happened to be wholly owned by WMC Resources International Pty., Ltd. (WMC), which in turn was
a wholly owned subsidiary of Western Mining Corporation Holdings Ltd., a publicly listed major
Australian mining and exploration company. WMC sold its shares in WMCP to Sagitarius, 60% of
which is owned by Filipinos.

Upon the other hand, the conveyance of the WMCP FTAA to a Filipino corporation can be likened to
the sale of land to a foreigner who subsequently acquires Filipino citizenship, or who later resells the
same land to a Filipino citizen. The conveyance would be validated, as the property in question would
no longer be owned by a disqualified vendee.

Petitioners: the alleged sale of the shares in WMCP from WMC to Sagittarius, and of the transfer of
the FTAA from WMCP to Sagittarius is invalid. And even assuming that the said transfers were valid,
there still exists an actual case predicated on the invalidity of RA 7942 and its Implementing Rules
and Regulations (DAO 96-40).


 Has the case been rendered moot by the sale of WMC shares in WMCP to Sagittarius (60
percent of Sagittarius' equity is owned by Filipinos and/or Filipino-owned corporations while
40 percent is owned by Indophil Resources NL, an Australian company) and by the
subsequent transfer and registration of the FTAA from WMCP to Sagittarius? (NO)

The transfer of the WMCP shares to Sagittarius does not transgress the Constitution

Petitioners assert that paragraph 4 of Section 2 of Article XII permits the government to enter into
FTAAs only with foreign-owned corporations. Petitioners insist that the first paragraph of this
constitutional provision limits the participation of Filipino corporations in the exploration,
development and utilization of natural resources to only three species of contracts -- production
sharing, co-production and joint venture -- to the exclusion of all other arrangements or variations
thereof, and the WMCP FTAA may therefore not be validly assumed and implemented by Sagittarius.
In short, petitioners claim that a Filipino corporation is not allowed by the Constitution to enter into an
FTAA with the government.

However, a textual analysis of the first paragraph of Section 2 of Article XII does not support
petitioners' argument. The pertinent part of the said provision states:

"Sec. 2. x x x The exploration, development and utilization of natural resources shall be under
the full control and supervision of the State. The State may directly undertake such activities, or
it may enter into co-production, joint venture, or production-sharing agreements with Filipino
citizens, or corporations or associations at least sixty per centum of whose capital is owned by
such citizens. x x x."

Nowhere in the provision is there any express limitation or restriction insofar as arrangements other
than the three aforementioned contractual schemes are concerned.

Besides, there is no basis to believe that the framers of the Constitution, a majority of whom were
obviously concerned with furthering the development and utilization of the country's natural
resources, could have wanted to restrict Filipino participation in that area. This point is clear,
especially in the light of the overarching constitutional principle of giving preference and priority to
Filipinos and Filipino corporations in the development of our natural resources.

No Need for a Separate Litigation of the Sale of Shares

Petitioners claim as third ground the "suspicious" sale of shares from WMC to Sagittarius; hence, the
need to litigate it in a separate case. Section 40 of RA 7942 (the Mining Law) allegedly requires the
President's prior approval of a transfer.

Sec. 40. Assignment/Transfer -- A financial or technical assistance agreement may be

assigned or transferred, in whole or in part, to a qualified person subject to the prior
approval of the President: Provided, That the President shall notify Congress of every
financial or technical assistance agreement assigned or converted in accordance with this
provision within thirty (30) days from the date of the approval thereof.
Section 40 expressly applies to the assignment or transfer of the FTAA, not to the sale and transfer
of shares of stock in WMCP. Moreover, when the transferee of an FTAA is another foreign
corporation, there is a logical application of the requirement of prior approval by the President of the
Republic and notification to Congress in the event of assignment or transfer of an FTAA. In this
situation, such approval and notification are appropriate safeguards, considering that the new
contractor is the subject of a foreign government.

On the other hand, when the transferee of the FTAA happens to be a Filipino corporation, the need
for such safeguard is not critical; hence, the lack of prior approval and notification may not be
deemed fatal as to render the transfer invalid. Besides, it is not as if approval by the President is
entirely absent in this instance. As pointed out by private respondent in its Memorandum, the issue
of approval is the subject of one of the cases brought by Lepanto against Sagittarius. That case
involved, among others, the review of the Decision of the Office of the President approving the
assignment of the WMCP FTAA to Sagittarius.

FTAA Not Void, Thus Transferrable

To bolster further their claim that the case is not moot, petitioners insist that the FTAA is void and,
hence cannot be transferred; and that its transfer does not operate to cure the constitutional
infirmity that is inherent in it; neither will a change in the circumstances of one of the parties serve to
ratify the void contract.

Petitioners in their Comment (on the MR) did ratiocinate that this Court had declared the FTAA to be
void because, at the time it was executed with WMCP, the latter was a fully foreign-owned
corporation, in which the former vested full control and management with respect to the
exploration, development and utilization of mineral resources, contrary to the provisions of
paragraph 4 of Section 2 of Article XII of the Constitution. And since the FTAA was per se void, no valid
right could be transferred; neither could it be ratified, so petitioners conclude.

Petitioners have assumed as fact that which has yet to be established. First and foremost, the
Decision of this Court declaring the FTAA void has not yet become final. Second, the FTAA does not
vest in the foreign corporation full control and supervision over the exploration, development and
utilization of mineral resources, to the exclusion of the government. A perusal of the FTAA provisions
will prove that the government has effective overall direction and control of the mining operations,
including marketing and product pricing, and that the contractor's work programs and budgets are
subject to its review and approval or disapproval.

Petitioners sniff at the citation of Chavez v. Public Estates Authority, and Halili v. CA, claiming that
the doctrines in these cases are wholly inapplicable to the instant case.

Chavez clearly teaches: "Thus, the Court has ruled consistently that where a Filipino citizen sells
land to an alien who later sells the land to a Filipino, the invalidity of the first transfer is
corrected by the subsequent sale to a citizen. Similarly, where the alien who buys the land
subsequently acquires Philippine citizenship, the sale is validated since the purpose of the
constitutional ban to limit land ownership to Filipinos has been achieved. In short, the law
disregards the constitutional disqualification of the buyer to hold land if the land is
subsequently transferred to a qualified party, or the buyer himself becomes a qualified party."
At bottom, we find completely outlandish petitioners' contention that an FTAA could be entered into
by the government only with a foreign corporation, never with a Filipino enterprise. Indeed, the
nationalistic provisions of the Constitution are all anchored on the protection of Filipino interests.
How petitioners can now argue that foreigners have the exclusive right to FTAAs totally overturns
the entire basis of the Petition -- preference for the Filipino in the exploration, development and
utilization of our natural resources. It does not take deep knowledge of law and logic to understand
that what the Constitution grants to foreigners should be equally available to Filipinos.
Topic: Qualifications and Disqualifications; Authority and Liabilities
Case No. 274
G.R. No. 170811 April 24, 2007
- versus -
Petitioner Supreme Steel Pipe Corporation (SSPC), a domestic corporation primarily engaged in the
business of manufacturing steel pipes, employed respondent Rogelio Bardaje as a warehouseman.

One day, Bardaje had an altercation with his co-employee Christopher Barrios, the security guard in
the workplace. Bajarde was apparently insulted by the manner Barrios’ reprimanding him for not
wearing the proper uniform. A heated exchange of words ensued, but the brewing scuffle between
the two was averted by a co-employee from the Production Division, Albert A. Bation. A security
guard, Ricky Narciso, was able to keep the parties apart. Barrios reported the incident to the SSPC

The next day, Bardaje received a Memorandum from petitioner SSPC stating that pending the
investigation for his alleged violation of the company rule prohibiting inciting a fight, harassing,
coercing, intimidating and/or threatening co-workers, he was being meted a 30-day preventive

However, when respondent reported back to work a month after, he was served with a Notice
terminating his employment. Petitioner SSPC had taken into account the incident for which he was
suspended as well as Bardaje’s previous infractions of company rules. Petitioner SSPC declared that
respondents continued employment would pose serious and imminent threat to the lives of his co-
workers and to the property of the corporation and its employees.

Alleging that his dismissal from service was illegal, Bardaje filed a Complaint against SSPC and its
President, Regan Sy.

Should SSPC President Regan Sy be held soolidarily liable with the corporation? (NO.)

Note: The SC ruled that there was illegal dismissal.

It appears that respondent impleaded SSPC President Regan Sy only because he is an officer/agent
of the company. However, petitioner Sy cannot be held solidarily liable with petitioner SSPC for the
termination of respondent’s employment, since there is no showing that the dismissal was attended
with malice or bad faith.

Topic: Doctrine of Apparent Authority
Case No. 293
G.R. No. 140667 August 12, 2004
- versus -
The respondent Roxas Electric and Construction Company, Inc. (RECCI), formerly the Roxas Electric
and Construction Company, was the owner of two parcels of land, identified as
 Lot No. 491-A-3-B-1 (Lot 1)
 Lot No. 491-A-3-B-2 (Lot 2)- 7,213 square meters
A portion of Lot1 which abutted (adjoining) Lot 2 was a dirt road accessing to the Sumulong
Highway, Antipolo, Rizal.

At a special meeting, the respondent RECCI’s Board of Directors approved a resolution authorizing
the corporation, through its president, Roberto B. Roxas:
 to sell Lot 2, at a price and under such terms and conditions which he deemed most
reasonable and advantageous to the corporation; and
 to execute, sign and deliver the pertinent sales documents and receive the proceeds of the
sale for and on behalf of the company.

Petitioner Woodchild Holdings, Inc. (WHI) wanted to buy Lot 2 on which it planned to construct its
warehouse building, and a portion of the adjoining lot, Lot 1, so that its 45-foot container van would
be able to readily enter or leave the property. In a Letter to Roxas, WHI President Jonathan Y. Dy
offered to buy Lot 2 under stated terms and conditions for P1,000 per square meter or at the price
of P7,213,000. One of the terms incorporated in Dy’s offer was the following provision:

5. This Offer to Purchase is made on the representation and warranty of the OWNER/SELLER,
that he holds a good and registrable title to the property, which shall be conveyed CLEAR
and FREE of all liens and encumbrances, and that the area of 7,213 square meters of the
subject property already includes the area on which the right of way traverses from the main
lot (area) towards the exit to the Sumulong Highway as shown in the location plan furnished
by the Owner/Seller to the buyer. Furthermore, in the event that the right of way is
insufficient for the buyers purposes (example: entry of a 45-foot container), the seller agrees
to sell additional square meter from his current adjacent property to allow the buyer to full
access and full use of the property.

Roxas indicated his acceptance of the offer on page 2 of the deed. Less than a month later, Roxas, as
President of RECCI (vendor) and Dy, as President of WHI (vendee), executed a contract to sell over
Lot 2 for P7,213,000. A Deed of Absolute Sale in favor of WHI was issued, under which the lot was
sold for P5,000,000, receipt of which was acknowledged by Roxas.

Wimbeco Builders, Inc. (WBI) was contracted by WHI for the construction of the warehouse building
on a portion of the property. However, WBI failed to commence the construction of the warehouse
as planned because of the presence of squatters in the property and suggested a renegotiation of
the contract after the squatters shall have been evicted. Subsequently, the squatters were evicted
from the property.
In the meantime, WHI complained to Roberto Roxas that the vehicles of RECCI were parked on a
portion of the property over which WHI had been granted a right of way. Roxas promised to look
into the matter. Dy and Roxas discussed the need of the WHI to buy a 500-square-meter portion of
Lot 1 as provided for in the deed of absolute sale. However, Roxas died soon thereafter. The WHI
wrote the RECCI, reiterating its verbal requests to purchase a portion of the said lot as provided for
in the deed of absolute sale, and complained about the latter’s failure to eject the squatters within
the three-month period agreed upon in the said deed.

The WHI demanded that the RECCI sell a portion of Lot 1 for its beneficial use within 72 hours from
notice thereof, otherwise the appropriate action would be filed against it. RECCI rejected the
demand of WHI. WHI reiterated its demand in a Letter. There was no response from RECCI.

Hence, WHI filed a complaint against the RECCI with the RTC for specific performance and damages.

In its answer to the complaint, the RECCI alleged that it never authorized its former president,
Roberto Roxas, to grant the beneficial use of any portion of Lot 1, nor agreed to sell any portion
thereof or create a lien or burden thereon. It alleged that, under the Resolution, it merely authorized
Roxas to sell Lot 2. As such, the grant of a right of way and the agreement to sell a portion of Lot1 in
the Deed of Sale are ultra vires. The RECCI further alleged that the provision therein that it would sell
a portion of Lot 1 to the WHI lacked the essential elements of a binding contract.

The RTC ruled in favor of WHI.

The CA reversed the RTC’s decision. The CA ruled that, under the resolution of the Board of Directors
of the RECCI, Roxas was merely authorized to sell Lot 2, but not to grant right of way in favor of the
WHI over a portion of Lot 1, or to grant an option to the petitioner to buy a portion thereof. The
appellate court also ruled that the grant of a right of way and an option to the respondent were so
lopsided in favor of the respondent because the latter was authorized to fix the location as well as
the price of the portion of its property to be sold to the respondent. Hence, such provisions
contained in the deed of absolute sale were not binding on the RECCI. The appellate court ruled that
the delay in the construction of WHIs warehouse was due to its fault.

Hence, this case.

Is the RECCI is bound by the provisions in the deed of absolute sale granting to the WHI beneficial
use and a right of way over a portion of Lot 1 accessing to the Sumulong Highway and granting the
option to the petitioner to buy a portion thereof? If so, is such agreement enforceable against RECCI?
(RECCI is not bound by the provisions of the Deed of Sale executed by Roxas.)
Generally, the acts of the corporate officers within the scope of their authority are binding on the
corporation. However, under Article 1910 of the New Civil Code, acts done by such officers beyond
the scope of their authority cannot bind the corporation unless it has ratified such acts expressly or
tacitly, or is estopped from denying them.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except
when he ratifies it expressly or tacitly.

Thus, contracts entered into by corporate officers beyond the scope of authority are unenforceable
against the corporation unless ratified by the corporation. In this case, RECCI denied authorizing its
then president Roberto B. Roxas to sell a portion of Lot 1 and to create a lien or burden thereon. WHI
was thus burdened to prove that the RECCI so authorized Roxas to sell the same and to create a lien

The Resolution of RECCI’s BOD which granted Roxas the authority to sell Lot 2, Roxas was not
specifically authorized under the said resolution to grant a right of way in favor of the petitioner on a
portion of Lot 1 or to agree to sell to WHI a portion thereof. The authority of Roxas, under the
resolution, to sell Lot 2 did not include the authority to sell a portion of the adjoining lot, Lot 1, or to
create or convey real rights thereon. Neither may such authority be implied from the authority
granted to Roxas to sell Lot 2 to the petitioner on such terms and conditions which he deems most
reasonable and advantageous.
On the Doctrine of Apparent Authority

We reject the WHI’s submission that, in allowing Roxas to execute the contract to sell and the deed
of absolute sale and failing to reject or disapprove the same, RECCI thereby gave him apparent
authority to grant a right of way over Lot 1 and to grant an option for the respondent to sell a
portion thereof to the petitioner. Absent estoppel or ratification, apparent authority cannot remedy
the lack of the written power required under the statement of frauds.

It bears stressing that apparent authority is based on estoppel and can arise from two instances:
first, the principal may knowingly permit the agent to so hold himself out as having such
authority, and in this way, the principal becomes estopped to claim that the agent does not
have such authority;

second, the principal may so clothe the agent with the indicia of authority as to lead a
reasonably prudent person to believe that he actually has such authority.

There can be no apparent authority of an agent without acts or conduct on the part of the principal
and such acts or conduct of the principal must have been known and relied upon in good faith and as
a result of the exercise of reasonable prudence by a third person as claimant and such must have
produced a change of position to its detriment. The apparent power of an agent is to be determined
by the acts of the principal and not by the acts of the agent.

For the principle of apparent authority to apply, the petitioner was burdened to prove the following:
a. the acts of the respondent justifying belief in the agency by the petitioner;
b. knowledge thereof by the respondent which is sought to be held; and,
c. reliance thereon by the petitioner consistent with ordinary care and prudence.

In this case, there is no evidence on record of specific acts made by the respondent showing or
indicating that it had full knowledge of any representations made by Roxas to the petitioner that the
respondent had authorized him to grant to the respondent an option to buy a portion of Lot 1 or to
create a burden or lien thereon, or that the respondent allowed him to do so.

Topic: Personal Liability of Directors and Other Corporate Officers
Case No. 312
ARNEL TY, et al.
GR 182147, 15 December 2010
Acting on a complaint filed by various LPG manufacturers, the NBI conducted a surveillance on the
activities of Omni Gas, which is being accused of selling LPG tanks without the required permit and
below its required standards. Agents De Jemil and Kawada attested to conducting surveillance of
Omni and brought eight branded LPG cylinders of Shellane, Petron Gasul, Totalgaz, and Superkalan
Gaz to Omni for refilling. The branded LPG cylinders were refilled, for which agents paid P1,582 as
evidenced by Sales Invoice No. 90040issued by Omni on April 15, 2004. The refilled LPG cylinders
were without LPG valve seals and one of the cylinders was actually underfilled, as found by LPG
Inspector Noel N. Navio of the Liquefied Petroleum Gas Industry Association (LPGIA) who inspected
the eight branded LPG cylinders.

The NBI's test-buy yielded positive results for violations of

 BP 33, Section 2(a) in relation to Secs. 3(c) and 4, i.e., refilling branded LPG cylinders without
authority; and
 Sec. 2(c) in relation to Sec. 4, i.e., under delivery or under filling of LPG cylinders.

Petitioners Arnel Ty, Marie Antonette Ty, Jason Ong, Willy Dy, and Alvin Ty questioned the case
against that, claiming that being mere directors, they are not liable to the case filed against Omni for
they are not in charge of the management of the said entity.

May Ty be held liable for the actions of Omni? (No, Ty only.)
Only Arnel Ty may be held liable in his capacity as president of Omni, but not the other directors. The
corporate powers of a corporation are reposed in the board of directors under the first paragraph of
Sec. 23 of the Corporation Code, it is of common knowledge and practice that the board of directors
is not directly engaged or charged with the running of the recurring business affairs of the
corporation. Depending on the powers granted to them by the Articles of Incorporation, the
members of the board generally do not concern themselves with the day-to-day affairs of the
corporation, except those corporate officers who are charged with running the business of the
corporation and are concomitantly members of the board, like the President. Section 25of the
Corporation Code requires the president of a corporation to be also a member of the board of

Evidently, petitioner Arnel, as President, who manages the business affairs of Omni, can be held
liable for probable violations by Omni of BP 33, as amended. The fact that petitioner Arnel is
ostensibly the operations manager of Multi-Gas Corporation, a family owned business, does not
deter him from managing Omni as well. It is well-settled that where the language of the law is clear
and unequivocal, it must be taken to mean exactly what it says. As to the other petitioners, unless
otherwise shown that they are situated under the catch-all "such other officer charged with the
management of the business affairs," they may not be held liable under BP 33, as amended, for
probable violations. Consequently, with the exception of petitioner Arnel, the charges against other
petitioners must perforce be dismissed or dropped.

Also, under BP 33 (which regulates the production and sale of LPG), Directors are not among those
enumerated as criminally liable for the acts of the corporation.
Topic: Personal Liability of Directors and other Corporate Officers
Case No. 331


GR 114787, 02 June 1995

Celso B. Balbastro filed a case against MAM Realty Development Corporation ("MAM") and its Vice
President Manuel P. Centeno, for unfair labor practice in violation of the Labor Code. Balbastro
alleged that he was employed by MAM as a pump operator in 1982 and had since performed such
work at its Rancho Estate, Marikina, Metro manila.

MAM countered that Balbastro had previously been employed by Francisco Cacho and co., Inc., the
developer of Rancho Estates. Sometime in May 1982, his services were contracted by MAM for the
operation of the Rancho Estates' water pump. He was engaged, however, not as an employee, but
as a service contractor, at an agreed fee of P1,590.00 a month. Similar arrangements were likewise
entered into by MAM with one Rodolfo Mercado and with a security guard of Rancho Estates III
Homeowners' Association. Under the agreement, Balbastro was merely made to open and close on a
daily basis the water supply system of the different phases of the subdivision in accordance with its
water rationing scheme. He worked for only a maximum period of three hours a day, and he made
use of his free time by offering plumbing services to the residents of the subdivision. He was not at
all subject to the control or supervision of MAM for, in fact, his work could so also be done either by
Mercado or by the security guard. On 23 May 1990, prior to the filing of the complaint, MAM
executed a Deed of Transfer, 1 effective 01 July 1990, in favor of the Rancho Estates Phase III
Homeowners Association, Inc., conveying to the latter all its rights and interests over the water
system in the subdivision.

NLRC found the corporation guilty as charged, and likewise held Centeno liable together with said

Should Centeno be held liable together with MAM Realty? (No.)
A corporation, being a juridical entity, may act only through its directors, officers and employees.
Obligations incurred by them, acting as such corporate agents, are not theirs but the direct
accountabilities of the corporation they represent. True, solidarily liabilities may at times be incurred
but only when exceptional circumstances. In labor cases, for instance, the Court has held corporate
directors and officers solidarily liable with the corporation for the termination of employment of
employees done with malice or in bad faith.

In the case at bench, there is nothing substantial on record that can justify, prescinding from the
foregoing, petitioner Centeno's solidary liability with the corporation. Nothing states that he acted
in bad faith.

Although the Court found that there is an employer-employee relationship between Balbastro and
MAM Realty, the case was remanded to NLRC for the recomputation of Balbastro’s monetary
awards, such as backwages and wage differentials.
Topic: Disloyalty
Case No. 350
G.R. No. 189158
• James A. Ient (Ient)
• Maharlika C. Schulze (Schulze)

Petitioner Ient is a British national and the Chief Financial Officer of Tradition Asia Pacific Pte. Ltd.
(Tradition Asia) in Singapore. Petitioner Schulze is a Filipino/German who does Application Support
for Tradition Financial Services Ltd. in London (Tradition London). Tradition Asia and Tradition
London are subsidiaries of Compagnie Financiere Tradition and are part of the "Tradition Group." The
Tradition Group and Tullett are competitors in the inter-dealer broking business. IDBs purportedly
"utilize the secondary fixed income and foreign exchange markets to execute their banks and their
bank customers' orders, trade for a profit and manage their exposure to risk, including credit,
interest rate and exchange rate risks." In the Philippines, the clientele for IDBs is mainly comprised of
banks and financial institutions.

Tullett was the first to establish a business presence in the Philippines and had been engaged in the
inter-dealer broking business or voice brokerage here since 1995. Meanwhile, on the part of the
Tradition Group, the needs of its Philippine clients were previously being serviced by Tradition Asia in

Sometime in August 2008, in line with Tradition Group's motive of expansion and diversification in
Asia, petitioners lent and Schulze were tasked with the establishment of a Philippine subsidiary of
Tradition Asia to be known as Tradition Financial Services Philippines, Inc. (Tradition Philippines).
Tradition Philippines was registered with the SEC with petitioners lent and Schulze, among others,
named as incorporators and directors in its Articles of Incorporation.

Tullett, through one of its directors, Gordon Buchan, filed a Complaint-Affidavit with the City
Prosecution Office of Makati City against the officers/employees of the Tradition Group for violation
of the Corporation Code. Impleaded as respondents in the Complaint-Affidavit were:
 petitioners lent and Schulze
 Jaime Villalon (Villalon), who was formerly President and Managing Director of Tullett
 Mercedes Chuidian (Chuidian), who was formerly a member of Tullett's Board of Directors,
 other John and Jane Does.

Villalon and Chuidian were charged with using their former positions in Tullett to sabotage said
company by orchestrating the mass resignation of its entire brokering staff in order for them to join
Tradition Philippines.
With respect to Villalon, Tullett claimed that the former held several meetings with members of
Tullett's Spot Desk and brokering staff in order to convince them to leave the company. Villalon
likewise supposedly intentionally failed to renew the contracts of some of the brokers. Another
meeting was also allegedly held in Howzat Bar in Makati City where petitioners and a lawyer of
Tradition Philippines were present. At said meeting, the brokers of complainant Tullett were
purportedly induced, en masse, to sign employment contracts with Tradition Philippines and were
allegedly instructed by Tradition Philippines' lawyer as to how they should file their resignation
letters. Complainant also claimed that Villalon asked the brokers present at the meeting to call up
Tullett's clients to inform them that they had already resigned from the company and were moving
to Tradition Philippines.

According to Tullett, respondents Villalon and Chuidian (who were still its directors or officers at the
times material to the Complaint-Affidavit) violated Sections 31 and 34 of the Corporation Code which
made them criminally liable under Section 144. As for petitioners lent and Schulze, Tullett asserted
that they conspired with Villalon and Chuidian in the latter's acts of disloyalty against the company.

What is the liability of the ‘disloyal’ directors and officers of Tullett, Criminal or Civil? (CIVIL)

The Corporation Code was intended as a regulatory measure, not primarily as a penal statute.

The main bone of disagreement among the parties in this case is the applicability of Section 144 of
the Corporation Code to Sections 31 and 34 of the same statute such that criminal liability attaches to
violations of Sections 31 and 34. For convenient reference, we quote the contentious provisions here:
SECTION 31. Liability of Directors, Trustees or Officers. - Directors or trustees who willfully
and knowingly vote for or assent to patently unlawful acts of the corporation or who are
guilty of gross negligence or bad faith in directing the affairs of the corporation or acquire
any personal or pecuniary interest in conflict with their duty as such directors or trustees
shall be liable jointly and severally for all damages resulting therefrom suffered by the
corporation, its stockholders or members and other persons.

When a director, trustee or officer attempts to acquire or acquires, in violation of his duty,
any interest adverse to the corporation in respect of any matter which has been reposed in
him in confidence, as to which equity imposes a disability upon him to deal in his own behalf,
he shall be liable as a trustee for the corporation and must account for the profits which
otherwise would have accrued to the corporation.

SECTION 34. Disloyalty of a Director. - Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong to the corporation, thereby obtaining
profits to the prejudice of such corporation, he must account to the latter for all such profits
by refunding the same, unless his act has been ratified by a vote of the stockholders owning
or representing at least two-thirds (2/3) of the outstanding capital stock. This provision shall
be applicable, notwithstanding the fact that the director risked his own funds in the venture.
SECTION 144. Violations of the Code. - Violations of any of the provisions of this Code or its
amendments not otherwise specifically penalized therein shall be punished by a fine of not
less than one thousand (₱1,000.00) pesos but not more than ten thousand (₱10,000.00)
pesos or by imprisonment for not Jess than thirty (30) days but not more than five (5) years,
or both, in the discretion of the court. If the violation is committed by a corporation, the
same may, after notice and hearing, be dissolved in appropriate proceedings before the
Securities and Exchange Commission: Provided, That such dissolution shall not preclude the
institution of appropriate action against the director, trustee or officer of the corporation
responsible for said violation: Provided, further, That nothing in this section shall be
construed to repeal the other causes for dissolution of a corporation provided in this Code.

As Section 144 speaks, among others, of the imposition of criminal penalties, the Court is guided by
the elementary rules of statutory construction of penal provisions. First, in all criminal prosecutions,
the existence of criminal liability for which the accused is made answerable must be clear and
certain. We have consistently held that "penal statutes are construed strictly against the State and
liberally in favor of the accused. When there is doubt on the interpretation of criminal laws, all must
be resolved in favor of the accused. Since penal laws should not be applied mechanically, the Court
must determine whether their application is consistent with the purpose and reason of the law."

After a meticulous consideration of the arguments presented by both sides, the Court comes to the
conclusion that there is textual ambiguity in Section 144; moreover, such ambiguity remains even
after an examination of its legislative history and the use of other aids to statutory construction,
necessitating the application of the rule of lenity in the case at bar.

We agree with petitioners that the lack of specific language imposing criminal liability in Sections 31
and 34 shows legislative intent to limit the consequences of their violation to the civil liabilities
mentioned therein. Had it been the intention of the drafters of the law to define Sections 31 and 34
as offenses, they could have easily included similar language as that found in Section 74.

Quite apart that no legislative intent to criminalize Sections 31 and 34 was manifested in the
deliberations on the Corporation Code, it is noteworthy from the same deliberations that legislators
intended to codify the common law concepts of corporate opportunity and fiduciary obligations of
corporate officers as found in American jurisprudence into said provisions. In common law, the
remedies available in the event of a breach of director's fiduciary duties to the corporation are civil
remedies. If a director or officer is found to have breached his duty of loyalty, an injunction may be
issued or damages may be awarded. A corporate officer guilty of fraud or mismanagement may be
held liable for lost profits. A disloyal agent may also suffer forfeiture of his compensation. There is
nothing in the deliberations to indicate that drafters of the Corporation Code intended to deviate
from common law practice and enforce the fiduciary obligations of directors and corporate officers
through penal sanction aside from civil liability. On the contrary, there appears to be a concern
among the drafters of the Corporation Code that even the imposition of the civil sanctions under
Section 31 and 34 might discourage competent persons from serving as directors in corporations.
The Corporation Code was intended as a regulatory measure, not primarily as a penal statute.
Sections 31 to 34 in particular were intended to impose exacting standards of fidelity on corporate
officers and directors but without unduly impeding them in the discharge of their work with
concerns of litigation. Considering the object and policy of the Corporation Code to encourage the
use of the corporate entity as a vehicle for economic growth, we cannot espouse a strict
construction of Sections 31 and 34 as penal offenses in relation to Section 144 in the absence of
unambiguous statutory language and legislative intent to that effect.

When Congress intends to criminalize certain acts it does so in plain, categorical language, otherwise
such a statute would be susceptible to constitutional attack. As earlier discussed, this can be readily
seen from the text of Section 450) of Republic Act No. 8189 and Section 74 of the Corporation Code.

Topic: Derivative Suit (Remedies to Enforce Personal Liability)
Case No. 365
G.R. No. L-5174. March 17, 1911
This action was brought by the plaintiff Pascual, in his own right as a stockholder of the bank, for the
benefit of the bank, and all the other stockholders thereof. The Banco Español-Filipino is a banking
corporation, constituted as such by royal decree of the Crown of Spain in the year 1854, the original
grant having been subsequently extended and modified by royal decree of July 14, 1897, and by Act
No. 1790 of the Philippine Commission.

It is alleged in the amended complaint that the only compensation contemplated or provided for the
managing officers of the bank was a certain per cent of the net profits resulting from the bank's
operations, as set forth in article 30 of its reformed charter or statutes.

The gist of the first and second causes of action is as follows: The defendants constitute a majority of
the present board of directors of the bank, who alone can authorize an action against them in the
name of the corporation. It appears that during the years 1903, 1904, 1905, and 1907 the defendants
and appellees, without the knowledge, consent, or acquiescence of the stockholders, deducted their
respective compensation from the gross income instead of from the net profits of the bank, thereby
defrauding the bank and its stockholders of approximately P20,000 per annum.

The second cause of action sets forth that defendants' and appellees' immediate predecessors in
office in the bank during the years 1899, 1900, 1901, and 1902, committed the same illegality as to
their compensation as is charged against the defendants themselves. In the four years immediately
following the year 1902, the defendants and appellees were the only officials or representatives of
the bank who could and should investigate and take action in regard to the sums of money thus
fraudulently appropriated by their predecessors. They were the only persons interested in the bank
who knew of the fraudulent appropriation by their predecessors.

The court below sustained the demurrer as to the first and second causes of action on the ground
that in actions of this character the plaintiff must aver in his complaint that he was the owner of
stock in the corporation at the time of the occurrences complained of, or else that the stock has
since devolved upon him by operation of law.

Does the petitioner Pasual have a cause of action to file a derivative suit? (YES.)
As to the first cause of action: In suits of this character the corporation itself and not the plaintiff
stockholder is the real party in interest. The rights of the individual stockholder are merged into that
of the corporation. It is a universally recognized doctrine that a stockholder in a corporation has no
title legal or equitable to the corporate property; that both of these are in the corporation itself for
the benefit of all the stockholders. So it is clear that the plaintiff, by reason of the fact that he is a
stockholder in the bank (corporation) has a right to maintain a suit for and on behalf of the bank, but
the extent of such a right must depend upon when, how, and for what purpose he acquired the
shares which he now owns.

As to the Second cause of action: It affirmatively appears from the complaint that the plaintiff was
not a stockholder during any of the time in question in this second cause of action. Upon the
question whether or not a stockholder can maintain a suit of this character upon a cause of action
pertaining to the corporation when it appears that he was not a stockholder at the time of the
occurrence of the acts complained of and upon which the action is based, the authorities do not